3. Lines of Credit and Restricted Cash

On August 28, 2006, the Company entered into a $4,000,000 Revolving Line of Credit (“line of credit”) with a commercial bank. As security for this credit facility, the Company deposited $4,000,000 into a certificate of deposit (“CD”) as collateral for a two year period. The CD earns interest at a rate of 5.25% annually, and any interest earned on the CD is restricted from withdrawal and must remain in the account for the entire term. The interest rate on the line of credit is 6% annually.

On November 21, 2006, the Company deposited an additional $4,000,000 into another CD with the same restrictions on withdrawal. This CD matures on November 21, 2008 and the deposit bears an interest rate of 5.12% annually.

The outstanding balance on the lines of credit was $7,475,692 as of September 30, 2007 (see note 6).

On November 8, 2007, the lines of credits were increased to $8,409,000 (see Note 12 - Subsequent Events)

4. Investment in Micrologic, Inc.

On October 11, 2006, the Company committed itself in the financing of Micrologic, Inc. (“Micrologic”), a Nevada corporation, engaged in the design and production of Electronic Design Automation (“EDA”) applications and Integrated Circuit (“IC”) design processes; specifically, the development and production of the NanoToolBox ^TM tools suite, which is a smart platform designed to accelerate IC's design time and shrink time to market factor. The agreement provides for an initial investment by the Company of up to $1,000,000, with warrants to purchase additional equity for additional investment. The Company owns 25.10% of Micrologic; however such equity positions might be revised contingent upon the exercise of the warrants. As of September 30, 2007, $400,000 was transferred as part of this commitment, and no warrants were issued.

On September 30, 2007, the Company determined that it would no longer fund the operations of Micrologic and that the amounts previously advanced to Micrologic would not be collectible. Therefore, the Company wrote off the $400,000 loan. The Company consolidated the results of Micrologic’s operations from October 11, 2006 through September 30, 2007, which resulted in a loss of $335,957, and expensed the remaining $64,043 to the Consolidated Statements of Operations, presented in the other selling, general and administrative expense classification.

 

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The Company’s interest in Micrologic has been consolidated from October 11, 2006 through September 30, 2007 in accordance with FIN46R, “Consolidation of Variable Interest Entities”. The Company is the primary beneficiary of Micrologic due to the VIE’s reliance on Emvelco to finance its’ ongoing business and software development activities, however, based upon the Company’s determination that it will no longer fund the activities, the balance sheets are not consolidated as of September 30, 2007.

5. Loans to Affiliates - Emvelco RE Corp and Verge Living Corporation

On June 14, 2006, Emvelco issued a $10 million line of credit to ERC. Outstanding balances bear interest at an annual rate of 12% and the line of credit had an orinal maximum borrowing limit of $10 million. Initially on October 26, 2006 and then again ratified on December 29, 2006, the Board of Directors of Emvelco approved an increase in the borrowing limit of the line of credit to $20 million. The Board also restricted use of the funds to real estate development

 

On June 19, 2006, Verge and ERC entered into a Secured Investment Agreement with Emvelco (“The June Investment Agreement”), pursuant to which ERC, within its sole discretion, has agreed to provide secured loans to Verge not to exceed the amount of $10,000,000. Verge owns a real property in downtown Las Vegas, Nevada, where it intends to build approximately 296 condominiums plus commercial space (the "Property"). Verge obtained entitlements to the Property, and it expects to break ground early in 2008. Each loan provided to Verge is due on demand or upon maturity on January 14, 2008. All loans secured by a first deed of trust, assignment of rents and security agreement with respect to the property, along with ALTA (American Land Title Association) title policy to be issued by a title company. If ERC requests that the funds be paid on demand prior to maturity, then Verge shall be entitled to reduce the amount requested to be prepaid by 10%. The 10% discount will be paid to Verge in the form of shares of common stock of Emvelco, which will be computed by dividing the dollar amount of the 10% discount by the market price of Emvelco's shares of common stock.

 

The terms of the loans require that ERC to be paid-off the greater of (i) the principal including 12% interest per annum or (ii) 33% of all gross profits derived from the Property

On May 14, 2007, the TIHG purchased its remaining 43.33% interest in ERC from Emvelco for $500,000. Verge gave its consent for assignment of the June Investment Agreement to Emvelco, and not through ERC, as part of the purchase agreement. Based on said consent, the June Investment Agreement is deemed to be between Verge and Emvelco directly.

 

On October 15, 2007, Emvelco delivered that certain Notice of Exercise of Options ("Notice") to ERC, TIHG, Verge and Darren C. Dunckel, individual, President of ERC and/or representative of the foregoing parties.

 

The closing of the acquisitions set forth in the Notice is contingent upon the closing of that certain Agreement, dated as of June 5, 2007, by and between Emvelco, Emvelco’s chief executive officer Yossi Attia, and Darren C. Dunckel (collectively, the "Investors"), on the one hand, and a third party, Upswing, Ltd., on the other hand (the "Upswing Agreement"). Pursuant to the Upswing Agreement, the Investors intend to invest in an entity listed on the Tel Aviv Stock Exchange (the "Investment Target"). In addition, the Investors intend to transfer rights and control of various real estate projects to the Investment Target.

 

Pursuant to the Notice, Emvelco, subject to performance under the Upswing Agreement, intends to exercise its option (the "Verge Option") to purchase a multi-use condominium and commercial property in Las Vegas, Nevada, via the purchase and acquisition of all outstanding shares of common stock of Verge. The Verge Option is exercisable in the amount of $5,000,000 payable in cash - not prior of Verge breaking ground, plus conversion of $10,000,000 loans given to Verge into Equity as consideration for 75,000 shares of Verge. Said transaction was closed on November 1, 2007 (see Note 12 Subsequent Events)

At September 30, 2007, the outstanding loan balances were as follows:

Emvelco RE Corp
Capital of loans provided:		$	77,644,921
Accrued interest on loan			1,349,405
Sub -Total		$	8,994,326
Verge Living Corporation*)
Capital of loans provided:		$	11,089,581
Accrued interest on loan			1,057,169
Sub -Total		$	12,146,750

*) Pursuant to exercise of said option on November 1, 2007, the sum of $10,000,000 from the above loan proceeds will be capitalized into additional paid in capital of Verge on its last quarter of 2007. On November 2, 2007, the Company was paid off partially by Verge (see Note 12 Subsequent Events). On September 17, 2007, Emvelco Board of Directors voted to appoint Verge President, Darren C Dunckel as Director in the Company (see Note 12 - Subsequent Events).

 

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6. Secured Bank Loans

The Company’s real estate investment operations require substantial up-front expenditures for land development contracts and construction. Accordingly, the Company requires a substantial amount of cash on hand, as well as funds accessible through lines of credit with banks or third parties, to conduct its business.  The Company has financed its working capital needs on a project-by-project basis, primarily with secured loans from banks (see note 3) and debt via the All Inclusive Trust Deed Agreement (AITDA), as well as with the existing cash of the Company. 

At September 30, 2007, the outstanding secured loan balances were as follows:

Project name		Principal Amount			Annual Interest Rate			Expiration
General financing (line of credits)		$	7,475,692			5.87	%		2008
Bank loan secured by real property*)			720,000			7.875	%		9/1/2037
Total principal amounts of loans		$	8,195,692
Less current portion			7,475,692
Long term portion of loans		$	720,000

*) - Said loan was refinance via a construction loan (see not 12 - Subsequent events)

7. Dispositions

Completed sale of Euroweb Hungary and Euroweb Romania

On December 15, 2005, the Board of Directors of the Company decided to sell its wholly-owned subsidiaries Euroweb Hungary and Euroweb Romania. On December 19, 2005, the Company entered into a share purchase agreement with Invitel Tavkozlesi Szolgaltato Rt., a Hungarian joint stock company, to sell Euroweb Hungary and Euroweb Romania, subject to various conditions including, but not limited to, shareholders’ approval. The closing of the sale of Euroweb Hungary and Euroweb Romania occurred on May 23, 2006 upon the Company’s receipt of the first part of the purchase price in the amount of $29,400,000.

Completed sale of Navigator

On February 16, 2007, the Company entered into a Sale and Purchase Agreement (the “Sale and Purchase Agreement”) with Marivaux Investments Limited (“MIL”) and Fleminghouse Investments Limited (“FIL” and collectively with MIL, the “Buyers”). Pursuant to the Sale and Purchase Agreement, the Company sold 100% of the Company’s interest in Navigator (a wholly-owned subsidiary of the Company) for $4,034,191 consisting of $3,200,000 in cash and 622,531 shares of the Company’s common stock, excluding estimated transaction costs and success fees. The Company shares were valued at $1.34 per share, representing the closing price of the Company on the NASDAQ Capital Market on February 16, 2007, the closing of the sale. The canceled the Emvelco common stock acquired during the disposition.

 

The sale of Euroweb Hungary, Euroweb Romania, and Navigator all met the criteria for presentation as a discontinued operation under the provisions of SFAS 144, and therefore amounts relating to Euroweb Hungary, Euroweb Romania and Navigator have been reclassified as discontinued operations for all periods presented.

 

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Completed sale of ERC

On May 14, 2007, the Company entered into a Stock Transfer and Assignment of Contract Rights Agreement (the "Stock Transfer Agreement") with ERC, ERC's principal shareholder TIHG and ERC's wholly owned subsidiary Verge. Pursuant to the Stock Transfer Agreement, the Company transferred and conveyed its 1,000 Shares (representing a 43.33% interest) (the "Shares") in ERC to TIHG to submit to ERC for cancellation and return to Treasury. ERC, TIHG and Verge agreed to assign (the "Assignment") to the Company all rights in and to that certain Investment Agreement, dated as June 19, 2006, and all Amendments thereto (collectively, the "Investment Agreement") wherein ERC (from funds available to ERC pursuant to the line of credit provided by the Company) agreed to provide secured loans to Verge for the construction of a multi-use condominium and commercial property in Las Vegas, Nevada (the "Verge Property") and for other projects and properties as provided therein. The Investment Agreement was disclosed by the Company in its Form 8-K filed on June 23, 2006. The consideration payable to the Company under the Stock Transfer Agreement is $500,000, which in TIHG's discretion, may be added to the outstanding loan amount owing to the Company by ERC (the "Loan Amount"). The effective date of the Stock Transfer Agreement is January 1, 2007 (the "Effective Date"). All rights assigned to the Company under the Investment Agreement will be considered to be assigned as of the Effective Date. Accordingly, as of the Effective Date, the Company shall be the sole secured and primary beneficiary under the Investment Agreement.

 

Result of Discontinued Operation- 2006

 

The following table shows the details of result of discontinued operation per reporting units for the nine months ended September 30, 2006 as follows:

 

Loss from discontinued Hungarian operations			(928,122	)
Income from discontinued Romanian operations			588,566
Gain on disposal of the Hungarian and Romanian operations, net of tax			15,939,858
Income from discontinued operations			15,600,302

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8. Commitments and Contingencies

Employment Agreements

The Company entered into a six-year agreement with its Chief Executive Officer, Csaba Törő, on October 18, 1999, which commenced January 1, 2000, and provided for annual compensation in the amount of $96,000. The agreement was amended in 2004 and 2005. The amended agreement provides for an annual salary of $200,000 and a bonus of up to $150,000 in 2006, 2007 and 2008, as well as an annual car allowance of $30,000 for the same periods. On May 24, 2006, the Company entered into a Severance Agreement with Mr. Toro. In consideration for Mr. Toro agreeing to relinquish and release all rights and claims under the employment agreement, including the payment of his annual salary, the Company agreed to pay Mr. Toro a one-time settlement fee of $750,000. Mr. Toro submitted his resignation as Chief Executive Officer and Director of the Company effective June 1, 2006. The severance was paid in full in May 2006.

The Company entered into a two-year employment agreement with Moshe Schnapp as President and Director of the Company, which commenced on April 15, 2005 and provided for annual compensation in the amount of $250,000 to be paid in the form of the Company’s shares of common stock. The number of shares to be received by Mr. Schnapp was calculated based on the average closing price 10 days prior to the commencement of each employment year. At April 14, 2006, Mr. Schnapp received 82,781 Emvelco shares of common stock of which 58,968 were issued in January 2006. In July 2006, the Company issued the remaining 46,007 shares of common stock for services from January 1, 2006 through July 30, 2006. Mr. Schnapp resigned as President and Director in August 2006 and waived his rights to any further compensation.

