0000910680-01-500556.txt : 20011026
0000910680-01-500556.hdr.sgml : 20011026
ACCESSION NUMBER: 0000910680-01-500556
CONFORMED SUBMISSION TYPE: 10QSB
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011018
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ION NETWORKS INC
CENTRAL INDEX KEY: 0000754813
STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577]
IRS NUMBER: 222413505
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0331
FILING VALUES:
FORM TYPE: 10QSB
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-13117
FILM NUMBER: 1761795
BUSINESS ADDRESS:
STREET 1: 1551 S WASHINGTON AVE
CITY: PISCATAWAY
STATE: NJ
ZIP: 08854
BUSINESS PHONE: 2014944440
MAIL ADDRESS:
STREET 1: 1551 S WASHINGTON AVE
CITY: PISCATAWAY
STATE: NJ
ZIP: 08854
FORMER COMPANY:
FORMER CONFORMED NAME: MICROFRAME INC
DATE OF NAME CHANGE: 19920703
10QSB
1
d753825_3.txt
FORM 10-QSB (SEPTEMBER 30, 2001)
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
----
/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
----
For the quarterly period ended September 30, 2001
OR
----
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
----
For the transition period from ____________ to ____________
Commission File No.: 0-13117
-------
ION NETWORKS, INC.
------------------
(Exact Name of Small Business Issuer in Its Charter)
Delaware 22-2413505
-------- ----------
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1551 South Washington Avenue Piscataway, New Jersey 08854
---------------------------------------------------------
(Address of Principal Executive Offices)
(732) 529-0100
--------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
There were 18,203,301 shares of Common Stock outstanding as of October 18, 2001.
Transitional Small Business Disclosure Format:
Yes No X
----- -----
ION NETWORKS, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Information 2
Condensed Consolidated Balance Sheets as of September 30, 2001
and March 31, 2001 (Unaudited) 3
Condensed Consolidated Statements of Operations for the Three
and Six Months ended September 30, 2001 and 2000 4
(Unaudited)
Condensed Consolidated Statement of Stockholders' Equity
for the Six Months ended September 30, 2001 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Six
Months ended September 30, 2001 and 2000 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION
--------------------------------------------
The condensed consolidated financial statements included herein have
been prepared by the registrant without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Although the registrant
believes that the disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these condensed financial statements be read
in conjunction with the audited financial statements and the notes thereto
included in the registrant's Annual Report on Form 10-KSB for the year ended
March 31, 2001.
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, March 31,
2001 2001
--------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 2,396,791 $ 5,230,833
Accounts receivable, net of allowance for doubtful
accounts of $155,827 and $163,000 respectively........................ 1,023,420 2,796,531
Other receivables ...................................................... - 13,497
Inventory, net.......................................................... 2,164,756 1,139,448
Prepaid expenses and other current assets............................... 392,741 205,829
Related party notes receivable.......................................... 101,537 897,250
--------------------- ------------------
Total current assets........................................... 6,079,245 10,283,388
Restricted cash............................................................. 375,000 375,000
Property and equipment at cost, net of accumulated
depreciation of $2,453,603 and $2,095,564 respectively.................. 1,122,437 1,467,766
Capitalized software, less accumulated amortization of $2,990,646
and $2,585,607, respectively............................................ 1,037,283 1,241,495
Goodwill and other acquisition - related intangibles, less accumulated
amortization of $878,825 and $694,444 respectively...................... 148,432 305,556
Other assets................................................................ 22,689 22,683
--------------------- ------------------
Total assets ...................................................... $ 8,785,086 $ 13,695,888
===================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases....................................... $ 74,426 $ 74,426
Current portion of long-term debt....................................... 88,755 107,026
Accounts payable........................................................ 1,320,204 1,716,212
Accrued expenses........................................................ 432,851 562,860
Accrued payroll and related liabilities................................. 380,364 416,093
Deferred income......................................................... 207,910 178,737
Other current liabilities............................................... 311,960 309,977
--------------------- ------------------
Total current liabilities.......................................... 2,816,470 3,365,331
Long-term portion of capital leases......................................... 184,585 220,966
Long-term debt, net of current portion...................................... 12,992 18,732
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, par value $.001 per share; authorized 1,000,000
