U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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/ X / QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
----- ACT OF 1934
For the quarterly period ended September 30, 2000
OR
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/___/ 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)
-----------------------------------------------
21 Meridian Road, Edison, New Jersey 08820
(Former Address of Principal Executive Offices)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
---
There were 18,133,435 shares of Common Stock outstanding as of November 8, 2000.
Transitional Small Business Disclosure Format:
Yes ___ No X
-----
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Condensed Consolidated Financial Information 2
Condensed Consolidated Balance Sheets as of September 30, 2000
and March 31, 2000 (Unaudited) 3
Condensed Consolidated Statements of Operations for the Three
and Six Months ended September 30, 2000 and September 30,
1999
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Six
Months ended September 30, 2000 and September 30, 1999
(Unaudited) 5
Condensed Consolidated Statement of Stockholders' Equity for the
Six Months ended September 30, 2000 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
<PAGE>
PART I. Financial Information
Item 1. Condensed Consolidated Financial Information
--------------------------------------------
The condensed consolidated financial statements included herein have
been prepared by the registrant without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Although the registrant
believes that the disclosures are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these condensed financial statements be read
in conjunction with the audited financial statements and the notes thereto
included in the registrant's Annual Report on Form 10-KSB for the year ended
March 31, 2000.
<PAGE>
<TABLE>
<CAPTION>
ION Networks, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, March 31,
2000 2000
-------------------- ------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................... $ 7,372,359 $ 10,381,612
Accounts receivable, net of allowance for doubtful
accounts of $163,133 and $251,000, respectively....................... 2,216,117 4,569,546
Other receivables ...................................................... 51,964 1,560,697
Inventory, net.......................................................... 2,988,253 1,924,671
Prepaid expenses and other current assets............................... 494,593 602,874
-------------------- ------------------
Total current assets........................................... 13,123,286 19,039,400
Restricted cash............................................................. 375,000 -
Property and equipment at cost, net of accumulated
depreciation of $1,496,990 and $1,566,366, respectively................. 1,997,723 2,146,956
Capitalized software, less accumulated amortization of $6,060,011
and $4,259,851, respectively............................................ 3,261,610 4,185,911
Goodwill and other acquisition - related intangibles, less accumulated
amortization of $1,519,949 and $1,030,334, respectively................. 1,449,101 1,938,716
Related party notes receivable.............................................. 750,000 -
Other assets................................................................ 87,782 79,258
-------------------- ------------------
Total assets ...................................................... $ 21,044,502 $ 27,390,241
==================== ==================
Liabilities and stockholders' equity Current liabilities:
Current portion of capital leases....................................... $ 67,900 $ 67,900
Current portion of long-term debt....................................... 96,000 96,000
Accounts payable and accrued expenses................................... 2,097,778 2,632,135
Accrued payroll and related liabilities................................. 512,244 2,139,524
Deferred income......................................................... 128,993 275,657
Other current liabilities............................................... 366,589 352,093
-------------------- ------------------
Total current liabilities.......................................... 3,269,504 5,563,309
Long-term portion of capital leases......................................... 275,099 302,866
Long-term debt, net of current portion...................................... 72,605 128,129
Commitments and contingencies
Stockholders' equity:
Preferred stock-par value $.001 per share; authorized 1,000,000
shares, none issued................................................. - -
Common stock, par value $.001 per share; authorized 50,000,000
shares, issued 18,077,210 shares and outstanding 18,015,179
shares at September 30, 2000; issued 15,111,617 shares and
outstanding 15,049,586 shares at March 31, 2000..................... 18,077 15,112
Additional paid-in capital.............................................. 40,535,024 35,063,207
Accumulated deficit..................................................... (22,903,680) (13,488,379)
Accumulated other comprehensive (loss) income........................... (14,927) 13,196
-------------------- ------------------