 

Effective July 1, 2006, the Company entered into a five-year employment agreement with Yossi Attia as the President of ERC which commenced on July 1, 2006 and provides for annual compensation in the amount of $240,000, an annual bonus not less than $120,000 per year, and an annual car allowance. At December 31, 2006, the car allowance expense amounted to $19,220. Mr. Attia is also entitled to a special bonus equal to 10% of the earnings before income tax, depreciation and amortization (“EBITDA”) of ERC, which such bonus is payable in shares of common stock of the Company; provided, however, the special bonus is only payable in the event that Mr. Attia remains continuously employed by ERC, and Mr. Attia shall not have sold shares of common stock of the Company on or before the payment date of the special bonus, unless such shares were received in connection with the exercise of an option that was scheduled to expire within one year of the date of exercise. In addition, on August 14, 2006, the Company amended the agreement to provide that Mr. Attia shall serve as the Chief Executive Officer of the Company for a term of two years commencing August 14, 2006 and granting annual compensation of $250,000 to be paid in the form of Company shares of common stock. The number of shares to be received by Mr. Attia is calculated based on the average closing price 10 days prior to the commencement of each employment year. Mr. Attia will receive 111,458 Emvelco shares of common stock for his first year service. Mr. Attia also agreed to not directly or indirectly compete with the business of the Company or ERC during his employment and for a period of two years following termination of employment. No shares were issued to Mr. Attia in 2006.

 

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On May 31, 2007 the Company, ERC and Mr. Attia entered into a Memorandum of Understanding, pursuant to which, the August 14, 2006 amendment to Mr. Attia’s employment agreement was terminated, and effective as of January 1, 2007, all of ERC’s rights and obligations under Mr. Attia’s employment agreement were transferred to the Company.

 

On September 17, 2007, the Board of Directors voted to appoint Darren C. Dunckel as a director of the Company. There are no understandings or arrangements between Mr. Dunckel and any other person pursuant to which Mr. Dunckel was selected as a director. Mr. Dunckel presently does not serve on any Company committee. Mr. Dunckel may be appointed to serve as a member of a committee although there are no current plans to appoint Mr. Dunckel to a committee as of the date hereof. Mr. Dunckel does not have any family relationship with any director, executive officer or person nominated or chosen by the Company to become a director or executive officer.

 

Mr. Dunckel has entered into various transactions and agreements with the Company on behalf of ERC, Verge and TIHG (all such transactions have been reported on the Company filings of Form 8Ks). On December 31, 2006, Mr. Dunckel executed the Agreement and Plan of Exchange on behalf of TIHG which was issued shares in ERC in consideration for the exchange of TIHG's interest in Verge. Pursuant to that certain Stock Transfer and Assignment of Contract Rights Agreement dated as of May 14, 2007, the Company transferred its shares in ERC in consideration for the assignment of rights to that certain Investment and Option Agreement, and amendments thereto, dated as of June 19, 2006 which gives rights to certain interests and assets. Mr. Dunckel has represented and executed the foregoing agreements on behalf of ERC, Verge and TIHG. In the event that the Company completes its transaction with Appswing Ltd., in connection with the purchase of Kidron Industrial Holdings Ltd., Mr. Dunckel will execute agreements on behalf of Verge to transfer 100% of Verge and a portion of ERC's interest and assets in Croatia in consideration of the Company receiving a large percentage equity interest in Kidron. Mr. Dunckel on behalf of ERC and/or TIHG will be entitle to $5,000,000 (See note 12 Subsequent Events).

 

Micrologic

On October 11, 2006, the Company committed itself in the financing of Micrologic. The agreement provides for an initial investment by the Company of up to $1,000,000, with warrants to purchase additional equity for additional investment. The Company owns 25.10% of Micrologic; however such equity positions might be revised contingent upon the exercise of the warrants. As of September 30, 2007, $400,000 was transferred as part of this commitment, and no warrants were issued. On September 30, 2007, the Company determined that it would no longer fund the operations of Micrologic and that the amounts previously advanced to would not be collectible. The Company is under negotiations with Micrologic to void the Company’s obligations in connection with further financing and restructure Micrologic in a way that the Company will be released from any further funding commitment.

Lease Agreements

In 2007, the Company entered into a one year agreement for office space. The rent expense related to such lease is $28,800 in 2007 and $0 in 2006, respectively. The Company gave notice of termination with respect to its office space in Beverly Hills, effective November 30, 2007, and will relocate its offices to Verge headquarters in West Hollywood, California.

Legal Proceedings

Except as set forth below, there are no known significant legal procedures that have been filed and are outstanding against the Company.

On April 26, 2006, a lawsuit was filed in the Delaware Court of Chancery (the "Court") by a stockholder of the Company against the Company, each of the Company's Directors and CORCYRA d.o.o., a stockholder of the Company that beneficially owned 39.81% of the Company's outstanding common stock at the date of the lawsuit. The Complaint is titled Laurence Paskowitz v. Csaba Toro et al., C.A. No. 2110-N (the “Complaint”) and was brought individually, and as a class action on behalf of certain of the Company's common stockholders, excluding defendants and their affiliates. The plaintiff alleged that the proposed sale of 100% of the Company's interest in the Company's two Internet and telecom related operating subsidiaries (the "Subsidiaries") constitutes a sale of substantially all of the Company's assets and required approval by a majority of the voting power of the Company's outstanding common stock under Section 271 of the Delaware General Corporation Law. The plaintiff also alleged the defendants breached their fiduciary duties in connection with the sale of the Subsidiaries, as well as the disclosures contained in the proxy statement filed on April 24, 2006. The plaintiff applied for a temporary restraining order seeking to enjoin the special meeting on May 15, 2006.

 

The Company denied any and all allegations of wrongdoing; however, in the interests of conserving resources, on April 28, 2006, the parties to the litigation entered into a Memorandum of Understanding (“MOU”) providing for, subject to confirmatory discovery by plaintiff, the negotiation of a formal stipulation of a settlement of the litigation. Pursuant to the MOU, the Board of Directors of the Company agreed to: (i) increase the vote required to approve the sale of 100% of the Company's interest in the Subsidiaries, (ii) revise the disclosure within the Proxy Statement to eliminate the bonus of up to US $400,000, which the Compensation Committee of the Company had the option to pay to select members of management, as the Board of Directors had previously elected to terminate the ability to pay such bonus and (iii) provide supplemental disclosure as contained in the Supplemental Proxy Statement to be mailed to stockholders and filed with the SEC on May 3, 2006.

 

The parties entered into a stipulation of settlement on April 3, 2007. The settlement provided for dismissal of the litigation with prejudice and was subject to Court approval. As part of the settlement, the Company agreed to attorneys' fees and expenses to plaintiff's counsel in the amount of $150,000. Pursuant to the stipulation of settlement, the Company sent out notices to the members of the class on May 3, 2007. A fairness hearing took place on June 8, 2007, where the Delaware Court of Chancery (the "Court") entered an Order and Final Judgment (the "Order"), approving the settlement of the Complaint, authorizing the parties to consummate the settlement in accordance with its terms, certifying the class and dismissing the litigation with prejudice. Pursuant to the settlement, the Company also sent out notices to the members of the class on May 3, 2007. A fairness hearing took place on June 8, 2007, and, as stated above, the Order was entered on June 8, 2007.

 

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The Company filed a complaint in the Superior Court for the County of Los Angeles, against an attorney. The case was filed on February 14, 2007, and service of process has been done. In the complaint the Company is seeking judgment against this attorney in the amount of approximately 250,000 Euros (approximately $316,000 as of the date of actual transferring the funds), plus interest, costs and fees. Defendant has not yet appeared in the action. The Company believes that it has a meritorious claim for the return of monies deposited with defendant in a trust capacity, and, from the documents in the Company’s possession, there is no reason to doubt the validity of the claim. However, management does not have any information on the collectibility of any judgment that might be entered in court. During April 2007 defendant returned $92,694 (70,000 Euros at the relevant time) which netted to $72,694 post legal expenses; the Company has granted him a 15-day extension to file his defense. Post the extension and in lieu of not filing a defense, the Company filed for a default judgment. On October 25, 2007 the Company obtained a California Judgment by court after default against the attorney for the sum of $249,340.65

Navigator Acquisition - Registration Rights

The Company entered into a registration rights agreement dated July 21, 2005, whereby it agreed to file a registration statement registering the 441,566 shares of Company common stock issued in connection with the Navigator acquisition within 75 days of the closing of the transaction. The Company also agreed to have such registration statement declared effective within 150 days from the filing thereof. In the event that Company failed to meet its obligations to register the shares, it may have been required to pay a penalty equal to 1% of the value of the shares per month. The Company obtained a written waiver from the seller stating that the seller would not raise any claims in connection with the filing of registration statement through May 30, 2006. The Company since received another waiver extending the registration deadline through May 30, 2007 without penalty. No provision was made, as Management received a verbal waiver until the end of 2007.

Indemnities Provided Upon Sale of Subsidiaries

On April 15, 2005, the Company sold Euroweb Slovakia. According to the securities purchase contract (the “Contract”); the Company will indemnify the buyer for all damages incurred by the buyer as the result of seller’s breach of certain representations, warranties, or obligations as set in the Contract up to an aggregate amount of $540,000. The buyer shall not be entitled to make any claim under the Contract after the fourth anniversary of the date of the Contract. No claims have been made to-date. At September 30, 2007 the Company accrued $35,000 as the estimated fair value of this indemnity.

On May 23, 2006, the Company sold Euroweb Hungary and Euroweb Romania. According to the share purchase agreement (the “SPA”), the Company will indemnify the buyer for all damages incurred by the buyer as the result of seller’s breach of certain representations, warranties or obligations as provided for in the SPA. The Company shall not incur any liability with respect to any claim for breach of representation and warranty or indemnity, and any such claim shall be wholly barred and unenforceable unless notice of such claim is served upon Emvelco by buyer no later than 60 days after the buyer’s approval of Euroweb Hungary and Euroweb Romania’s statutory financial reports for the fiscal year 2006, but in any event no later than June 1, 2007. In the case of Clause 8.1.6 (Taxes) or Clause 9.2.4 of SPA, the time period is five years from the last day of the calendar year in which the closing date occurs. No claims have been made to date. At September 30, 2007, the Company has accrued $201,020 as the estimated fair value of this indemnity.

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Verge and ERC Options Exercise - Balances Post Agreements:

 

As stated in Note 1 - Organization and Business and pursuant to the Notice, the Company, subject to performance under the Upswing Agreement, further intends to exercise its option, the "Sitnica Option", to purchase ERC's derivative rights and interest in Sitnica d.o.o. through ERC's holdings one-third (1/3) interest in AP Holdings Limited ("AP Holdings"), a company organized under the Companies (Jersey) Law 1991, which equates to a one-third interest in Sitnica d.o.o. ,excluding ERC's interest in AP Holdings. The Sitnica Option is exercisable in the amount of $4,000,000, payable by reducing the outstanding loan amount owed to the Company under the Investment Agreement by $3,550,000 and reducing the Company's deposit with Shalom Atia, Trustee of AP Holdings, by $450,000. Pursuant to the Notice, Emvelco, subject to performance under the Upswing Agreement, intends to exercise its option (the "Verge Option") to purchase a multi-use condominium and commercial property in Las Vegas, Nevada, via the purchase and acquisition of all outstanding shares of common stock of Verge. The Verge Option is exercisable in the amount of $5,000,000 payable in cash - not prior of Verge breaking ground, plus conversion of $10,000,000 loans given to Verge into Equity as consideration for 75,000 shares of Verge. Said transaction was closed on November 1, 2007 (see Note 12 Subsequent Events)

Upon actual closing (see note 12), the ERC loan receivable balance as of September 30, 2007 before closing was $8,994,326, and it will be reduced by about a total of $8,550,000, consisting of $3,550,000 for exercise the one third Sitnica option and $5,000,000 upon Verge breaking ground. The Company Verge balances will be reduced by converting $10,000,000 into Verge equity.

9. Stockholders’ Equity

The Company entered into a two-year employment agreement with Moshe Schnapp as President and Director of the Company beginning on April 15, 2005, which provided for annual compensation in the amount of $250,000 to be paid in the form of the Company shares of common stock. The number of shares to be received by Mr. Schnapp was calculated based on the average closing price 10 days prior to the commencement of each employment year. On August 14, 2006, Moshe Schnapp resigned as President of the Company. In January 2006, the Company issued 58,968 shares of common stock out of the total 82,781 covering the service period from April 15, 2005 to December 31, 2005. In July 2006, the Company issued the remaining 46,007 shares of common stock for services from January 1, 2006 through July 31, 2006. Mr. Schnapp waived his rights to any further compensation.

Effective August 14, 2006, the Company entered into a two-year employment agreement with Yossi Attia as the Chief Executive Officer of the Company, which provided for annual compensation in the amount of $250,000 to be paid in the form of Company shares of common stock. The number of shares to be received by Mr. Attia was calculated based on the average closing price 10 days prior to the commencement of each employment year. Mr. Attia will receive 111,458 Emvelco shares of common stock for his first year service. No shares have been issued in connection with his services in 2006. On May 31, 2007, the Company, ERC and Mr. Attia entered into a MOU, which resulted in the termination of Mr. Attia’s employment with ERC, cancelling the Amendment of August 14, 2006 and effective January 1, 2007 assuming all of the terms of employment of Mr. Attia with the Company instead of ERC. The negation of the Amendment effectively cancels Mr. Attia’s rights to share compensation from January 1, 2007, and will instead entitle Mr. Attia to a pro-ration number of shares from August 14, 2006 until December 31, 2006. The Company made the provision of $72,324 for Mr. Attia’s shareholder equity entitlement in its financial statements.

