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 June 30, 2005
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 27,050,044 shares of Common Stock outstanding as of August 9, 2005.
Transitional Small Business Disclosure Format:
Yes___ No X
ION NETWORKS, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED June 30, 2005
PART I. FINANCIAL INFORMATION
Page
Item 1. Condensed Consolidated Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheet as of June 30, 2005 4
Condensed Consolidated Statements of Operations for the Three and Six Months
ended June 30, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows for the Six Months ended June
30, 2005 and 2004 6
Notes to Condensed Consolidated 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. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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/A3 for the year ended
December 31, 2004.
3
ION NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
As of June 30, 2005
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 168,123
Accounts receivable, less allowance for doubtful accounts of
$16,923 732,836
Inventories, net 624,799
Prepaid expenses and other current assets 44,391
-------------
Total current assets 1,570,149
Property and equipment, net 17,623
Capitalized software, net 667,590
Other assets 12,836
-------------
Total assets $ 2,268,198
=============
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 2,552
Accounts payable 350,706
Accrued expenses 341,678
Accrued payroll and related liabilities 145,209
Deferred income 149,924
Sales tax payable 1,779
Other current liabilities 10,000
-------------
Total current liabilities 1,001,848
-------------
Long-term liabilities
Convertible debenture 208,877
Long-term debt, net of current portion 5,749
-------------
Total long-term liabilities 214,626
-------------
Commitments and contingencies
Stockholders' Equity
Preferred stock - par value $.001 per share; authorized
1,000,000 shares; 200,000 shares designated Series A; 155,557
shares issued and outstanding (aggregate liquidation
preference $280,003) 156
Common stock - par value $.001 per share; authorized
50,000,000 shares; 27,050,044 shares issued and outstanding 27,051
Additional paid-in capital 44,845,881
Accumulated deficit (43,821,364)
-------------
Total stockholders' equity 1,051,724
-------------
Total liabilities and stockholders' equity $ 2,268,198
=============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
ION NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Net sales $ 1,050,150 $ 606,300 $ 1,982,581 $ 1,511,261
Cost of sales 385,249 280,955 629,866 668,590
------------- ------------- ------------- -------------
Gross Margin 664,901 325,345 1,352,715 842,671
------------- ------------- ------------- -------------
Research and development expenses 122,929 140,007 276,998 260,276
Selling, general and administrative expenses, including
$58,750 of non-cash stock based compensation for the
six months ended June 30, 2004 668,938 478,094 1,325,362 1,190,632
Depreciation expense 2,379 15,364 4,912 40,609
------------- ------------- ------------- -------------
Total operating expenses 794,246 633,465 1,607,272 1,491,517
------------- ------------- ------------- -------------
Loss from operations (129,345) (308,120) (254,557) (648,846)
Other income - - 15,339 -
Interest income/(expense) - related party (2,493) - (4,710) 19,705
Interest income/(expense) (98) (941) (36) (2,728)
------------- ------------- ------------- -------------
Loss before income taxes (131,936) (309,061) (243,964) (631,869)
Income tax expense 550 - 822 -
=============================================================
Net loss $ (132,486) $ (309,061) $ (244,786) $ (631,869)
=============================================================
Per share data
Net loss per share
Basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.03)
Weighted average number of common shares outstanding
Basic and diluted 27,050,044 22,875,500 24,872,589 23,847,876
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
ION NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six For the Six
Months Ended Months Ended
June 30, June 30,
2005 2004
----------- -----------
Cash flows from operating activities
Net loss $ (244,786) $ (631,869)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 70,604 221,444
Non-cash stock-based compensation - 58,750
Provision for inventory reserve (43,266) (28,413)
Notes receivable from officers - (19,253)
Interest on convertible debt 4,710 -
Changes in operating assets and liabilities:
Accounts receivable (154,345) 107,520
Inventories (70,107) 231,639
Prepaid expenses and other current assets 34,045 66,417
Other assets - 465
Accounts payable (3,896) (48,903)
Accrued expenses (48,218) -
Accrued payroll and related liabilities (14,625) 34,581
Deferred income (10,288) 25,263
Sales tax payable (4,296) (32,694)
----------- -----------
Net cash used in operating activities (484,468) (15,053)
----------- -----------
Cash flows from investing activities
Acquisition of property and equipment (10,686) (6,946)
Capitalized software expenditures (326,933) (102,662)
----------- -----------
Net cash used in investing activities (337,619) (109,608)
----------- -----------
Cash flows from financing activities
Principal payments on debt and capital leases (952) (47,821)
