UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended March 31, 2019
or
☐
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from ______________________ to ______________________
Commission file number:
333-206745
I-ON DIGITAL CORP.
(Exact name of registrant as specified in its charter)
(formerly known as I-ON Communications Corp.)
Delaware
|
|
46-3031328
|
(State or other jurisdiction of incorporation or organization)
|
|
(I.R.S. Employer Identification No.)
|
15, Tehran-ro 10-gil, Gangam-gu, Seoul, Korea 06234
(Address of principal executive offices, including zip code)
+82-2-3430-1200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common
Stock, Par Value $0.001
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 preceding 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
☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
|
Accelerated filer ☐
|
Non-accelerated filer ☒
|
Smaller reporting company ☒
|
|
Emerging growth company ☐
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new
or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
|
Trading
Symbol(s)
|
|
Name of each exchange on which
registered
|
Common Stock, $0.0001 par value per share
|
|
IONI
|
|
OTC Markets
|
The number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
|
|
Outstanding as of May 14, 2019
|
Common Stock, $0.0001 par value per share
|
|
35,030,339 shares
|
|
PART I – FINANCIAL INFORMATION
|
|
|
|
|
Item 1.
|
|
2
|
Item 2.
|
|
25
|
Item 3.
|
|
30
|
Item 4.
|
|
30
|
|
|
|
|
PART II – OTHER INFORMATION
|
|
|
|
|
Item 1.
|
|
31
|
Item 2.
|
|
31
|
Item 3.
|
|
31
|
Item 4.
|
|
31
|
Item 5.
|
|
31
|
Item 6.
|
|
31
|
|
|
|
|
|
32
|
PART 1 – FINANCIAL INFORMATION
Item 1.
|
Interim Consolidated Financial Statements
|
The unaudited interim consolidated financial statements of I-ON Digital Corp. and subsidiary (“we”, “our”, “us”, the “Company”) follow. All currency
references in this report are to US dollars unless otherwise noted.
I-ON Digital Corp. and Subsidiary
Consolidated Financial Statements (UNAUDITED)
|
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
I-ON Digital Corp. and Subsidiary
Consolidated Balance Sheets (Unaudited)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
355,427
|
|
|
$
|
1,709,210
|
|
Restricted cash
|
|
|
1,669,889
|
|
|
|
1,699,331
|
|
Short-term financial instruments
|
|
|
731,236
|
|
|
|
741,417
|
|
Short-term loan receivable
|
|
|
40,000
|
|
|
|
25,000
|
|
Accounts receivables, net of allowance for doubtful accounts $711,752 and $756,812, respectively
|
|
|
2,325,101
|
|
|
|
2,692,933
|
|
Deferred tax assets
|
|
|
64,805
|
|
|
|
65,947
|
|
Prepaid expenses and other current assets
|
|
|
1,025,219
|
|
|
|
856,959
|
|
Total current assets
|
|
|
6,211,677
|
|
|
|
7,790,797
|
|
|
|
|
|
|
|
|
|
Non-current assets:
|
|
|
|
|
|
|
|
|
Investments
|
|
|
90,928
|
|
|
|
102,756
|
|
Property and equipment, net
|
|
|
175,053
|
|
|
|
163,995
|
|
Intangible assets, net
|
|
|
139,184
|
|
|
|
136,432
|
|
Deposits
|
|
|
360,518
|
|
|
|
358,028
|
|
Derivate asset
|
|
|
107,450
|
|
|
|
109,343
|
|
Deferred tax assets
|
|
|
1,166,374
|
|
|
|
1,211,621
|
|
Total non-current assets
|
|
|
2,039,507
|
|
|
|
2,082,175
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,251,184
|
|
|
$
|
9,872,972
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
475,245
|
|
|
$
|
375,318
|
|
Accrued expenses and other
|
|
|
480,384
|
|
|
|
790,676
|
|
Value added tax payable
|
|
|
73,444
|
|
|
|
108,534
|
|
Income tax payable
|
|
|
16,846
|
|
|
|
20,353
|
|
Short-term loan payable
|
|
|
483,389
|
|
|
|
626,062
|
|
Current portion of long term debt
|
|
|
65,890
|
|
|
|
89,509
|
|
Total current liabilities
|
|
|
1,595,198
