U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2004
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)
120 CORPORATE BOULEVARD, SOUTH PLAINFIELD, NJ 07080
---------------------------------------------------
(Address of Principal Executive Offices)
(908) 546-3900
---------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 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 22,525,500 shares of Common Stock outstanding as of November 10,
2004.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
YES __ NO _X_
ION NETWORKS, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
PART I. FINANCIAL INFORMATION
PAGE
ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 3
Condensed Balance Sheet as of September 30, 2004 4
Condensed Statements of Operations for the Three and Nine Months
ended September 2004 and 2003 (Consolidated) 5
Condensed Statements of Cash Flows for the Nine Months ended
September 30, 2004 and 2003 (Consolidated) 6
Notes to Condensed Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 11
ITEM 3. CONTROLS AND PROCEDURES 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
The condensed 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 accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations. It is suggested that these financial statements be read in
conjunction with the audited financial statements and the notes thereto included
in the registrant's Report on Form 10-KSB for the year ended December 31, 2003.
3
ION NETWORKS, INC.
CONDENSED BALANCE SHEET
As of September 30, 2004
(Unaudited)
ASSETS
------
Current assets
Cash and cash equivalents $ 140,138
Accounts receivable, less allowance for doubtful accounts of $43,974 522,734
Inventory, net 482,502
Prepaid expenses and other current assets 75,156
------------
Total current assets 1,220,530
Property and equipment, net 8,963
Capitalized software, less accumulated amortization of $4,063,481 355,147
Other assets 12,836
------------
Total assets $ 1,597,476
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of capital leases $ 8,102
Current portion of long-term debt 2,287
Accounts payable 390,592
Accrued expenses 349,248
Accrued payroll and related liabilities 176,076
Deferred income 178,853
Sales tax payable 9,367
Other current liabilities 53,337
------------
Total current liabilities 1,167,862
------------
Long term liabilities
Convertible debenture 200,000
Long-term debt, net of current portion 7,528
------------
Total long term liabilities 207,528
------------
Commitments and contingencies
Stockholders' Equity
Preferred stock - par value $.001 per share; authorized 1,000,000
shares; 200,000 shares designated Series A; 166,835 shares issued
and outstanding (aggregate liquidation preference $300,303) 167
Common stock - par value $.001 per share; authorized 50,000,000 shares;
23,125,500 shares issued and outstanding 23,126
Additional paid-in capital 44,362,997
Notes receivable from former officer (see note 5) (211,295)
Accumulated deficit (43,952,909)
------------
Total stockholders' equity 222,086
------------
Total liabilities and stockholders' equity $ 1,597,476
============
The accompanying notes are an integral part of these condensed financial statements.
4
ION NETWORKS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 1,047,054 $ 888,324 $ 2,558,315 $ 2,527,643
Cost of sales 306,200 214,535 793,954 689,374
------------ ------------ ------------ ------------
Gross margin 740,854 673,789 1,764,361 1,838,269
------------ ------------ ------------ ------------
Research and development expenses 167,247 116,080 427,525 377,834
Selling, general and administrative expenses 530,768 454,509 1,721,400 1,937,370
Restructuring, asset impairment and other (63,716) (213,071)
charges (63,716) (405,402)
Depreciation and amortization expenses 100,617 163,597 322,061 604,025
------------ ------------ ------------ ------------
Total operating expenses 734,916 521,115 2,407,270 2,513,827
------------ ------------ ------------ ------------
Income(loss) from operations 5,938 152,674 (642,909) (675,558)
Other income -- 3,465 -- 4,120
Interest income 257 4,308 19,962 15,633
Interest expense (496) (1,681) (3,224) (11,708)
------------ ------------ ------------ ------------
Net income(loss) $ 5,699 $ 158,766 $ (626,171) $ (667,513)
============ ============ ============ ============
Per share data
Net income(loss) per share
Basic $ 0.00 $ 0.01 $ (0.03) $ (0.03)
Diluted $ 0.00 $ 0.01 $ (0.03) $ (0.03)
Weighted average number of common shares
outstanding
Basic 22,883,652 23,900,500 23,527,872 23,900,500
Diluted 27,633,535 25,581,263 23,527,872 23,900,500
The accompanying notes are an integral part of these condensed financial statements.