17,634,494 21,603,136
Less-Treasury stock 62,031 shares, at cost at
September 30, 2000 and March 31, 2000................................... (207,199) (207,199)
-------------------- ------------------
Total stockholders' equity.................................................. 17,427,295 21,395,937
-------------------- ------------------
Total liabilities and stockholders' equity.................................. $ 21,044,502 $ 27,390,241
==================== ==================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
ION Networks, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended For the Six Months Ended
September 30, September 30,
2000 1999 2000 1999
--------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenue........................................... $ 2,788,497 $ 5,792,325 $ 4,872,001 $ 10,681,346
Cost of sales..................................... 1,972,478 2,048,130 3,126,077 3,656,004
----------------- ----------------- ----------------- -----------------
Gross margin...................................... 816,019 3,744,195 1,745,924 7,025,342
Research and development expenses............ 1,044,421 636,740 2,256,539 1,739,866
Selling, general and administration.......... 2,990,461 2,674,686 6,342,074 5,020,551
Depreciation and amortization................ 1,624,508 1,016,169 2,712,545 1,939,820
----------------- ----------------- ----------------- -----------------
Loss from operations.............................. (4,843,371) (583,400) (9,565,234) (1,674,895)
Interest income................................... 89,322 48,318 219,314 48,318
Interest (expense)................................ (6,982) (86,481) (27,653) (152,017)
----------------- ----------------- ----------------- -----------------
Loss before income tax expense.................... (4,761,031) (621,563) (9,373,573) (1,778,594)
----------------- ----------------- ----------------- -----------------
Income tax expense................................ 19,034 --- 41,728 ---
----------------- ----------------- ----------------- -----------------
Net loss.......................................... $ (4,780,065) $ (621,563) $ (9,415,301) $ (1,778,594)
================= ================= ================= =================
Per share data
Net loss per share
Basic........................................ $ (0.29) $ (0.05) $ (0.53) $ (0.16)
Diluted...................................... $ (0.29) $ (0.05) $ (0.53) $ (0.16)
Weighted average number of common shares outstanding:
Basic.......................................... 16,649,608 11,391,360 17,927,379 11,218,396
Diluted........................................ 16,649,608 11,391,360 17,927,379 11,218,396
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
ION Networks, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity
For the six months ended September 30, 2000
(Unaudited)
Accumulated
Additional Other Total
Paid-in Accumulated Comprehensive Treasury Stockholder's
Shares Par Value Capital Deficit (Loss) Income Stock Equity
------ --------- --------- ---------- -------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 31, 2000 15,111,617 $ 15,112 $ 35,063,207 $ (13,488,379) $ 13,196 $ (207,199) $ 21,395,937
Net loss (9,415,301) (9,415,301)
Exercise of stock options
and warrants 108,451 108 392,072 392,180
Issuance of common stock 2,857,142 2,857 4,997,143 5,000,000
Noncash stock-based
compensation - - 82,602 82,602
Translation adjustments (28,123) (28,123)
---------- --------- ------------- -------------- ----------------- ----------- --------------
Balance September 30, 2000 18,077,210 $ 18,077 $ 40,535,024 $ (22,903,680) $ (14,927) $ (207,199) $ 17,427,295
========== ========= ============= ============== ================ ============ =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
ION Networks, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
September 30,
2000 1999
---- -----
Cash flows from operating activities
<S> <C> <C>
Net loss............................................................. $ (9,415,301) $ (1,778,594)
Adjustments to reconcile net (loss) to net cash used
in operating activities:
Depreciation and amortization.................................... 2,712,545 1,939,820
Provision for doubtful accounts.................................. - 95,434
Provision for inventory obsolescence............................. 526,095 -
Noncash stock-based compensation charges......................... 82,602 -
Changes in operating assets and liabilities:
(Increase) decrease in
Accounts receivable.............................................. 2,353,429 (2,843,520)
Other receivables................................................ 1,508,733 -
Inventory........................................................ (1,589,677) 203,098
Prepaid expenses and other current assets........................ 108,281 212,440
Other assets..................................................... (8,524) 23
Increase (decrease) in
Accounts payable and accrued expenses............................ (534,356) (680,740)
Accrued payroll and related liabilities.......................... (1,627,280) (304,011)
Deferred income.................................................. (146,664) (66,016)
Other current liabilities........................................ 14,496 (1,311,798)
