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 March 31, 2003
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)
There were 24,875,500 shares of Common Stock outstanding as of May 12, 2003.
Transitional Small Business Disclosure Format:
Yes___ No X
ION NETWORKS, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 2003
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Condensed Consolidated Financial Information 2
Condensed Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002 3
Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2003 (Unaudited) and 2002 (Unaudited) 4
Condensed Consolidated Statement of Stockholders' Equity for the Three Months ended March 31, 2003 (Unaudited)
and for the Nine Months ended December 31, 2002 5
Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2003 (Unaudited) and 2002 (Unaudited) 7
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis 14
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 22
1
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 Transition Report on Form 10-KSB for the nine months ended December
31, 2002.
2
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2003 2002
Assets (Unaudited)
------------ ------------
Current assets
Cash and cash equivalents $ 397,185 $ 865,684
Accounts receivable, less allowance for doubtful accounts of
$90,799, and $90,521, respectively 453,985 561,762
Inventory, net 1,174,182 1,259,268
Prepaid expenses and other current assets 121,549 203,934
------------ ------------
Total current assets 2,146,901 2,890,648
Restricted cash -- 125,700
Property and equipment, net 418,694 485,735
Capitalized software, less accumulated amortization of $4,083,247 and
$3,920,223, respectively 672,202 764,429
Other assets 4,115 14,878
------------ ------------
Total assets $ 3,241,912 $ 4,281,390
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Current portion of capital leases $ 89,033 $ 87,057
Current portion of long-term debt 5,890 4,004
Accounts payable 1,099,265 1,195,023
Accrued expenses 1,044,974 906,154
Accrued payroll and related liabilities 128,461 185,358
Deferred income 129,384 155,021
Sales tax payable 73,381 84,025
Other current liabilities 91,031 89,317
------------ ------------
Total current liabilities $ 2,661,419 $ 2,705,959
------------ ------------
Long term portion of capital leases 50,538 73,551
Long term debt, net of current portion -- 5,717
Commitments and contingencies (Note 10)
Stockholders' Equity
Preferred stock - par value $.001 per share; authorized 1,000,000 shares at
March 31, 2003, and December 31, 2002; 200,000 shares designated
Series A at March 31, 2003 and December 31, 2002; 166,835 shares
issued and outstanding at March 31, 2003 and December 31, 2002 167 167
Common stock - par value $.001 per share; authorized 50,000,000 shares at
March 31, 2003 and December 31, 2002; 24,875,500 shares issued and
outstanding at March 31, 2003 and December 31, 2002 24,876 24,876
Additional paid-in capital 44,585,740 44,680,740
Notes receivable from officers (480,658) (473,405)
Accumulated deficit (43,597,858) (42,722,946)
Accumulated other comprehensive loss (2,312) (13,269)
------------ ------------
Total stockholder's equity 529,955 1,496,163
------------ ------------
Total liabilities and stockholders' equity $ 3,241,912 $ 4,281,390
============ ============
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)
Three Months Three Months,
Ended Ended
March 31, 2003 March 31, 2002
------------ ------------
Net sales $ 765,119 $ 2,076,197
Cost of sales 243,988 961,085
------------ ------------
Gross Margin 521,131 1,115,112
------------ ------------
Research and development expenses 137,399 171,116
Selling, general and administrative expenses 1,026,703 1,714,159
Depreciation and amortization expenses 234,115 439,296
------------ ------------
Loss from operations (877,086) (1,209,459)
Interest income 9,543 22,924
Interest expense (7,369) (6,647)
------------ ------------
(874,912) (1,193,182)
Loss before income taxes
Income tax expense -- 24,364
------------ ------------
Net loss $ (874,912) $ (1,217,546)
============ ============
Per share data
Basic and diluted $ (0.04) $ (0.06)
Weighted average number of common shares outstanding
Basic and diluted 23,512,668 18,890,609
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 THREE MONTHS ENDED MARCH 31, 2003 (Unaudited)
AND NINE MONTHS ENDED DECEMBER 31, 2002
Accumulated
Additional Other
Paid-In Accumulated Comprehensive
Preferred Common Capital Deficit Loss
--------------------- --------------------------- ------------ ------------ -------------
Shares Stock Shares Stock
-------- --------- ------------ ----------- ------------ ------------ -------------
Balance, March 31, 2002 -- -- 25,138,000 $ 25,138 $44,381,454 $(37,094,424) $ 27,866
-------- --------- ------------ ----------- ------------ ------------ -------------
Comprehensive loss
Net loss (5,628,522)
Translation adjustments (41,135)
Total comprehensive loss
Issuances of preferred
stock 166,835 $ 167 285,136
Cancellation of restricted
shares (262,500) (262) (80,850)
Notes receivable from
officers
Deferred compensation
Non-cash stock-based
compensation 95,000
-------- --------- ------------ ----------- ------------ ------------ -------------
Balance, December 31, 2002 166,835 $ 167 24,875,500 $ 24,876 $44,680,740 $(42,722,946) $ (13,269)
-------- --------- ------------ ----------- ------------ ------------ -------------
Comprehensive loss
Net loss (874,912)
Translation adjustments 10,957
Total comprehensive loss
Notes Receivable from
officers
Non-cash stock-based
compensation (95,000)
-------- --------- ------------ ----------- ------------ ------------ -------------
Balance, March 31, 2003 166,835 $ 167 24,875,500 $ 24,876 $44,585,740 $(43,597,858) $ (2,312)
======== ========= ============ =========== ============ ============ =============
5
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 (Unaudited)
AND NINE MONTHS ENDED DECEMBER 31, 2002
Notes Total
Receivable Deferred Stockholders'
from Officers Compensation Equity
-------------- ------------------ ------------------
Balance, March 31, 2002 $ (549,914) $ (62,893) $ 6,727,227
-------------- ------------------ ------------------
Comprehensive loss
Net loss (5,628,522)
Translation adjustments (41,135)
------------------
Total comprehensive loss (5,669,657)
Issuances of preferred
stock 285,303
Cancellation of restricted
shares (81,112)
Notes receivable from
officers 76,509 76,509
Deferred compensation 62,893 62,893
Non-cash stock-based
compensation 95,000
-------------- ------------------ ------------------
Balance, December 31, 2002 $ (473,405) - $ 1,496,163
-------------- ------------------ ------------------
Comprehensive loss
Net loss (874,912)
Translation adjustments 10,957
------------------
Total comprehensive loss (863,955)
Notes Receivable from
officers (7,253) (7,253)
Non-cash stock-based
compensation (95,000)
-------------- ------------------ ------------------
Balance, March 31, 2003 $ (480,658) - $ 529,955
============== ================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Three Months
Ended March 31, Ended March 31,
2003 2002
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities
Net loss $ (874,912) $(1,217,546)
Adjustments to reconcile net loss to net cash used in
operating activities:
Restructuring, asset impairments and other charges,
non-cash -- (2,930)
Depreciation and amortization 234,115 439,296
Provision for inventory obsolescence (13,544) (641,434)
Other charges -- 9,052
Non-cash stock-based compensation charge (95,000) --
Issuances of restricted stock -- 539,000
Notes receivable from officers (7,254) (549,914)
Deferred compensation -- 62,893
Changes in operating assets and liabilities:
Accounts receivable 107,777 (46,209)
Inventory 98,630 1,053,410
Prepaid expenses and other current assets 82,385 (224,065)
Other assets 10,763 --
Accounts payable and other accrued expenses 43,062 (233,568)
Accrued payroll and related liabilities (56,897) (318,810)
