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 December 31, 1999
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
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ION NETWORKS, INC.
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(Exact Name of Small Business Issuer in Its Charter)
Delaware 22-2413505
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(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
1551 South Washington Avenue Piscataway, New Jersey 08854
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(Address of Principal Executive Offices)
(732) 529-0100
----------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- -----
There were 14,220,321 shares of Common Stock outstanding as of January 31, 2000.
Transitional Small Business Disclosure Format:
Yes No X
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<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
FORM 10-QSB
FOR THE QUARTER ENDED DECEMBER 31, 1999
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Information 2
Condensed Consolidated Balance Sheets as of December 31, 1999
and March 31, 1999 (Unaudited) 3
Condensed Consolidated Statements of Operations for the Three
and Nine Months ended December 31, 1999 and December 31,
1998
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended December 31, 1999 and December 31, 1998
(Unaudited) 5
Condensed Consolidated Statement of Stockholders' Equity for the
Nine Months ended December 31, 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis 9
PART II. OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
<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/A for the year ended
March 31, 1999.
2
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<TABLE>
<CAPTION>
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, March 31,
1999 1999
----------------- ----------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents................................................ $ 11,854,318 $ 165,994
Accounts receivable, net of allowance for doubtful accounts
of $283,607 and $150,000, respectively................................... 4,057,034 3,092,867
Other receivables........................................................ - -
Inventory, net .......................................................... 1,512,693 2,554,643
Deferred tax assets...................................................... 539,539 422,310
Prepaid expenses and other current assets................................ 153,404 433,031
---------------- ---------------
Total current assets.................................................. 18,116,988 6,668,845
Property and equipment at cost, net of accumulated depreciation of $ 1,381,601
and $991,347, respectively ............................................ 1,561,553 1,010,369
Capitalized software, less accumulated amortization of
$3,140,933 and $1,951,715, respectively.................................. 4,448,354 5,350,388
Goodwill and other acquisition - related intangibles, less
accumulated amortization of $795,226 and $63,810, respectively........... 2,173,824 2,905,240
Security deposits............................................................... 31,993 38,633
----------------- ---------------
Total assets............................................................. $ 26,332,712 $ 15,973,475
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................... $ 178,243 $ 488,948
Accounts payable and accrued expenses .................................... 2,115,743 3,890,152
Accrued payroll and related liabilities .................................. 550,434 813,266
Deferred income .......................................................... 177,321 269,457
Other current liabilities ................................................ 417,433 1,909,072
----------------- ----------------
Total current liabilities ............................................. 3,439,174 7,370,895
Deferred tax liabilities, net .................................................. 305,505 188,276
Long-term debt ................................................................. 486,131 2,013,266
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
13,947,862 shares and outstanding 13,885,831 shares at December 31,
1999; issued 8,286,670 shares and outstanding
8,224,639 shares at March 31 1999...................................... 13,948 8,287
Additional paid-in capital...................................................... 33,128,496 14,858,560
Accumulated deficit ............................................................ (10,806,176) (8,228,641)
Accumulated other comprehensive income.......................................... (27,167) (29,969)
----------------- ---------------
22,309,101 6,608,237
Less-Treasury stock 62,031 shares, at cost at December 31, 1999 and
March 31, 1999......................................................... (207,199) (207,199)
----------------- ---------------
Total stockholders' equity...................................................... 22,101,902 6,401,038
----------------- ---------------
Total liabilities and stockholders' equity...................................... $ 26,332,712 $ 15,973,475
================= ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
December 31, December 31,
1999 1998 1999 1998
--------------- --------------- ---------------- ----------------
Revenue $6,338,988 $3,273,701 $ 17,020,334 $9,451,604
Cost of sales......................................... 2,376,852 1,372,154 6,032,612 3,436,590
--------------- --------------- ---------------- ----------------
Gross margin.......................................... 3,962,136 1,901,547 10,987,722 6,015,014
Research and development expenses............ 1,251,498 637,852 2,991,365 1,556,402
Selling, general and administration ......... 2,549,829 1,469,189 7,569,472 3,926,276
Depreciation and amortization ............... 1,016,833 96,037 2,956,653 410,616
--------------- --------------- ---------------- ----------------
(Loss) income from operations......................... (856,024) (301,531) (2,529,768) 121,720