Advances from related parties 110,500 -
Repayment of advances from related parties (110,500) -
Proceeds from issuance of common stock 703,725 -
----------- -----------
Net cash provided by (used in) financing activities 702,773 (47,821)
----------- -----------
Net decrease in cash and cash equivalents (119,314) (172,482)
Cash and cash equivalents - beginning of period 287,437 357,711
----------- -----------
Cash and cash equivalents - end of period $ 168,123 $ 185,229
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
ION NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 1-CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures and
sells security solutions that protect enterprise network administrative
interfaces from improper, unauthorized or otherwise undesirable access from
external and internal sources. Administrative interfaces are the network access
points used by highly trained technical individuals who are charged with the
responsibilities of maintaining and supporting the networks and devices employed
within the networks such as servers, routers, PBXs and similar network
equipment. These technicians may be employees of the enterprise or employed by
third parties such as managed service providers, consultants, device vendors or
application developers. In all cases, they are considered "trusted insiders"
since in order to perform their jobs; permission to enter and work within the
network must be granted. The Company's solution, comprised of centralized
management and control software, administrative security appliances and soft
tokens, are designed to provide secure, auditable access to all administrative
interfaces and monitored security once working within the network. Service
Providers, Enterprises and Governmental Agencies utilize the ION solution
globally in their voice, data and converged environments, to establish and
maintain security policies while providing the support and maintenance required
of networks and their devices.
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 Scottish corporation was dissolved in
2003. The Company's principal objective is 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 its revenues
being generated from sales to various telecommunications companies.
The condensed consolidated balance sheet as of June 30, 2005, the condensed
consolidated statements of operations for the three and six month periods ended
June 30, 2005 and 2004 and the condensed consolidated statements of cash flows
for the six month periods ended June 30, 2005 and 2004, 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 June 30, 2005 and 2004 not
misleading have been made. The results of operation for the three and six months
ended June 30, 2005 and 2004 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 thereto included in the report on Form 10-KSB/A3
for the year ended December 31, 2004.
At June 30, 2005 the Company had an accumulated deficit of $43,821,364 and
working capital of $568,301. The Company also realized a net loss of $244,786
for the six month period ended June 30, 2005. The Company continues to have a
delicate cash position. Management believes it is necessary for it to continue
to strictly manage expenditures and to increase product revenues despite the
cash infusion of $750,000 (less approximately $46,300 for expenses) on March 31,
2005 from the sale of 4,411,765 shares of common stock and warrants to purchase
an additional 2,205,882 shares of common stock ("the Equity Financing").
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of ION Networks, Inc. and Subsidiary. All material inter-company
balances and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the financial statements for the three and six months ended
June 30, 2004 have been reclassified to conform to the presentation of the
financial statements for the three and six months ended June 30, 2005 from
operating expenses. The reclassifications were principally due to the change in
classification of amortized expense related to capitalized software costs from
operating expenses to cost of sales. There was no change in previously reported
net loss.
7
ION NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 to cost of
sales 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.
The Company records 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. The
Company's cash flow estimates are based on historical results adjusted to
reflect its best estimate of future market and operating conditions. The net
carrying value of assets not recoverable is reduced to fair value. While the
Company believes that its estimates of future cash flows are reasonable,
different assumptions regarding such cash flows could materially affect the
Company's estimates.
Amortization expense totaled $34,813 and $90,353 for the three month periods
ending June 30, 2005 and 2004, respectively. Amortization expense totaled
$65,694 and $180,836 for the six month periods ending June 30, 2005 and 2004,
respectively. Amortization expense is included in Cost of sales in the Statement
of Operations.
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 of 12,738,422 and
8,168,979 at June 30, 2005 and 2004 are excluded from the computation of diluted
net loss per share as their inclusion would be antidilutive.
