10QSB 1 d12310110qsb.txt PERIOD ENDING 12/31/01 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 December 31, 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 21,138,001 shares of Common Stock outstanding as of January 22, 2002. Transitional Small Business Disclosure Format: Yes ___ No X ----- FORM 10-QSB FOR THE QUARTER ENDED DECEMBER 31, 2001
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Condensed Consolidated Financial Information 2 Condensed Consolidated Balance Sheets as of December 31, 2001 and March 31, 2001 (Unaudited) 3 Condensed Consolidated Statements of Operations for the Three and Nine Months ended December 31, 2001 and 2000 4 (Unaudited) Condensed Consolidated Statement of Stockholders' Equity for the Nine Months ended December 31, 2001 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Nine Months ended December 31, 2001 and 2000 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18
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) December 31, March 31, 2001 2001 ------------ --------- ASSETS Current assets: Cash and cash equivalents ....................................................... $ 1,746,632 $ 5,230,833 Accounts receivable, net of allowance for doubtful accounts of $148,781 and $161,000 respectively ................................ 1,475,021 2,796,531 Other receivables ............................................................... -- 13,497 Inventory, net .................................................................. 1,436,102 1,139,448 Prepaid expenses and other current assets ....................................... 255,609 205,829 Related party notes receivable .................................................. 98,537 897,250 ------------ ------------ Total current assets ................................................... 5,011,901 10,283,388 Restricted cash ...................................................................... 375,000 375,000 Property and equipment at cost, net of accumulated depreciation of $2,612,357 and $2,095,564 respectively .......................... 948,248 1,467,766 Capitalized software, less accumulated amortization of $3,197,791 and $2,585,607, respectively .................................................... 967,120 1,241,495 Goodwill and other acquisition - related intangibles, less accumulated amortization of $963,021 and $694,444 respectively .............................................. 63,523 305,556 Other assets ......................................................................... 19,588 22,683 ------------ ------------ Total assets .............................................................. $ 7,385,380 $ 13,695,888 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital leases ............................................... $ 74,426 $ 74,426 Current portion of long-term debt ............................................... 61,320 107,026 Accounts payable ................................................................ 1,128,145 1,716,212 Accrued expenses ................................................................ 397,035 562,860 Accrued payroll and related liabilities ......................................... 668,625 416,093 Deferred income ................................................................. 179,381 178,737 Other current liabilities ....................................................... 296,782 309,977 ------------ ------------ Total current liabilities ................................................. 2,805,714 3,365,331 Long-term portion of capital leases .................................................. 165,775 220,966 Long-term debt, net of current portion ............................................... 8,702 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 21,124,801 at December 31, 2001; issued and outstanding 18,203,301 shares at March 31, 2001 ............................. 21,125 18,203 Additional paid-in capital ...................................................... 40,764,831 40,191,346 Notes receivable from officers .................................................. (536,100) -- Accumulated deficit ............................................................. (35,876,878) (30,165,045) Accumulated other comprehensive income .......................................... 32,211 46,355 ------------ ------------ Total stockholders' equity ........................................................... 4,405,189 10,090,859 ------------ ------------ Total liabilities and stockholders' equity ........................................... $ 7,385,380 $ 13,695,888 ============ ============ The accompanying notes are an integral part of these condensed consolidated financial statements.
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ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Three Months Ended For the Nine Months Ended December 31, December 31, 2001 2000 2001 2000 ---- ---- ---- ---- Revenue ............................................... $ 2,214,216 $ 3,432,572 $ 5,236,038 $ 8,304,574 Cost of sales ......................................... 1,092,872 1,610,796 2,523,047 4,738,864 ------------ ------------ ------------ ------------ Gross margin .......................................... 1,121,344 1,821,776 2,712,991 3,565,710 Research and development expenses ................ 211,929 468,539 720,426 1,987,673 Selling, general and administration .............. 1,870,157 2,450,863 6,405,442 9,532,008 Restructuring, asset impairments and other charges 217,467 2,961,125 217,467 3,449,420 Depreciation and amortization .................... 468,830 949,787 1,412,794 3,175,999 ------------ ------------ ------------ ------------ Loss from operations .................................. (1,647,039) (5,008,538) (6,043,138) (14,579,390) Other income .......................................... 264,725 -- 264,725 -- Interest income ....................................... 17,932 91,756 91,714 311,172 Interest expense ...................................... (7,510) (12,289) (25,134) (40,621) ------------ ------------ ------------ ------------ Loss before income tax expense ........................ (1,371,892) (4,929,071) (5,711,833) (14,308,839) Income tax expense .................................... -- 11,291 -- 53,019 ------------ ------------ ------------ ------------ Net loss .............................................. $ (1,371,892) $ (4,940,362) $ (5,711,833) $(14,361,858) ============ ============ ============ ============ PER SHARE DATA Net loss per share Basic ............................................ $ (0.07) $ (0.27) $ (0.31) $ (0.87) Diluted .......................................... $ (0.07) $ (0.27) $ (0.31) $ (0.87) Weighted average number of common shares outstanding: Basic ............................................ 18,542,991 18,077,210 18,316,943 16,598,179 Diluted .......................................... 18,542,991 18,077,210 18,316,943 16,598,179 The accompanying notes are an integral part of these condensed consolidated financial statements.