Interest income....................................... 75,020 - 123,679 5,139
Interest expense...................................... (17,938) (25,445) (171,446) (55,725)
--------------- --------------- ---------------- ----------------
(Loss) income before income tax (benefit) expense..... $ (798,942) (326,976) (2,577,535) 71,134
--------------- --------------- ---------------- ----------------
Income tax (benefit) expense................. - (108,868) - 39,723
=============== =============== ================ ================
Net (loss) income..................................... $ (798,942) $ (218,108) $ (2,577,535) $ 31,411
=============== =============== ================ ================
PER SHARE DATA
Net (loss) income per share
Basic........................................ $ (0.06) $ (0.04) $ (0.22) $ 0.01
Diluted...................................... $ (0.06) $ (0.04) $ (0.22) -
Weighted average number of common shares outstanding:
Basic........................................ 13,378,574 5,465,331 11,499,791 5,490,922
Diluted...................................... 13,378,574 5,465,331 11,499,791 6,455,398
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31,
(UNAUDITED)
1999 1998
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income........................................................... $ (2,577,535) $ 31,411
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization............................................. 2,956,653 410,616
Provision for doubtful accounts........................................... 133,607 (30,751)
Provision for product warranty 30,000
Noncash stock-based compensation charges.................................. 144,000
Deferred tax provision ................................................... - 39,723
Changes in operating assets and liabilities:
(Increase) decrease in
Accounts receivable ...................................................... (1,097,774) (125,495)
Inventory ................................................................ 965,299 (611,216)
Prepaid expenses and other current assets ................................ 279,627 (307,989)
Security deposits ........................................................ 6,640 (4,082)
Increase (decrease) in
Accounts payable and accrued expenses..................................... (1,697,758) 783,418
Accrued payroll and related liabilities .................................. (262,832) (136,049)
Deferred income .......................................................... (92,136) (85,900)
Other current liabilities ................................................ (1,521,639) (67,566)
---------------- -----------------
Net cash used in operating activities .......................................... (2,733,848) (103,880)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment ...................................... (1,043,336) (383,582)
Capitalized software ....................................................... (1,113,662) (759,623)
Proceeds from the sales of software licenses................................ 285,414
Other assets................................................................ - (1,026,064)
----------------- -----------------
Net cash used in investing activities ......................................... (1,871,584) (2,169,269)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on revolving line of credit .................................. 253,720
Proceeds from debt....................................................... 450,000 1,300,428
Principal payments on debt .............................................. (2,541,560) (30,009)
Proceeds from sales of common stock...................................... 18,131,596 840,896
----------------- -----------------
Net cash provided by financing activities ................................... 16,293,756 2,111,315
----------------- -----------------
Net increase (decrease) in cash ............................................. 11,688,324 (161,834)
Cash and cash equivalents, beginning of year ................................ 165,994 507,726
Cash and cash equivalents, end of period..................................... $11,854,318 $ 345,892
================ =================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999
(UNAUDITED)
Accumulated
Additional Other Total
Paid-in Accumulated Comprehensive Treasury Stockholders'
Shares Par Value Capital Deficit Income Stock Equity
------------ ------------ ------------ ---------------- ----------------- ----------- --------------
Balance March 31, 1999 8,286,670 $ 8,287 $ 14,858,560 $ (8,228,641) $ (29,969) $ (207,199) $ 6,401,038
Net loss (2,577,535) (2,577,535)
Issuance of common
stock 3,000,000 3,000 12,497,000 12,500,000
Exercise of stock options
and warrants 2,661,192 2,661 5,628,936 5,631,597
Noncash stock-based 144,000 144,000
compensation
Translation adjustments 2,802 2,802
============ ============ ============ ================ =================-============= ============
Balance December 31,
1999 13,947,862 $ 13,948 $ 33,128,496 $ (10,806,176) $(27,167) $ (207,199) $22,101,902
============ ============ ============ ================ ================= ============= ============
</TABLE>
6
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1999
(Unaudited)
Note 1 - Condensed Consolidated Financial Statements:
- ----------------------------------------------------
The condensed consolidated balance sheets as of December 31, 1999 and March 31,
1999, the condensed consolidated statements of operations for the three and nine
month periods ended December 31, 1999 and for the same periods in 1998 and the
condensed consolidated statements of cash flows for the nine 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 December 31, 1999 and 1998 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 financial
statements are read in conjunction with the audited financial statements and
notes thereto included in the annual report on Form 10-KSB/A for the year ended
March 31, 1999.