Through its share repurchase program and Navigator sale, the Company acquired 1,279,893 shares of its common stock at a cost of $2,117,711 as of September 30, 2007.

There were no options or warrants exercised in the period ended September 30, 2007.

Pursuant to the Sale and Purchase Agreement of Navigator, the Company received 622,531 shares of the Company’s common stock as partial consideration on February 16, 2007 (the Closing Date). The Company shares were valued at $1.34 per share, representing the closing price of the Company on the NASDAQ Capital Market on February 16, 2007. The Company canceled the Emvelco common stock acquired during the disposition in the amount of $834,192.

10. Stock Option Plan and Employee Options

(a) Stock option plans

In 2004, the Board of Directors established the “2004 Incentive Plan” (“the Plan”), with an aggregate of 800,000 shares of common stock authorized for issuance under the Plan. The Plan was approved by the Company’s Annual Meeting of Stockholders in May 2004. In 2005, the Plan was adjusted to increase the number of shares of common stock issuable under such plan from 800,000 shares to 1,200,000 shares. The adjustment was approved at the Company’s Annual Meeting of Stockholders in June 2005. The Plan provides that incentive and nonqualified options may be granted to key employees, officers, directors and consultants of the Company for the purpose of providing an incentive to those persons. The Plan may be administered by either the Board of Directors or a committee of two directors appointed by the Board of Directors (the "Committee"). The Board of Directors or Committee determines, among other things, the persons to whom stock options are granted, the number of shares subject to each option, the date or dates upon which each option may be exercised and the exercise price per share.

 

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Options granted under the Plan are generally exercisable for a period of up to ten years from the date of grant. Incentive options granted to stockholders that hold in excess of 10% of the total combined voting power or value of all classes of stock of the Company must have an exercise price of not less than 110% of the fair market value of the underlying stock on the date of the grant. The Company will not grant a nonqualified option with an exercise price less than 85% of the fair market value of the underlying common stock on the date of the grant.

The Company has granted the following options under the Plan:

On April 26, 2004, the Company granted 125,000 options to its Chief Executive Officer, an aggregate of 195,000 options to five employees and an aggregate of 45,000 options to two consultants of the Company (which do not qualify as employees). The stock options granted to the Chief Executive Officer vest at the rate of 31,250 options on November 1, 2004, October 1, 2005, October 1, 2006 and October 1, 2007. The stock options granted to the other employees and consultants vest at the rate of 80,000 options on November 1, 2004, October 1, 2005 and October 1, 2006. The exercise price of the options ($4.78) was equal to the market price on the date of grant. The options granted to the Chief Executive Officer were forfeited/ cancelled in August 2006 due to the termination of his employment. Of the 195,000 options originally granted to employees, 60,000 options were forfeited or cancelled during 2005, while the remaining 135,000 options were forfeited or cancelled in August 2006 due to termination of the five employee contracts. 15,000 options granted to one of the consultants were also forfeited or cancelled in April 2006 due to the termination of the consultant’s contract.

In accordance with SFAS 123, as amended by SFAS 123R, and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”, the Company computed total compensation charges of $162,000 for the grants made to the two consultants. Such compensation charges are recognized over the vesting period of three years. Compensation expense for the year ended December 31, 2006 was $9,921.

 

On March 22, 2005, the Company granted an aggregate of 200,000 options to two of the Company’s Directors. These stock options vest at the rate of 50,000 options on each September 22 of 2005, 2006, 2007 and 2008, respectively. The exercise price of the options ($3.40) was equal to the market price on the date the options were granted. Through December 31, 2005, the Company did not recognize compensation expense under APB 25 as the options had a zero intrinsic value at the date of grant. The adoption of SFAS 123R on January 1, 2006 resulted in a compensation charge of $128,284 for the year ended December 31, 2006. One of the directors was elected as Chief Executive Officer commencing on August 14, 2006, and is not entitled to participate in the plan.

On June 2, 2005, the Company granted 100,000 options to a director of the Company, which vests at the rate of 25,000 options on December 2 of 2005, 2006, 2007, and 2008, respectively. Through December 31, 2005, the Company did not recognize compensation expense under APB 25 as the options had a zero intrinsic value at the date of grant. The adoption of SFAS 123R on January 1, 2006 resulted in a compensation charge of $89,346 for the year ended December 31, 2006. On November 13, 2006, the Director filed his resignation. His options were vested unexercised in February 2007.

(b) Other Options

On October 13, 2003, the Company granted two Directors 100,000 options each, at an exercise price (equal to the market price on that day) of $4.21 per share, with 25,000 options vesting on each April 13, 2004, 2005, 2006 and 2007. There were 100,000 options outstanding as of December 31, 2006. The adoption of SFAS 123R on January 1, 2006 resulted in a compensation charge of $31,824 during the year ended December 31, 2006.

The following table summarizes the total number of shares for which options have been issued (Stock Option Plan, 2004 Incentive Plan, Employment Agreements and grants to Directors) and are outstanding:

 

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		2006
		Options			Weighted average exercise price
Outstanding, January 1,			705,000		$	4.20
Granted			-			-
Exercised			-			-
Forfeited or expired			(275,000	)		4.78
Outstanding, December 31			430,000		$	3.84

No options were granted and no options were exercised during the nine month period ended September 30, 2007 and the year ended December 31, 2006.

The following table summarizes information about shares subject to outstanding options as of December 31, 2006, which was issued to current or former employees, consultants or directors pursuant to the 2004 Incentive Plan and grants to Directors:

		Options Outstanding				Options Exercisable
Number Outstanding		Range of Exercise Prices		Weighted- Average Exercise Price		Weighted- Average Remaining Life in Years		Number Exercisable		Weighted- Average Exercise Price
100,000		$4.21		$4.21		3.76		75,000		$4.21
30,000		$4.78		$4.78		4.31		30,000		$4.78
200,000		$3.40		$3.40		5.22		100,000		$3.40
100,000		$4.05		$4.05		5.42		50,000		$4.05
430,000		$3.40-$4.78		$3.84		4.46		255,000		$3.93

(c) Warrants

On June 7, 2005, the Company granted 100,000 warrants to a consulting company as compensation for investor relations services at exercise prices as follows: 40,000 warrants at $3.50 per share, 20,000 warrants at $4.25 per share, 20,000 warrants at $4.75 per share and 20,000 warrants at $5 per share. The warrants have a term of five years and trenches vest proportionately at a rate of a total 8,333 warrants per month over a one year period. The warrants are being expensed over the performance period of one year. In February 2006, the Company terminated its contract with the consultant company providing investor relation services. The warrants granted under the contract were reduced time-proportionally to 83,330, based on the time in service by the consultant company.

11. Treasury Stock

In June 2006, the Company's Board of Directors approved a program to repurchase, from time to time, at management's discretion, up to 700,000 shares of the Company's common stock in the open market or in private transactions commencing on June 20, 2006 and continuing through December 15, 2006 at prevailing market prices. Repurchases will be made under the program using our own cash resources and will be in accordance with Rule 10b-18 under the Securities Exchange Act of 1934 and other applicable laws, rules and regulations. The Shemano Group is acting as agent for the Company stock repurchase program. As of September 30, 2007, the Company acquired 1,279,893 shares of its common stock at a cost of $2,117,711.

Pursuant to the unanimous consent of the Board of Directors in September 2006, the number of shares that may be purchased under the Repurchase Program was increased from 700,000 to 1,500,000 shares of common stock and the Repurchase Program was extended until October 1, 2007, or until the increased amount of shares is purchased.

Pursuant to the Sale and Purchase Agreement of Navigator, the Company received 622,531 shares of the Company’s common stock as partial consideration on February 16, 2007 (the Closing Date). The Company shares were valued at $1.34 per share, representing the closing price of the Company on the NASDAQ Capital Market on February 16, 2007. The Company canceled the Emvelco common stock acquired during the disposition in the amount of $834,192.

12. Subsequent events

Appswing Agreement and Kidron:

Based on a series of agreements executed in June and July 2007, Emvelco Corp., finalized its agreements with Appswing Ltd., a boutique investment banking firm and unrelated third party (the "Appswing Agreements"). The Appswing Agreements effectuates certain of the terms and provisions set forth in the agreements where Appswing purchased control of an entity traded on the Tel-Aviv Stock Exchange named Kidron Industrial Holdings Ltd. ("Kidron"). The Investors (The Company, ERC and AP) and Appswing will effectuate a transaction (the "Transaction") pursuant to which the Investors will acquire About 72.11% of Kidron), in exchange for the transfer of the rights to certain real estate projects in Las Vegas and Croatia to Kidron. Appswing, among other items, will advise the Investors on the steps necessary to effectuate the Transaction. Following the closing of the Transaction (the "Closing"), Kidron will undertake a financing to raise additional capital (the "Financing").

 

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On July 19, 2007, as contemplated in the Appswing Agreement, Emvelco also entered into an agreement by and between Kidron, on the one side, and the Investors, on the other side (the "Kidron Agreement"). The Kidron Agreement provides that the Investors will transfer certain interests in real estate projects in Las Vegas and Croatia to Kidron in consideration of shares of Kidron, equal to about 72.11% of the issued capital stock of Kidron. Further, Kidron will issue to Appswing shares of Kidron, which shall constitute about 13.66% of the issued capital stock of Kidron.

 

The closing of the Kidron Agreement is subject to the completion of due diligence by the Investors and other conditions, including the approval of an agreement pursuant to which Mr. Yossi Attia, chief executive officer of the Company, will serve as chief executive officer of Kidron, and the approval of an agreement pursuant to which Mr. Shalom Attia, Mr. Yossi Attia's brother, will serve as Vice President to Kidron's operations in Europe. Mr. Yossi Attia will continue to serve as the chairman of the board and executive officer of the Company.

 

On October 15, 2007, Emvelco delivered that certain Notice of Exercise of Option ("Notice") to ERC, TIHG, Verge and Darren C. Dunckel, individual, President of ERC and/or representative of the foregoing parties. Pursuant to the Notice, the Company, subject to performance under the Upswing Agreement, further intends to exercise its option (the "Sitnica Option") to purchase ERC's derivative rights and interest in Sitnica d.o.o. through ERC's holdings (one-third (1/3) interest) in AP Holdings Limited ("AP Holdings"), a company organized under the Companies (Jersey) Law 1991, which equates to a one-third interest in Sitnica d.o.o. (excluding ERC's interest in AP Holdings). The Sitnica Option is exercisable in the amount of $4,000,000, payable by reducing the outstanding loan amount owing to the Company under the Investment Agreement by $3,550,000 and reducing the Company's deposit with Shalom Atia, Trustee of AP Holdings, by $450,000.

 

Based on these series of agreement, and assuming final exercise of Emvelco option, as well final execution of the Kidron agreements, the Company presents below the Verge Performa balance sheet as of September 30, 2007 as if the exercise of option would take place.

 

The Performa balance sheet shows the land was increased based on fair value, less applicable deferred taxes. This increases the total equity in Verge up to the amount paid by Emvelco, $15,000,000. The Company received an appraisal as of August 21, 2007, from an independent US appraisal company, on the vacant land for $15,500,000.

 

The Verge Performa statements below were done based on the legal agreements between the parties, which a new cash payment from Emvelco totaling to $5,000,000 (subject to ground breaking) and capitalization of $10,000,000 in loans. The transaction is supported by an external appraisal for the Verge project.