Deferred income (25,637) (63,454)
Sales tax payable (10,644) 46,544
Other current liabilities 1,714 (80,968)
----------- -----------
Net cash used in operating activities (505,442) (1,228,703)
----------- -----------
Cash flows from investing activities
Acquisition of property and equipment -- (4,493)
Capitalized software expenditures (74,846) (166,248)
Related party notes receivable -- 14,880
Restricted cash 125,700 249,300
----------- -----------
Net cash provided by (used in) investing activities 50,854 (433,797)
----------- -----------
Cash flows from financing activities
Repayment of restricted stock note -- (162,143)
Repayment of debt (24,868) 110,927
Issuances of common stock and warrants -- 3,475,592
Exercises of options and warrants -- 19,258
----------- -----------
Net cash (used in) provided by financing activities (24,868) 3,443,634
----------- -----------
Effect of exchange rates on cash 10,957 (4,345)
----------- -----------
Net (decrease) increase in cash and cash equivalents (468,499) 2,304,025
Cash and cash equivalents - beginning of period 865,684 1,746,632
----------- -----------
Cash and cash equivalents - end of period $ 397,185 $ 4,050,657
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2003
(Unaudited)
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures and
sells infrastructure security and management products to corporations, service
providers and government agencies. The Company's hardware and software products
are designed to form a secure auditable portal to protect IT and network
infrastructure from internal and external security threats. ION's infrastructure
security solution operates in the IP, data center, telecommunications and
transport, and telephony environments and is sold by a direct sales force and
indirect channel partners mainly throughout North America and Europe.
The condensed consolidated balance sheet as of March 31, 2003, the condensed
consolidated statements of operations for the three month periods ended March
31, 2003 and 2002, the condensed consolidated statements of cash flows for the
three month periods ended March 31, 2003 and 2002 and the condensed consolidated
statement of stockholders' equity for the three month period ended March 31,
2003, have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal non-material recurring
adjustments) necessary for the fair presentation of the Company's financial
position, results of operations and cash flows at March 31, 2003 and 2002 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
consolidated financial statements and notes thereto included in the transition
report on Form 10-KSB for the nine months ended December 31, 2002.
Our consolidated financial statements have been prepared on the basis that we
will continue as a going concern. At March 31, 2003, we had an accumulated
deficit of $43,597,858 and negative working capital of $514,518. We also
realized a net loss of $874,912 for the three months ended March 31, 2003. We
have been aggressively seeking to raise additional capital through selling our
equity since August 2002 and have been unable to secure such financing other
than the $300,303 raised from the sale of our preferred stock in September 2002.
Additionally, our efforts to raise approximately $1.5 million of additional
capital through selling securities and/or debt have not been successful. Because
of the weak financial condition of the Company, we expect that it will be
necessary to issue securities having a valuation and terms that are far more
favorable to investors than securities ION has previously issued. In order to
induce investors to provide capital to ION at this time, it may be necessary to
pledge all of the assets of the Company as collateral for such securities,
provide liquidation preferences at a multiple of the purchase price of the
securities, provide favorable conversion premiums to investors and other similar
terms which could have a negative effect on the value of our common stock and
rights of our equity shareholders upon liquidation or other circumstances. There
is no assurance we can raise the needed $1.5 million or any additional capital
on any terms reasonably acceptable to the Company. Nonetheless, the management
will continue to have discussions with the creditors to defer payments and/or
extend payment terms in order to improve the ability for its cash flows to fund
its ongoing operations. The board of directors has also been considering
strategic alternatives for the Company which have not materialized as of this
date. If the Company is unable to secure additional financing, enter into a
strategic transaction or generate revenues sufficient to sustain its operations,
the Company may need to consider other alternatives including ceasing its
operations as early as June 2003.
NOTE 2. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ION
Networks, Inc. and its subsidiaries (collectively, the "Company") and have been
prepared on the accrual basis of accounting. All material inter-company balances
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the year. Actual results could differ from those estimates.
The significant estimates include the allowance for doubtful accounts, allowance
for inventory obsolescence, capitalized software including estimates of future
gross revenues, and the related amortization lives, deferred tax asset valuation
allowance and depreciation and amortization lives.
8
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less at the time of purchase to be cash equivalents.
Allowance for Doubtful Accounts Receivable
Accounts receivable are reduced by an allowance to estimate the amount that will
actually be collected from our customers. Many of our customers have been
adversely affected by economic downturn in the telecommunications industry. If
the financial condition of our customers were to materially deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances could be required.
Inventory
Inventories are stated at the lower of cost (average cost) or market. Reserves
for slow moving and obsolete inventories are provided based on historical
experience and current product demand. If our estimate of future demand is not
correct or if our customers place significant order cancellations, inventory
reserves could increase from our estimate. We may also receive orders for
inventory that has been fully or partially reserved. To the extent that the sale
of reserved inventory has a material impact on our financial results, we will
appropriately disclose such effects. Our inventory carrying costs are not
material; thus we may not physically dispose of reserved inventory immediately.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which are
generally two to five years. Expenditures for maintenance and repairs, which do
not extend the economic useful life of the related assets, are charged to
operations as incurred. Gains or losses on disposal of property and equipment
are reflected in the statements of operations in the period of disposal.
Capitalized Software
The Company capitalizes computer software development costs in accordance with
the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS No. 86"). SFAS No. 86 requires that the Company capitalize
computer software development costs upon the establishment of the technological
feasibility of a product, to the extent that such costs are expected to be
recovered through future sales of the product. Management is required to use
professional judgment in determining whether development costs meet the criteria
for immediate expense or capitalization. These costs are amortized by the
greater of the amount computed using (i) the ratio that current gross revenues
from the sales of software bear to the total of current and anticipated future
gross revenues from the sales of that software, or (ii) the straight-line method
over the estimated useful life of the product. As a result, the carrying amount
of the capitalized software costs may be reduced materially in the near term.