Note 2 - Inventory
- ------------------
Inventory, net of reserve for obsolescence of $52,200 and $185,000 at December
31, 1999 and March 31, 1999, respectively, consists of the following:
December 31, 1999 March 31, 1999
----------------- --------------
Raw materials $ 726,093 $ 1,570,150
Work in process 196,650 223,229
Finished goods 589,950 761,264
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Total $ 1,512,693 $ 2,554,643
=========== ===========
Note 3 - 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:
7
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<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
12/31/99 12/31/98 12/31/99 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted Average # of Shares Outstanding 13,378,574 5,465,331 11,499,791 5,490,922
Incremental Shares for Common Equivalents 3,237,113 727,023 3,422,688 964,476
--------- ------- --------- -------
Diluted Shares Outstanding 16,615,687 6,192,354 14,922,479 6,455,398
========== ========= ========== =========
</TABLE>
The potential common shares of 3,237,113, 727,023 and 3,422,688, respectively,
were excluded from the computation of diluted earnings per share for the three
months ended December 31, 1999 and 1998 and the nine months ended December 31,
1999 because their inclusion would have had an antidilutive effect on earnings
per share due to the Company's net loss for each respective period.
Note 4 - 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) income per the financial statements and
comprehensive income.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
12/31/99 12/31/98 12/31/99 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net (loss) income $ (798,942) $ (218,108) $ (2,577,535) $ 31,411
Effect of foreign currency translation (18,156) (11,755) 2,802 (1,514)
------- ------- ------ -------
Comprehensive (loss) income $ (817,098) $ (229,863) $ 2,574,733 $ 29,897
=========== =========== ============= ========
</TABLE>
Note 5 - Contingent Liabilities:
- --------------------------------
In the normal course of business the Company and its subsidiaries may be
involved in legal proceedings, claims and assessments arising in the ordinary
course of business. Such matters are subject to many uncertainties, and outcomes
are not predictable with assurance. In the opinion of management, the outcome of
such current legal proceedings, claims and assessments would not have a material
effect on the Company's reported financial position, results of operations or
cash flows.
Note 6 - Borrowings:
- --------------------
On May 5, 1999, the Company entered into a borrowing agreement for $300,000.
This borrowing is collateralized by certain property and equipment of the
Company. The loan with a term of 3 years is payable monthly at an interest rate
of 8.5%. Principal repayments under this loan are $75,871, $98,371, $107,026 and
$18,732 for the years ended March 31, 2000, 2001, 2002, and 2003.
In November 1999, the Company entered into a line of credit agreement with
United National Bank for $2,500,000 which is available to July 31, 2000. The
Company has $0 outstanding against this line of credit at December 31, 1999.
Note 7 - Related Party Transaction:
- -----------------------------------
The Company borrowed funds from a director of the Company in the amount of
$150,000 on April 14, 1999. This amount was fully repaid along with a market
rate of interest during the quarter ended June 30, 1999. The amount of interest
expense was not material to the Company.
8
<PAGE>
Note 8 - Income Taxes:
- ----------------------
The Company has recorded a valuation allowance against a portion of the federal
and state net operating loss carry forwards and a full valuation allowance
against the foreign net operating loss carryforwards and the research and
development credit as management believes, at December 31, 1999, that it is more
likely than not that substantially all of the net operating loss carryforwards
and credits will expire without being utilized.