 

Verge Living Corporation

Pro Forma Balance Sheet

		(unaudited)
		September 30, 2007
ASSETS
Current assets:
Cash and cash equivalents		$	70,183
Prepaid and other current assets			379,061
Total current assets			449,244
Restricted cash			4,354,635
Investment in Land Development			21,818,542
Fixed Assets, net after Depreciation			34,956
Total assets		$	26,657,377
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts Payable			391,392
Other current liabilities			70,000
Accrued expenses			56,233
Secured Loan from Emvelco			2,146,750
Total current liabilities			2,664,375
Liability for escrow refunds			4,354,635
Liability for brokerage fees due on closing			1,972,826
Deferred taxes			2,665,541
Total liabilities			11,657,377
Commitments and contingencies
Stockholders' equity
Common stock, $1 par value - Authorized 75,000, shares; 75,000 shares issued and outstanding			75,000
Additional paid-in capital			15,313,362
Accumulated deficit			(388,362	)
Total stockholders' equity			15,000,000
Total liabilities and stockholders' equity		$	26,657,377

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On November 1, 2007, that certain closing (the "Closing") took place by and between Emvelco Corp. and AP Holdings, on the one hand and Kidron Industrial Holdings, Ltd. ("Kidron") on the other hand, in connection with that certain agreement dated July 19, 2007 with respect to the transfer of certain of the Company's assets to Kidron (the "Kidron Transaction"), as reported on Emvelco's 8-K filings dated June 11, 2007 and July 26, 2007. In the Minutes of Completion of the Agreement dated July 19, 2007 (the "Agreement") that was conducted on November 1, 2007, the Parties acknowledged that the preliminary conditions for the Kidron Transaction were satisfied, that due diligence on the acquired assets; namely, the capital stock of Verge Living Corporation ("Verge") and Sitnica, d.o.o. ("Sitnica") had been completed and accepted, and that the Emvelco shall receive and be issued pursuant to the Closing 734,060,505 shares of stock in Kidron, represent about 58% of Kidron. Upon closing Verge became a fully owned subsidiary of Kidron.

On October 29, 2007 Verge entered into a loan agreement effective November 2, 2007 with Kidron. The loan is for period of 12 months beginning November 2, 2007 and will bear interest at the rate of 12% and is payable at maturity. On November 2, 2007, Kidron funded Verge with $1,700,000, and Verge paid off the Emvelco Loans in part. The $10,000,000 loan to Verge was capitalized into Verge equity.

Appswing will receive up to $1,000,000, plus value added tax as applicable, in consideration from the Investors, payable as follows: (a) $250,000 was paid to Appswing in June 2007 under the First Agreement, all of which was paid by the Company, and (b) $750,000 at the completion of the financing. In addition, upon the Closing, the Investors will purchase additional shares of Kidron, equal to approximately 4% of the outstanding shares of Kidron from Appswing, for $3,250,000, payable as follows: (a) $1,250,000.00 upon Closing, and (b) $2,000,000.00 within 30 days of Closing. If the Investors elect not to effect the Transaction, the Appswing Agreement will be terminated, and the Company's $250,000 initial payment made in June 2007 will be forfeited. On November 2007 the Company advanced $700,000 to Appswing.

Directors:

 

On October 4, 2007, Robin Gorelick, resigned as a director of the Company. Ms. Gorelick will continue to act as general counsel and corporate secretary for the Company.

 

NASDAQ:

 

On November 1, 2007, the Company received a NASDAQ Staff Determination (the "Determination") indicating that the Company has failed to comply with the requirement for continued listing set forth in Marketplace Rule 4310(c)(4) requiring the Company to maintain a minimum bid price of $1.00 and that its securities are, therefore, subject to delisting from the NASDAQ Capital Market if it does not regain compliance by April 29, 2008. If the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days anytime prior to April 29, 2008, then the NASDAQ Staff will provide written notification that it complies with the Rule. In the event that the Company does not meet the minimum bid requirement by April 29, 2008 but satisfies all initial listing criteria, the Company will be given a 180 day extension to meet the minimum bid price. In the event that the Company does not meet the initial listing criteria, NASDAQ will provide the Company with written notification that the Company's securities will be delisted, which such determination may be appealed by the Company.

 

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Secured Bank Loan:

 

On November 2007 the Company via a single assets entity (610 N Crescent Heights, LLC) - owned 100% by the Company, entered into a construction loan agreement with a commercial bank for the amount of $1,440,000. The existing loan of $720,000 was paid in full via the construction loan obtained.

Restricted cash and line of credits:

On August and November, 2006, the Company entered into two $4,000,000 Revolving Line of Credits (“line of credits”) with a commercial bank. As security for this credit facility, the Company deposited two time $4,000,000 into a certificate of deposits (“CD”) as collateral for a two year period. The CD earns interest at a rate of 5.25% and 5.12% annually, and any interest earned on the CD is restricted from withdrawal and must remain in the account for the entire term. The interest rate on the line of credit is 6% annually. The outstanding balance on the lines of credit was $7,475,692 as of September 30, 2007.

On November 8, 2007, the lines of credits were increased and extended as the following: $4,180,000 until October 16, 2008 and $4,229,000 until September 1, 2008. Both lines bear interest of 5.87% and are secured by restricted cash deposited in CD’s with the bank.  

 

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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

Emvelco operates in the US. For the period from June 11, 2006 through December 30, 2006, ERC was a wholly owned subsidiary of Emvelco. On December 31, 2006, the Company entered into an Exchange Agreement with TIHG, whereby TIHG became the primary beneficiary of ERC. Thus, the Company is not required to consolidate ERC, but rather report the Company’s interest in ERC by using the equity method. On May 14, 2007, the Company entered into a Stock Transfer and Assignment of Contract Rights Agreement (the "ERC Agreement") with ERC, ERC's principal shareholder TIHG and ERC's wholly owned subsidiary Verge. Pursuant to the Agreement, the Company transferred and conveyed its 1,000 Shares (representing a 43.33% interest) (the "ERC Shares") in ERC to TIHG to submit to ERC for cancellation and return to Treasury. ERC, TIHG and Verge agreed to assign (the "Assignment") to the Company all rights in and to that certain Investment Agreement, dated as June 19, 2006, and all Amendments thereto (collectively, the "Investment Agreement") wherein ERC (from funds available to ERC from the Company) agreed to provide secured loans to Verge for the construction of a multi-use condominium and commercial property in Las Vegas, Nevada (the "Verge Property").

The Company’s position is based on a detailed analysis conducted by management of FASB Interpretation No. 46R: Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (“FIN 46R”), the accounting pronouncements governing consolidation.

Under its FIN 46R analysis, the Company determined that ERC is a variable interest entity. This in turn required a determination as to which enterprise is the primary beneficiary. The Company determined that TIHG, rather than Emvelco, is the primary beneficiary. The Company performed an analysis of the calculated expected losses of ERC. Of these amounts 56.67% was allocated to TIHG. Because Emvelco is not the primary beneficiary of ERC, Emvelco should not consolidate ERC under FIN 46R, but should report the 43.33% interest in ERC using the equity method. Accordingly, TIHG should consolidate ERC.

As a result of the Company’s analysis set forth above, the Company determined that, under FIN 46R, the Company did not consolidate ERC for the year ended December 31, 2006.

On October 11, 2006, the Company committed itself in the financing of Micrologic, Inc. (“Micrologic”), a Nevada corporation, engaged in the design and production of Electronic Design Automation (“EDA”) applications and Integrated Circuit (“IC”) design processes; specifically, the development and production of the NanoToolBox ^TM tools suite, which is a smart platform designed to accelerate IC's design time and shrink time to market factor. The agreement provides for an initial investment by the Company of up to $1,000,000, with warrants to purchase additional equity for additional investment. The Company owns 25.10% of Micrologic; however such equity positions might be revised contingent upon the exercise of the warrants. As of September 30, 2007, $400,000 was transferred as part of this commitment, and no warrants were issued.

The Company’s interest in Micrologic has been consolidated in accordance with FIN46R, “Consolidation of Variable Interest Entities”. The Company is the primary beneficiary of Micrologic due to the VIE’s reliance on Emvelco to finance its’ ongoing business and software development activities. On September 30, 2007, the Company determined that it would no longer fund the operations of Micrologic and that the amounts previously advanced to Micrologic would not be collectible. Therefore, the Company wrote off the $400,000 loan. The Company consolidated the results of Micrologic’s operations from October 11, 2006 through September 30, 2007.

 

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On February 16, 2007, the Company completed the sale of Navigator for $3,200,000 in cash and the transfer to the Company of 622,531 shares of the Company. The closing of the sale of Navigator occurred on February 16, 2007. On May 3, 2007 the Company surrendered said 622,531 stock certificates together with stock powers to American Stock Transfer & Trust Company the Company’s transfer agent for return to Treasury and cancellation.

The sale of Euroweb Slovakia, Euroweb Hungary, Euroweb Romania and Navigator met the criteria for presentation as discontinued operations under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (“SFAS 144”). Therefore, Euroweb Slovakia, Euroweb Hungary, Euroweb Romania and Navigator are reclassified as discontinued operations in the financial statements of the Company in 2006.

The Company operates in financial investment in real estate development for subsequent sales, investment and financing activities, directly or through affiliates currently in the USA.

In June 2006, the Company commenced operations in the real estate industry through ERC and its subsidiaries. ERC has commenced developments in the real estate industry, which must satisfy the parameters set by the Board of Directors as follows:

·	Any investment in the real estate opportunity (the “Proposed RE Investment”), including loans, shall not exceed a planned period of three years;

 

·	The expected return on investment on the Proposed RE Investment will be at minimum 15% per year;

 

·	The Proposed RE Investment will not be leveraged in excess of $1.50 for each $1.00 invested in equity; and

 

·	Each Proposed RE Investment will have a clear exit strategy (i.e. purchase, development and sale) and no Proposed RE Investment intent will be to acquire income producing real estate.

As stated above, on May 14, 2007, the Company entered into the ERC Agreement pursuant to which the Company transferred and conveyed the ERC Shares to TIHG to submit to ERC for cancellation and return to treasury. ERC, TIHG and Verge agreed to assign the Assignment.

 

The consideration payable to the Company under the Stock Transfer Agreement is $500,000, which in TIHG's discretion, may be added to the outstanding loan amount owing to the Company by ERC (the "Loan Amount"). As of May 14, 2007, the current outstanding Loan Amount owing to the Company is approximately $12 million. Under the Stock Transfer Agreement, in no event shall the Loan Amount exceed eighty percent (80%) of the fair market value of the Verge Property. Pursuant to the Stock Transfer Agreement, a current appraisal of the Verge Property was presented to the Company on May 22, 2007, valuing the Verge Property at $14,800,000. On August 2007, Verge obtained an appraisal of said property, valued at $15,500,000). The effective date of the Stock Transfer Agreement is January 1, 2007 (the "Effective Date"). All rights assigned to the Company under the Investment Agreement will be considered to be assigned as of the Effective Date. Accordingly, as of the Effective Date, the Company shall be the sole secured and primary beneficiary under the Investment Agreement.

 

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As of the Effective Date, under the Investment Agreement, each loan made to Verge is due on demand or upon maturity on January 14, 2008. If the Company requests that the funds be paid on demand prior to maturity, then Verge shall be entitled to reduce the amount requested to be prepaid by 10%. The 10% discount will be paid in the form of shares of common stock of the Company, which will be computed by dividing the dollar amount of the 10% discount by the market price of the Company's shares of common stock. The terms of the loans require that the Company, be paid-off the greater of (i) the principal including 12% interest per annum or (ii) 33% of all gross profits derived from the Verge Property. In addition, the Company has the right to acquire the Verge Property for a purchase price of $15,000,000 through January 1, 2015. The purchase is payable in $10,000,000 in cash and $5,000,000 in shares of common stock of the Company or all cash per the Company’s discretion.

 

Based on a series of agreements executed in June and July 2007, Emvelco Corp., finalized its agreements with Appswing Ltd - A boutique Investment Banker - third party (the "Appswing Agreements"). The Appswing Agreements effectuates certain of the terms and provisions set forth in the agreements where Appswing purchased control of an entity traded on the Tel-Aviv Stock Exchange named Kidron Industrial Holdings Ltd. ("Kidron"). The Investors (The Company, ERC and AP) and Appswing will effectuate a transaction (the "Transaction") pursuant to which the Investors will acquire About 72.11% of Kidron), in exchange for the transfer of the rights to certain real estate projects in Las Vegas and Croatia to Kidron. Appswing, among other items, will advise the Investors on the steps necessary to effectuate the Transaction. Following the closing of the Transaction (the "Closing"), Kidron will undertake a financing to raise additional capital (the "Financing").

 

On July 19, 2007, as contemplated in the Appswing Agreement, Emvelco also entered into an agreement by and between Kidron, on the one side, and the Investors, on the other side (the "Kidron Agreement"). The Kidron Agreement provides that the Investors will transfer certain interests in real estate projects in Las Vegas and Croatia to Kidron in consideration of shares of Kidron, equal to about 72.11% of the issued capital stock of Kidron. Further, Kidron will issue to Appswing shares of Kidron, which shall constitute about 13.66% of the issued capital stock of Kidron.

 

The closing of the Kidron Agreement is subject to the completion of due diligence by the Investors and other conditions, including the approval of an agreement pursuant to which Mr. Yossi Attia, chief executive officer of the Company, will serve as chief executive officer of Kidron, and the approval of an agreement pursuant to which Mr. Shalom Attia, Mr. Yossi Attia's brother, will serve as Vice President to Kidron's operations in Europe. Mr. Yossi Attia will continue to serve as the chairman of the board and executive officer of the Company.