------------------ ------------------
Net cash used in operating activities................................ (6,015,621) (4,533,864)
Cash flows from investing activities
Acquisition of property and equipment............................ (301,662) (736,725)
Capitalized software............................................. (875,859) (927,664)
Related party notes receivable, net of repayments................ (750,000)
Increase in restricted cash...................................... (375,000) -
------------------ ------------------
Net cash used in investing activities................................ (2,302,521) (1,664,389)
Cash flows from financing activities
Borrowings on revolving line of credit........................... - 253,720
Proceeds from debt............................................... - 450,000
Principal payments on debt and capital leases.................... (83,291) (2,477,362)
Proceeds from sales of common stock / exercise of stock options
and warrants..................................................... 5,392,180 14,666,571
------------------ ------------------
Net cash provided by financing activities............................ 5,308,889 12,892,929
------------------ ------------------
Net (decrease) increase in cash...................................... (3,009,253) 6,694,676
Cash and cash equivalents, beginning of year......................... 10,381,612 165,994
------------------ ------------------
Cash and cash equivalents, end of period............................. $ 7,372,359 $ 6,860,670
================== ==================
</TABLE>
6
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements:
-----------------------------------------------------
The condensed consolidated balance sheets as of September 30, 2000 and March 31,
2000, the condensed consolidated statements of operations for the three and six
month periods ended September 30, 2000 and for the same periods in 1999 and the
condensed consolidated statements of cash flows for the six month periods then
ended have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary for the fair presentation of the Company's financial position, results
of operations and cash flows at September 30, 2000 and 1999 have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the audited
financial statements and notes thereto included in the annual report on Form
10-KSB for the year ended March 31, 2000.
During the first two quarters of fiscal 2001, the Company significantly
increased its research and development activities and expanded its sales and
marketing infrastructure and related costs in order to execute its growth plans.
As a result of these actions, and a sharp downturn in the Company's sales, the
Company has continued to incur significant losses from operations. The Company's
management is in the process of performing an evaluation of the Company's
strategic direction. This evaluation includes an assessment of the Company's
business plan and other alternatives in an effort to stabilize the Company's
operating performance. Management's plans, when completed and if approved by the
Board of Directors, may result in the impairment of certain of the Company's
assets including inventory, capitalized software, and other purchased
intangibles, as well as a reduction in costs. The amount of assets on the
balance sheet as of September 30, 2000 that may be impaired upon completion and
approval of the plans approximate $925,000. As the plans mature and are
approved, additional assets may be determined to be impaired.
To the extent that the Company's revenue assumptions included in its operating
plan are not met, the Company will have to raise additional equity and/or debt
financing, and will have to curtail expenditures. There can be no assurance that
the Company will be able to obtain any such financing on acceptable terms, if at
all.
7
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Note 2 - Restricted Cash:
------------------------
On September 7, 2000, due to the expiration of the Company's $1.5 million line
of credit on September 30, 2000, $375,000 was pledged as collateral on an
outstanding letter of credit related to the required security deposit for the
Company's Piscataway, New Jersey facility.
Note 3 - Inventory:
------------------
Inventory, net of reserve for obsolescence of $809,000 and $283,000 at September
30, 2000 and March 31, 2000, respectively, consists of the following:
September 30, 2000 March 31, 2000
------------------ --------------
Raw materials $ 818,078 $ 782,813
Work in process 193,996 259,180
Finished goods 1,976,179 882,678
----------- -----------
Total $ 2,988,253 $ 1,924,671
=========== ===========
The Company increased its reserve for obsolete inventory in the quarter to
reflect a build up of certain raw materials that the Company believes are slow
moving based on current sales projections of the ultimate finished product.
Note 4 - Earnings Per Share:
---------------------------
The computation of Basic Earnings Per Share is based on the weighted average
number of common shares outstanding for the period. Diluted Earnings Per Share
is based on the weighted average number of common shares outstanding for the
period plus the dilutive effect of common stock equivalents, comprised of
outstanding stock options and warrants.