We record impairment losses on capitalized software and other long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow estimates
are based on historical results adjusted to reflect our best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. While we believe that our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our estimates.
Research and Development Costs
The Company charges all costs incurred to establish the technological
feasibility of a product or enhancement to research and development expense in
the period incurred.
Revenue Recognition Policy
The Company recognizes revenue from product sales to end users, value-added
resellers (VARs) and original equipment manufacturers (OEMs) upon shipment if no
significant vendor obligations exist and collectibility is probable. We do not
offer our customers the right to return products, however the Company records
warranty costs at the time revenue is recognized. Management estimates the
anticipated warranty costs but actual results could differ from those estimates.
Maintenance contracts are sold separately and maintenance revenue is recognized
on a straight-line basis over the period the service is provided, generally one
year.
Fair Value of Financial Instruments
The carrying value of items included in working capital and debt approximates
fair value because of the relatively short maturity of these instruments.
Net Loss Per Share of Common Stock
Basic net loss per share excludes dilution for potentially dilutive securities
and is computed by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share reflects the potential dilution that could occur if
securities or other instruments to issue common stock were exercised or
converted into common stock. Potentially dilutive securities are excluded from
the computation of diluted net loss per share when their inclusion would be
antidilutive. A reconciliation between basic and diluted weighted average shares
outstanding is as follows:
9
Three Months Three Months
Ended Ended
3/31/03 3/31/02
(Unaudited) (Unaudited)
Basic Weighted Average No. of Shares Outstanding 23,512,668 18,890,609
Incremental Shares for Common Stock Equivalents 1,669,868 1,101,786
---------- ----------
Total* 25,182,535 21,745,265
========== ==========
* Since there was a loss attributable to common shareholders in these
periods, the basic weighted average shares outstanding were used in
calculating diluted loss per share, as inclusion of the incremental
shares shown in this calculation would be antidilutive. Potential
common shares of 1,669,868 at March 31, 2003 and 1,101,786 at March 31,
2002 were excluded from the computation of diluted earnings per share.
Stock Compensation
We account for stock-based employee compensation arrangements in accordance with
provisions of Accounting Principals Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and comply with the disclosure requirements of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123," issued in December 2002. Under APB Opinion No. 25, compensation expense is
based on the difference, if any, generally on the date of grant, between the
fair value of our stock and the exercise price of the option. We account for
equity instruments issued to non-employee vendors in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No.
96-18, "Accounting for Equity Instruments That are Issued to Other Than
Employees from Acquiring, or in Conjunction with Selling, Goods and Services".
All transactions in which goods or services are the consideration received for
the issuance of equity instruments are accounted for based on the fair value of
the consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. The measurement date of the fair value of
the equity instrument issued is the date on which the counter party's
performance is complete.
If the Company had elected to recognize compensation costs based on the fair
value at the date of grant for awards for the three months ended March 31, 2003
and 2002, consistent with the provisions of SFAS No. 123, the Company's net loss
and basic and diluted net loss per share would have increased to the pro forma
amounts indicated below: by $333,803 and $0.01 and $423,865 and $0.03,
respectively, for the three-months ended March 31, 2003 and 2002.
Three months Three months
ended ended
March 31, 2003 March 31, 2002
(Unaudited) (Unaudited)
-------------- -----------
Net loss
As reported $ 874,912 $1,217,546
Deduct: Stock based employee
compensation determined under
fair value methods for all awards
granted since 1994 (inception) 333,803 423,865
---------- ----------
Pro forma $1,208,715 $1,641,411
========== ==========
Basic and diluted net loss per share of common
stock
As reported $ 0.04 $ 0.06
Pro forma $ 0.05 $ 0.09
Foreign Currency Translation
The financial statements of the foreign subsidiaries were prepared in local
currency and translated into U.S. dollars based on the current exchange rate at
the end of the period for the balance sheet and a weighted-average rate for the
period on the statement of operations. Translation adjustments are reflected as
foreign currency translation adjustments in stockholders' equity and,
accordingly, have no effect on net loss. Transaction adjustments for the foreign
subsidiaries are included in income and are not material.
Income Taxes
Deferred income tax assets and liabilities are computed annually based on
enacted tax laws and rates for temporary differences between the financial
accounting and income tax bases of assets and liabilities. A valuation allowance
is established, when necessary, to reduce deferred income tax assets to the
amount that is more likely than not to be realized.
Warranty Costs
The Company estimates its warranty costs based on historical warranty claim
experience. Future costs for warranties applicable to sales recognized in the
current period are charged to cost of sales. The warranty accrual is reviewed
quarterly to reflect the remaining obligation. Adjustments are made when actual
warranty claim experience differs from estimates. The warranty accrual included
in other current liabilities as of March 31, 2003 and March 31, 2002
approximated $48,400 and $55,000, respectively.
10
NOTE 3 - RESTRICTED CASH:
The Company maintains a restricted cash balance in accordance with its Lease
Agreement for its Piscataway, NJ facility. On March 17, 2003 the Lease Agreement
for the Piscataway, NJ facility was amended to apply $105,908 of the remaining
restricted cash balance of $125,700 towards the payment of the outstanding rent
obligations. The balance of $19,792 was added to the working capital reducing
the letter of credit to zero. This amendment to the Lease Agreement required the
Company to deposit $60,000 into a new letter of credit by December 2003.
NOTE 4 - INVENTORY:
Inventory, net of allowance for obsolescence of $315,725 and $720,772, at March
31, 2003 and December 31, 2002, respectively, consists of the following:
March 31,
2003 December 31,
(Unaudited) 2002
---------- ----------
Raw materials $ 163,141 $ 195,283
Work-in-progress 65,440 84,231
Finished goods 945,601 979,755
---------- ----------
$1,174,182 $1,259,268
========== ==========
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
Ended Ended
3/31/03 3/31/02
(Unaudited) (Unaudited)
----------- -----------
Net loss $ (874,912) $(1,217,546)
Effect of foreign currency translation 10,957 997
----------- -----------
Comprehensive loss $ (863,955) $(1,216,549)
=========== ===========
NOTE 6 - INCOME TAXES:
The Company has recorded a full valuation allowance against the federal and
state net operating loss carry-forwards and a full valuation allowance against
the foreign net operating loss carry-forwards 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 carry-forwards and credits will
expire unutilized.