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ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 (Unaudited) Accumulated Additional Other Notes Total Paid-in Accumulated Comprehensive Receivable Stockholders' Shares Par Value Capital Deficit Income from Officers Equity ------ --------- ------- ------- ------ ------------- ------ Balance March 31, 2001 18,203,301 $ 18,203 $ 40,191,346 $(30,165,045) $ 46,355 $ -- $ 10,090,859 Net loss (5,711,833) (5,711,833) Exercise of stock options 21,500 22 4,386 4,408 and warrants Issuance of restricted shares 2,900,000 2,900 536,100 539,000 Notes receivable from officers (536,100) (536,100) Noncash stock-based compensation 32,999 32,999 Translation adjustments (14,144) (14,144) ---------- ------------ ------------ ------------ -------- ---------- ------------ Balance December 31, 2001 21,124,801 $ 21,125 $ 40,764,831 $(35,876,878) $ 32,211 $ (536,100) $ 4,405,189 ========== ============ ============ ============ ======== ========== ============ The accompanying notes are an integral part of these condensed consolidated financial statements.
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ION NETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES Net loss ........................................................................ $ (5,711,833) $(14,361,858) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization .............................................. 1,412,794 3,175,999 Provision for inventory obsolescence ....................................... 75,953 530,542 Other charges .............................................................. (9,052) 3,449,420 Noncash stock-based compensation charges ................................... 32,999 (5,018) Changes in operating assets and liabilities: (Increase) decrease in Accounts receivable ........................................................ 1,321,510 2,576,579 Other receivables .......................................................... 13,497 1,560,697 Inventory .................................................................. (372,607) (1,318,768) Prepaid expenses and other assets ......................................... (46,685) 194,715 Increase (decrease) in Accounts payable and accrued expenses ...................................... (753,892) (694,157) Accrued payroll and related liabilities .................................... 252,532 (1,734,116) Deferred income ............................................................ 644 (161,447) Other current liabilities .................................................. (13,195) 21,889 ------------ ------------ Net cash used in operating activities ........................................... (3,797,335) (6,765,523) CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of property and equipment ...................................... (30,776) (329,759) Capitalized software ....................................................... (334,140) (1,169,060) Related party notes receivable, net of repayments .......................... 798,713 (912,250) Increase in restricted cash ................................................ -- (375,000) ------------ ------------ Net cash provided by (used in) investing activities ............................. 433,797 (2,786,069) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on debt and capital leases .............................. (110,927) (120,218) Proceeds from sales of common stock / exercise of stock options and warrants 4,408 5,323,047 ------------ ------------ Net cash (used in) provided by financing activities ............................. (106,519) 5,202,829 Effects of exchange rates on cash ............................................... (14,144) -- ------------ ------------ Net decrease in cash ............................................................ (3,484,201) (4,348,763) Cash and cash equivalents, beginning of year .................................... 5,230,833 10,381,612 ------------ ------------ Cash and cash equivalents, end of period ........................................ $ 1,746,632 $ 6,032,849 ============ ============ 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 DECEMBER 31, 2001 (Unaudited) Note 1 - Condensed Consolidated Financial Statements: ----------------------------------------------------- The condensed consolidated balance sheets as of December 31, 2001 and March 31, 2001, the condensed consolidated statements of operations for the three and nine month periods ended December 31, 2001 and 2000, the condensed consolidated statements of cash flows for the nine month periods ended December 31, 2001 and 2000 and the condensed consolidated statement of stockholders' equity for the nine month period ended December 31, 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 December 31, 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 operating plan included certain assumptions, the most important of which is the attainment of future revenues in the twelve months ending September 30, 2002 equivalent to those attained in fiscal year 2001 of approximately $11 million. Based on its performance in the quarter ending December 31, 2001, analysis of its sales pipeline and the Company's expectation of sequential continued growth, the Company believes it is on target to achieve such revenues. As a result, the Company believes that it will have sufficient cash to fund its operations for the next twelve months. However, 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, the 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 December 31, 2001 and March 31, 2001. Note 3 - Inventory: ------------------- Inventory, net of allowance for obsolescence of $1,647,342 and $1,571,388 at December 31, 2001 and March 31, 2001, respectively, consists of the following: December 31, 2001 March 31, 2001 ----------------- -------------- Raw materials $ 341,039 $ 690,566 Work in process 4,107 18,440 Finished goods 1,090,956 430,442 ---------- ---------- Total $1,436,102 $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 Months Three Months Nine Months Nine Months Ended Ended Ended Ended 12/31/01 12/31/00 12/31/01 12/31/00 ------------ ------------ ----------- ----------- Weighted Average No. of Shares Outstanding 18,542,991 18,077,210 18,316,943 16,598,179 Incremental Shares for Common Equivalents 643,046 132,310 220,302 1,283,290 ---------- ---------- ---------- ---------- Diluted Shares Outstanding 19,186,037 18,209,520 18,537,245 17,881,469 ========== ========== ========== ==========