The following is a reconciliation of the denominator used in the calculation of
basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
9/30/00 9/30/99 9/30/00 9/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted Average # of Shares Outstanding 16,649,608 11,391,360 17,927,379 11,218,396
Incremental Shares for Common Equivalents 653,559 715,210 2,054,866 562,312
---------- ------- ---------- -------
Diluted Shares Outstanding 17,303,167 12,106,570 19,982,245 11,780,708
=========== ========== =========== ==========
</TABLE>
The potential common shares of 653,559 and 2,054,866, respectively, were
excluded from the computation of diluted earnings per share for the three and
six months ended September 30, 2000 because their inclusion would have had an
antidilutive effect on earnings per share due to the Company's net loss for each
respective period.
8
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
9/30/00 9/30/99 9/30/00 9/30/99
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Net loss $(4,780,065) $(621,563) $(9,415,301) $(1,778,594)
Effect of foreign currency translation 30,395 206 (28,123) (15,353)
------------ ---------- ------------ ------------
Comprehensive loss $(4,749,670) $(621,357) $(9,443,424) $(1,793,947)
============ ========== ============ ============
</TABLE>
Note 6 - Stockholders' Equity
-----------------------------
On August 18, 2000, the Company sold 2,857,142 shares of Common Stock at a price
of $1.75 per share, for total consideration of $5,000,000. Pursuant to the
transaction, the Company has undertaken to register these shares of Common Stock
for resale.
Note 7 - Asset Impairment Charge
--------------------------------
As a result of the Company's significant decreases in revenues during the first
six months of fiscal 2001 as compared to the prior year and significant
increases in operating losses due to its growth strategy, management concluded
that circumstances indicated that the carrying amount of certain long-lived
assets may not be recoverable and a review for recoverability was performed. The
Company has made the strategic decision to abandon certain products and
technologies which were acquired in the acquisition of SolCom Systems, Ltd. on
March 31, 1999. As a result of the above decisions, the Company recorded an
impairment charge of $488,295 on the capitalized core technology from this
acquisition. This charge has been recorded within Depreciation and Amortization
on the Company's Statement of Operations for the three and six months ended
September 30, 2000.
Note 8 - Income Taxes:
----------------------
The Company's valuation allowance against its federal, state and foreign net
operating loss carryforwards and its research and development credits increased
by $3,114,367 during the six months ended September 30, 2000. The Company has
recorded a full valuation allowance against the federal and state net operating
loss carryforwards and a full valuation allowance against the foreign net
operating loss carryforwards and the research and development credit because
management believes that it is more likely than not that substantially all of
the net operating loss carryforwards and credits will expire unutilized.
Note 9 - New Accounting Pronouncements:
----------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, it requires that
9
<PAGE>
entities recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Gains and losses resulting from changes in the fair values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This standard, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, and Amendment of FASB Statement No.
133", is effective for fiscal years beginning after June 15, 2000, though
earlier adoption is encouraged and retroactive application is prohibited. For
the Company, this means the standard must be adopted no later than April 1,
2001. Management, based on its current operations, does not expect the adoption
of this standard to have a material impact on the Company's results of
operations, financial position or cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." The SEC delayed the effective
date of this SAB from June 30, 2000 to the fourth quarter of fiscal 2001 for the
Company. The Company has assessed the impact of SAB 101 on its results of
operations and believes that its results of operations for the quarter ended
September 30, 2000 have been presented in accordance with the provisions of the
SAB. The adoption of the SAB is not expected to have an effect on the Company's
financial statements.
Note 10 - Related Party Transactions:
-------------------------------------
During April 2000, the Company issued a loan to the former Chief Executive
Officer (the "Former CEO") of the Company in the amount of $750,000. The loan
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 employed the Former CEO.
The Former CEO resigned his position at the Company effective September 29,
2000. On October 5, 2000, the Company entered into an agreement with the Former
CEO pursuant to which the $750,000 promissory note was amended to extend the due
date to April 30, 2001, and to provide that interest on the note shall accrue
through September 29, 2000. The loan is collateralized by the receipt of a first
mortgage interest on the personal residence of the Former CEO. Pursuant to this
agreement, the Former CEO also agreed to reimburse the Company for certain
expenses totaling $200,000, to be paid over a period of six months ending March
31, 2001. Subsequent to the signing of this agreement, $15,000 was repaid
immediately and $22,000 will be recorded as a non-cash offset as a result of
earned but unpaid vacation owed to the Former CEO. The $200,000 reimbursement
will be recorded during the third quarter of fiscal 2001.