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB also issued SFAS No.143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 is effective for years beginning
after June 15, 2002. The Company has evaluated and determined that there is no
material impact that adoption of this standard will have on its consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires all long-lived assets classified
as held for sale to be valued at the lower of their carrying amount of fair
value less cost to sell and which broadens the presentation of discontinued
operations to include more disposal transactions. The Company adopted this
standard on April 1, 2002. There was no effect upon adoption on the Company's
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. This differs from prior guidance, which required the liability to be
recognized when a commitment plan was put into place. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect that the adoption
of this standard will have a material impact on its financial position, results
of operations, or cash flow.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are entered
into or modified after December 31, 2002. The impact of FIN 45 on the company's
consolidated financial statements will depend upon whether the company enters
into or modifies any material guarantee arrangements. The Company did not enter
into any new material guarantees in 2003.
11
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial
statements issued after January 31, 2003, if it is reasonably possible that as
of the transition date: (1) the company will be the primary beneficiary of an
existing VIE that will require consolidation or, (2) the company will hold a
significant variable interest in, or have significant involvement with, an
existing VIE. The Company does not have any entities that require disclosure or
new consolidation as a result of adopting the provisions of FIN 46.
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The changes in SFAS No. 149 improve financial reporting by requiring
that contracts with comparable characteristics be accounted for similarly. Those
changes will result in more consistent reporting of contracts as either
derivatives or hybrid instruments. SFAS No. 149 is to be applied prospectively
to contracts entered into or modified after June 30, 2003, with certain
exceptions, and for hedging relationships designated after June 30, 2003.
Management believes that adopting this statement will not have a material impact
on the financial statements of the Company.
NOTE 8 - RELATED PARTY TRANSACTIONS:
During April 2000, the Company issued a loan (the "Loan") to the former Chief
Executive Officer (the "Former CEO") of the Company in the amount of $750,000.
The Loan accrues 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 employs 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 which the $750,000 promissory note for the Loan 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. Pursuant to the terms of the Separation
and Forbearance Agreement between the Company and the Former CEO, 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 year ended
March 31, 2001, $50,000 of the amounts owed to the Company by the Former CEO was
repaid and $22,000 has been recorded as a non-cash offset as a result of earned
but unpaid vacation owed to the Former CEO. During the year ended March 31,
2002, $813,593 was repaid. At March 31, 2003, the total amount owed to the
Company by the Former CEO was approximately $156,388 (including accrued
interest) has been fully reserved. The Company will continue to attempt to
collect the note receivable.
NOTE 9 - STOCKHOLDERS' EQUITY:
On September 13, 2002 the Company received equity financing in the amount of
$300,303 ($285,303, net of issuance cost) for the issuance of 166,835
unregistered shares of the Company's Preferred Stock at $1.80 per share. The
Company has designated 200,000 of the 1,000,000 authorized shares of preferred
stock as Series A Preferred Stock ("Preferred Stock"). Each share of Preferred
Stock is convertible into 10 shares of the Company's common stock at the
conversion price of $0.18 per share of common stock, which was the closing bid
price of the Company's common stock on September 13, 2002. The Preferred Stock
is non-voting, has a standard liquidation preference equal to its purchase
price, and does not pay dividends. Proceeds of the equity financing will be used
for working capital and general corporate purposes. All of the shares of
Preferred Stock were purchased by directors and management of the Company. The
purpose of the Preferred Stock Financing was to enable the Company to comply
with the Nasdaq SmallCap Market's initial listing requirement of a minimum of
$5,000,000 of stockholders' equity so that the Company was eligible for an
additional 180-day grace period to attempt to regain compliance with the $1.00
minimum bid price requirement of the Nasdaq SmallCap Market (based on
stockholders equity of $5,004,215 at June 30, 2002, adjusted on a pro forma
basis for the equity financing). The preferred stock is recorded in
Stockholders' equity, net of issuance costs.
Effective October 2001, the Company approved and granted 2,900,000 shares of
restricted stock to Messrs. Kam Saifi, Cameron Saifi, and David Arbeitel 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 officers' employment, as defined in their employment
agreements, for an amount equal to the purchase price per share paid by the
officers. The Company received a series of partial recourse interest bearing
(5.46% on an annual basis) promissory notes for the value of the Restricted
Shares to be repaid by the officers. The notes are to be repaid by the officers
at the earlier of ten years or the date upon which the employees dispose of
their shares or under certain circumstances, when the borrower's employment with
the company terminates for any reason. The issuance of the restricted shares and
the notes receivable due from the officers is recorded in the Company's
financial statements. Only the vested portion of the shares has been included in
the weighted average number of common shares outstanding at March 31, 2003. On
September 29, 2002 , Mr. David Arbeitel separated employment from the Company.
As a result, the note relating to Mr. Arbeitel's 37,500 vested Restricted Shares
became due and payable and as of September 30, 2002, Mr Arbeitel owed
approximately $12,190 (including approximately $602 of interest) with respect to
such vested shares. On November 11, 2002, Mr. Arbeitel paid the Company $12,264
(including accrued interest of $676) in satisfaction of the note for the 37,500
vested shares. The Company and Mr. Arbeitel agreed to rescind the stock purchase
transaction with respect to 262,500 of the unvested Restricted Shares thereby
canceling the unpaid portion of the notes in an amount of $ 85,322 (including
accrued interest of $4,210) relating to such unvested shares.
12
The variable accounting method used to account for the partial recourse
restricted stock granted to management resulted in a cashless credit of $95,000
for the three month period ended March 31,2003.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company entered into a lease on February 18, 1999 for approximately 26,247
square feet for its principal executive offices at 1551 South Washington Avenue,
Piscataway, New Jersey. On March 17, 2003, the Company signed an amendment with
the landlord reducing the space from 26,247 to 12,722 square feet and the rent
from $50,153.64 to $20,143.17 per month effective March 1, 2003. The Company is
also obligated to make additional payments to the landlord relating to certain
taxes and operating expenses.
Capital Leases
The Company leases certain equipment under agreements which are classified as
capital leases. Each of the capital lease agreements expire within five years
and have purchase options at the end of the lease term.
Contingent Liabilities
In the normal course of business the Company and its subsidiaries may be
involved in legal proceedings, claims and assessments arising in the ordinary
course of business. Such matters are subject to many uncertainties, and outcomes
are not predictable with assurance. In the opinion of management, the outcome of
such current legal proceedings, claims and assessments will not have a material
effect on the Company's financial position, results of operations or cash flows.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
ION Networks, Inc. (the "Company"), designs, develops, manufactures and sells
infrastructure security and management products to corporations, service
providers and government agencies. The Company's hardware and software products
are designed to form a secure auditable portal to protect IT and network
infrastructure from internal and external security threats. ION's products
operate in the IP, data center, telecommunications and transport, and telephony
environments and are sold by a direct sales force and indirect channel partners
mainly throughout North America and Europe.