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 complies 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 the Company's 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. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 six months ended June
30, 2005 and 2004, consistent with the provisions of SFAS No. 123, the Company's
net loss and basic and diluted net loss per share for the three and six month
periods ended June 30, 2005 and 2004 would have increased to the pro forma
amounts indicated below:
Three months Three months Six months Six months
ended ended ended ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net loss as reported $ (132,486) $ (309,061) $ (244,786) $ (631,869)
Add: Stock based compensation expense
included in net loss - 58,750 - 58,750
Deduct: Stock based employee compensation
determined under fair value method (39,221) (82,627) (66,739) (398,780)
----------- ----------- ------------ ------------
Pro forma net loss $ (171,707) $ (332,938) $ (311,525) $ (971,899)
=========== =========== ============ ============
Basic and diluted net loss per share of
common stock
As reported
Basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.03)
Pro forma
Basic and diluted $ (0.01) $ (0.01) $ (0.01) $ (0.04)
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 June 30, 2005 is $10,000.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of
Accounting Research Bulletin No. 43, Chapter 4 - Inventory Pricing". The
amendments made by Statement 151 clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage) should be
recognized as current-period charges and require the allocation of fixed
production overheads to inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005.
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary Assets,
an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions"
("SFAS 153"). The amendments made by SFAS 153 are based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interes in
the same or similar productive asset should be based on the recorded amount of
the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents the
economics of the transactions. The Statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively.
9
The Company expects that the adoption of the new statements will not have a
significant impact on its financial statements.
In October 2004, the FASB ratified the consensus reached in Emerging Issues Task
Force ("EITF") Issue No. 04-8, "The Effect of Contingently Convertible Debt on
Diluted Earnings Per Share." The EITF reached a consensus that contingently
convertible instruments, such as contingently convertible debt, contingently
convertible preferred stock, and other such securities should be included in
diluted earnings per share (if dilutive) regardless of whether the market price
trigger has been met. The consensus became effective for reporting periods
ending after December 15, 2004. The adoption of this statement did not have a
significant impact on the Company's financial statements.
NOTE 3 - INVENTORIES
Inventories, net of allowance for obsolescence of $103,018 at June 30, 2005,
consists of the following:
Raw materials $ 260,745
Work-in-progress 465
Finished goods 363,589
----------
$ 624,799
==========
NOTE 4 - RESTRUCTURING, ASSET IMPAIRMENT AND OTHER CREDITS
As of June 30, 2005, the Company has included as part of accounts payable and
accrued expenses certain liabilities that may, in the future, result in
additional restructuring credits. The Company's accounts payable balance
includes invoices for professional services in the amount of $103,687 and
accrued expenses in the amount of $238,579. These items arose from alleged
services provided to the Company between November 2002 and August 2003. The
Company is disputing these amounts with the vendors, however, at the present
time, management is unable to estimate the final outcome of these disputes but
believes that the final settlement amount should not exceed the total of the
above amounts.
NOTE 5 - STOCKHOLDERS' EQUITY
On February 22, 2005, the Company converted 2,778 shares of preferred stock into
27,780 of common stock.
On March 31, 2005, the Company completed a private placement of 4,411,764 shares
of common stock and warrants to purchase an additional 2,205,882 shares of
common stock. The total proceeds from the sale was $750,000 less approximately
$46,300 for expenses related to the transaction. The shares of common stock were
issued at $0.17 cents per share and the warrants are exercisable at a price of
$0.23 per share subject to certain anti-dilution adjustments. The warrants will
expire on March 31, 2010. The Company has the right to call the warrants in the
event that its common stock trades at a price exceeding $0.69 per share for
twenty (20) consecutive trading sessions and certain other conditions are met.
The Company also agreed to register for resale the shares of common stock as
well as the shares issued upon exercise of the warrants. The registration
statement must be declared effective no later than the earlier of five business
days after the SEC determines that no review of the registration statement will
be made and 120 days after March 30, 2005. If the Company fails to meet these
registration obligations or to maintain the effectiveness of the registration
statement as required under the terms of the Agreements, the Company will be
obligated to make certain cash liquidated damage payments to the investors. On
August 9, 2005, the registration statement was declared effective by the SEC.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the quarter ended March 31, 2005, certain directors and officers advanced
a total of $110,500 without interest. Upon closing of the Equity Financing, the
Company repaid these advances.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures and
sells security solutions that protect enterprise network administrative
interfaces from improper, unauthorized or otherwise undesirable access from
external and internal sources. Administrative interfaces are the network access
points used by highly trained technical individuals who are charged with the
responsibilities of maintaining and supporting the networks and devices employed
within the networks such as servers, routers, PBXs and similar network
equipment. These technicians may be employees of the enterprise or employed by
third parties such as managed service providers, consultants, device vendors or
application developers. In all cases, they are considered "trusted insiders"
since in order to perform their jobs; permission to enter and work within the
network must be granted. The Company's solution, comprised of centralized
management and control software, administrative security appliances and soft
tokens, are designed to provide secure, auditable access to all administrative
interfaces and monitored security once working within the network. Service
Providers, Enterprises and Governmental Agencies utilize the ION solution
globally in their voice, data and converged environments, to establish and
maintain security policies while providing the support and maintenance required
of networks and their devices.