|
|
|
|
2,010,452
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
-
|
|
|
|
25,000
|
|
Long term debt, net of current portion
|
|
|
395,430
|
|
|
|
402,397
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,990,628
|
|
|
|
2,437,849
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par
value; authorized 100,000,000
shares; 35,030,339
shares issued and
outstanding at March 31, 2019 and December 31, 2018
|
|
|
3,603
|
|
|
|
3,603
|
|
Treasury stock
|
|
|
(709,478
|
)
|
|
|
(709,478
|
)
|
Additional paid-in-capital
|
|
|
3,601,956
|
|
|
|
3,582,987
|
|
Accumulated other comprehensive loss
|
|
|
(148,032
|
)
|
|
|
(52,193
|
)
|
Accumulated retained earnings
|
|
|
3,511,898
|
|
|
|
4,609,785
|
|
Total company stockholders’ equity
|
|
|
6,259,947
|
|
|
|
7,434,704
|
|
Non-controlling interests
|
|
|
609
|
|
|
|
419
|
|
Total stockholders’ equity
|
|
|
6,260,556
|
|
|
|
7,435,123
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
8,251,184
|
|
|
$
|
9,872,972
|
|
See accompanying notes to consolidated financial statements.
I-ON Digital Corp. and Subsidiary
Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
|
|
Quarter-ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,639,619
|
|
|
$
|
1,297,742
|
|
Cost of goods sold
|
|
|
1,815,355
|
|
|
|
1,889,719
|
|
Gross profit (loss)
|
|
|
(175,736
|
)
|
|
|
(591,977
|
)
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
218,507
|
|
|
|
308,672
|
|
General and administrative
|
|
|
484,062
|
|
|
|
500,751
|
|
Total operating expense
|
|
|
702,569
|
|
|
|
809,423
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(878,305
|
)
|
|
|
(1,401,400
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
|
(160,419
|
)
|
|
|
-
|
|
Miscellaneous income, net
|
|
|
14,083
|
|
|
|
167,000
|
|
Interest expense
|
|
|
(45,147
|
)
|
|
|
-
|
|
Total other income (expense), net
|
|
|
(191,483
|
)
|
|
|
167,000
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes, loss on equity investments in affiliates, and n
on-controlling interest
|
|
|
(1,069,788
|
)
|
|
|
(1,234,400
|
)
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
|
24,543
|
|
|
|
44,958
|
|
|
|
|
|
|
|
|
|
|
Net loss before income or loss on equity investments in affiliates and non-controlling interest
|
|
|
(1,094,331
|
)
|
|
|
(1,279,358
|
)
|
|
|
|
|
|
|
|
|
|
Loss on equity investments in affiliates
|
|
|
(3,556
|
)
|
|
|
(8,152
|
)
|
|
|
|
|
|
|
|
|
|
Net loss before non-controlling interest
|
|
|
(1,097,887
|
)
|
|
|
(1,287,510
|
)
|
|
|
|
|
|
|
|
|
|
Non-controlling interest income (loss)
|
|
|
190
|
|
|
|
(279
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,097,697
|
)
|
|
$
|
(1,287,789
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income statement:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,097,697
|
)
|
|
$
|
(1,287,789
|
)
|
Foreign currency translation
|
|
|
(95,839
|
)
|
|
|
136,150
|
|
Total comprehensive loss
|
|
$
|
(1,193,536
|
)
|
|
$
|
(1,151,639
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic
|
|
|
|
|
|
|
|
|
Net loss before non-controlling interest
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
Non-controlling interest
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
Earnings per share to stockholders
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted
|
|
|
|
|
|
|
|
|
Net loss before non-controlling interest
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
Non-controlling interest
|
|
|
0.00
|
|
|
|
(0.00
|
)
|
Earnings per share to stockholders
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,030,039
|
|
|
|
31,784,293
|
|
Diluted
|
|
|
35,030,039
|
|
|
|
31,784,293
|
|
See accompanying notes to consolidated financial statements.