The Company is a Delaware corporation founded in 1999 through the combination of
two companies - MicroFrame ("MicroFrame"), a New Jersey Corporation (the
predecessor entity to the Company, originally founded in 1982), and SolCom
Systems Limited ("SolCom"), a Scottish corporation located in Livingston,
Scotland (originally founded in 1994). From the time of the merger in 1999
through the quarter ended December 31, 2001, the Company's principal objective
was to address the need for security and network management and monitoring
solutions, primarily for the PBX-based telecommunications market, resulting in a
significant portion of our revenues being generated from sales to various
telecommunications companies. During the quarter ended December 31, 2001, a new
management team joined the Company and evaluated ION's revenue and expenditures,
exiting product suite, present customer base and evolving addressable market. As
a result of this evaluation, the Company refocused its product line from that of
network management monitoring to that of infrastructure security, which was the
original focus of MicroFrame prior to the merger with Solcom. We also added
significant network features to the product to broaden the scope of the
potential customer base, emphasizing infrastructure security. We identified
additional enterprise markets that extend beyond the telecommunications industry
and believe that successfully penetrating these additional markets could
positively impact revenue, although there can be no assurance that these efforts
will be successful. Despite these efforts, during the last two years, the
telecommunications industry has endured a significant economic downturn.
Telecommunications service providers have generally reduced planned capital
spending, have reduced staff, and, in some cases, sought bankruptcy proceedings
and/or ceased operations. Consequently, the spending cutback of the
organizations has affected the Company through reduced product orders. The
decline in product orders negatively impacted our revenues, resulting in
significant operating losses and negative cash flows.
As a result, it is imperative for us to be successful in increasing our revenue,
reducing costs, and/or securing additional funding in fiscal 2003 in order to
continue operating as a going concern. If we are not successful in raising
additional equity capital, to generate sufficient cash flows to meet our
obligations as they come due, our financial condition and results of operations
will be materially and adversely affected and we will not be able to continue to
operate as a going concern beyond June 2003. If we are successful in raising
additional capital but fail to increase our revenue or reduce our expenses and
defer payments and/or extend payment terms in order to allow the cash flows to
meet ongoing operations, our financial condition and results of operations may
be materially and adversely affected and we may not be able to continue to
operate as a going concern.
RESULTS OF OPERATIONS
For the three months ended March 31, 2003 compared to the same period in 2002
Net sales for the three months ended March 31, 2003, was $765,119 compared to
net sales of $2,076,197 for the same period in 2002, a decrease of $ 1,311,078
or 63.1%. The decrease in sales is attributable mainly to the reduction in the
number of units sold in the three-month period ended March 31, 2003. The Company
sold mostly the ION Secure 3000 series security appliances (formerly called the
Sentinel 2000) in both periods so there was no impact on revenue from a change
in product mix. The continuing impact of the overall downturn in the information
technology and the telecommunications industry compounded by the weak financial
condition of the Company has caused the Company's decrease in sales for this
period.
Cost of sales for the three months ended March 31, 2003 was $243,988 compared to
$961,085 for the same period in 2002. Cost of sales as a percentage of net sales
for the three months ended March 31, 2003 decreased to 31.9% from 46.3% for the
same period in 2002, and therefore gross margin increased to 68.1% from 53.7% as
compared to the prior year. The decrease in cost of sales or the increase in
gross margin is mainly due to lowering the costs associated with manufacturing
of the appliances and lack of larger sales orders that typically require higher
volume discounts.
Research and development expense, net of capitalized software development, for
the three months ended March 31, 2003 was $137,399 compared to $171,116 for the
same period in 2002 or an decrease of $33,717 as compared to the comparable
period of the prior year. The decrease is primarily attributable to the
reduction in salaries.
Selling, general and administrative expenses ("SG&A") for the three months ended
March 31, 2003 were $1,026,703 compared to $1,714,159 for the same period in
2002, a decrease of $687,456. This is primarily due to a decrease in payroll
costs associated with reduction in the workforce. Also during the quarter ended
March 31, 2003, the Company abandoned the space at California location. As a
result, the Company incurred a one-time charge of $123,510 in the quarter ended
March 31, 2003.
Depreciation and amortization expenses - amortization of capitalized software,
goodwill and other acquisition related intangibles, and depreciation on
equipment, furniture and fixtures - was $234,115 for the three months ended
March 31, 2003 compared to $439,296 in the same period in 2002. The decrease was
primarily the result of the three-year amortization period for the acquisitions
of LeeMAH and Solcom Systems, Ltd coming to an end on March 31, 2002.
14
Net loss for the three months ended March 31, 2003 was $874,912 compared to a
loss of $1,217,546 for the same period in 2002. This is primarily due to the
reduction of the operating expenses and improved gross margin.
FINANCIAL CONDITION AND CAPITAL RESOURCES
Our consolidated financial statements have been prepared on the basis that we
will continue as a going concern. At March 31, 2003, we had an accumulated
deficit of $43,597,858 and a working capital deficit of $514,518 as compared to
$164,689 at March 31, 2002. This decline in working capital was due to continued
operating losses generated throughout the three months ended March 31, 2003. We
also realized net losses of $874,912 and $1,217,546 for the three months ended
March 31, 2003 and 2002 respectively. We believe that our working capital as of
March 31, 2003 is not sufficient to fund the Company's operations beyond June
2003. We have been aggressively seeking to raise additional capital through
selling our equity since August 2002 and have been unable to secure such
financing other than the $300,303 raised from the sale of our preferred stock in
September 2002. Additionally, our efforts to raise approximately $1.5 million of
additional capital through selling securities and/or debt have not been
successful. Because of the weak financial condition of the Company, we expect
that it will be necessary to issue securities having a valuation and terms that
are far more favorable to investors than securities ION has previously issued.
In order to induce investors to provide capital to ION at this time, it may be
necessary to pledge all of the assets of the Company as collateral for such
securities, provide liquidation preferences at a multiple of the purchase price
of the securities, provide favorable conversion premiums to investors and other
similar terms which could have a negative effect on the value of our common
stock and rights of our equity shareholders upon liquidation or other
circumstances. There is no assurance we can raise the needed $1.5 million or any
additional capital on any terms reasonably acceptable to the Company.