shares, none issued................................................. - -
Common stock, par value $.001 per share; authorized 50,000,000
shares, issued and outstanding 18,203,301 at September 30, 2001;
issued and outstanding 18,203,301 shares at March 31, 2001......... 18,203 18,203
Additional paid-in capital.............................................. 40,224,345 40,191,346
Accumulated deficit..................................................... (34,504,987) (30,165,045)
Accumulated other comprehensive income................................. 33,478 46,355
--------------------- ------------------
Total stockholders' equity.................................................. 5,771,039 10,090,859
--------------------- ------------------
Total liabilities and stockholders' equity.................................. $ 8,785,086 $ 13,695,888
===================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended For the Six Months Ended
September 30, September 30,
2001 2000 2001 2000
------------ ------------ ----------- ------------
Revenue .................................................... $ 1,088,380 $ 2,788,497 $ 3,021,822 $ 4,872,001
Cost of sales .............................................. 572,576 1,972,478 1,430,176 3,126,077
------------ ------------ ----------- ------------
Gross margin ............................................... 515,804 816,019 1,591,646 1,745,924
Research and development expenses ..................... 158,622 664,388 508,497 1,519,134
Selling, general and administration ................... 2,250,262 3,370,494 4,535,285 7,079,479
Depreciation and amortization ......................... 472,688 1,624,508 943,964 2,712,545
------------ ------------ ----------- ------------
Loss from operations ....................................... (2,365,768) (4,843,371) (4,396,100) (9,565,234)
Interest income ............................................ 26,250 89,322 73,782 219,314
Interest expense ........................................... (8,508) (6,982) (17,624) (27,653)
------------ ------------ ----------- ------------
Loss before income tax expense ............................. (2,348,026) (4,761,031) (4,339,942) (9,373,573)
Income tax expense ......................................... -- 19,034 -- 41,728
------------ ------------ ----------- ------------
Net loss ................................................... $ (2,348,026) $ (4,780,065) $(4,339,942) $ (9,415,301)
============ ============ =========== ============
PER SHARE DATA
Net loss per share
Basic ................................................. $ (0.13) $ (0.29) $ (0.24) $ (0.53)
Diluted ............................................... $ (0.13) $ (0.29) $ (0.24) $ (0.53)
Weighted average number of common
shares outstanding:
Basic ................................................. 18,203,301 16,649,608 18,203,301 17,927,379
Diluted ............................................... 18,203,301 16,649,608 18,203,301 17,927,379
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001
(Unaudited)
Accumulated
Additional Other Total
Paid-in Accumulated Comprehensive Stockholders'
Shares Par Value Capital Deficit Income Equity
---------- --------- ------------ ------------- ------------- ------------
Balance March 31, 2001 18,203,301 $ 18,203 $ 40,191,346 $ (30,165,045) $ 46,355 $ 10,090,859
Net loss (4,339,942) (4,339,942)
Noncash stock-based
compensation 32,999 32,999
Translation adjustments (12,877) (12,877)
---------- --------- ------------ ------------- ------------- ------------
Balance September 30, 2001 18,203,301 $ 18,203 $ 40,224,345 $ (34,504,987) $ 33,478 $ 5,771,039
========== ========= ============= ============= ============= ============
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED
SEPTEMBER 30,
2001 2000
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................................................. $ (4,339,942) $ (9,415,301)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................................... 943,964 2,712,545
Provision for inventory obsolescence............................. 24,996 526,095
Other charges.................................................... (12,187) -
Noncash stock-based compensation charges......................... 32,999 82,602
Changes in operating assets and liabilities:
(Increase) decrease in
Accounts receivable.............................................. 1,773,111 2,353,429
Other receivables................................................ 13,497 1,508,733
Inventory........................................................ (1,050,304) (1,589,677)
Prepaid expenses and other current assets........................ (184,766) 99,757
Increase (decrease) in
Accounts payable and accrued expenses............................ (526,017) (534,356)
Accrued payroll and related liabilities.......................... (35,729) (1,627,280)
Deferred income.................................................. 29,173 (146,664)
Other current liabilities........................................ 1,983 14,496
------------------ ------------------
Net cash used in operating activities................................ (3,329,222) (6,015,621)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment............................ (31,208) (301,662)
Capitalized software............................................. (193,904) (875,859)
Related party notes receivable, net of repayments................ 793,561 (750,000)
Increase in restricted cash...................................... - (375,000)