The increase in the valuation allowance is due primarily to the current nine
months net operating loss carryforwards for federal and state purposes, $148,453
- - tax effected, and foreign purposes, $274,519 - tax effected, and research and
development credits, $15,000, offset by the utilization of a small portion of
foreign net operating loss carryforwards, ($12,777) - tax effected, during the
nine months ended December 31, 1999.
The Company's non NOL-related deferred tax assets recorded are expected to be
utilized as the Company has sufficient taxable temporary differences that will
reverse in the loss carryforward period.
Note 9-Financing:
- -----------------
In June 1999, the Company raised net $3,000,000 in connection with a private
financing of Common Stock. In August 1999, the Company raised an additional net
$9,500,000 in connection with a private financing of Common Stock. The Company
used a portion of the funds received to pay fees related to the placement, as
well as to pay down the outstanding line of credit in the amount of $2,250,000.
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 OPERATIONS
For the three months ended December 31, 1999 compared to the same period in 1998
- --------------------------------------------------------------------------------
Revenue for the three months ended December 31, 1999, was $6,338,988
compared to revenue of $3,273,701 for the same period in 1998, an increase of
$3,065,287 or 93.6%. The increase was primarily from increased product sales
from the Company's PRIISM's Architecture current range of products (with the
Sentinel 2000 products in particular), higher professional services income and
the inclusions of revenue obtained as the result of the acquisition of SolCom
Systems Limited ("SolCom") in March 1999 and the purchase of certain assets from
LeeMAH DataCom Securities Corporation ("LeeMAH") in February of 1999, the latter
resulting in a new division called Secur@ccess. During the quarter, the Company
developed and licensed the rights to certain customized modules of its software
via a perpetual license agreement to an existing customer for approximately $1.5
million. This development and licensing had a positive effect on the Company's
rate of revenue growth and its gross margins in the third quarter. The Company
has no future obligations to the customer with respect to this development and
the licensed software. The Company is in negotiations with the customer for
additional modules of software product which may be perpetually licensed in the
last quarter of fiscal 2000, which ends March 31, 2000. The Company may elect to
continue to pursue these kinds and/or similar kinds of activities and revenue
opportunities in the future.
9
<PAGE>
Cost of goods sold for the three months ended December 31, 1999 was
$2,376,852 compared to $1,372,154 for the same period in 1998, an increase of
73.2%, as the result of increased business activity. Cost of goods sold as a
percentage of revenue decreased to 37.5% of revenue for the three months ended
December 31, 1999 compared to 41.9% for the same period in 1998 principally due
to the software license sales described above.
Research and development expense, net of capitalized software
development, for the three months ended December 31, 1999 was $1,251,498
compared to $637,852 for the same period in 1998. As a percentage of revenue,
research and development expenses increased to 19.7% compared to 19.5% for the
same period in 1998. The increase of $613,646 was due to the assimilation of
SolCom's and LeeMAH's research and development efforts into the Company's
existing research and development efforts in order to provide further support
and enhancements in developing the next generation of the Company's PRIISM'S
Architecture range of products (Networx and PRIISM's Manager) as well as to
support enhancements to the current products within the PRIISM's family (in
particular the continued growth of the Sentinel 2000), and the impact of the
cost of materials necessary to construct prototypes of the new product prior to
their sales launch.
Selling, general and administrative expenses for the three months
ended December 31, 1999 were $2,549,829 compared to $1,469,189 for the same
period in 1998. As a percentage of revenue, selling general and administrative
expenses decreased to 40.2% compared to 44.9% for the same period in 1998. This
increase of $1,080,640 (which includes non-cash stock-based compensation
charges) was primarily from the Company's aggressive growth plans and the sales
and marketing support thereto, as well as the increased existing product growth
and projected new product introductions, coupled with the acquisition of SolCom
and of Secur@ccess.