 

On October 15, 2007, Emvelco delivered that certain Notice of Exercise of Option ("Notice") to ERC, TIHG, Verge and Darren C. Dunckel, individual, President of ERC and/or representative of the foregoing parties. Pursuant to the Notice, the Company, subject to performance under the Upswing Agreement, further intends to exercise its option (the "Sitnica Option") to purchase ERC's derivative rights and interest in Sitnica d.o.o. through ERC's holdings (one-third (1/3) interest) in AP Holdings Limited ("AP Holdings"), a company organized under the Companies (Jersey) Law 1991, which equates to a one-third interest in Sitnica d.o.o. (excluding ERC's interest in AP Holdings). The Sitnica Option is exercisable in the amount of $4,000,000, payable by reducing the outstanding loan amount owing to the Company under the Investment Agreement by $3,550,000 and reducing the Company's deposit with Shalom Atia, Trustee of AP Holdings, by $450,000.

On November 1, 2007, that certain closing (the "Closing") took place by and between Emvelco Corp. and AP Holdings, on the one hand and Kidron Industrial Holdings, Ltd. ("Kidron") on the other hand, in connection with that certain agreement dated July 19, 2007 with respect to the transfer of certain of the Company's assets to Kidron (the "Kidron Transaction"), as reported on Emvelco's 8-K filings dated June 11, 2007 and July 26, 2007. In the Minutes of Completion of the Agreement dated July 19, 2007 (the "Agreement") that was conducted on November 1, 2007, the Parties acknowledged that the preliminary conditions for the Kidron Transaction were satisfied, that due diligence on the acquired assets; namely, the capital stock of Verge Living Corporation ("Verge") and Sitnica, d.o.o. ("Sitnica") had been completed and accepted, and that the Emvelco shall receive and be issued pursuant to the Closing 734,060,505 shares of stock in Kidron, representing about 58% of Kidron. Upon Closing, Verge became a fully owned subsidiary of Kidron.

On October 29, 2007 Verge entered into a loan agreement effective November 2, 2007 with Kidron. The loan is for a period of 12 months from November 2, 2007 and will bear interest at the rate of 12% per annum and is payable at maturity of said loan. On November 2, 2007, Kidron funded Verge with $1,700,000., and Verge partially paid off the Emvelco Loans, whereas the amount of $10,000,000 loan to Verge was capitalized into Verge equity.

Appswing will receive up to $1,000,000, plus value added tax as applicable, in consideration from the Investors, payable as follows: (a) $250,000 paid to Appswing in June 2007 under the First Agreement (all of which was paid by the Company) and (b) $750,000 at the completion of the financing. In addition, upon the Closing, the Investors will purchase additional shares of Kidron, equal to approximately 4% of the outstanding shares of Kidron from Appswing, for $3,250,000, payable as follows: (a) $1,250,000.00 upon Closing, and (b) $2,000,000.00 within 30 days of Closing. If the Investors elect not to effect the Transaction, the Appswing Agreement will be terminated, and the Company's $250,000 initial payment made in June 2007 will be forfeited. On November 2007 the Company advanced $700,000 to Appswing.

 

The Board of Directors of the Company has approved the Notice and ratified the transactions there under pursuant to Consent of the Board of Directors dated July 16, 2007; except that Yossi Attia abstained with respect to the vote and ratification of the Sitnica Option as his brother is an equity owner in AP Holdings.

 

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In June 2006, the Company’s Board of Directors approved a program to repurchase, from time to time, at management's discretion, up to 700,000 shares of the Company’s common stock in the open market or in private transactions commencing on June 20, 2006 and continuing through December 15, 2006 at prevailing market prices. Repurchases will be made under the program using our own cash resources and will be in accordance with Rule 10b-18 under the Securities Exchange Act of 1934 and other applicable laws, rules and regulations. The Shemano Group act as agent for the Company’s stock repurchase program. Pursuant to the unanimous consent of the Board of Directors in September 2006, the number of shares that may be purchased under the Repurchase Program was increased from 700,000 to 1,500,000 shares of common stock and the Repurchase Program was extended until October 1, 2007 or until the increased amount of shares is purchased.

As of September 30, 2007, the Company held 1,279,893 treasury shares at a cost of $2,117,711.

 

Acquisitions and disposals

(a) On December 31, 2006, the Company and its subsidiary ERC entered into an Agreement and Plan of Exchange with Verge and its sole shareholder, TIHG. Pursuant to the Exchange Agreement, ERC issued shares to TIHG in exchange for 100% of the outstanding securities of Verge. After the exchange, the Company owned 43.33% of ERC, TIHG owned 56.67% and Verge became a wholly-owned subsidiary of ERC.

In accordance with FAS141, Business Combinations, the transaction was valued based on the fair value of Verge, the acquired company, which was supported by a current appraisal at the time of the transaction.

(b) Disposal of Navigator and ERC

On February 16, 2007, the Company completed the sale of Navigator for $3,200,000 in cash and the transfer to the Company of 622,531 shares of the Company for cancellation. The closing of the sale of Navigator occurred on February 16, 2007. On May 3, 2007 the Company surrendered said 622,531 stock certificates together with stock powers to American Stock Transfer & Trust Company the Company’s transfer agent for cancellation and return to Treasury.

On May 14, 2007, pursuant to the Stock Transfer Agreement, the Company transferred and conveyed its 1,000 Shares (representing a 43.33% interest) in ERC to TIHG to submit to ERC for cancellation and return to Treasury. ERC, TIHG and Verge agreed to assign to the Company all rights in and to the Investment Agreement.

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(c) Notice of Exercise of Option

As described in details above, on October 15, 2007, the Company delivered Notice of Exercise of Option ("Notice") to Emvelco RE Corp., a Nevada corporation ("ERC"), The International Holdings Group Ltd., a Marshall Islands corporation, Verge Living Corporation, a Nevada corporation ("Verge") and Darren C. Dunckel, individual, President of ERC and/or representative of the foregoing parties.

On November 1, 2007, that certain closing (the "Closing") took place by and between Emvelco Corp. and AP Holdings, on the one hand and Kidron Industrial Holdings, Ltd. ("Kidron") on the other hand, in connection with that certain agreement dated July 19, 2007 with respect to the transfer of certain of the Company's assets to Kidron (the "Kidron Transaction"), as reported on Emvelco's 8-K filings dated June 11, 2007 and July 26, 2007. In the Minutes of Completion of the Agreement dated July 19, 2007 (the "Agreement") that was conducted on November 1, 2007, the Parties acknowledged that the preliminary conditions for the Kidron Transaction were satisfied, that due diligence on the acquired assets; namely, the capital stock of Verge Living Corporation ("Verge") and Sitnica, d.o.o. ("Sitnica") had been completed and accepted, and that the Emvelco shall receive and be issued pursuant to the Closing 734,060,505 shares of stock in Kidron, represent about 58% of Kidron. Upon Closing Verge became fully owned Subsidiary of Kidron.

The closing of the Kidron Agreement is subject to the completion of due diligence by the Investors and other conditions, including the approval of an agreement pursuant to which Mr. Yossi Attia, chief executive officer of the Company, will serve as chief executive officer of Kidron, and the approval of an agreement pursuant to which Mr. Shalom Attia, Mr. Yossi Attia's brother, will serve as Vice President to Kidron's operations in Europe. Mr. Yossi Attia will continue to serve as the chief executive officer of the Company.

 

The Board of Directors of the Company have approved the Appswing Agreement and the Kidron Agreement and ratified the transactions there under. Yossi Attia abstained with respect to the votes.

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Plan of operation

The Company’s plan of operation for the next 12 months will include the following components:

 

We plan to finance and invest in real estate developments, including obtaining financing of Verge Living for the purpose of commencing or continuing the project in 2008. Our plan is to proceed with financial investment in real estate developments in the US. This phase of development will include the following elements:

 

(a) Attempting to take a financing role in raising bond or debt financing through Verge and AP Holdings if possible. Any cash receipt from financing will be utilized partly by the Company’s financial investment in real estate developments in the US. In connection with Verge and AP Holdings’ financing, the Company anticipates spending approximately $400,000 on professional fees over the next 12 months in order to pursue these attempts.

(b) Verge Project - Verge is pursuing construction loan and mezzanine financing for the Verge Property. The Company is seeking to participate in financing of a construction loan through a commercial bank and/or private investors potentially as equity holder.

(c) The Company completed the sale of the Company’s ownership interest in ERC, pursuant to which all rights in and to the Investment Agreement were assigned to the Company. The Board of Directors wishes to maintain cash liquidity, and, therefore has instructed management to limit the line of credit provided to Verge as a percentage of the fair value of the Verge Property.

(d) The Company anticipates spending approximately $150,000 on professional fees over the next 12 months on the filing of a registration statement on Form SB-2 under the Securities Act of 1933, as amended.

(e) Subject to obtaining adequate financing, the Company anticipates that it will be spending approximately $5,000,000 over the next 12 month period pursuing its stated plan of investment operation. The Company’s present cash reserves are not sufficient for it to carry out its plan of operation without substantial additional financing. The Company is currently attempting to arrange for financing through financial arrangements that would enable it to proceed with its plan of investment operation.

 

(f) The Company will not continue with the treasury share repurchase program, as it expired per its original terms.

 

(g) The outstanding amount of commitment to the Company’s investment in Micrologic is $400,000. Micrologic believes it will have developed products in 2007 of which there is no guarantee. On September 30, 2007, the Company determined that it would no longer fund the operations of Micrologic and that the amounts previously advanced to Micrologic would not be collectible. The Company is under negotiations with Micrologic to void the Company’s obligations in connection with further financing and restructure Micrologic in a way that the Company will be released from any further funding commitment.

The current situation in the US mortgage market is on of tight money in lieu of the Sub-Prime crises, whereby many borrowers are having a difficult time obtaining financing. This “tight money” policy is the result of several factors: an increase in home foreclosures; an increase in the failure of mortgage companies; a steep decline in funding available mortgages (primarily sub prime mortgage but also “A” credit mortgages) and a decline in housing prices. As relates to the Company project’s involvements the current crises will be monitored closely by the Company that may lead to certain delays or termination in the Company plan of operation. The Company’s actual expenditures and business plan may differ from the one stated above. Its board of directors may decide not to pursue this plan as a whole or part of it. In addition, the Company may modify the plan based on available financing. The US real estate market trends are toward a soft market in the last year. Management believes that the “softer market” is due to the Federal Reserve Bank Policy of raising interest rates (in order to depress inflation trends). Fluctuations in interest rates make financing more expensive, and more difficult to obtain.

The residential real estate markets in Southern California, Nevada and Croatia are more active during spring and summer. It is the Company’s desire to complete its financial development during the summer, to increase the potential for a fast sale. In some jurisdictions, such as Nevada, regulations allow selling of units off-plans. The Company anticipates that these seasonal factors should not affect the Company’s financial condition or results of operation, though they may moderately affect the liquidity position of the Company.

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Summery Plan of Operation:

The Company believes that its liquidity will be enough for implementing its plan, and the Company anticipates that subject to actual pre-sales, it will obtain financing to complete its projects in the short-term as well as in the long-term. If actual sales are inadequate, the Company will not continue spending its existing cash, and therefore anticipates that it can avoid liquidity problems. 

The Company’s primary source of liquidity comes from divesting its ISP business in Central Eastern Europe, which was concluded on May 2006, when it completed the disposal of Euroweb Hungary and Euroweb Romania to Invitel. In February 2007, the Company closed the disposal of Navigator, which added approximately $3.2 million net of cash to its internal source of liquidity.

Our external source of liquidity is based on a project by project basis. The Company intends to obtain financial investment in land and construction loans from commercial lenders for its development activities.

 

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements that have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). This preparation requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. US GAAP provides the framework from which to make these estimates, assumptions and disclosures. We choose accounting policies within US GAAP that management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Management regularly assesses these policies in light of current and forecasted economic conditions. Although we believe that our estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions for a number of reasons. Our accounting policies are stated in Note 2 to the 2006 Consolidated Financial Statements, as well as in our 2007 interim financials. We identified the following accounting policies as critical to understanding the results of operations and representative of the more significant judgments and estimates used in the preparation of the consolidated financial statements: impairment of goodwill, allowance for doubtful accounts, acquisition related assets and liabilities, accounting of income taxes and analysis of FIN46R as well as FASB 67.

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·

Investment in Real Estate and Commercial Leasing Assets. Real estate held for sale and construction in progress is stated at the lower of cost or fair value less costs to sell and includes acreage, development, construction and carrying costs and other related costs through the development stage. Commercial leasing assets, which are held for use, are stated at cost. When events or circumstances indicate than an asset’s carrying amount may not be recoverable, an impairment test is performed in accordance with the provisions of SFAS 144. For properties held for sale, if estimated fair value less costs to sell is less than the related carrying amount, then a reduction of the assets carrying value to fair value less costs to sell is required. For properties held for use, if the projected undiscounted cash flow from the asset is less than the related carrying amount, then a reduction of the carrying amount of the asset to fair value is required. Measurement of the impairment loss is based on the fair value of the asset. Generally, we determine fair value using valuation techniques such as discounted expected future cash flows.