------------------ ------------------
Net cash provided by (used in) investing activities.................. 568,449 (2,302,521)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on debt and capital leases.................... (60,392) (83,291)
Proceeds from sales of common stock / exercise of stock options
and warrants..................................................... - 5,392,180
------------------ ------------------
Net cash (used in) provided by financing activities.................. (60,392) 5,308,889
Effects of exchange rates on cash.................................... (12,877) -
------------------ ------------------
Net decrease in cash................................................. (2,834,042) (3,009,253)
Cash and cash equivalents, beginning of year......................... 5,230,833 10,381,612
------------------ ------------------
Cash and cash equivalents, end of period............................. $ 2,396,791 $ 7,372,359
================== ==================
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements:
-----------------------------------------------------
The condensed consolidated balance sheets as of September 30, 2001 and March 31,
2001, the condensed consolidated statements of operations for the three and six
month periods ended September 30, 2001 and 2000, the condensed consolidated
statements of cash flows for the six month periods ended September 30, 2001 and
2000 and the condensed consolidated statement of stockholders' equity for the
six month period ended September 30, 2001, have been prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary for the fair presentation of the
Company's financial position, results of operations and cash flows at September
30, 2001 and 2000 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
financial statements and notes thereto included in the annual report on Form
10-KSB for the year ended March 31, 2001.
During the second quarter of fiscal 2002, the Company initiated an aggressive
plan to increase its revenue and reduce its expenditures and operating costs
significantly. The Company's current operating plan includes certain
assumptions, the most important of which is the attainment of future revenues in
the next twelve months equivalent to those attained in fiscal year 2001 of
approximately $11 million. As a result of the implementation of this new plan,
the Company believes that it will have sufficient cash to fund its operations
for the next twelve months, however, based on the first two quarters of fiscal
year 2002, the rate of current revenue generation will not be sufficient to meet
the Company's cash needs. To the extent that revenues in the next 12 months fall
below those achieved in all of fiscal year 2001, the Company may have to (i)
modify its operating plan and scale back its expenditures for personnel and
other operating costs in order to preserve cash; and/or (ii) raise additional
funds through equity and/or debt financing. In addition, the Company is
presently evaluating the need to raise additional funds through debt or equity
financing to grow its business through expansion and/or through acquisitions.
There can be no assurance that the Company will be able to obtain any such
financing, or that such additional financing can be obtained on terms acceptable
to the Company.
7
Note 2 - Restricted Cash:
-------------------------
Due to the expiration of the Company's $1.5 million line of credit on September
30, 2000, he Company pledged $375,000 on September 7, 2000 as collateral on an
outstanding letter of credit related to the required security deposit for the
Company's Piscataway, New Jersey facility. Accordingly, $375,000 has been
reflected as restricted cash and is classified as a non-current asset at
September 30, 2001 and March 31, 2001.
Note 3 - Inventory:
-------------------
Inventory, net of allowance for obsolescence of $1,518,357 and $1,571,388 at
September 30, 2001 and March 31, 2001, respectively, consists of the following:
September 30, 2001 March 31, 2001
------------------ --------------
Raw materials $ 461,572 $ 690,566
Work in process 20,268 18,440
Finished goods 1,682,916 430,442
--------- -------
Total $ 2,164,756 $ 1,139,448
=========== ===========
Note 4 - Earnings Per Share:
----------------------------
The computation of Basic Earnings Per Share is based on the weighted average
number of common shares outstanding for the period. Diluted Earnings Per Share
is based on the weighted average number of common shares outstanding for the
period plus the dilutive effect of common stock equivalents, comprised of
outstanding stock options and warrants.
The following is a reconciliation of the denominator used in the calculation of
basic and diluted earnings per share:
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
9/30/01 9/30/00 9/30/01 9/30/00
---------- ---------- ---------- ----------
Weighted Average # of Shares
Outstanding 18,203,301 16,649,608 18,203,301 17,927,379
Incremental Shares for Common
Equivalents 12,308 653,559 18,624 2,054,866
---------- ---------- ---------- ----------
Diluted Shares Outstanding 18,215,609 17,303,167 18,221,925 19,982,245
========== ========== ========== ==========
The potential incremental common shares were excluded from the computation of
diluted earnings per share for all periods presented, because their inclusion
would have had an antidilutive effect on earnings per share due to the Company's
net loss for each respective period.