5
ION NETWORKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months For the Nine Months
Ended September 30, Ended September 30,
2004 2003
---------------- ------------------
Cash flows from operating activities
Net loss $(626,171) $(667,513)
Adjustments to reconcile net loss to net cash used in
operating activities:
Restructuring, asset impairments and other charges,
non-cash 63,716 (528,912)
Depreciation and amortization 322,061 604,025
Non-cash stock-based compensation 58,750 (95,000)
Interest income from notes receivable from former officers (19,253) (13,130)
Changes in operating assets and liabilities:
Accounts receivable (126,992) 30,288
Inventory 219,540 402,584
Prepaid expenses and other current assets 54,984 67,616
Other assets 465 (4,831)
Accounts payable and other accrued expenses (136,731) (352,261)
Accrued payroll and related liabilities 73,261 (122,514)
Deferred income (21,452) 42,073
Sales tax payable (43,273) (12,878)
Other current liabilities -- (29,452)
--------- ---------
Net cash used in operating activities (181,095) (679,905)
--------- ---------
Cash flows from investing activities
Acquisition of property and equipment (6,947) --
Capitalized software expenditures (173,504) (184,671)
Proceeds from the sale of fixed assets -- 30,129
Restricted cash -- 125,700
--------- ---------
Net cash used in investing activities (180,451) (28,842)
--------- ---------
Cash flows from financing activities
Principal payments on debt and capital leases (67,277) (66,918)
Issuance of convertible debenture 200,000 --
Proceeds from the exercise of stock options 11,250 --
--------- ---------
Net cash provided by (used in) financing activities 143,973 (66,918)
--------- ---------
Effect of exchange rates on cash -- (905)
--------- ---------
Net decrease in cash and cash equivalents (217,573) (776,570)
Cash and cash equivalents - beginning of period 357,711 865,684
--------- ---------
Cash and cash equivalents - end of period $ $
140,138 89,114
========= =========
The accompanying notes are an integral part of these condensed financial statements.
6
ION NETWORKS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 1 - CONDENSED 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, and telephony environments
and is sold by a direct sales force and indirect channel partners mainly
throughout North America and Europe.
The condensed balance sheet as of September 30, 2004, the condensed statements
of operations for the three and nine month periods ended September 30, 2004 and
2003 (consolidated), and the statements of cash flows for the nine month periods
ended September 30, 2004 and 2003 (consolidated), have been prepared by the
Company without audit.) In the opinion of management, all adjustments (which
include normal recurring adjustments) necessary to make the Company's financial
position, results of operations and cash flows at September 30, 2004 and 2003
not misleading have been made. The results of operation for the three and nine
months ended September 30, 2004 and 2003 are not indicative of a full year or
any other interim period.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. It is suggested
that these financial statements be read in conjunction with the audited
financial statements and notes there to included in the report on Form 10-KSB
for the year ended December 31, 2003.
The Company's financial statements have been prepared on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. At September 30, 2004, the Company had an accumulated deficit of
$43,952,909 and a working capital of $52,668. The Company also realized net
income of $5,699 and net loss of $626,171 for the three and nine month periods
ended September 30, 2004, respectively. The Company continues to experience a
shortfall in the cash necessary to expand operations. Management and the Board
of Directors are exploring various alternatives to secure funding necessary to
meet its cash requirements. These factors raise substantial doubt about the
entity's ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying condensed 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 inter-company balances and
transactions have been eliminated in consolidation. During the year ended
December 31, 2003, the Company ceased the operation of its subsidiaries.
7
ION NETWORKS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Potentially dilutive securities of the Company include the
following:
----------------------------------------------------------------------
For the three months ended For the nine months ended
----------------------------------------------------------------------
Sept, 30,2004 Sept. 30, 2003 Sept. 30, 2004 Sept. 30, 2003
(Unaudited)** (Unaudited)** (Unaudited)* (Unaudited)*
----------------------------------------------------------------------
Weighted average shares
outstanding, basic 22,883,652 23,900,500 23,527,872 23,900,500
Incremental shares of common stock
equivalents 1,731,076 12,413 -- --
Conversion of preferred stock to
common stock 1,668,350 1,668,350 -- --
Conversion of convertible debenture
to common stock 1,350,457 -- -- --
----------------------------------------------------------------------
Weighted average shares
outstanding, diluted 27,633,535 25,581,263 23,527,872 23,900,500
======================================================================
* Since there was a loss attributable to common shareholders in the nine
months ended September 30, 2004 and 2003, the basic weighted average shares
outstanding were used in calculating diluted loss per share. Potential
common shares of 10,193,618 and 7,327,037 for the nine months ended
September 30, 2004 and 2003, respectively were excluded from the
computation of diluted earnings per share.