I-ON Digital Corp. and Subsidiary
Consolidated
Statements of Stockholders’ Equity
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Company
|
|
|
Non-
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Stockholders'
|
|
|
Controlling
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income (Loss)
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2017
|
|
|
2,808,214
|
|
|
$
|
1,203,383
|
|
|
$
|
1,949,690
|
|
|
$
|
4,508,763
|
|
|
$
|
-
|
|
|
$
|
(473,317
|
)
|
|
$
|
7,188,519
|
|
|
$
|
161
|
|
|
$
|
7,188,680
|
|
Balance - December 31, 2017
|
|
|
26,000,000
|
|
|
|
2,600
|
|
|
|
3,212,037
|
|
|
|
4,527,781
|
|
|
|
-
|
|
|
|
274,468
|
|
|
|
8,016,886
|
|
|
|
252
|
|
|
|
8,017,138
|
|
Balance - December 31, 2018
|
|
|
35,130,339
|
|
|
$
|
3,603
|
|
|
$
|
3,582,987
|
|
|
$
|
4,609,785
|
|
|
$
|
(709,478
|
)
|
|
$
|
(52,193
|
)
|
|
$
|
7,434,704
|
|
|
$
|
419
|
|
|
$
|
7,435,123
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(95,839
|
)
|
|
|
(95,839
|
)
|
|
|
-
|
|
|
|
(95,839
|
)
|
Stock compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
18,969
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,969
|
|
|
|
-
|
|
|
|
18,969
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,097,887
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,097,887
|
)
|
|
|
190
|
|
|
|
(1,097,697
|
)
|
Balance - Mar 31, 2019
|
|
|
35,130,339
|
|
|
$
|
3,603
|
|
|
$
|
3,601,956
|
|
|
$
|
3,511,898
|
|
|
$
|
(709,478
|
)
|
|
$
|
(148,032
|
)
|
|
$
|
6,259,947
|
|
|
$
|
609
|
|
|
$
|
6,260,556
|
|
See accompanying notes to consolidated financial statements.
I-ON Digital Corp. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31,
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,097,697
|
)
|
|
$
|
(1,287,789
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
|
(190
|
)
|
|
|
(279
|
)
|
Loss on equity investments in affiliates
|
|
|
3,556
|
|
|
|
8,152
|
|
Depreciation and amortization
|
|
|
75,126
|
|
|
|
13,259
|
|
Stock options expense
|
|
|
18,969
|
|
|
|
24,741
|
|
Loss on extinguishment of debt - debt discount write-off
|
|
|
160,419
|
|
|
|
-
|
|
Foreign exchange gain
|
|
|
515
|
|
|
|
1,435
|
|
Amortization of debt discount
|
|
|
8,333
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
484,917
|
|
|
|
1,112,705
|
|
Prepaid expenses and other current assets
|
|
|
(185,172
|
)
|
|
|
(30,997
|
)
|
Deposit
|
|
|
(8,787
|
)
|
|
|
3,293
|
|
Deferred taxes
|
|
|
24,543
|
|
|
|
44,958
|
|
Accounts payable
|
|
|
(44,732
|
)
|
|
|
39,891
|
|
Accrued expenses and other
|
|
|
(299,955
|
)
|
|
|
(634,088
|
)
|
Value added tax payable
|
|
|
(33,587
|
)
|
|
|
(56,592
|
)
|
Income tax payable
|
|
|
(3,191
|
)
|
|
|
18,816
|
|
Net cash used in operating activities
|
|
|
(896,933
|
)
|
|
|
(742,495
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
(891,492
|
)
|
|
|
-
|
|
Proceeds from sales of short-term investments
|
|
|
888,826
|
|
|
|
-
|
|
Purchases of property and equipment
|
|
|
(69,109
|
)
|
|
|
(5,008
|
)
|
Purchases of patent
|
|
|
(25,244
|
)
|
|
|
(2,739
|
)
|
Issuance of short-term loan receivable
|
|
|
(15,607
|
)
|
|
|
(46,629
|
)
|
Net cash used in investing activities
|
|
|
(112,626
|
)
|
|
|
(54,376
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments of short-term borrowings
|
|
|
(133,324
|
)
|
|
|
-
|
|
Redemption of convertible debt
|
|
|
(200,000
|
)
|
|
|
-
|
|
Repayments of loan payable
|
|
|
(22,318
|
)
|
|
|
-
|
|
Net cash used in financing activities
|
|
|
(355,642
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash equivalents
|
|
|
(18,024
|
)
|
|
|
(13,384
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,383,225
|
)
|
|
|
(810,255
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents including restricted cash, beginning of year
|
|
$
|
3,408,541
|
|
|
|
3,235,481
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents including restricted cash, end of year
|
|
$
|
2,025,316
|
|
|
$
|
2,425,226
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
6,972
|
|
|
$
|
1,892
|
|
Taxes paid
|
|
$
|
6,979
|
|
|
$
|
-
|
|
See accompanying notes to consolidated financial statements.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 1.