On June 29, 2000, the Company made an advance of $135,000 to the Former CEO. The
advance was subsequently repaid in full on July 26, 2000.
Note 11 - Commitments:
----------------------
On September 18, 2000, the Company entered into a consulting agreement with
Venture Consulting Group, Inc. ("VCGI") whereby VCGI is to provide the services
of Ronald C. Sacks as Chief Executive Officer of the Company, and the services
of three additional consultants. The fees for the consultants' services are
$500,000 over a one-year period. In addition, October 5, 2000 the individual
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<PAGE>
consultants were issued options to purchase 240,000 shares of common stock at
the fair market value on the date of grant. Such options vest ratably over a
one-year period. The Company will record compensation expense based upon the
fair value of the options during each reporting period beginning in October 2000
in connection with the one-year vesting period.
Item 2. Management's Discussion and Analysis
------------------------------------
A number of statements contained in this report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the applicable statements. These
risks and uncertainties include, but are not limited to, the recent introduction
of, and the costs associated with, a new product line; dependence on the
acceptance of this new family of products; risks related to technological
factors; potential manufacturing difficulties; dependence on third parties; a
limited customer base; and liability risks.
RESULTS OF OPERATION
For the three months ended September 30, 2000 compared to the same period in
1999
Revenue for the three months ended September 30, 2000, was $2,788,497 compared
to revenue of $5,792,325 for the same period in 1999, a decrease of $3,003,828
or 51.9%. The decrease in revenue was primarily due to reduced order activity,
the delay from first quarter to the end of the second quarter of the
introduction of an updated version of PRIISMS Manager, a slower than anticipated
ramp-up of new sales personnel, and a non-recurring realization from a sale of a
perpetual technology license to an existing customer in 1999. The Company is
beginning to experience increased activity and order levels for both newer and
older customers.
During the quarter ended September 30, 2000, the Company recognized $391,830 in
revenues related to the $1.1 million sales backlog reported in the Company's
Form 10-KSB for the fiscal year ended March 31, 2000. It recognized $378,500 in
such revenues during the quarter ended June 30, 2000. While the Company expects
to recognize additional revenue from this sales backlog in future quarters,
there can be no assurance that all revenue associated with this sales backlog
will ultimately be realized by the Company.
Cost of goods sold for the three months ended September 30, 2000 was $1,972,478
compared to $2,048,130 for the same period in 1999. Included in the $1,972,478
is a $526,000 reserve that the Company believes are slow moving based on current
sales projections of the ultimate finished product. Cost of goods sold as a
percentage of revenue for the three months ended September 30, 2000 increased to
70.7% from 35.4% for the same period in 1999. Without the inventory reserve, the
percentage is 52.8%. The increase is due to the impact of certain fixed
manufacturing costs that are spread over a decreased revenue base resulting in a
deterioration of product margins.
Research and development expense, net of capitalized software development, for
the three months ended September 30, 2000 was $1,044,421 compared to $636,740
for the same period in 1999. As a percentage of net revenue, research and
development expenses were 37.5%
11
<PAGE>
compared to 11.0% for the same period in 1999. The increase was the result of
additional engineering manpower and other expenditures required to support and
to enhance the Company's product portfolio. The significant increase in the
percentage of research and development to net revenue was primarily caused by
lower sales volume combined with increased spending levels, as discussed above.
Selling, general and administrative expenses ("SG&A") for the three months ended
September 30, 2000 were $2,990,461 compared to $2,674,686 for the same period in
1999. As a percentage of revenue, SG&A increased to 107.2% compared to 46.2% for
the same period in 1999, due primarily to lower sales volume. The increase in
SG&A expenses for the quarter ended September 30, 2000 compared to the same
quarter in 1999 was a result of additional spending related to increased sales
and marketing personnel as well as administrative infrastructure necessary to
execute the Company's growth plans.