 

Our expected future cash flows are affected by many factors including:

 

a) The economic condition in the US, especially in Las Vegas, Nevada and Los Angeles, California markets;

 

b) The performance of the real estate industry in the markets where our properties are located;

 

c) Our financial condition, which may influence our ability to develop our real estate; and

 

d) Governmental regulations.

Because any one of these factors could substantially affect our estimate of future cash flows, this is a critical accounting policy because these estimates could result in us either recording or not recording an impairment loss based on different assumptions. Impairment losses are generally substantial charges. We are currently in the beginning state of development of real estates, therefore no impairment is required. Any impairment charge would more likely than not have a material effect on our results of operations.

The estimate of our future revenues is also important because it is the basis of our development plans and also a factor in our ability to obtain the financing necessary to complete our development plans. If our estimates of future cash flows from our properties differ from expectations, then our financial and liquidity position may be compromised, which could result in our default under certain debt instruments or result in our suspending some or all of our development activities.

·

Allocation of Overhead Costs. We periodically capitalize a portion of our overhead costs and also allocate a portion of these overhead costs to cost of sales based on the activities of our employees that are directly engaged in these activities. In order to accomplish this procedure, we periodically evaluate our “corporate” personnel activities to see what, if any, time is associated with activities that would normally be capitalized or considered part of cost of sales. After determining the appropriate aggregate allocation rates, we apply these factors to our overhead costs to determine the appropriate allocations. This is a critical accounting policy because it affects our net results of operations for that portion which is capitalized. In accordance with paragraph 7 of SFAS No. 67, we only capitalize direct and indirect project costs associated with the acquisition, development and construction of a real estate project. Indirect costs include allocated costs associated with certain pooled resources (such as office supplies, telephone and postage) which are used to support our development projects, as well as general and administrative functions. Allocations of pooled resources are based only on those employees directly responsible for development (i.e. project manager and subordinates). We charge to expense indirect costs that do not clearly relate to a real estate project such as salaries and allocated expenses related to the Chief Executive Officer and Chief Financial Officer.

 

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·

Revenue Recognition. In accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” we recognize revenues from property sales when the risks and rewards of ownership are transferred to the buyer, when the consideration received can be reasonably determined and when we have completed our obligations to perform certain supplementary development activities, if any exist, at the time of the sale. Consideration is reasonably determined and considered likely of collection when we have signed sales agreements and have determined that the buyer has demonstrated a commitment to pay. The buyer’s commitment to pay is supported by the level of their initial investment, our assessment of the buyer’s credit standing and our assessment of whether the buyer’s stake in the property is sufficient to motivate the buyer to honor its obligation to us. This is a critical accounting policy because for certain sales, we use our judgment to determine the buyer’s commitment to pay us and thus determine when it is proper to recognize revenues.

We recognize our rental income based on the terms of our signed leases with tenants on a straight-line basis. We recognize sales commissions and management and development fees when earned, as lots or acreages are sold or when the services are performed.

·

Accounting for Income Taxes: We recognize deferred tax assets and liabilities for the expected future tax consequences of transactions and events. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. If necessary, deferred tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount of the valuation allowance. In addition, tax reserves are based on significant estimates and assumptions as to the relative filing positions and potential audit and litigation exposures related thereto. To the extent the Company establishes a valuation allowance or increases this allowance in a period, the impact will be included in the tax provision in the statement of operations.

Commitments and contingencies

Employment Agreements

 

Effective July 1, 2006, the Company entered into a five-year employment agreement with Yossi Attia as the President of ERC which commenced on July 1, 2006 and provides for annual compensation in the amount of $240,000, an annual bonus not less than $120,000 per year, and an annual car allowance. At December 31, 2006, the car allowance expense amounted to $19,220. Mr. Attia is also entitled to a special bonus equal to 10% of the earnings before income tax, depreciation and amortization (“EBITDA”) of ERC, which such bonus is payable in shares of common stock of the Company; provided, however, the special bonus is only payable in the event that Mr. Attia remains continuously employed by ERC, and Mr. Attia shall not have sold shares of common stock of the Company on or before the payment date of the special bonus, unless such shares were received in connection with the exercise of an option that was scheduled to expire within one year of the date of exercise. In addition, on August 14, 2006, the Company amended the agreement to provide that Mr. Attia shall serve as the Chief Executive Officer of the Company for a term of two years commencing August 14, 2006 and granting annual compensation of $250,000 to be paid in the form of Company shares of common stock. The number of shares to be received by Mr. Attia is calculated based on the average closing price 10 days prior to the commencement of each employment year. Mr. Attia will receive 111,458 Emvelco shares of common stock for his first year service. Mr. Attia also agreed to not directly or indirectly compete with the business of the Company or ERC during his employment and for a period of two years following termination of employment. No shares were issued to Mr. Attia in 2006.

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On May 31, 2007 the Company, ERC and Mr. Attia entered into a Memorandum of Understanding, pursuant to which, the August 14, 2006 amendment to Mr. Attia’s employment agreement was terminated, and effective as of January 1, 2007, all of ERC’s rights and obligations under Mr. Attia’s employment agreement were transferred to the Company.

 

On September 17, 2007, the Board of Directors voted to appoint Darren C. Dunckel as a director of the Company. There are no understandings or arrangements between Mr. Dunckel and any other person pursuant to which Mr. Dunckel was selected as a director. Mr. Dunckel presently does not serve on any Company committee. Mr. Dunckel may be appointed to serve as a member of a committee although there are no current plans to appoint Mr. Dunckel to a committee as of the date hereof. Mr. Dunckel does not have any family relationship with any director, executive officer or person nominated or chosen by the Company to become a director or executive officer. Mr. Dunckel has entered into various transactions and agreements with the Company on behalf of ERC, Verge and TIHG (all such transactions have been reported on the Company filings of Form 8Ks). On December 31, 2006, Mr. Dunckel executed the Agreement and Plan of Exchange on behalf of TIHG which was issued shares in ERC in consideration for the exchange of TIHG's interest in Verge. Pursuant to that certain Stock Transfer and Assignment of Contract Rights Agreement dated as of May 14, 2007, the Company transferred its shares in ERC in consideration for the assignment of rights to that certain Investment and Option Agreement, and amendments thereto, dated as of June 19, 2006 which gives rights to certain interests and assets. Mr. Dunckel has represented and executed the foregoing agreements on behalf of ERC, Verge and TIHG. In the event that the Company completes its transaction with Appswing Ltd., in connection with the purchase of Kidron Industrial Holdings Ltd., Mr. Dunckel will execute agreements on behalf of Verge to transfer 100% of Verge and a portion of ERC's interest and assets in Croatia in consideration of the Company receiving a large percentage equity interest in Kidron. Mr. Dunckel on behalf of ERC and/or TIHG will be entitle to $5,000,000 (See note 12 Subsequent Events)

Micrologic

On October 11, 2006, the Company committed itself in the financing of Micrologic The agreement provides for an initial investment by the Company of up to $1,000,000, with warrants to purchase additional equity for additional investment. The Company owns 25.10% of Micrologic; however such equity positions might be revised contingent upon the exercise of the warrants. As of September 30, 2007, $400,000 was transferred as part of this commitment, and no warrants were issued. On September 30, 2007, the Company determined that it would no longer fund the operations of Micrologic and that the amounts previously advanced to Micrologic would not be collectible. The Company is under negotiations with Micrologic to void the Company commitment and re-structure Micrologic in a way that the Company will be released from its funding commitment.

Lease Agreements

In 2007, the Company entered into a one year agreement for office space. The rent expense related to such leases is $28,800 in 2007 and $0 in 2006, respectively. The Company gave a notice of termination its office space rent, effective end of November 2007, and will relocate its offices into Verge headquarters in West Hollywood.

Navigator Acquisition - Registration Rights

The Company entered into a registration rights agreement dated July 21, 2005, whereby it agreed to file a registration statement registering the 441,566 shares of Company common stock issued in connection with the Navigator acquisition within 75 days of the closing of the transaction. The Company also agreed to have such registration statement declared effective within 150 days from the filing thereof. In the event that Company failed to meet its obligations to register the shares, it may have been required to pay a penalty equal to 1% of the value of the shares per month. The Company obtained a written waiver from the seller stating that the seller would not raise any claims in connection with the filing of registration statement through May 30, 2006. The Company since received another waiver extending the registration deadline through May 30, 2007 without penalty. No provision was made, as Management received a verbal waiver until the end of 2007.

Indemnities Provided Upon Sale of Subsidiaries

On April 15, 2005, the Company sold Euroweb Slovakia. According to the securities purchase contract (the “Contract”); the Company will indemnify the buyer for all damages incurred by the buyer as the result of seller’s breach of certain representations, warranties, or obligations as set in the Contract up to an aggregate amount of $540,000. The buyer shall not be entitled to make any claim under the Contract after the fourth anniversary of the date of the Contract. No claims have been made to-date. At September 30, 2007 the Company accrued $35,000 as the estimated fair value of this indemnity.

On May 23, 2006, the Company sold Euroweb Hungary and Euroweb Romania. According to the share purchase agreement (the “SPA”), the Company will indemnify the buyer for all damages incurred by the buyer as the result of seller’s breach of certain representations, warranties or obligations as provided for in the SPA. The Company shall not incur any liability with respect to any claim for breach of representation and warranty or indemnity, and any such claim shall be wholly barred and unenforceable unless notice of such claim is served upon Emvelco by buyer no later than 60 days after the buyer’s approval of Euroweb Hungary and Euroweb Romania’s statutory financial reports for the fiscal year 2006, but in any event no later than June 1, 2007. In the case of Clause 8.1.6 (Taxes) or Clause 9.2.4 of SPA, the time period is five years from the last day of the calendar year in which the closing date occurs. No claims have been made to date. At September 30, 2007, the Company has accrued $201,020 as the estimated fair value of this indemnity.

 

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Verge and ERC Options Exercise - Balances Post Acquisitions:

 

As stated in footnote number 1, Pursuant to the Notice, the Company, subject to performance under the Upswing Agreement, further intends to exercise its option (the "Sitnica Option") to purchase ERC's derivative rights and interest in Sitnica d.o.o. through ERC's holdings (one-third (1/3) interest) in AP Holdings Limited ("AP Holdings"), a company organized under the Companies (Jersey) Law 1991, which equates to a one-third interest in Sitnica d.o.o. (excluding ERC's interest in AP Holdings). The Sitnica Option is exercisable in the amount of $4,000,000, payable by reducing the outstanding loan amount owing to the Company under the Investment Agreement by $3,550,000 and reducing the Company's deposit with Shalom Atia, Trustee of AP Holdings, by $450,000. And footnote 5, Pursuant to the Notice, Emvelco, subject to performance under the Upswing Agreement, intends to exercise its option (the "Verge Option") to purchase a multi-use condominium and commercial property in Las Vegas, Nevada, via the purchase and acquisition of all outstanding shares of common stock of Verge. The Verge Option is exercisable in the amount of $5,000,000 payable in cash - not prior of Verge breaking ground, plus conversion of $10,000,000 loans given to Verge into Equity as consideration for 75,000 shares of Verge. Said transaction was closed on November 1, 2007 (see Note 12 Subsequent Events)

Upon actual closing (see note 12) - ERC balances (as of September 30, 2007 before closing: $8,994,326), will be reduced by about $8,550,000 ($3,550,000 for exercise the one third Sitnica option and $5,000,000 upon Verge breaking ground). The Company Verge balances will be reduced by converting $10,000,000 into Verge equity.

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Off Balance Sheet Arrangements

There are no materials off balance sheet arrangements.

 

Results of Operations 

 

Nine Months Period Ended September 30, 2007 Compared to Nine Months Period Ended September 30, 2006

 

Due to the new real estate activity, which commenced in June 2006, discontinued operation presentation of Euroweb Hungary, Euroweb Romania, and Navigator, disposal of the Company’s interest in ERC, and consolidation of Micrologic, the consolidated statements of operations for the periods ended September 30, 2007 and 2006 are not comparable. The financial figures for 2007 only include the corporate expenses of the Company’s legal entity registered in the State of Delaware, as the Company commenced its financial investment in real estate related activity with related revenues and costs in June 2006.

Nine months ended September 30,		2007			2006
Total revenues		$	6,950,000		$	4,764,201

 

Revenues increased by 46%, or $2,185,799 primarily due to the sale of the three properties changes, the Laurel Property, the Harper Property, and the Edinburgh Properties. The Company closed all three properties during the third quarter of 2007.