** Potential common shares of 3,484,811 and 5,031,187 for the three months
ended September 30, 2004 and 2003, respectively were excluded from the
computation of diluted earnings per share.
STOCK COMPENSATION
The Company accounts 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. The Company accounts 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.
8
ION NETWORKS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION (CONTINUED)
If the Company had elected to recognize compensation costs based on the fair
value at the date of grant for awards for the three and nine month periods ended
September 30, 2004 and 2003, consistent with the provisions of SFAS No. 123, the
Company's net income(loss) and basic and diluted net income(loss) per share
would have increased to the pro forma amounts indicated below:
Three months Three months Nine months Nine months
ended ended ended ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------- --------- ---------- ----------
Net income (loss)
As reported $ 5,699 $ 158,766 $(626,171) $(667,513)
Add back (Deduct): Stock
based employee
compensation
determined
under fair value
methods for
all awards granted (26,948) 41,746 (367,252) (135,761)
--------- --------- --------- ---------
Pro forma net income (loss) $ (21,249) $ 200,512 $(993,423) $(803,274)
========= ========= ========= =========
Basic and diluted net income (loss)
per share
of common stock
As reported $ 0.00 $ 0.01 $ (0.03) $ (0.03)
Pro forma $ 0.00 $ 0.01 $ (0.04) $ (0.03)
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 September 30, 2004 approximated $48,000.
NOTE 3 - INVENTORY
Inventory, net of allowance for obsolescence of $167,829 at September 30, 2004,
consists of the following:
Raw materials $ 63,487
Work-in-progress 4,355
Finished goods 414,660
----------
$ 482,502
==========
9
ION NETWORKS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2004
(Unaudited)
NOTE 4 - COMMITMENTS AND CONTINGENCIES
On March 29, 2004, the Company agreed to a final separation agreement with its
former President and Chief Executive Officer. As part of the agreement, the
Company agreed to accept the return of 2,000,000 shares of the Company's common
stock as full payment for the former officers' total indebtedness to the Company
of $294,493. In addition, the former officer released the Company from any
obligations, which may have arisen from the separation of the officer from the
Company.
On August 5, 2004, the Company issued, for $200,000 cash, a convertible
debenture (the "Debenture") to one of the Company's directors. The Debenture
matures on August 5, 2008 and bears interest at five (5%) percent per annum,
compounded annually. The principal amount of the Debenture is convertible into
shares of the Company's common stock, $.001 par value at a conversion price
equal to $0.083 per share (the "Conversion Price"), which is equal to the ten
(10) day average of the closing prices of the Company's common stock, as quoted
on the OTC Bulletin Board during the five (5) trading days immediately prior to
and subsequent to August 5, 2004. The principal amount of the Debenture is
convertible at the Conversion Price at the option of the holder, or after
December 5, 2005 at the Company's option if the Company's common stock trades at
a price of at least $0.166 for twelve (12) trading days in any fifteen (15)
trading day period. The Company is also entitled to prepay the principal amount
of the Debenture, at any time after August 5, 2005, but shall be required to pay
a premium of two (2%) percent in the second year after issuance of the Debenture
of the principal amount prepaid, for prepayments made during that period. The
Company has granted certain "piggyback" registration rights to the holder to
register for resale the shares issuable upon conversion of the Debenture.
NOTE 5 - SUBSEQUENT EVENT
On October 14, 2004, the Company agreed to a final separation agreement with its
former President and Chief Operating Officer. As part of the agreement, the
Company agreed to accept the return of 600,000 shares of the Company's common
stock as full payment for the former officers' total indebtedness to the Company
of $216,926. In addition, the former officer released the Company from any
obligations, other than the sum of $8,000 to cover certain expenses, which may
have arisen from the separation of the officer from the Company.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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). The Company liquidated operations in
Scotland during the quarter ended June 30, 2003.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE SAME PERIOD IN
2003:
Net sales for the three month period ended September 30, 2004, were $1,047,054
compared to net sales of $888,324 for the same period in 2003, an increase of
$158,730 or 17.9%. Revenues for the third quarter of 2004 were higher compared
to the same quarter of 2003 primarily due to increased volume and a change in
the product sales mix, with more revenue coming from high-end 5500 products as
compared to the same period last year.