Depreciation and amortization expenses - amortization of capitalized software,
goodwill and other acquisition related intangibles, and depreciation on
equipment, furniture and fixtures - was $1,624,508 for the three months ended
September 30, 2000 compared to $1,016,169 in the same period in 1999. The
increased expense was primarily the result of management's strategic decision to
abandon certain of the products and technology associated with the SolCom
acquisition in March 1999. This resulted in a $488,295 impairment charge for
certain of the Company's capitalized software.
Income tax provision for the three months ended September 30, 2000 was $19,034
compared to $0 at September 30, 1999 due to the required provision for the
reported taxable earnings of the Company's UK subsidiary.
Net loss for the three months ended September 30, 2000 was $4,780,065 compared
to a loss of $621,563 for the same period in 1999 based on the factors discussed
above.
For the six months ended September 30, 2000 compared to the same period in 1999
Revenue for the six months ended September 30, 2000, was $4,872,001 compared to
revenue of $10,681,346 for the same period in 1999, a decrease of $5,809,345 or
54.4%. The decrease in revenue was primarily due reduced order activity, the
delay from first quarter to the end of the second quarter of the introduction of
an updated version of PRIISMS Manager, a slower than anticipated ramp-up of new
sales personnel, and the non-recurring realization of revenue from a sale of a
perpetual technology license to an existing customer in 1999.
During the quarter ended September 30, 2000, the Company recognized $391,830 in
revenues related to the $1.1 million sales backlog reported in the Company's
Form 10-KSB for the fiscal year ended March 31, 2000. It recognized $378,500 in
such revenues during the quarter ended June 30, 2000. While the Company expects
to recognize additional revenue from this sales backlog in future quarters,
there can be no assurance that all revenue associated with this sales backlog
will ultimately be realized by the Company.
Cost of goods sold for the six months ended September 30, 2000 was $3,126,077
compared to $3,656,004 for the same period in 1999, a decrease of $529,927 or
14.5%, due to lower sales volume. Included in the $3,126,077 is a $526,000
reserve for raw materials inventory that the
12
<PAGE>
Company believes are slow moving based on current sales projections of the
ultimate finished product. Without this reserve, the decrease would be 28.2%.
Cost of goods sold as a percentage of revenue increased to 64.2% for the six
months ended September 30, 2000 as compared to 34.2% for the same period in
1999. Without the reserve, the percentage is 53.9% because lower sales volume
increased the negative impact that certain fixed manufacturing costs had on
margins.
Research and development expenses, net of capitalized software development, for
the six months ended September 30, 2000 was $2,256,539 compared to $1,739,866
for the same period in 1999. As a percentage of revenue, research and
development expenses increased to 46.3% compared to 16.3% for the same period in
1999, due primarily to lower sales volume.
SG&A expenses for the six months ended September 30, 2000 were $6,342,074
compared to $5,020,551 for the same period in 1999. As a percentage of revenue,
SG&A expenses increased to 130.2% compared to 47.0% for the same period in 1999
due primarily to lower sales volume. The increased expenditures resulted
primarily from the Company's aggressive growth plans and associated sales and
marketing support.
Depreciation and amortization expenses - amortization of capitalized software
goodwill and other acquisition related intangibles, and depreciation on
equipment, furniture and fixtures - was $2,712,545 for the six months ended
September 30, 2000 compared to $1,939,820 for the same period in 1999. The
increased expense was primarily the result of management's strategic decision to
abandon certain of the products and technology associated with the SolCom
acquisition in March 1999. This resulted in a $488,295 impairment charge for
certain of the Company's capitalized software.
Income tax provision for the six months ended September 30, 2000 was $41,728
compared to $0 at September 30, 1999 due to the required provision for the
reported taxable earnings of the Company's United Kingdom subsidiary.
Net loss for the six months ended September 30, 2000 was $9,415,301 compared to
a loss of $1,778,594 for the same period in 1999, based on the factors discussed
above.