 

Cost of revenues (excluding depreciation and amortization)

The following table summarizes cost of revenues (excluding depreciation and amortization) for the nine months ended September 30, 2007 and 2006:

Nine months ended September 30,		2007			2006
Total cost of revenues		$	6,436,006		$	1,447,486

 

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Costs of sales increased by 345%, or $4,988,520 primarily due to the sale of the three properties changes, the Laurel Property, the Harper Property, and the Edinburgh Properties. The gross margin on these residential real estate facilities were approximately 7%, which was a lower margin than the nine months ended September 30, 2006. The Company closed all three properties during the third quarter of 2007.

Compensation and related costs

The following table summarizes compensation and related costs for the nine months ended September 30, 2007 and 2006:

Nine months ended September 30,		2007			2006
Compensation and related costs		$	328,547		$	2,348,019

Overall compensation and related costs decreased by 86%, or $2,019,472 primarily due to changes in the treatment of stock options to the CEO in accordance with SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), as well as the sales of our European activities decrease materially our compensation and related costs.

Severance costs

The following table summarizes severance costs for the nine months ended September 30, 2007 and 2006:

Nine months ended September 30,		2007			2006
Severance costs		$	0		$	750,000

On May 24, 2006, the Company entered into a Severance Agreement with Mr. Toro. In consideration for Mr. Toro agreeing to relinquish and release all rights and claims under the employment agreement, including the payment of his annual salary, the Company agreed to pay Mr. Toro a one-time settlement fee of $750,000. Mr. Toro submitted his resignation as Chief Executive Officer and Director of the Company effective June 1, 2006. The severance was paid in full in May 2006.

Consulting, director and professional fees

The following table summarizes consulting and professional fees for the nine months ended September 30, 2007 and 2006:

Nine months ended September 30,		2007			2006
Consulting, director and professional fees		$	597,201		$	1,579,592

Overall consulting, professional and director fees decreased by 62%, or $982,311, primarily as the result of the new Director compensation policy, compensation charge on stock option to the Directors in accordance with SFAS 123R and decrease in relation to the cost of several consultants, investment bankers, advisors, accounting and lawyers fee over last period.

 

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Other selling, general and administrative expenses

The following table summarizes other selling, general and administrative expenses for the nine months ended September 30, 2007 and 2006:

Nine months ended September 30,		2007			2006
Other selling, general and administrative expenses		$	354,689		$	1,118,020

Overall, other selling, general and administrative expenses decreased by 68%, or $763,331, primarily attributable to saving on costs in lieu of disposals.

Software development expense

The following table summarizes software development expense for the nine months ended September 30, 2007 and 2006:

Nine months ended September 30,		2007			2006
Software development expense		$	136,236		$	0

Software development expense was incurred by Micrologic for the design and development of Electronic Design Automation (“EDA”) applications and Integrated Circuit (“IC”) design processes; specifically, the development and production of the NanoToolBox ^TM tools suite.

Interest income and expense

The following table summarizes interest income and expense for the nine months ended September 30, 2007 and 2006:

Nine months ended September 30,		2007			2006
Interest income		$	1,425,314		$	336,556
Interest expense		$	(205,957	)	$	(74,737	)

The increase in interest income is attributable to the Company investing proceeds on the sale of Euroweb Hungary, Euroweb Romania and Navigator in money market funds and certificate of deposits pending establishment of the real estate development business, as well as loans to ERC and Verge. The increase in interest expense is due to the increase line of credit outstanding during the nine months ended September 30, 2007.

  Three Months Period Ended September 30, 2007 Compared to Three Months Period Ended September 30, 2006

 

Due to the new financial investment in real estate activity, which commenced in June 2006, discontinued operation presentation of Euroweb Hungary, Euroweb Romania and Navigator, disposal of the Company’s interest in ERC, and consolidation of Micrologic, the consolidated statements of operations for the periods ended September 30, 2007 and 2006 are not comparable. The financial figures for 2007 only include the corporate expenses of the Company’s legal entity registered in the State of Delaware, as the Company commenced its financial investment in real estate related activity with related revenues and costs in June 2006.

Three months ended September 30,		2007			2006
Total revenues		$	6,950,000		$	1,369,684

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Revenues increased by 407%, or $5,580,316 primarily due to the sale of the three properties changes, the Laurel Property, the Harper Property, and the Edinburgh Properties The Company closed all three properties during the third quarter of 2007.

Cost of revenues (excluding depreciation and amortization)

The following table summarizes cost of revenues (excluding depreciation and amortization) for the three months ended September 30, 2007 and 2006:

Three months ended September 30,		2007			2006
Total cost of revenues		$	6,436,006		$	303,689

Costs of sales increased by 2019% or $6,132,308 primarily due to sale of three properties changes, the Laurel Property, the Harper Property, and the Edinburgh Properties. The gross margin on these residential real estate facilities were approximately 7%, which was a lower margin than the three nine months ended September 30, 2006. The Company closed all three properties during the third quarter of 2007.

Compensation and related costs

The following table summarizes compensation and related costs for the three months ended September 30, 2007 and 2006:

Three months ended September 30,		2007			2006
Compensation and related costs		$	90,001		$	878,607

Overall compensation and related costs decreased by 90%, or $788,606 primarily due to changes in the treatment of stock options to the CEO in accordance with SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), as well as the sales of our European activities decrease materially our compensation and related costs.

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Consulting, director and professional fees

The following table summarizes consulting and professional fees for the three months ended September 30, 2007 and 2006:

Three months ended September 30,		2007			2006
Consulting, director and professional fees		$	166,579		$	681,562

Overall consulting, professional and director fees decreased by 76%, or $514,965, primarily as the result of the new Director compensation policy, compensation charge on stock option to the Directors in accordance with SFAS 123R and decrease in relation to the cost of several consultants, investment bankers, advisors, accounting and lawyers fee over last period.

Other selling, general and administrative expenses

The following table summarizes other selling, general and administrative expenses for the three months ended September 30, 2007 and 2006:

Three months ended September 30,		2007			2006
Other selling, general and administrative expenses		$	151,259		$	416,856

Overall, other selling, general and administrative expenses decreased by 64%, or $265,597, primarily attributable to saving on costs in lieu of disposals.

Software development expense

The following table summarizes software development expense for the three months ended September 30, 2007 and 2006:

Three months ended September 30,		2007			2006
Software development expense		$	37,336		$	0

Software development expense was incurred by Micrologic for the design and development of Electronic Design Automation (“EDA”) applications and Integrated Circuit (“IC”) design processes; specifically, the development and production of the NanoToolBox ^TM tools suite.

Interest income and expense

The following table summarizes interest income and expense for the three months ended September 30, 2007 and 2006:

 

Nine months ended September 30,		2007			2006
Interest income		$	1,425,314		$	336,556
Interest expense		$	(68,628	)	$	(74,737	)

The increase in interest income is attributable to the Company investing proceeds on the sale of Euroweb Hungary, Romania and Navigator in money market funds and certificate of deposits pending establishment of the real estate development business, as well as loans to ERC and Verge. The increase in interest expense is due to the increase line of credit outstanding during the three months ended September 30, 2007.

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Liquidity and Capital Resources

 

The Company currently anticipates that its available cash resources will be sufficient to meet its presently anticipated working capital requirements for at least the next 12 months

As of September 30, 2007, our cash, cash equivalents and marketable securities were approximately $68,000, a decrease of approximately $2.8 million from the end of fiscal year 2006. The decrease in our cash, cash equivalents and marketable securities is the result of our investment policy.

 

Cash flow provided by/(used in) operating activities for the nine months ended September 30, 2007 was $(1,845,079) and $(2,390,287) for the same period last year. The change is due to disposal of operations of some units incurring losses.

Cash flow provided by/(used in) investing activities for the nine months ended September 30, 2007 and 2006 was $(5.8) million and $5.8 million, respectively. The change was due to the net proceeds of the sale of Euroweb Hungary and Euroweb Romania being received in the prior year.

Cash provided by/(used in) financing activities was $4.9 million for the nine months ended September 30, 2007 and $4.2 million for the nine months ended September 30, 2006. This increase is due to increased funding to establish loans to Verge Living Corp in the current period.

The Company currently anticipates that its available cash resources will be sufficient to meet its presently anticipated working capital and capital expenditure requirements for at least the next 12 months.

The Company holds restricted Certificates of Deposit (CD’s) with the Bank to access a revolving line of credit. These deposits are interest bearing and approximated $8.4 million as of September 30, 2007. On November 8, 2007, the lines of credits were increased and extended as the following: $4,180,000 until October 16, 2008 and $4,229,000 until September 1, 2008. Both line bearing interest of 5.87% and secured by restricted cash deposited in CD’s with the bank.  

In the event the Company makes future acquisitions or investments, additional bank loans or fund raising may be used to finance such future acquisitions. The Company may consider the sale of non-strategic assets.

 

Inflation and Foreign Currency

 

The Company maintains its books in local currency: Hungarian Forit for Navigator and US Dollars for the Parent Company registered in the State of Delaware.

The Company’s operations are primarily in the United States through its wholly owned subsidiary. Some of the Company’s customers were in Hungary. As a result, fluctuations in currency exchange rates may significantly affect the Company's sales, profitability and financial position when the foreign currencies, primarily the Hungarian Forit, of its international operations are translated into U.S. dollars for financial reporting. In additional, we are also subject to currency fluctuation risk with respect to certain foreign currency denominated receivables and payables. Although the Company cannot predict the extent to which currency fluctuations may or will affect the Company's business and financial position, there is a risk that such fluctuations will have an adverse impact on the Company's sales, profits and financial position. Because differing portions of our revenues and costs are denominated in foreign currency, movements could impact our margins by, for example, decreasing our foreign revenues when the dollar strengthens and not correspondingly decreasing our expenses. The Company does not currently hedge its currency exposure. In the future, we may engage in hedging transactions to mitigate foreign exchange risk.

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Effect of Recent Accounting Pronouncements 

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. This Statement is required to be adopted by the Company on July 1, 2008. Management is currently assessing the impact of the adoption of this Statement.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement provides entities the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management is currently evaluating the impact of adopting this Statement.

 

Forward-Looking Statements

 

When used in this Form, in other filings by the Company with the SEC, in the Company’s press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer of the Company, the words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

 

The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, are based on certain assumptions and expectations which may or may not be valid or actually occur, and which involve various risks and uncertainties, including but not limited to the risks set forth above. See “Risk Factors.” In addition, sales and other revenues may not commence and/or continue as anticipated due to delays or otherwise. As a result, the Company’s actual results for future periods could differ materially from those anticipated or projected.

Unless otherwise required by applicable law, the Company does not undertake, and specifically disclaims any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

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Item 3. Controls and Procedures

 

As of September 30, 2007, an evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer, the Principal Financial Officer and the Audit Committee members, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the Chief Executive Officer and the Principal Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2007. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls in the quarter ended June 30, 2007 that materially affected or are reasonably likely to materially affect the Company’s internal controls.

As the Company disclosed in its Form 8-K filed on April 30, 2007, on April 25, 2007, Deloitte Kft. (the "Former Auditor") advised the Company that it has resigned as the Company's independent auditor. The Former Auditor maintained, among other things, that the Company failed to provide adequate records with respect to certain transactions. The Company disputes this contention and maintains that its disclosure controls and procedures were effective as of March 31, 2007. The Former Auditor furnished a letter to the Company, which letter was filed May 14, 2007, as an exhibit to Form 8-K/A.

 

Notwithstanding the foregoing, on April 19, 2007, the Company received a NASDAQ Staff Determination (the "Determination") indicating that the Company has failed to comply with the requirement for continued listing set forth in Marketplace Rule 4310(c)(14) requiring the Company to file its Form 10-KSB for the year ended December 31, 2006 with the Securities and Exchange Commission and that its securities are, therefore, subject to delisting from the NASDAQ Capital Market. The Company requested and received a hearing before a NASDAQ Listing Qualifications Panel (the "Panel") to review the Determination.

On May 17, 2007, the Company received a NASDAQ Additional Staff Determination (the “Additional Determination”) indicating that the Company has failed to comply with the requirement for continued listing set forth in Marketplace Rule 4310(c)(14) requiring the Company to file its Form 10-QSB for the quarter ended March 31, 2007 with the Securities and Exchange Commission and that that this failure serves as an additional basis for why its securities are subject to delisting from the NASDAQ Capital Market. The Company reviewed the Additional Determination at its Panel hearing, which took place on May 31, 2007.

On June 12, 2007, the Company received a decision letter from The NASDAQ Stock Market LLC ("NASDAQ") informing the Company that it has regained compliance with the filing requirement of The NASDAQ Capital Market. The decision letter noted, among other things, that the Company became current in its filings shortly after the Company's May 31, 2007 hearing before the Panel on June 5, 2007; that the Panel was satisfied with the Company's responses to the Panel's questions related to disclosures by the Company's former auditors; and that the Company's new auditors issued an unqualified opinion on the Company's 2006 financial statements.