Cost of sales for the three month period ended September 30, 2004 was $306,200
compared to $214,535 for the same period in 2003. Cost of sales as a percentage
of net sales for the three months ended September 30, 2004 increased to 29.3%
from 24.2% for the same period in 2003, resulting in gross margins decreasing to
70.7% from 75.8% as compared to the prior year. Comparing the third quarter of
2004 to the same period 2003, the cost of sales has declined; however, sales
prices have declined more rapidly resulting in lower gross margin as a
percentage of revenue.
Research and development expenses for the three month period ended September 30,
2004 was $167,247 compared to $116,080 for the same period in 2003 or an
increase of $51,167. The increase was attributable primarily to the cost related
to increased employee headcount from 5 on September 30, 2003 to 7 on September
30, 2004 and expanded utilization of outside consultants for new product
development and conversion to standards based platform.
Selling, general and administrative expenses ("SG&A") for the three months ended
September 30, 2004 were $530,768 compared to $454,509 for the same period in
2003, an increase of $76,259. The increase in SG&A expenses was due primarily to
increased employee headcount from 18 on September 30, 2003 to 22 on September
30, 2004, offset in part by cost containment programs implemented by management.
Restructuring, asset impairment and other charges for the three months ended
September 30, 2004 were a credit of $63,716 compared to a credit of $213,071 for
the same period in 2003. In 2003 the Company successfully negotiated a
settlement of a $243,071 due to a vendor for the payment of $30,000, resulting
in a forgiveness of debt in the amount of $213,071.
Depreciation and amortization expenses for depreciation of fixed assets and
amortization of capitalized software was $100,617 for the three months ended
September 30, 2004 compared to $163,597 in the same period in 2003. The decrease
was due to lower depreciable assets and capitalized software balances subject to
amortization.
Net income for the three months ended September 30, 2004 and 2003 amounted to
$5,699 and $158,766, respectively. The decrease of net income of $153,067 was
due primarily to the positive impact on the third quarter 2003 results of
$213,071 related to a non-recurring reduction of certain expenses reflected in
restructuring, asset impairment and other charges.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE SAME PERIOD IN
2003:
Net sales for the nine months ended September 30, 2004, were $2,558,315 compared
to net sales of $2,527,643 for the same period in 2003, an increase of $30,672
or 1.2%. This slight increase for the nine months ended September 30, 2004 was
due primarily to increased volume offset in part by lower selling prices as
compared to the same period last year.
Cost of sales for the nine month period ended September 30, 2004 was $793,954
compared to $689,374 for the same period in 2003. Cost of sales as a percentage
of net sales for the nine months ended September 30, 2004 increased to 31.0%
from 27.3% for the same period in 2003, resulting therefore in gross margins
decreasing to 69.0% from 72.7% as compared to the prior year. The decrease in
gross margin as a percentage of revenue is due primarily to increased sales
volume on a lower margin product in the current period as compared to the same
period last year.
11
Research and development expenses for the nine month period ended September 30,
2004 was $427,525 compared to $377,834 for the same period in 2003 or an
increase of $49,691. The increase was due primarily to expense increases in the
quarter ended September 30, 2004 of employee headcount and expanded utilization
of outside consultants for new product development and conversion to standards
based platform.
Selling, general and administrative expenses ("SG&A") for the nine months ended
September 30, 2004 were $1,721,400 compared to $1,937,370 for the same period in
2003, a decrease of $215,970. The decline in SG&A expenses are due primarily to
sharply reduced executive compensation, steep reductions in facilities
expenditures, including rent, sales and marketing and other overhead items under
management instituted cost containment programs. These reductions were partially
offset by stock compensation expense for options granted during the three month
period ended June 30, 2004.
Restructuring, asset impairment and other charges for the nine months ended
September 30, 2004 were a credit of $63,716 compared to a credit of $405,402 for
the same period in 2003. In 2003 the Company successfully negotiated a
settlement of a $243,071 due to a vendor for the payment of $30,000, resulting
in a forgiveness of debt in the amount of $213,071 and the reversal of certain
liabilities of $508,458 upon the liquidation of a foreign subsidiary. Partially
offset by the Company incurring an asset impairment charge for leasehold
improvements and furniture of $192,617.