FINANCIAL CONDITION AND CAPITAL RESOURCES
During the first six months ended September 30, 2000, the Company's working
capital position deteriorated as the Company's reduced revenues combined with
continuing expenditure levels utilized significant operating cash. This cash
utilization was offset partially by the $5,000,000 raised through the issuance
of new shares in a private placement. Working capital at September 30, 2000
decreased $3,247,309 to $10,228,782 from $13,476,091 at March 31, 2000.
Net cash used in operating activities during the six months ended September 30,
2000 was $6,015,621 compared to net cash used during the same period in 1999 of
$4,533,864. The increase in net cash used resulted primarily from the build-up
of inventory due to lower than expected revenues, the payment of accounts
payable and accrued expenses, and the significant increase in the net loss.
13
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Net cash used in investing activities during the six months ended September 30,
2000 was $2,302,521 compared to net cash used during the same period in 1999 of
$1,664,389. Investing activities during the six months ended September 30, 2000
include the restriction of $375,000 in cash relating to the Piscataway, New
Jersey operating lease and the notes receivable issued to the Former CEO in the
amount of $885,000, offset by the repayment of $135,000 during the current
quarter. This use of cash was offset partially by the decrease in expenditures
for property and equipment.
Net cash provided by financing activities during the six months ended September
30, 2000 was $5,308,889 compared to net cash provided during the same period in
1999 of $12,892,929. Financing activities during the six months ended September
30, 2000 include the sales of 2,857,142 shares of Common Stock at a price of
$1.75 per share, for total consideration of $5,000,000 in a private equity
transaction. Pursuant to the transaction, the Company has undertaken to register
these shares of Common Stock for resale.
On September 30, 1999, the Company entered into a $2,500,000 line of credit
agreement. The line of credit was available through July 15, 2000. This line of
credit has been terminated and effectively replaced with the $1,500,000 line as
noted below.
On July 15, 2000, the Company entered into a line of credit agreement for
$1,500,000. The line of credit was available through September 30, 2000. The
line of credit expired on September 30, 2000 with no amounts having been drawn
down on such line.
During the first two quarters of fiscal 2001, the Company significantly
increased its research and development activities and expanded its sales and
marketing infrastructure and related costs in order to execute its growth plans.
As a result of these actions, and a sharp downturn in the Company's sales, the
Company has incurred significant losses from operations. The Company's
management is in the process of performing an evaluation of the Company's
strategic direction. This evaluation includes an assessment of the Company's
business plan in an effort to stabilize the Company's operating performance.
Management's plans, once completed and approved by the Board of Directors, may
result in the impairment of certain of the Company's assets including inventory,
capitalized software, and other purchased intangibles, as well as a reduction in
costs. The amount of assets on the balance sheet as of September 30, 2000 that
may be impaired upon completion and approval of the plans approximate $925,000.
As the plans mature and are approved, additional assets may be determined to be
impaired.
The Company believes, based on current revenue assumptions in its operating
plan, that it has sufficient cash to meet its operating requirements over the
next twelve months. To the extent that the Company's revenue assumptions
included in its operating plan are not met, the Company will have to raise
additional equity and/or debt financing, and will have to curtail expenditures.
There can be no assurance that the Company will be able to obtain any such
financing on acceptable terms, if at all.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities
On August 18, 2000, the Company sold 2,857,142 shares of Common Stock at a price
of $1.75 per share to a group of accredited investors in consideration of an
amount equal to $5,000,000, pursuant to Rule 506 promulgated under the
Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
(a) Exhibits:
10.1. Consulting Agreement entered into September 18, 2000
between the Company and Venture Consulting Group, Inc.
10.2. Separation and Forebearance Agreement made as of
October 5, 2000 between the Company and Stephen B. Gray
10.3. Promissory Note in the amount of $163,000 dated
October 5, 2000 made by Stephen B. Gray to the Company
10.4. First Amendment to Promissory Note dated as of August
5, 2000 by and between the Company and Stephen B. Gray
27. Financial Data Schedule
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter.
<PAGE>
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 14, 2000
ION NETWORKS, INC.
/s/ Ronald C.Sacks
-----------------------------------------------
Ronald C. Sacks, Chief Executive Officer
and Interim Principal Financial Officer