In July and August 2007, NASDAQ approached the Company in regard to complying with NASDAQ Marketplace Rules 4300 and 4330(c) pertaining that the Company is a shell per these rules. The Company responded to all NASDAQ questions, and the Company’s position is that the Company is not a shell.

 

On November 1, 2007, the Company received a NASDAQ Staff Determination (the "Determination") indicating that the Company has failed to comply with the requirement for continued listing set forth in Marketplace Rule 4310(c)(4) requiring the Company to maintain a minimum bid price of $1.00 and that its securities are, therefore, subject to delisting from the NASDAQ Capital Market if it does not regain compliance by April 29, 2008. If the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days anytime prior to April 29, 2008, then the NASDAQ Staff will provide written notification that it complies with the Rule. In the event that the Company does not meet the minimum bid requirement by April 29, 2008, but satisfies all initial listing criteria, the Company will be given a 180 day extension to meet the minimum bid price. In the event that the Company does not meet the initial listing criteria, NASDAQ will provide the Company with written notification that the Company's securities will be de-listed, which such determination may be appealed by the Company.

 

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ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we are a party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not involved currently in legal proceedings other than detailed below that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

 

Except as set forth below, there are no known significant legal procedures that have been filed and are outstanding against the Company.

On April 26, 2006, a lawsuit was filed in the Delaware Court of Chancery (the "Court") by a stockholder of the Company against the Company, each of the Company's Directors and CORCYRA d.o.o., a stockholder of the Company that beneficially owned 39.81% of the Company's outstanding common stock at the date of the lawsuit. The Complaint is titled Laurence Paskowitz v. Csaba Toro et al., C.A. No. 2110-N (the “Complaint”) and was brought individually, and as a class action on behalf of certain of the Company's common stockholders, excluding defendants and their affiliates. The plaintiff alleged that the proposed sale of 100% of the Company's interest in the Company's two Internet and telecom related operating subsidiaries (the "Subsidiaries") constitutes a sale of substantially all of the Company's assets and required approval by a majority of the voting power of the Company's outstanding common stock under Section 271 of the Delaware General Corporation Law. The plaintiff also alleged the defendants breached their fiduciary duties in connection with the sale of the Subsidiaries, as well as the disclosures contained in the proxy statement filed on April 24, 2006. The plaintiff applied for a temporary restraining order seeking to enjoin the special meeting on May 15, 2006.

 

The Company denied any and all allegations of wrongdoing; however, in the interests of conserving resources, on April 28, 2006, the parties to the litigation entered into a Memorandum of Understanding (“MOU”) providing for, subject to confirmatory discovery by plaintiff, the negotiation of a formal stipulation of a settlement of the litigation. Pursuant to the MOU, the Board of Directors of the Company agreed to: (i) increase the vote required to approve the sale of 100% of the Company's interest in the Subsidiaries, (ii) revise the disclosure within the Proxy Statement to eliminate the bonus of up to US $400,000, which the Compensation Committee of the Company had the option to pay to select members of management, as the Board of Directors had previously elected to terminate the ability to pay such bonus and (iii) provide supplemental disclosure as contained in the Supplemental Proxy Statement to be mailed to stockholders and filed with the SEC on May 3, 2006.

 

The parties entered into a stipulation of settlement on April 3, 2007. The settlement provided for dismissal of the litigation with prejudice and was subject to Court approval. As part of the settlement, the Company agreed to attorneys' fees and expenses to plaintiff's counsel in the amount of $150,000. Pursuant to the stipulation of settlement, the Company sent out notices to the members of the class on May 3, 2007. A fairness hearing took place on June 8, 2007, where the Delaware Court of Chancery (the "Court") entered an Order and Final Judgment (the "Order"), approving the settlement of the Complaint, authorizing the parties to consummate the settlement in accordance with its terms, certifying the class and dismissing the litigation with prejudice. Pursuant to the settlement, the Company also sent out notices to the members of the class on May 3, 2007. A fairness hearing took place on June 8, 2007, and, as stated above, the Order was entered on June 8, 2007.

The Company filed a complaint in the Superior Court for the County of Los Angeles, against an attorney. The case was filed on February 14, 2007, and service of process has been done. In the complaint the Company is seeking judgment against this attorney in the amount of approximately 250,000 Euros (approximately $316,000 as of the date of actual transferring the funds), plus interest, costs and fees. Defendant has not yet appeared in the action. The Company believes that it has a meritorious claim for the return of monies deposited with defendant in a trust capacity, and, from the documents in the Company’s possession, there is no reason to doubt the validity of the claim. However, management does not have any information on the collectibility of any judgment that might be entered in court. During April 2007 defendant returned $92,694 (70,000 Euros at the relevant time) which netted to $72,694 post legal expenses; the Company has granted him a 15-day extension to file his defense. Post the extension and in lieu of not filing a defense, the Company filed for a default judgment. On October 25, 2007 the Company obtained a California Judgment by court after default against the attorney for the sum of $249,340.65

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ITEM 2. CHANGES IN SECURITIES

 

In June 2006, the Company's Board of Directors approved a program to repurchase (the “Repurchase Program”), from time to time, at management's discretion, up to 700,000 shares of the Company's common stock in the open market or in private transactions commencing on June 20, 2006 and continuing through December 15, 2006 at prevailing market prices. Repurchases will be made under the program using our own cash resources and will be in accordance with Rule 10b-18 under the Securities Exchange Act of 1934 and other applicable laws, rules and regulations. The Shemano Group is acting as agent for our stock repurchase program. As of September 30, 2007, the Company acquired 1,279,893 shares of its common stock at a cost of $2,117,711.

Pursuant to the unanimous consent of the Board of Directors in September 2006, the number of shares that may be purchased under the Repurchase Program was increased from 700,000 to 1,500,000 shares of common stock and the Repurchase Program was extended until October 1, 2007, or until the increased amount of shares is purchased.

Pursuant to the Sale and Purchase Agreement of Navigator, the Company received 622,531 shares of the Company’s common stock as partial consideration on February 16, 2007, the closing date. The Company shares were valued at $1.34 per share, representing the closing price of the Company on the NASDAQ Capital Market on February 16, 2007. The Company canceled the Emvelco common stock acquired during the disposition in the amount of $834,192.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None

 

ITEM 5.  OTHER INFORMATION

DELOITTE RESIGNATION -

 

On April 25, 2007 (the "Resignation Date"), Deloitte Kft. (the "Former Auditor") advised the Company that it has resigned as the Company's independent auditor. The Former Auditor performed the audit for the one year period ended December 31, 2005, which report for the one year ended December 31, 2005 did not contain any adverse opinion or a disclaimer of opinion, nor was it qualified as to audit scope or accounting principles. During the Company's two most recent fiscal years and during any subsequent interim period prior to the Resignation Date, there were no disagreements with the Former Auditor, with respect to accounting or auditing issues of the type discussed in Item 304(a)(iv) of Regulation S-B.

 

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Prior to the Resignation Date, the Former Auditor advised the Company that it had raised certain issues relating to the accounting of ERC. The Former Auditor believes that this communication is a disclosable event pursuant to Item 304(a)(v). The issues raised by the Former Auditor related to the recording of the cost of real estate purchased by Verge (a wholly owned subsidiary of ERC), the production of records relating to loans made to VLC and the valuation of land in connection with Lorraine LLC (a wholly owned subsidiary of ERC). Management of the Company disagrees with the aforementioned statements and believes that it has adequately explained each of the above inquires made by the Former Auditor. Further, prior to being advised of the above issues, the Company maintained that ERC and its subsidiaries do not need to be consolidated in the Company's financial statements, which such position was subsequently confirmed by a detailed analysis by management and an independent third party consultant of the accounting pronouncements governing consolidation.

 

The Company provided the Former Auditor with a copy of this disclosure. The Former Auditor advised the Company that it intended to furnish a letter to the Company, addressed to the SEC, stating that it agreed with the statements made herein or the reasons why it disagreed. The letter from the Former Auditor was filed as an exhibit to Form 8-K/A filed May 14, 2007.

 

Appointment of New Auditors - Robison, Hill & Co. ("RHC") -

On April 26, 2007, the Company engaged Robison, Hill & Co. ("RHC") as its independent registered public accounting firm for the Company's fiscal year ended December 31, 2006. The decision to engage RHC as the Company's independent registered public accounting firm was approved by the Company's Board of Directors.

 

During the two most recent fiscal years and through April 26, 2007, the Company has not consulted with RHC regarding either:

 

1. the application of accounting principles to any specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report was provided to the Company nor oral advice was provided that RHC concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or

 

2. any matter that was either subject of disagreement or event, as defined in Item 304(a)(1)(iv)(A) of Regulation S-B and the related instruction to Item 304 of Regulation S-B, or a reportable event, as that term is explained in Item 304(a)(1)(iv)(A) of Regulation S-B.

Recent NASDAQ Staff Determination

 

On November 1, 2007, the Company received a NASDAQ Staff Determination (the "Determination") indicating that the Company has failed to comply with the requirement for continued listing set forth in Marketplace Rule 4310(c)(4) requiring the Company to maintain a minimum bid price of $1.00 and that its securities are, therefore, subject to delisting from the NASDAQ Capital Market if it does not regain compliance by April 29, 2008. If the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days anytime prior to April 29, 2008, then the NASDAQ Staff will provide written notification that it complies with the Rule. In the event that the Company does not meet the minimum bid requirement by April 29, 2008, but satisfies all initial listing criteria, the Company will be given a 180 day extension to meet the minimum bid price. In the event that the Company does not meet the initial listing criteria, NASDAQ will provide the Company with written notification that the Company's securities will be de-listed, which such determination may be appealed by the Company.

 

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ITEM 6. EXHIBITS

 

Exhibits (numbers below reference Regulation S-B, Item 601)

 

(3) (a)

Certificate of Incorporation filed November 9, 1992(1)

(b)	Amendment to Certificate of Incorporation filed July 9, 1997(2)

 

(c)	Restated Certificate of Incorporation filed May 29, 2003

 

(d)	Restated By-laws (filed as an exhibit to the Form 10-QSB for the quarter ended September 30, 2004)

 

(10) (a)

Shares Purchase Agreement between PanTel Tavkozlesi es Kommunikacios rt., a Hungarian company, and Emvelco Corp., a Delaware corporation (3)

 

(10) (b)

Guaranty by Emvelco International Corp., a Delaware corporation, in favor of PanTel Tavkozlesi es Kommunikacios rt., a Hungarian company (3)

 

(10) (c)

Shares Purchase Agreement between Vitonas Investments Limited, a Hungarian corporation, Certus Kft., a Hungarian corporation, Rumed 2000 Kft., a Hungarian corporation and Emvelco International Corp., a Delaware corporation, dated as of February 23, 2004. (4)

 

(10) (d)

Share Purchase Agreement by and between Emvelco International Corp. and Invitel Tavkozlesi Szolgaltato Rt. (5)

 

(10) (e)

Investment Agreement, dated as of June 19, 2006, by and between EWEB RE Corp. and AO Bonanza Las Vegas, Inc. (6)

 

(10) (f)

Sale and Purchase Agreement, dated as of February 16, 2007, by and between Emvelco Corp. and Marivaux Investments Limited (7)

 

(10) (g)

Stock Transfer and Assignment of Contract Rights Agreement, dated as of May 14, 2007 among Emvelco Corp., Emvelco RE Corp., The International Holdings Group Ltd., and Verge Living Corporation (8)

 

(10) (h)

Memorandum of Understanding, dated as of May 31, 2007, among Emvelco Corp., Emvelco RE Corp., and Yossi Attia

 

(31) (a)

Certification of the Chief Executive Officer, Principal Accounting Officer and Principal Financial Officer of EMVELCO Corp. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

(32) (a)

Certification of the Chief Executive Officer, Principal Accounting Officer and Principal Financial Officer of EMVELCO Corp. pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

____________________

(1) Exhibits are incorporated by reference to Registrant's Registration Statement on Form SB-2 dated May 12, 1993 (Registration No. 33-62672-NY, as amended)

 

(2) Filed with Form 10-QSB for quarter ended June 30, 1998.

 

(3) Filed as an exhibit to Form 8-K on February 27, 2004.

 

(4) Filed as an exhibit to Form 8-K on March 9, 2004.

 

(5) Filed as an exhibit to Form 8-K on December 21, 2005.

 

(6) Filed as an exhibit to Form 8-K on June 23, 2006

 

(7) Filed as an exhibit to Form 8-K on February 20, 2007

 

(8) Filed as an exhibit to Form 8-K on May 16, 2007

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Beverly Hills, California, on November 14, 2007.

 

	EMVELCO CORP.
	By:	/s/Yossi Attia
		Yossi Attia
		Chief Executive Officer and Principal Financial Officer

 

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