8
Note 5- Comprehensive Income:
-----------------------------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income". The following table reflects the
reconciliation between net loss per the financial statements and comprehensive
loss.
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
9/30/01 9/30/00 9/30/01 9/30/00
----------- ----------- ----------- -----------
Net loss $(2,348,026) $(4,780,065) $(4,339,942) $(9,415,301)
Effect of foreign currency translation (10,064) 30,395 (12,877) (28,123)
----------- ----------- ----------- -----------
Comprehensive loss $(2,358,090) $(4,749,670) $(4,352,819) $(9,443,424)
============ ============ ============ ============
Note 6 - Restructuring, asset impairments and other charges
-----------------------------------------------------------
During the year ended March 31, 2001, the Company recorded $3,763,612 of
restructuring, asset impairments and other charges.
As a result of the Company's operating performance during the first six months
of fiscal 2001 as compared to the prior year, the Company's new management
evaluated the Company's business and product strategy and, in the Company's
third fiscal quarter of fiscal 2001, implemented a business restructuring plan
which is intended to enable the Company to reach a position of positive
operating cash flows and focus its product offerings on those believed to have
the greatest potential to generate further, near-term market penetration and
positive operating contribution.
Included in the exit costs were approximately $353,000 of cash severance and
termination benefits associated with the separation of approximately 38
employees. All of these affected employees left the company as of March 31,
2001. All termination benefits were paid as of June 30, 2001.
In addition, the Company made strategic decisions to abandon certain products
and technologies including those which were acquired in the acquisition of
SolCom Systems, Ltd. on March 31, 1999. The Company also closed down the
research and development efforts at SolCom Systems, Ltd. and centralized the
research and development functions at its New Jersey headquarters. As a result
of the above decisions, the Company recorded an impairment charge of
approximately $2,332,000 primarily relating to the abandonment of the
capitalized core technology from this acquisition and other existing capitalized
software. An additional impairment charge of approximately $870,000 was recorded
to write-off the remaining goodwill from the Company's acquisition of SolCom
Systems, Ltd. in March 1999 which was being depreciated over a three year
period. Additionally, the Company recorded an impairment in the amount of
approximately $209,000 on fixed assets previously used in the manufacturing
process at SolCom Systems, Ltd. As of March 31, 2001, all of the restructuring
activities described above were completed.
Note 7 - Income Taxes:
----------------------
The Company has recorded a full valuation allowance against the federal and
state net operating
9
loss carryforwards and a full valuation allowance against the foreign net
operating loss carryforwards and the research and development credit because
management currently believes that it is more likely than not that substantially
all of the net operating loss carryforwards and credits will expire unutilized.
Note 8 - New Accounting Pronouncements:
----------------------------------------
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.101
Revenue Recognition in Financial Statements. SAB No.101 did not have an impact
on the Company's financial statements.
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This standard, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activites - Deferral of the
Effective Date of FASB Statement No. 133, and Amendment of FASB Statement No.
133", is effective for the Company as of April 1, 2001. The Company has no
transition adjustment as a result of adopting the standard.
In July 2001, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". Statement No.
141 requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase method of accounting. In addition, it further
clarifies the criteria for recognition of intangible assets separately from
goodwill. Statement No. 142 establishes new standards for goodwill acquired in a
business combination and eliminates the amortization of goodwill over its
estimated useful life. Rather, goodwill will now be tested for impairment
annually, or more frequently if circumstances indicate potential impairment, by
applying a fair value based test. The Company expects to adopt these statements
during the first quarter of fiscal 2003. Management does not believe that the
adoption of these standards will have a material impact on the Company's
financial position or results of operation.
The Company is currently evaluating the impact of adopting SFAS Nos. 143 and
144, which were recently issued by the FASB. These pronouncements will be
adopted by the Company during fiscal year 2003.
Note 9 - Related Party Transactions:
------------------------------------
During April 2000, the Company issued a loan to the former Chief Executive
Officer (the "Former CEO") of the Company in the amount of $750,000. The loan
accrued interest at a rate of LIBOR plus 1%. This loan had an original maturity
date of the earlier of April 2005 or thirty days after the Company for any
reason no longer employed the Former CEO.