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 Scottish corporation was dissolved in
2003. The Company's principal objective is 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 its revenues
being generated from sales to various telecommunications companies.
RESULTS OF OPERATIONS
For the three months ended June 30, 2005 compared to the same period in 2004:
Net sales for the three month period ended June 30, 2005, was $1,050,150
compared to net sales of $606,300 for the same period in 2004, an increase of
$443,850 or 73.2%. Revenues for the second quarter of 2005 were higher compared
to the same quarter of 2004 primarily due the increase in sales from new Service
Provider customers, such as Sprint, and increased volume from OEM customers.
Appliance revenue increased approximately $387,000 in the quarter ended June 30,
2005 compared to the same period in 2004.
Cost of sales for the three month period ended June 30, 2005 was $385,249
compared to $280,955 for the same period in 2004. Cost of sales as a percentage
of net sales for the three months ended June 30, 2005 decreased to 36.7% from
46.3% for the same period in 2004, resulting in gross margins increasing to
63.3% from 53.7% as compared to the prior year. The increase in gross margin as
a percentage of revenue is due primarily to the impact of amortization expense
declining from $90,353 or 14.9% of net sales for the three month period ended
June 30, 2004 to $34,813 or 3.3% of net sales for the same period in 2005. Gross
margin was also impacted by two offsetting items during the quarter ended June
30, 2005. Inventory reserves were reduced from $145,031 to $ 103,018 or 4.5% of
net sales to reflect the reevaluation of certain inventory items reserves. The
Company's gross margin should be favorably impacted by the introduction of the
5600 product line which would have increased profitability by approximately
$49,000 or 4.67% of net sales during the quarter ended June 30, 2005.
Research and development expenses for the three month period ended June 30, 2005
was $122,929 compared to $140,007 for the same period in 2004 or a decrease of
$17,078. This decrease is primarily attributable to the capitalization of
$150,612 in the three month period ended June 30, 2005 compared to $64,757 in
the same period during 2004. The increased capitalization of software
development costs were related to new products reaching the technology
feasibility stage including the 5600 product line, secure modem and a new
release of PRIISMS software.
Selling, general and administrative expenses ("SG&A") for the three months ended
June 30, 2005 were $668,938 compared to $478,094 for the same period in 2004, an
increase of $190,844. The increase in SG&A expenses are due primarily to
increased payroll costs for commissions and salaries of approximately $90,000 in
2005. In addition, during the three month period ended June 30, 2004, there were
two one-time adjustments related to the forgiveness of certain debt in the
amount of $59,570 and the reversal of an over-accrual of payroll costs related
to a discontinued foreign subsidiary in the amount of $24,448.
Depreciation expense was $2,379 for the three months ended June 30, 2005
compared to $15,364 in the same period in 2004. The decrease was due to a
reduction of depreciable fixed assets in the three month period ended June 30,
2005 as compared to the same period in 2004.
Net loss for the three months ended June 30, 2005 totaled $132,486 compared to a
net loss for the three months ended June 30, 2004 of $309,061 or a decrease of
$176,575 due primarily to increased gross margin of $339,556 from higher product
sales offset in part by increased operating expenses of $160,781. This increase
in operating expenses for the three month period ending June 30, 2005 compared
to the same period in 2004 is due to increased SG&A expenses of $190,844 offset
in part by reduced research and development expenses of $17,078 and depreciation
expenses of $12,985.
11
For the six months ended June 30, 2005 compared to the same period in 2004:
Net sales for the six month period ended June 30, 2005, was $1,982,581 compared
to net sales of $1,511,261 for the same period in 2004, an increase of $471,320
or 31.2%. Revenues for the six months ended June 30, 2005 were higher compared
to the same period of 2004 primarily due to increased sales of software
$208,000, appliances $192,000 and professional services $100,000.