The potential incremental common shares above 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 Months Three Months Nine Months Nine Months Ended Ended Ended Ended 12/31/01 12/31/00 12/31/01 12/31/00 ------------ ------------ ----------- ----------- Net loss $ (1,371,892) $ (4,940,362) $ (5,711,833) $(14,361,858) Effect of foreign currency translation (1,267) (27,923) (14,144) (56,046) ------------ ------------ ------------ ------------ Comprehensive loss $ (1,373,159) $ (4,968,285) $ (5,725,977) $(14,417,904) ============ ============ ============ ============
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 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 was 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 amortized 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. In addition to the implementation of the above restructuring plan, in early October 2001, the Company announced the layoff of 17 employees in order to bring its expenses in line with its anticipated revenues. The Company recorded $217,467 of severance and termination related 9 costs. Termination benefits of $178,624 were paid during the third quarter of fiscal 2002 with the balance to be paid in the fourth quarter of fiscal 2002. Note 7 - Income Taxes: ---------------------- The Company has recorded a full valuation allowance against the federal and state net operating 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 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 operations. The Company is currently evaluating the impact of adopting SFAS Nos. 143, "Accounting for Asset Retirement Obligations" and 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" 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. 10 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 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. The Company received two additional payments of $3,000 each in September and October 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 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 recorded compensation expense of $19,800 for the nine months ended December 31, 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 - Equity: ----------------- Effective October 2001, the Company approved and granted 2,900,000 shares of restricted stock to three executives at fair value. The restricted shares are subject to a repurchase right which will permit the Company to repurchase any shares which have not yet vested at the effective date of termination of the employees' employment, as defined in their employment agreements, for an amount equal to the purchase price per share paid by the employees. The Company will receive a series of interest bearing promissory notes for the value of the shares to be repaid by the employees. The notes are to be repaid by the employees at the earlier of ten years or the date upon which the employees dispose of their shares. The issuance of the restricted shares and the notes receivable due from the employees is recorded in the Company's financial statements during the quarter ended December 31, 2002. Only the vested portion of the shares has been included in earnings per share at December 31, 2001. 11 Note 12 - Subsequent Events: ---------------------------- On November 9, 2001, the Company entered into an agreement with the landlord for its Piscataway, NJ facility to amend the Lease Agreement dated February 18, 1999 as follows: The Company will use $250,000 of its restricted cash from the letter of credit (see Note 2) towards the rent payments for 10 months starting January 2002. The Company will pay the remaining 50% of its rent from its general cash reserves on a monthly basis for this 10 month period. On January 10, 2002, the Landlord received the $250,000 from the letter of credit per the above mentioned lease amendment. The Company agreed to replenish the letter of credit by November 2003. As of January 1, 2002, the Company entered into a memorandum of understanding to sublease approximately 5,400 square feet of its facility to a third party tenant for a period of 24 months. The rent will be $5,200 per month for the first nine months and $10,400 per month for the last fifteen months, but with a 100% abatement for the first three months. As part of the rental payment, the third party tenant will issue to the Company warrants to purchase approximately $77,400 worth of its common stock at an exercise price equivalent to the price of the common stock in its first round of financing. 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 included in its annual report Form 10-KSB, for the fiscal year ended March 31, 2001. 12 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE SAME PERIOD IN 2000 Revenue for the three months ended December 31, 2001, was $2,214,216 compared to revenue of $3,432,572 for the same period in 2000, a decrease of $1,218,356 or 35.5%. The decrease in revenue was due to reduced order activity in part attributable to the severe economic downturn impacting the telecommunications industry as well as continuing residual affects of the September 11, 2001 tragedy. In response to this decline in revenue, the Company continues to take steps to strengthen its sales force, build sales momentum and improve its sales pipeline. Although the Company cannot guarantee that the opportunities identified in the pipeline will translate to increased revenue in the future, it believes the current level of activity in the three months ended December 31, 2001 is a positive sign. Cost of sales for the three months ended December 31, 2001 was $1,092,872 compared to $1,610,796 for the same period in 2000. Cost of sales as a percentage of revenue for the three months ended December 31, 