The Former CEO resigned his position at the Company effective September 29,
2000. On October 5, 2000, the Company entered into an agreement with the Former
CEO pursuant to
10
which the $750,000 promissory note was amended to extend the due date to April
30, 2001, and to provide that interest on the note shall accrue through
September 29, 2000. The loan was collateralized by the receipt of a first
mortgage interest on the personal residence of the Former CEO. Pursuant to this
agreement, the Former CEO also agreed to reimburse the Company for certain
expenses totaling $200,000, to be paid over a period of six months ending March
31, 2001. During the fiscal year ended March 31, 2001, $50,000 was repaid and
$22,000 was recorded as a non-cash offset as a result of earned but unpaid
vacation owed to the Former CEO. During the quarter ended June 30, 2001, an
additional $15,000 was repaid. On August 3, 2001, the Company received a cash
payment of $777,713 from the Former CEO, in partial payment of the promissory
notes. An additional payment of $3,000 was received in September 2001.
On June 29, 2000, the Company made an advance of $135,000 to the Former CEO. The
advance was repaid in full on July 26, 2000.
Note 10 - Commitments:
----------------------
On October 5, 2000, the Company entered into a consulting agreement with Venture
Consulting Group, Inc. ("VCGI") whereby VCGI provided the services of Ronald C.
Sacks as Chief Executive Officer of the Company, and the services of three
additional consultants. The fees for the consultants' services were $500,000
over a one-year period. In addition, the individual consultants were issued
options to purchase 240,000 shares of common stock at the fair market value on
the date of grant. Such options vested 25% during December 2000 with the
remaining vesting ratably monthly from January 2001 through September 2001. The
Company has recorded compensation expense based upon the fair value of the
options during each reporting period beginning in October 2000 in connection
with the one-year vesting period. The Company has recorded compensation expense
of $1,200 for the quarter ended September 30, 2001 and $19,800 for the six
months ended September 30, 2001 based upon the fair value of the vested options
as of September 30, 2001 as determined using the Black Scholes option pricing
model.
Note 11 - Subsequent Events:
----------------------------
On October 4, 2001 the Company announced the layoff of 15 employees in order to
bring expenses into line with anticipated revenues. The Company expects that the
layoffs will result in a charge of approximately $90,000 in severance and other
employee related matters. Two additional employees have left the Company since
October 4, and the Company expects to incur a charge of approximately $85,000 in
severance and other employee related matters in connection with these
departures.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
A number of statements contained in this report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the applicable statements. These
risks and uncertainties include, but are not limited to, those described in the
Company's filings with the Securities and Exchange Commission including in its
annual report Form 10-KSB, for the fiscal year ending March 31, 2001.
11
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE SAME PERIOD IN
2000
Revenue for the three months ended September 30, 2001, was $1,088,380 compared
to revenue of $2,788,497 for the same period in 2000, a decrease of $1,700,117
or 61.0%. The decrease in revenue was due to reduced order activity primarily
attributable to the severe economic downturn impacting the telecommunications
industry compounded by the September 11, 2001 tragedy. In response to this
decline in revenue, the Company has taken steps to strengthen and improve its
sales force and related processes during the past twelve months, resulting in an
improved sales pipeline. Although the Company cannot guarantee that the
opportunities identified in the pipeline will translate to increased revenue in
the future, it believes that the level of activity is a positive sign.
Cost of sales for the three months ended September 30, 2001 was $572,576
compared to $1,972,478 for the same period in 2000. Cost of sales as a
percentage of revenue for the three months ended September 30, 2001 decreased to
52.6% from 70.7% for the same period in 2000 due to ongoing improvements in
inventory management and general cost containment strategies implemented during
the past 12 months. Included in cost of sales for the three months ended
September 30, 2000 was a $526,000 reserve for raw material.
Research and development expense, net of capitalized software development, for
the three months ended September 30, 2001 was $158,622 compared to $664,388 for
the same period in 2000. As a percentage of revenue, research and development
expenses were 14.6% compared to 23.8% for the same period in 2000. The decrease
in the percentage of research and development to revenue primarily reflects the
completed development of the Company's next generation product release,
NetwoRx-PRIISMS Integration 1.2 and a reduction of the R&D staff as a result of
the Company's restructuring activities.