Depreciation and amortization expenses, which includes amortization of
capitalized software, goodwill and other acquisition related intangibles, along
with depreciation on equipment, furniture and fixtures, was $1,016,833 for the
three months ended December 31, 1999 compared to $96,037 in the same period in
1998. The increased expense was primarily the result of the goodwill and
capitalized software associated with the SolCom acquisition in March 1999 and
the acquisition of certain assets associated with LeeMAH in February 1999, along
with the amortization of increased levels of capitalized software related to
research and development activities deemed to have reached technological
feasibility.
Income tax provision for the three months ended December 31, 1999 was
$0 compared to a benefit of $108,868, for the same period in 1998. The provision
of $0 at December 31, 1999 was the result of the additional valuation allowance
recorded on the current quarter net operating loss carryforwards for federal,
state, and foreign purposes that the company believes, at December 31, 1999, are
more likely than not to expire unutilized.
Net loss after taxes for the three months ended December 31, 1999 was
$798,942 compared to $218,108 for the same period in 1998 based on the factors
discussed above.
For the nine months ended December 31, 1999 compared to the same period in 1998
- --------------------------------------------------------------------------------
Revenue for the nine months ended December 31, 1999, was $17,020,334
compared to revenue of $9,451,604 for the same period in 1998, an increase of
$7,568,730 or 80.1%. The increase was primarily from increased product sales
from the Company's current range of PRIISM's Architecture products (with the
Sentinel 2000 products in particular), higher professional services income and
the inclusion of revenue obtained as the result of the acquisitions of SolCom in
March 1999 and certain assets from LeeMAH in February 1999, the latter resulting
in a new division called Secur@ccess. During the nine months, the Company
developed and licensed the rights to certain customized modules of its software
via a perpetual license agreement to an existing customer for approximately $2.7
million. This development and licensing had a positive effect on the Company's
rate of revenue growth and its gross margins in the first nine months of the
fiscal year. The Company has no future obligations to the customer with respect
to this
10
<PAGE>
development and the licensed software. The Company is in negotiations with the
customer for additional modules of software product which may be perpetually
licensed in the last quarter of fiscal 2000. The Company may elect to continue
to pursue these kinds and/or similar kinds of activities and revenue
opportunities in the future.
Cost of goods sold for the nine months ended December 31, 1999 was
$6,032,612 compared to $3,436,590 for the same period in 1998, an increase of
75.5%, as a result of increased business activity. Cost of goods sold as a
percentage of revenue decreased to 35.4% for the nine months ended December 31,
1999 compared to 36.4% for the same period in 1998, due to the impact of higher
professional services income in the current nine month period.
Research and development expenses, net of capitalized software
development, for the nine months ended December 31, 1999 was $2,991,365 compared
to $1,556,402 for the same period in 1998. As a percentage of revenue, research
and development expenses increased to 17.6% compared to 16.5% for the same
period in 1998. The increase in both dollars and percentage of revenue was due
to the assimilation of SolCom's and LeeMAH's research and development efforts
into the Company's existing research and development efforts in order to provide
further support and enhancements in developing the Company's next generation of
the Company's PRIISM's Architecture range of products (Network and PRIISM's
Manager), as well as to support the enhancements to the current products within
PRIISM's family (in particular the continued growth of Sentinel 2000) and the
impact of the cost of materials necessary to construct prototypes of the new
products prior to their sales launch.
Selling, general and administrative expenses for the nine months ended
December 31, 1999 were $7,569,472 compared to $3,926,276 for the same period in
1998. As a percentage of revenue, selling general and administrative expenses
increased to 44.5% compared to 41.5% for the same period in 1998. This increase
results primarily from the Company's aggressive growth plans and the sales and
marketing support thereof, as well as costs associated with increased existing
product growth and projected new product introductions, coupled with the
acquisition of SolCom and establishment of the Secur@ccess division.
Depreciation and amortization expenses, which includes amortization of
capitalized software and goodwill, along with depreciation on equipment,
furniture and fixtures, was $2,956,653 for the nine months ended December 31,
1999 compared to $410,616 in the same period in 1998. The increased expense was
primarily the result of the goodwill and capitalized software associated with
the SolCom acquisition in March 1999 and the acquisition of certain assets from
LeeMAH, along with the impact of a higher capitalized software expenses
associated with new research and development activities and increased equipment
purchases to support the sales and infrastructure necessary to support the
project sales growth.