Depreciation and amortization expenses for depreciation of fixed assets and
amortization of capitalized software was $322,061 for the nine months ended
September 30, 2004 compared to $604,025 in the same period in 2003. The decrease
was due to lower depreciable assets, capitalized software balances subject to
amortization in the nine month period ended September 30, 2004 as compared to
the same period in 2003.
Net loss for the nine months ended September 30, 2004 and 2003 amounted to
$626,171 and $667,513, respectively an improvement of $41,342. This improvement
was due primarily to lower selling, general and administrative expenses of
$215,970 and lower depreciation and amortization expenses of $281,964, offset in
part by lower gross margins of $73,909, and positive restructuring items of
$405,402 for the nine month period ended September 30, 2003.
FINANCIAL CONDITION AND CAPITAL RESOURCES
The Company's financial statements have been prepared on the basis that the
Company will continue as a going concern, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business. At September 30, 2004 the Company had an accumulated deficit of
$43,952,909 and a working capital of $52,668. The Company also realized a net
loss of $626,171 for the nine month period ended September 30, 2004. The Company
continues to experience a shortfall in the cash necessary to expand operations.
Management and the Board of Directors are exploring various alternatives to
secure funding necessary to meet its cash requirements. Any future operations
are dependent upon the Company's ability to obtain additional debt or equity
financing, and its ability to generate revenues sufficient to fund its
operations. There can be no assurances that the Company will be successful in
its attempts to generate positive cash flows or raise sufficient capital
essential to its survival. Additionally, even if the Company does raise
operating capital, there can be no assurances that the net proceeds will be
sufficient enough to enable it to develop its business to a level where it will
generate profits and positive cash flows. These matters raise substantial doubt
about the Company's ability to continue as a going concern. However, the
accompanying financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities in
the normal course of business. The financial statements do not include any
adjustments relating to the recorded assets or the classification of the
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Net cash used in operating activities during the nine months ended September 30,
2004 was $181,095 compared to net cash used during the same period in 2003 of
$679,905. The net cash used in operating activities was $498,810 less for the
nine months ended September 30, 2004 compared to the same period in 2003 due to
the absence of approximately $350,000 of non-cash items. The remainder of the
variance was due to the positive impact of changes in working capital items of
approximately $137,000 in the nine months ended September 30, 2004 when compared
to the same period in 2004
Net cash used in investing activities during the nine months ended September 30,
2004 was $180,451 compared to $28,842 in the same period in 2003. This increase
in cash used of $151,609 was primarily due to the release of restricted cash of
$125,700 during the nine months ended September 30, 2003.
Net cash provided from financing activities during the nine months ended
September 30, 2004 was $143,973 compared to net cash used during the same period
in 2003 of $66,918. The increase of $210,891 was primarily due to the issuance
of a $200,000 convertible debenture in the third quarter of 2004.
12
ITEM 3. CONTROLS AND PROCEDURES
Prior to the filing of this report, the Company's management carried out an
evaluation, under the supervisions and with the participation of its Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this report. Based on this evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company's controls and procedures were effective to ensure that information
required to be disclosed by the Company in the reports filed by it under the
Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and include controls and procedures designed to ensure that information
required to be disclosed by the Company in such reports is accumulated and
communicated to the Company's management, including the Chief Executive Officer
and Chief Financial Officer of the Company, as appropriate to allow timely
decisions regarding required disclosure.
There have been no significant change in the company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that has materially affected or is reasonably likely to affect its
internal control over financial reporting.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 5, 2004, the Company issued, for $200,000 cash, a
convertible debenture (the "Debenture") to Stephen M. Deixler, one of the
Company's directors. The Debenture matures on August 5, 2008 and bears interest
at five (5%) percent per annum, compounded annually. The principal amount of the
Debenture is convertible into shares of the Company's common stock, $.001 par
value at a conversion price equal to $0.083 per share (the "Conversion Price"),
which is equal to the ten (10) day average of the closing prices of the
Company's common stock, as quoted on the OTC Bulletin Board during the five (5)
trading days immediately prior to and subsequent to August 5, 2004. The
principal amount of the Debenture is convertible at the Conversion Price at the
option of the holder, or after August 5, 2005 at the Company's option if the
Company's common stock trades at a price of at least $0.166 for twelve (12)
trading days in any fifteen (15) trading day period. The Company is also
entitled to prepay the principal amount of the Debenture, at any time after
August 5, 2005, but shall be required to pay a premium of two (2%) percent in
the second year after issuance of the Debenture of the principal amount prepaid,
for prepayments made during that period. The Company has granted certain
"piggyback" registration rights to the holder to register for resale the shares
issuable upon conversion of the Debenture. The issuance of the Debenture was
pursuant to an exemption granted under Rule 506 of Regulation D, promulgated
under the Securities Act of 1933, as amended, in that the purchaser represented
his status as an accredited investor, and that he was acquiring the Debenture
for investment purposes and not with a view to any sale or distribution. In
addition, the Debenture bore a restrictive legend, which stated that the
Debenture was a "restricted security" under the Securities Act of 1933, as
amended, and a similar legend is required to be placed on any shares issued on
conversion of the Debenture. A copy of the Debenture is filed as an exhibit to
Form 10-QSB filed on August 13,2004.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 27, 2004, the Company held its 2004 Annual Meeting of Stockholders
(the "2004 Meeting").