Selling, general and administrative expenses ("SG&A") for the three months ended
September 30, 2001 were $2,250,262 compared to $3,370,494 for the same period in
2000. As a percentage of revenue, SG&A is higher at 206.8% from 120.9%
experienced in the same period in 2000, primarily due to reduced sales volumes.
This reduction in expenses is primarily the result of the Company's
restructuring efforts implemented during fiscal 2001.
Depreciation and amortization expenses - amortization of capitalized software,
goodwill and other acquisition related intangibles, and depreciation on
equipment, furniture and fixtures - was $472,688 for the three months ended
September 30, 2001 compared to $1,624,508 in the same period in 2000. The
decreased expense was primarily the result of management's decision during the
fiscal 2001 to abandon certain of the products and technology associated with
the SolCom acquisition.
Net loss for the three months ended September 30, 2001 was $2,348,026 compared
to a loss of $4,780,065 for the same period in 2000. This represents a
significant year over year improvement despite the reduction in revenue seen
this quarter. This is attributable to the Company's focused efforts to reduce
expenses, improve operating margins and stabilize the operating environment.
12
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE SAME PERIOD IN 2000
Revenue for the six months ended September 30, 2001, was $3,021,822 compared to
revenue of $4,872,001 for the same period in 2000, a decrease of $1,850,179 or
38.0%. The decrease in revenue was due to reduced order activity primarily
attributable to the severe economic downturn impacting the telecommunications
industry compounded by the September 11, 2001 tragedy. In response to this
decline in revenue, the Company has taken steps to strengthen and improve its
sales force and related processes during the past twelve months, resulting in an
improved sales pipeline. Although the Company cannot guarantee that the
opportunities identified in the pipeline will translate to increased revenue in
the future, it believes that the level of activity is a positive sign.
Cost of sales for the six months ended September 30, 2001 was $1,430,176
compared to $3,126,077 for the same period in 2000. Cost of sales as a
percentage of revenue for the six months ended September 30, 2000 decreased to
47.3% from 64.2% for the same period in 2000 due to ongoing improvements in
inventory management and general cost containment strategies implemented during
the past 12 months. Included in cost of sales for the six months ended September
30, 2000 was a $526,000 reserve for raw material.
Research and development expense, net of capitalized software development, for
the six months ended September 30, 2001 was $508,497 compared to $1,519,134 for
the same period in 2000. As a percentage of revenue, research and development
expenses were 16.8% compared to 31.2% for the same period in 2000. The decrease
in the percentage of research and development to revenue primarily reflects the
completed development of the Company's next generation product release,
NetwoRx-PRIISMS Integration 1.2 and a reduction of the R&D staff as a result of
the Company's restructuring activities.
Selling, general and administrative expenses ("SG&A") for the six months ended
September 30, 2001 were $4,535,285 compared to $7,079,479 for the same period in
2000. As a percentage of revenue, SG&A is higher at 150.1% from 145.3%
experienced in the same period in 2000, primarily due to reduced sales volumes.
This reduction in expenses is primarily the result of the Company's
restructuring efforts implemented during fiscal 2001.
Depreciation and amortization expenses - amortization of capitalized software,
goodwill and other acquisition related intangibles, and depreciation on
equipment, furniture and fixtures - was $943,964 for the six months ended
September 30, 2001 compared to $2,712,545 in the same period in 2000. The
decreased expense was primarily the result of management's decision during
fiscal 2001 to abandon certain of the products and technology associated with
the SolCom acquisition.
Net loss for the six months ended September 30, 2001 was $4,339,942 compared to
a loss of $9,415,301 for the same period in 2000. This represents a significant
year over year improvement despite the reduction in revenue seen in the first
two quarters of fiscal 2002. This is attributable to the Company's focused
efforts to reduce expenses, improve operating margins and stabilize the
operating environment.
13
FINANCIAL CONDITION AND CAPITAL RESOURCES
Net cash used in operating activities during the six months ended September 30,
2001 was $3,329,222 compared to net cash used during the same period in 2000 of
$6,015,621. The net cash used for the six months ended September 30, 2001
resulted primarily from the build-up of inventory due to lower than expected
revenues, the payment of accounts payable, and the net loss incurred during the
quarter.