Income tax provision for the nine months ended December 31, 1999 was $0
compared to a provision of $39,723 for the same period in 1998. The provision of
$0 at December 31, 1999 is the result of the additional valuation allowance
recorded on the current period net operating loss carryforwards for federal,
state, and foreign purposes that the Company believes, at December 31, 1999, are
more than likely to expire unutilized.
Net (loss) income after taxes for the nine months ended December 31,
1999 was a loss of $2,577,535 compared to income of $31,411 for the same period
in 1998 based on the factors discussed above.
IN-PROCESS RESEARCH AND DEVELOPMENT ("IPR&D") - DESCRIPTION AND ANALYSIS
In connection with the Company's acquisition of SolCom in the fourth
quarter of fiscal 1999, the Company allocated $3,490,177 of the purchase price
thereof to purchased IPR&D. The following provides an update on the status of
the projects included in the IPR&D analysis.
11
<PAGE>
NetworX is a New Modular product line being developed as part of the
Company's PRIISM's Architecture range of products. NetworX will be the
industry's first integrated platform for proactive, remote, real time, secure
management and monitoring of voice, data and video networks. It uses Dial up,
Telnet or SNMP connections so that managers can monitor, evaluate and
proactively control all aspects of their networks from a single, remote point.
NetworX Version 1 was released in September 1999, with new daughter cards for
Frame Relay (E1, T1, and V series) expected to be fully released in the fourth
quarter fiscal year 2000.
Sentinel III products offer a range of comprehensive site management
tools for centralized remote maintenance of large distributed voice and data
networks. All Sentinel products will feature Alarm & Fault Management, PBX Toll
Fraud Detection, Environmental Monitoring and Control as well as Security Access
Management. Sentinel III, previously reported at fiscal year end as a New
Modular product, was an intelligent port controller that would have combined
remote monitoring and Sentinel network device management, allowing control of a
network as well as a comprehensive picture of its activities. The Company
elected to re-badge the Sentinel III as a less expensive (slower processer, less
memory, etc.) version of the NetworX product.
The Company is currently developing an ASIC (Application Specific
Integrated Circuit), a based range of Modular product, that will incorporate all
the hardware and software required to carry out specific tasks on a single chip.
This should lead to a substantial increase in processing speed and reduction in
build costs. Designing the ASIC requires the Company to experience a learning
curve while the engineers become familiar with this technology. Initially there
will be one ASIC but once the initial ASIC has been developed, there will be an
ongoing development to introduce more capabilities and features into ASICs. The
ASIC development project was put on hold by management to further focus
resources other development efforts. As a result the ASIC is only 20% completed
at December 31, 1999. Its expected release date has been pushed back and will be
re-visited as business and market conditions warrant sometime during fiscal year
2001. Research and development costs to complete are estimated to be in excess
of $350,000.
Financial Condition and Capital Resources
During the first nine months ended December 31, 1999, the Company's
working capital position improved substantially as the Company raised over $
12.5 million dollars in equity funds through the issuance of new shares in
private placements, as well as over $5.6 million of cash relating to the
exercise of certain warrants and options. Working capital (net of deferred tax
assets) at December 31, 1999 increased to a positive $14,138,275 from a negative
$1,124,360 at March 31, 1999.
Net cash used in operating activities during the nine months ended
December 31, 1999 was $2,733,848 compared to net cash used in operating
activities during the same period in 1998 of $103,880. The increase in net cash
used was primarily the result of higher accounts receivables for sales, along
with cash outflows for account payables, accrued expenses and other current
liabilities partially offset by decreases in inventory.
Net cash used in investing activities during the nine months ended
December 31, 1999 was $1,871,584 compared to net cash used during the same
period in 1998 of $2,169,269. The decrease in net cash used was the result of
over $1.0 million of acquisition related expenditures in period ended December
31, 1998. Cash received from sales of software licenses was completely offset by
increases in software expenditures. In addition, in 1999, the Company expended
an additional $660,000 of cash on property and equipment mostly for the
Company's new headquarters.