At the 2004 Meeting, the Company's stockholders elected two directors to serve
until the 2005 Annual Meeting of Stockholders and until their successors shall
be elected and qualified.
The vote with respect to the election of directors was as follows:
Name For Authority Withheld
(a) Stephen M. Deixler 19,382,623 111,725
(b) Frank S. Russo 19,400,463 93,885
14
ITEM 5. OTHER INFORMATION
On November 10, 2004, the Company and its Chief Executive Officer and Chief
Financial Officer, Norman E. Corn and Patrick E. Delaney, respectively, entered
into an amendment to each of their respective employment contracts. The
amendments provide for a lump-sum severance payment upon termination without
"Cause" or due to a "Change in Control", by adding the following provision to
each such respective employment agreement.
SEVERANCE. Executive's employment may be terminated, at any time immediately
upon written notice by the Company, without "Cause". If Executive is terminated
without "Cause", or effectively terminated pursuant to a Change in Control for
any reason other than for "Cause," Executive shall be entitled to a lump sum
severance payment equal to eighteen (18) months of base salary in effect as of
the termination date, less withholdings and deductions required by law.
Executive and Company agree that such severance payment shall also constitute
liquidated damages and is a reasonable approximation of Employee's damages as a
result of such termination.
"Cause" is defined as termination of Executive by the Company for the following
infractions by the Executive: gross negligence, felony conviction and
significant breach of Executive's duties pursuant to this agreement.
A Change in Control is defined as (i) a sale of all or substantially all of the
assets or all of the outstanding equity of the Company or (ii) the merger or
consolidation of the Company with or into another entity or any other corporate
reorganization if persons who were not shareholders of the Company immediately
prior to such merger, consolidation or reorganization own immediately after such
merger, consolidation or other reorganization fifty percent (50%) or more of the
voting powers of the outstanding securities of each of (A) the continuing or
surviving entity and (B) any direct or indirect parent corporation of such
continuing or surviving entity.
On August 31, 2004, the Company entered into an employment offer with Henry Hill
(a copy of which is attached as an exhibit to this report). Under the terms of
the employment offer, Mr. Hill is employed as the Company's Senior Vice
President, Technical Services, and is to be paid a base salary of $150,000 per
year. Mr. Hill's employment can be terminated by the Company at any time without
"cause", provided that in such event Mr. Hill would be entitled to a one-time
lump-sum payment equal to 6 months of his base salary. In addition, Mr. Hill
received stock options to purchase 500,000 shares of the Company's common stock.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit
No. Description
------- -----------
10.1 Employment Agreement dated August 31, 2004 by
and between the Company and Henry A. Hill
31.1 Section 302 Certification of the Chief Executive Officer.*
31.2 Section 302 Certification of the Chief Financial Officer.*
32.1 Section 906 Certification of the Chief Executive Officer.*
32.2 Section 906 Certification of the Chief Financial Officer.*
* Filed herewith
16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 15, 2004
ION NETWORKS, INC.
/s/ Norman E. Corn
------------------------------------------
Norman E. Corn, Chief Executive Officer
/s/ Patrick E. Delaney
------------------------------------------
Patrick E. Delaney, Chief Financial Officer
17
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
10.2 Employment Agreement dated August 31, 2004 by
and between the Company and Henry A. Hill
31.1 Section 302 Certification of the Chief Executive Officer.*
31.2 Section 302 Certification of the Chief Financial Officer.*
32.1 Section 906 Certification of the Chief Executive Officer.*
32.2 Section 906 Certification of the Chief Financial Officer.*
* Filed herewith
18