Net cash provided by investing activities during the six months ended September
30, 2001 was $568,449 compared to net cash used during the same period in 2000
of ($2,302,521). The majority of this was the collection of the related party
receivable.
Net cash used in financing activities during the six months ended September 30,
2001 was ($60,392) compared to net cash provided during the same period in 2000
of $5,308,889.
During the second quarter of fiscal 2002, the Company initiated an aggressive
plan to increase its revenue and reduce its expenditures and operating costs
significantly. The Company's current operating plan includes certain
assumptions, the most important of which is the attainment of future revenues in
the next twelve months equivalent to those attained in fiscal year 2001 of
approximately $11 million. As a result of the implementation of this new plan,
the Company believes that it will have sufficient cash to fund its operations
for the next 12 months, however, based on the first two quarters of fiscal year
2002, the current rate of revenue generation will not be sufficient to meet the
Company's cash needs. To the extent that revenues in the next 12 months fall
below those achieved in all of fiscal year 2001, the Company may (i) have to
modify its current operating plan to scale back its expenditures for personnel
and other operating costs in order to preserve operating cash; and/or (ii) raise
additional funds through equity and/or debt financing. In addition, the Company
is presently evaluating the need to raise additional funds through debt or
equity financing to grow its business through expansion and/or through
acquisitions. There can be no assurance that the Company will be able to obtain
any such financing, or that such additional financing can be obtained on terms
that are acceptable to the Company.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.101
Revenue Recognition in Financial Statements. SAB No.101 did not have an impact
on the Company's financial statements.
In June 1998, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Among other provisions, it requires that
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This standard, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activites - Deferral of the
Effective Date of FASB Statement No. 133, and Amendment of FASB Statement No.
133", is effective for the Company as of April 1, 2001. The Company has no
transition adjustment as a result of adopting the standard.
14
In July 2001, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". Statement No.
141 requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase method of accounting. In addition, it further
clarifies the criteria for recognition of intangible assets separately from
goodwill. Statement No. 142 establishes new standards for goodwill acquired in a
business combination and eliminates the amortization of goodwill over its
estimated useful life. Rather, goodwill will now be tested for impairment
annually, or more frequently if circumstances indicate potential impairment, by
applying a fair value based test. The Company expects to adopt these statements
during the first quarter of fiscal 2003. Management does not believe that the
adoption of these standards will have a material impact on the Company's
financial position or results of operation.
The Company is currently evaluating the impact of adopting SFAS Nos. 143 and
144, which were recently issued by the FASB. These pronouncements will be
adopted by the Company during fiscal year 2003.
15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
On September 24, 2001, the Company held its 2001 Annual Meeting of
Stockholders (the "2001 Meeting").
At the 2001 Meeting, the Company's Stockholders elected seven directors to serve
until the 2002 Annual Meeting of Stockholders and until their successors shall
be elected and qualified. The vote with respect to the election of such
directors was as follows:
NAME FOR AUTHORITY WITHHELD
---- --- ------------------
(a) Stephen M. Deixler 14,500,158 589,529
(b) Baruch Halpern 14,899,858 289,829
(c) Frank S. Russo 14,899,858 289,829
(d) Alexander S. Stark, Jr. 14,899,858 289,829
(e) Alan Hardie 14,899,858 289,829
(f) William Martin Ritchie 14,899,858 289,829
(g) Ronald C. Sacks 14,899,858 289,829
In addition to electing the directors, the Company's Stockholders voted to
approve a proposed amendment to the Company's Certificate of Incorporation (the
"Amendment"), to effect a stock combination (reverse stock split) in the
Company's issued and outstanding shares of Common Stock. 14,247,898 votes were
cast in favor of the approval of the Amendment, representing approximately 78%
of the shares of Common Stock issued and outstanding and entitled to vote
thereon. 765,019 votes were cast in opposition to such approval and 76,770 votes
abstained. The proposal allows the Company's Board of Directors, in its sole
discretion, to decide if and when (within 12 months following the 2001 Meeting)
to effect the Amendment, and to determine the reverse split ratio within a range
of 1 for 2 to 1 for 6.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits: None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
16
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
DATE: October 18, 2001
ION NETWORKS, INC.
/s/ Stephen M. Deixler
--------------------------------------------------
Stephen M. Deixler, Chairman of the Board, Interim
Chief Executive Officer and Interim Principal
Financial Officer
17