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