Net cash provided by financing activities during the nine months ended
December 31, 1999 was $16,293,756 compared to net cash provided during the same
period in 1998 of $2,111,315. The increase
12
<PAGE>
in net cash provided was primarily the result of two private sales (as described
further below) of Common Stock, along with the proceeds from the exercise of
warrants, as well as the exercise of certain employee stock options. Net cash
provided was partially offset by full payment of the Company's line of credit
with a portion of the funds received in the second private sale of common stock.
From April 1999 through December 1999, the Company raised $5,631,597
through the exercise of warrants issued in connection with a private financing
of Common Stock and warrants to purchase Common Stock consummated in April 1996
as well as the exercise of certain employee stock options. In June 1999, the
Company raised net $3,000,000 in connection with a private financing of Common
Stock.
In August 1999 the Company raised net $9,500,000 in connection with a
private financing of Common Stock. The Company used a portion of the funds
received to pay down the outstanding line of credit in the amount of $2,250,000.
In October 1998, the Company entered into a line of credit agreement
with United National Bank with an available balance of $2,000,000 through July
31, 1999, which was extended in July 1999 through September 30, 1999. In April
1999, the line of credit was increased to $2,250,000. On September 9, 1999 this
line of credit was paid down in full with some of the proceeds of the August
1999 private financing. On September 30, 1999 the line of credit expired.
In November 1999, the Company entered into a new $2,500,000 line of
credit agreement with United National Bank. This line of credit is available
through July 31, 2000. No portion of the line of credit has been utilized at
December 31, 1999.
The Company expects to fund the expansion of its business and
operations and meet its short and long-term liquidity needs from available cash
and working capital from funds derived from future operating revenue as well as
through additional financing from outside sources. The Company currently
believes that it will have sufficient cash flows to meet its operational needs
over the next twelve months.
YEAR 2000
- ---------
General
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish the twentieth century dates. The Company uses software and related
technologies that are affected by the "Year 2000 problem." The Company began the
process of identifying the changes required to their computer programs and
hardware during 1996. The Company believes that all of its major programs and
hardware are Year 2000 compliant. However, there can be no assurance that other
companies' computer systems and applications on which the Company's operations
rely, will be timely converted, or that any such failure to convert by another
company would not have a material adverse effect on the company's systems and
operations. Furthermore, there can be no assurance that the software that the
Company uses which has been designed to be Year 2000 compliant contains all
necessary date code changes. To date, the Company has not experienced any Year
2000 problems.
Third Parties
13
<PAGE>
The Company has also initiated formal communications with significant
suppliers and other key third parties to determine the extent to which the
Company is vulnerable to those third parties failure to resolve their own Year
2000 compliance issues. There can be no assurance that the systems or other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company's results of operations.
Risk Assessment/Contingency Planning
At this time, the Company believes its worst case scenario regarding
the Year 2000 problem would include (i) a key material vendor or service
provider experiencing problems with delivery of materials, components or
services; (ii) the failure of infrastructure services provided by government
agencies and other third parties (e.g., electric, telephone, transportation,
Internet services, etc.). As noted above, the Company is evaluating the Year
2000 compliance status of its key third-party vendors to identify potential
risks for contingency planning purposes.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
- ------ ------------------
On October 18, 1999, at a meeting of the Board of Directors, the directors of
the Company appointed Mr. Baruch Halpern as an additional director, and
appointed Stephen M. Deixler as the Chairman of the Board of Directors.
Effective December 29, 1999, Mr. Alfred M. Leonardi was appointed as the Chief
Financial Officer, Vice President of Finance and Administration, Treasurer and
Secretary of the Company by unanimous written consent of the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter.
15
<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: February 10, 2000
ION NETWORKS, INC.
/s/ Alfred M. Leonardi
-----------------------------------
Alfred M. Leonardi, Chief Financial
Officer, Treasurer (Principal
Financial Officer) and duly authorized
officer of the registrant
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