Cost of sales for the six month period ended June 30, 2005 was $629,866 compared
to $668,590 for the same period in 2004. Cost of sales as a percentage of net
sales for the six months ended June 30, 2005 decreased to 31.8% from 44.2% for
the same period in 2004, resulting in gross margins improving to 68.2% from
55.8% as compared to the prior year. The increase in gross margin as a
percentage of revenue is due primarily to the impact of amortization expense
declining from $180,836 or 12.0% of net sales for the six month period ended
June 30, 2004 to $65,694 or 3.3% of net sales for the same period in 2005, as
well as an increase in higher margin software and professional services revenues
as a percentage of total revenues.
Research and development expenses for the six month period ended June 30, 2005
was $276,998 compared to $260,276 for the same period in 2004 or an increase of
$16,722.
Selling, general and administrative expenses ("SG&A") for the six months ended
June 30, 2005 were $1,325,362 compared to $1,190,632 for the same period in
2004, an increase of $134,730. The increase in SG&A expenses are due primarily
to increased payroll costs of $176,189, offset by a reduction in insurance
expenditures of $68,699. In addition, during the six month period ended June 30,
2004, there were two one-time adjustments which reduced expenses due to the
forgiveness of certain debt in the amount of $59,570 and the reversal of an
over-accrual of payroll costs related to a discontinued foreign subsidiary in
the amount of $24,448. These one-time adjustments in 2004 were offset by a
non-cash stock based compensation charge of $58,750.
Depreciation expense was $4,912 for the six months ended June 30, 2005 compared
to $40,609 in the same period in 2004. The decrease was due to a reduction of
depreciable fixed assets in the six month period ended June 30, 2005 as compared
to the same period in 2004.
Net loss for the six month periods ended June 30, 2005 and 2004 were $244,786
and $631,869, respectively, a decrease of $387,083 due primarily to an increase
in gross margin of $510,044 offset in part by an increase in operating expenses
of $115,755.
FINANCIAL CONDITION AND CAPITAL RESOURCES
The Company's working capital balance as of June 30, 2005 was $568,301 compared
to $372,861 at December 31, 2004. The increase of $195,440 was due primarily to
the receipt by the Company of the net proceeds of $703,725 realized from the
sale of 4,411,764 shares of common stock and warrants to purchase an additional
2,205,882 shares of common stock offset by increases in accounts receivable of
$154,345 and inventory of $113,373, operating losses net of depreciation and
amortization of $174,182 and reductions in current liabilities of $81,082.
Net cash used in operating activities during the six months ended June 30, 2005
was $484,468 compared to net cash used during the same period in 2004 of
$15,053. The increase in net cash used during the six months ended June 30, 2005
compared to the same period in 2004, was primarily due to increases in accounts
receivable of $261,865 and inventory of $316,599 offset in part by a decrease in
operating cash losses of $196,746.
Net cash used in investing activities during the six months ended June 30, 2005
was $337,619 compared to net cash used in the same period in 2004 of $109,608.
This increase of $228,011 was primarily due to increased expenditures for the
development of new products including the 5600 product line, secure modem and a
new release of PRIISMS software.
Net cash provided by financing activities during the six months ended June 30,
2005 was $702,773 compared to net cash used during the same period in 2004 of
$47,821. The increase was due primarily to the receipt by the Company of the net
proceeds of $703,725 realized from the sale of 4,411,764 shares of common stock
and warrants to purchase an additional 2,205,882 shares of common stock.
12
ITEM 3. CONTROLS AND PROCEDURES
Prior to the filing of this report, the Company's management carried out an
evaluation, under the supervision 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 has been no 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 materially affect its internal
control over financial reporting.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
While the Company is occasionally involved in various claims and legal actions
in the ordinary course of business, it is not currently involved in any legal
proceedings other than routine litigation incidental to the business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
No. Description
------ -----------
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
(b) Reports on Form 8-K:
15
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: August 9, 2005
ION NETWORKS, INC.
/S/ Norman E. Corn
-------------------------------------------
Norman E. Corn, Chief Executive Officer
/S/ Patrick E. Delaney
-------------------------------------------
Patrick E. Delaney, Chief Financial Officer
16
Exhibit Index
Exhibit
No. Description
------ -----------
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
17