Nonetheless, the management will continue to have discussions with the creditors
to defer payments and/or extend payment terms in order to improve the ability
for its cash flows to fund its ongoing operations. The board of directors has
also been considering strategic alternatives for the Company which have not
materialized as of this date. If the Company is unable to secure additional
financing, enter into a strategic transaction or generate revenues sufficient to
sustain its operations, the Company may need to consider other alternatives
including ceasing its operations as early as June 2003.
Net cash used in operating activities during the three months ended March 31,
2003 was $505,442 compared to net cash used during the same period in 2002 of
$1,228,703. The decrease in net cash used during the three months ended March
31, 2003 compared to the same period in 2002, was primarily due to the reduction
in operating expenses and improved gross margins. The $505,442 net cash used in
operating activities during the three month period ended March 31, 2003 was
primarily the result of operating losses incurred during this period which was
partially offset by the cash generated from the net decrease in accounts
receivable.
Net cash provided by investing activities during the three months ended March
31, 2003 was $50,854 compared to net cash used in during the same period in 2002
of $433,797. This is the net of the $125,700 restricted cash in the letter of
credit for the Piscataway, NJ facility that was primarily used for the payment
of rent offset by the capitalization of software costs of $74,846 for the three
month period ended March 31, 2003.
Net cash used from financing activities during the three months ended March 31,
2003 was $24,868 compared to net cash generated during the same period in 2002
of $3,443,634. The $24,868 used in this period reflects reduction in current
capital lease obligations which was attributable to the net proceeds from the
sale of 4,000,000 shares of Common Stock.
SIGNIFICANT ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions or conditions.
Significant accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below.
Revenue Recognition - The Company recognizes revenue from product sales to end
users, value-added resellers (VARs) and original equipment manufacturers (OEMs)
upon shipment if no significant vendor obligations exist and collectibility is
probable. We do not offer our customers the right to return products, however
the Company records warranty costs at the time revenue is recognized. Management
estimates the anticipated warranty costs but actual results could differ from
those estimates. Maintenance contracts are sold separately and maintenance
revenue is recognized on a straight-line basis over the period the service is
provided, generally one year.
Allowance for Doubtful Accounts Receivable - Accounts receivable are reduced by
an allowance to estimate the amount that will actually be collected from our
customers. Many of our customers have been adversely affected by economic
downturn in the telecommunications industry. If the financial condition of our
customers were to materially deteriorate, resulting in an impairment of their
ability to make payments, additional allowances could be required.
15
Inventory Obsolescence Reserves - Inventories are stated at the lower of cost
(average cost) or market. Reserves for slow moving and obsolete inventories are
provided based on historical experience and current product demand. If our
estimate of future demand is not correct or if our customers place significant
order cancellations, inventory reserves could increase from our estimate. We may
also receive orders for inventory that has been fully or partially reserved. To
the extent that the sale of reserved inventory has a material impact on our
financial results, we will appropriately disclose such effects. Our inventory
carrying costs are not material; thus we may not physically dispose of reserved
inventory immediately.
Impairment of Software Development and Purchased Software Costs - The Company
capitalizes computer software development costs in accordance with the
provisions of Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed"
("SFAS 86"). SFAS 86 requires that the Company capitalize computer software
development costs upon the establishment of the technological feasibility of a
product, to the extent that such costs are expected to be recovered through
future sales of the product. Management is required to use professional judgment
in determining whether development costs meet the criteria for immediate expense
or capitalization. These costs are amortized by the greater of the amount
computed using (i) the ratio that current gross revenues from the sales of
software bear to the total of current and anticipated future gross revenues from
the sales of that software, or (ii) the straight-line method over the estimated
useful life of the product. As a result, the carrying amount of the capitalized
software costs may be reduced materially in the near term.
We record impairment losses on capitalized software and other long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow estimates
are based on historical results adjusted to reflect our best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. While we believe that our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our estimates.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB also issued SFAS No.143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 is effective for years beginning
after June 15, 2002. The Company has evaluated and determined that there is no
material impact that adoption of this standard will have on its consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires all long-lived assets classified
as held for sale to be valued at the lower of their carrying amount of fair
value less cost to sell and which broadens the presentation of discontinued
operations to include more disposal transactions. The Company adopted this
standard on April 1, 2002. There was no effect upon adoption on the Company's
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. This differs from prior guidance, which required the liability to be
recognized when a commitment plan was put into place. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect that the adoption
of this standard will have a material impact on its financial position, results
of operations, or cash flow.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are entered
into or modified after December 31, 2002. The impact of FIN 45 on the company's
consolidated financial statements will depend upon whether the company enters
into or modifies any material guarantee arrangements. The Company did not enter
into any new material guarantees in 2003.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial
statements issued after January 31, 2003, if it is reasonably possible that as
of the transition date: (1) the company will be the primary beneficiary of an
existing VIE that will require consolidation or, (2) the company will hold a
significant variable interest in, or have significant involvement with, an
existing VIE. The Company does not have any entities that require disclosure or
new consolidation as a result of adopting the provisions of FIN 46.
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. SFAS No. 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. The changes in SFAS No. 149 improve financial reporting by requiring
that contracts with comparable characteristics be accounted for similarly. Those
changes will result in more consistent reporting of contracts as either
derivatives or hybrid instruments. SFAS No. 149 is to be applied prospectively
to contracts entered into or modified after June 30, 2003, with certain
exceptions, and for hedging relationships designated after June 30, 2003.
Management believes that adopting this statement will not have a material impact
on the financial statements of the Company.
16
ITEM 3. CONTROLS AND PROCEDURES.
The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, performed an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures within 90 days before the filing date of this
quarterly report. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to their evaluation.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
18
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit
No. Description
------- -----------
3.1 Certificate of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on August 5, 1998./(2)/
3.2 Certificate of Amendment of the Certificate of Incorporation, as
filed with the Secretary of State of the State of Delaware on
December 11, 1998./(2)/
3.3 Certificate of Amendment of the Certificate of Incorporation, as
filed with the Secretary of state of the State of Delaware an
October 12, 1999./(3)/
3.4 By-Laws of the Company./(2)/
3.5 Form of Specimen Common Stock Certificate of the Company./(4)/
4.1 1994 Stock Option Plan of the Company. /(1)/
4.2 1998 Stock Option Plan of the Company./(2)/
4.3 1998 U.K. Sub-Plan of the Company, as amended./(2)/
4.4 Amended and Restated Certificate of Designation of Rights
Preferences, Privileges and Restrictions of Series A Preferred
Stock of ION Networks, Inc. /(20)/
4.5 2000 Stock Option Plan of the Company./(17)/
4.6 2002 Stock Option Plan of the Company./(19)/
4.7 Form of Warrant Agreement dated July 17, 2001./(13)/
4.8 Form of Warrant Agreement dated January 4, 2002./(13)/
4.9 Form of Non-Qualified Stock Option Agreement dated March 19, 1999
by and between the Company's predecessor, Microframe, Inc. and its
consultants./(13)/
4.10 Form of Non-Employee Director Stock Option Contract dated March 10,
1998 between the Company's predecessor, Microframe, Inc. and its
non-employee directors./(13)/
4.11 Form of Non-Employee Director Stock Option Contract dated September
17, 1997 by and between the Company's predecessor, Microframe, Inc.