2001 increased to 49.4% from 46.9% for the same period in 2000 due to an increase of approximately $127,000 (net of write-offs) to the reserve for obsolete inventory. Research and development ("R&D") expense, net of capitalized software development, for the three months ended December 31, 2001 was $211,929 compared to $468,539 for the same period in 2000. As a percentage of revenue, R&D expenses were 9.6% compared to 13.6% for the same period in 2000. The decrease in the percentage of R&D to revenue primarily reflects the completed development of the Company's next scheduled product release 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 December 31, 2001 were $1,870,157 compared to $2,450,863 for the same period in 2000. As a percentage of revenue, SG&A is higher at 84.5% from 71.4% experienced in the same period in 2000, primarily due to reduced sales volumes. This reduction in expenses in dollar terms 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 $468,830 for the three months ended December 31, 2001 compared to $949,787 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 three months ended December 31, 2001 was $1,371,892 compared to a loss of $4,940,362 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 business environment in line with current market conditions. 13 FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE SAME PERIOD IN 2000 Revenue for the nine months ended December 31, 2001, was $5,236,038 compared to revenue of $8,304,574 for the same period in 2000, a decrease of $3,068,536 or 37.0%. 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 continues to take steps to strengthen its sales force, build sales momentum and improve its sales pipeline. Although the Company cannot guarantee that the opportunities identified in the pipeline will translate to increased revenue in the future, it believes the current level of activity in the three months ended December 31, 2001 is a positive sign. Cost of sales for the nine months ended December 31, 2001 was $2,523,047 compared to $4,738,864 for the same period in 2000. Cost of sales as a percentage of revenue for the nine months ended December 31, 2001 decreased to 48.2% from 57.1% 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 nine months ended December 31, 2001 was approximately $127,000 (net of write-offs) to the reserve for obsolete inventory. Research and development ("R&D") expense, net of capitalized software development, for the nine months ended December 31, 2001 was $720,426 compared to $1,987,673 for the same period in 2000. As a percentage of revenue, R&D expenses were 13.8% compared to 23.9% for the same period in 2000. The decrease in the percentage of R&D to revenue primarily reflects the completed development of the Company's next scheduled product release 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 nine months ended December 31, 2001 were $6,405,442 compared to $9,532,008 for the same period in 2000. As a percentage of revenue, SG&A is higher at 122.3% from 114.8% experienced in the same period in 2000, primarily due to reduced sales volumes. This reduction in expenses in dollar terms 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 $1,412,794 for the nine months ended December 31, 2001 compared to $3,175,999 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 nine months ended December 31, 2001 was $5,711,833 compared to a loss of $14,361,858 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 business environment in line with current market conditions. 14 FINANCIAL CONDITION AND CAPITAL RESOURCES Net cash used in operating activities during the nine months ended December 31, 2001 was $3,797,335 compared to net cash used during the same period in 2000 of $6,765,523. The net cash used for the nine months ended December 31, 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 nine months ended December 31, 2001 was $433,797 compared to net cash used during the same period in 2000 of ($2,786,069). The majority of this was the collection of the related party receivable. Net cash used in financing activities during the nine months ended December 31, 2001 was ($106,519) compared to net cash provided during the same period in 2000 of $5,202,829. 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 operating plan included certain assumptions, the most important of which is the attainment of future revenues in the twelve months ending September 30, 2002 equivalent to those attained in fiscal year 2001 of approximately $11 million. Based on its performance in the quarter ending December 31, 2001, analysis of its sales pipeline and the Company's expectation of sequential continued growth, the Company believes it is on target to achieve such revenues. As a result, the Company believes that it will have sufficient cash to fund its operations for the next twelve months. However, 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. NEW ACCOUNTING PRONOUNCEMENTS 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 15 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 operations. The Company is currently evaluating the impact of adopting SFAS Nos. 143, "Accounting for Asset Retirement Obligations" and 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which were recently issued by the FASB. These pronouncements will be adopted by the Company during fiscal year 2003. 16 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: None. (b) Reports on Form 8-K: (i) On October 23, 2001, the Company filed a current report on Form 8-K, reporting the issuance of a press release relating to the hiring of Kam Saifi as its new President and CEO. (ii) On October 24, 2001, the Company filed a current report on Form 8-K, reporting the issuance of a press release relating to the hiring of Cameron Saifi and David Arbeitel, as the Company's COO and CTO, respectively. 17 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: January 23, 2002 ION NETWORKS, INC. /s/ Kam Saifi --------------------------------------------- Kam Saifi, Director, Chief Executive Officer, President and Interim Principal Financial Officer 18