and its non-employee directors./(13/)
4.12 Form of Non-Qualified Stock Option Agreement dated September 25,
1996 by and between the Company's predecessor, Microframe, Inc. and
its employees./(13)/
4.13 Amended and Restated Non-Qualified Stock Option Agreement dated May
19, 1997 by and between the Company's Predecessor, Microframe, Inc.
and its employees./(9)/
19
Exhibit
No. Description
------- -----------
10.1 Lease Agreement dated February 18, 1999 by and between the Company
and Washington Plaza Associates, L.P., as landlord. /(4)/
10.2 Business Park Gross Lease dated May 17, 1999 by and between the
Company and Bedford Property Investors, Inc./(4)/
10.3 Agreement dated as of December 19, 1994 by and between LeeMAH
DataCom Security Corporation and Siemens Rolm Communications
Inc./(4)/
10.4 Equipment Lease Agreements dated June 10, 1999 and May 5, 1999 by
and between the Company and Siemens Credit Corporation./(4)/
10.5 Equipment Lease Agreement dated June 17, 1999 by and between the
Company and Lucent Technologies./(4)/
10.6 (i) Non-negotiable Promissory Note in the principal amount of
$750,000 issued by Stephen B. Gray to the Company./(5)/
(ii) First Amendment to Promissory Note dated as of August 5, 2000
by and between the Company and Stephen B. Gray./(5)/
10.7 Line of Credit Agreement with United Nations Bank dated September
30, 1999./(5)/
10.8 (i) Separation and Forbearance Agreement made as of October 5, 2000
between the Company and Stephen B. Gray./(7)/
(ii)Promissory Note in the amount of $163,000 dated October 5, 2000
made by Stephen B. Gray to the Company./(7)/
10.9 Materials and Services Contract dated January 16, 2001, between the
Company and SBC Services, Inc./(8)/
10.10 Stock Purchase Agreement dated August 11, 2000 by and between the
Company and the parties identified therein./(8)/
10.11 Purchase Agreement by and between the Company and the Selling
Shareholders set forth therein dated February 7, 2002./(18)/
10.12 Employment Agreement dated October 4, 2001 between the Company and
Kam Saifi./(11)/
10.13 Employment Agreement dated October 17, 2001 between the Company and
Cameron Saifi./(12)/
10.14 Sublease Agreement dated April 17, 2002 between the Company and
Multipoint Communications, LLC./(14)/
10.15 Agreement and General Release dated August 15, 2002 between the
Company and Ron Forster./(16)/
10.16 Rescission Agreement dated September 29, 2002 between the Company
and David Arbeitel./(16)/
20
Exhibit
No. Description
------- -----------
10.17 Separation Agreement and General Release dated October 31, 2002
between the Company and David Arbeitel./(16)/
10.18 Employment Agreement dated May 20, 2002 between the Company and Ted
Kaminer./(15)/
10.19 Employment Agreement dated February 25, 2002, between the Company
and William Whitney. /20)/
16.1 Letter dated June 28, 2001, from PricewaterhouseCoopers LLP to the
Securities and Exchange Commission./(10)/
21.1 List of Subsidiaries./(14)/
99.1 Section 906 Certification of the Chief Executive Officer.*
99.2 Section 906 Certification of the Chief Financial Officer.*
(1) Incorporated by Reference to the Company's Registration Statement on Form
S-8 filed on August 15, 1995.
(2) Incorporated by Reference to the Company's Registration Statement on Form
S-8 filed on April 22, 1999.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on March 17, 2000.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1999.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed on June 28, 2000.
(6) Incorporated by Reference to the Company's Current Report on Form 8-K filed
on March 12, 1999.
(7) Incorporated by reference to the Company's Quarterly report on Form 10-QSB
filed on November 14, 2000
(8) Incorporated by reference to the Company's Annual report on Form 10-KSB
filed on June 29, 2001.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on November 17, 2000.
(10) Incorporated by reference to the Company's Annual report on Form 10-KSB
filed on June 29, 2001.
(11) Incorporated by Reference to the Company's Current Report on Form 8-K filed
on October 23, 2001.
(12) Incorporated by Reference to the Company's Current Report on Form 8-K filed
on October 24, 2001.
(13) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 2002, as filed on July 1, 2002.
(14) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A,
Amendment No.2, for the fiscal year ended March 31, 2002, as filed on
August 2, 2002.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed on August 14, 2002.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed on November 14, 2002.
(17) Incorporated by Reference to the Company's Registration Statement on Form
S-8 filed on January 11, 2002.
(18) Incorporated by Reference to the Company's Registration Statement on Form
S-3 filed on March 4, 2002.
(19) Incorporated by Reference to the Company's Definitive Proxy Statement filed
on September 16, 2002.
(20) Incorporated by reference to the Company's Transition Report on Form 10-KSB
for the nine months ended December 31, 2002, as filed on April 15, 2003.
* Filed herewith
(b) Reports on Form 8-K:
On March 26, 2003, the Company filed a report on Form 8-K reporting the issuance
of two press releases announcing the Company's financial results for the three
months and nine months ended December 31, 2002 and the delisting of the
Company's common stock from the Nasdaq SmallCap Market at the opening of
business on March 28, 2003.
21
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: May 15, 2003
ION NETWORKS, INC.
/s/ Kam Saifi
------------------------------------------
Kam Saifi, Chief Executive Officer and President
(Principal Executive Officer)
/s/ Stephen M. Deixler
------------------------------------------
Stephen M. Deixler, Chairman of the Board and
Interim Chief Financial Officer
22
CERTIFICATIONS
I, Kam Saifi, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of ION Networks, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within in 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 15, 2003
------------
By: /s/ Kam Saifi
------------------------------------------------
Kam Saifi, Chief Executive Officer and President
23
I, Stephen M. Deixler, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of ION Networks, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within in 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
d) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were any significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: May 15, 2003
------------
By: /s/ Stephen M. Deixler
----------------------------------------------
Stephen M. Deixler, Chairman of the Board and
Interim Chief Financial Officer
24
Exhibit Index
Exhibit
No. Description
------- -----------
3.1 Certificate of Incorporation of the Company, as filed with the
Secretary of State of the State of Delaware on August 5, 1998./(2)/
3.2 Certificate of Amendment of the Certificate of Incorporation, as
filed with the Secretary of State of the State of Delaware on
December 11, 1998./(2)/
3.3 Certificate of Amendment of the Certificate of Incorporation, as
filed with the Secretary of state of the State of Delaware an
October 12, 1999./(3)/
3.4 By-Laws of the Company./(2)/
3.5 Form of Specimen Common Stock Certificate of the Company./(4)/
4.1 1994 Stock Option Plan of the Company. /(1)/
4.2 1998 Stock Option Plan of the Company./(2)/
4.3 1998 U.K. Sub-Plan of the Company, as amended./(2)/
4.4 Amended and Restated Certificate of Designation of Rights
Preferences, Privileges and Restrictions of Series A Preferred
Stock of ION Networks, Inc. /(20)/
4.5 2000 Stock Option Plan of the Company./(17)/
4.6 2002 Stock Option Plan of the Company./(19)/
4.7 Form of Warrant Agreement dated July 17, 2001./(13)/
4.8 Form of Warrant Agreement dated January 4, 2002./(13)/
4.9 Form of Non-Qualified Stock Option Agreement dated March 19, 1999
by and between the Company's predecessor, Microframe, Inc. and its
consultants./(13)/
4.10 Form of Non-Employee Director Stock Option Contract dated March 10,
1998 between the Company's predecessor, Microframe, Inc. and its
non-employee directors./(13)/
4.11 Form of Non-Employee Director Stock Option Contract dated September
17, 1997 by and between the Company's predecessor, Microframe, Inc.
and its non-employee directors./(13/)
4.12 Form of Non-Qualified Stock Option Agreement dated September 25,
1996 by and between the Company's predecessor, Microframe, Inc. and
its employees./(13)/
4.13 Amended and Restated Non-Qualified Stock Option Agreement dated May
19, 1997 by and between the Company's Predecessor, Microframe, Inc.
and its employees./(9)/
25
Exhibit
No. Description
------- -----------
10.1 Lease Agreement dated February 18, 1999 by and between the Company
and Washington Plaza Associates, L.P., as landlord. /(4)/
10.2 Business Park Gross Lease dated May 17, 1999 by and between the
Company and Bedford Property Investors, Inc./(4)/
10.3 Agreement dated as of December 19, 1994 by and between LeeMAH
DataCom Security Corporation and Siemens Rolm Communications
Inc./(4)/
10.4 Equipment Lease Agreements dated June 10, 1999 and May 5, 1999 by
and between the Company and Siemens Credit Corporation./(4)/
10.5 Equipment Lease Agreement dated June 17, 1999 by and between the
Company and Lucent Technologies./(4)/
10.6 (i) Non-negotiable Promissory Note in the principal amount of
$750,000 issued by Stephen B. Gray to the Company./(5)/
(ii) First Amendment to Promissory Note dated as of August 5, 2000
by and between the Company and Stephen B. Gray./(5)/
10.7 Line of Credit Agreement with United Nations Bank dated September
30, 1999./(5)/
10.8 (i) Separation and Forbearance Agreement made as of October 5, 2000
between the Company and Stephen B. Gray./(7)/
(ii)Promissory Note in the amount of $163,000 dated October 5, 2000
made by Stephen B. Gray to the Company./(7)/
10.9 Materials and Services Contract dated January 16, 2001, between the
Company and SBC Services, Inc./(8)/
10.10 Stock Purchase Agreement dated August 11, 2000 by and between the
Company and the parties identified therein./(8)/
10.11 Purchase Agreement by and between the Company and the Selling
Shareholders set forth therein dated February 7, 2002./(18)/
10.12 Employment Agreement dated October 4, 2001 between the Company and
Kam Saifi./(11)/
10.13 Employment Agreement dated October 17, 2001 between the Company and
Cameron Saifi./(12)/
10.14 Sublease Agreement dated April 17, 2002 between the Company and
Multipoint Communications, LLC./(14)/
10.15 Agreement and General Release dated August 15, 2002 between the
Company and Ron Forster./(16)/
10.16 Rescission Agreement dated September 29, 2002 between the Company
and David Arbeitel./(16)/
10.17 Separation Agreement and General Release dated October 31, 2002
between the Company and David Arbeitel./(16)/
26
Exhibit
No. Description
------- -----------
10.18 Employment Agreement dated May 20, 2002 between the Company and Ted
Kaminer./(15)/
10.19 Employment Agreement dated February 25, 2002, between the Company
and William Whitney. /20)/
16.1 Letter dated June 28, 2001, from PricewaterhouseCoopers LLP to the
Securities and Exchange Commission./(10)/
21.1 List of Subsidiaries./(14)/
99.3 Section 906 Certification of the Chief Executive Officer.*
99.4 Section 906 Certification of the Chief Financial Officer.*
(1) Incorporated by Reference to the Company's Registration Statement on Form
S-8 filed on August 15, 1995.
(2) Incorporated by Reference to the Company's Registration Statement on Form
S-8 filed on April 22, 1999.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on March 17, 2000.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1999.
(5) Incorporated by reference to the Company's Annual Report on Form 10-KSB
filed on June 28, 2000.
(6) Incorporated by Reference to the Company's Current Report on Form 8-K filed
on March 12, 1999.
(7) Incorporated by reference to the Company's Quarterly report on Form 10-QSB
filed on November 14, 2000
(8) Incorporated by reference to the Company's Annual report on Form 10-KSB
filed on June 29, 2001.
(9) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on November 17, 2000.
(10) Incorporated by reference to the Company's Annual report on Form 10-KSB
filed on June 29, 2001.
(11) Incorporated by Reference to the Company's Current Report on Form 8-K filed
on October 23, 2001.
(12) Incorporated by Reference to the Company's Current Report on Form 8-K filed
on October 24, 2001.
(13) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 2002, as filed on July 1, 2002.
(14) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A,
Amendment No.2, for the fiscal year ended March 31, 2002, as filed on
August 2, 2002.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed on August 14, 2002.
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed on November 14, 2002.
(17) Incorporated by Reference to the Company's Registration Statement on Form
S-8 filed on January 11, 2002.
(18) Incorporated by Reference to the Company's Registration Statement on Form
S-3 filed on March 4, 2002.
(19) Incorporated by Reference to the Company's Definitive Proxy Statement filed
on September 16, 2002.
(20) Incorporated by reference to the Company's Transition Report on Form 10-KSB
for the nine months ended December 31, 2002, as filed on April 15, 2003.
* Filed herewith
27