|
Organization and Operations
|
I-ON Digital Corp. (“the Company”) was incorporated on July 5, 1999, and is engaged in developing and supplying computerized system. The corporate
headquarter is located at 15 Teheran-ro 10-gil Gangnam-gu Seoul, South Korea. The Company provides enterprise content management services to customers primarily in Korea, Japan and Indonesia, by developing industry-leading products such as ICS
(web content management system), iDrive (e-document management system), LAMS (load aggregator’s management system), e.Form (mobile contract system), IDAS (digital asset management system) and ICE (content delivery system).
I-ON, Ltd is the Japanese subsidiary of the Company incorporated in 2002. The total assets of I-ON, Ltd is approximately $144,000. The Company has 99.5%
ownership of I-ON, Ltd. PT ION-soft is the Indonesian affiliate of the Company incorporated in October 2011. The Company has 20% of ownership of PT I-ON-soft, which is accounted for under the equity method.
Note 2.
|
Summary of Significant Accounting Policies
|
The summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The
consolidated financial statements and notes are representations of the Company’s
management, who is responsible for integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements. The accompanying consolidated financial statements and the
notes hereto are reported in US Dollars.
Basis of Presentation
The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been
omitted pursuant to such rules and regulations. These consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2018 included in
the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The unaudited information contained herein has been prepared on the same basis as the Company’s audited consolidated financial statements, and, in the opinion of the
Company’s management, includes all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The interim results presented herein are not necessarily indicative of
the results of operations that may be expected for the full fiscal year ending December 31, 2019 or any future period.
Principles of Consolidation
The consolidated financial statements include the accounts of I-ON Communication Co., Ltd. and its 99.5% owned subsidiary, I-ON, Ltd. All intercompany
accounts, transactions, and profits have been eliminated upon consolidation.
The consolidated financial statements were prepared and presented in accordance with
Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810,
Consolidation
.
Non-controlling interests represent the portion of earnings that is not within the parent Company’s control. These amounts are required to be reported as equity instead of as a liability on the consolidated balance sheet. ASC requires
net income or loss from non-controlling minority interests to be shown separately on the consolidated statements of operations.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
The Company is also required to consolidate any variable interest entities (VIEs), of which it is the primary beneficiary, as defined. Based on the
Company’s analysis pursuant to ASC 810-10-25,
Consolidations
, the Company does not have any VIEs that need to be consolidated at this time. When the
Company does not have a controlling interest in an entity, but exerts a significant influence over the entity, the Company would apply the equity method of accounting.
Foreign Currency Transaction and Translation
The Company’s principal country of operations is Korea. The financial position and results of operations of the Company are determined using the local
currency, Korean Won (“KRW”), as the functional currency.
The financial position and results of operations of I-ON, Ltd, the Japanese subsidiary of the Company, are initially recorded using its local currency,
Japanese Yen (“JPY”). Assets and liabilities denominated in foreign currency are translated to the functional currency at the functional currency rate of exchange at the balance sheet date. The results of operations denominated in foreign
currency are translated at the average rate of exchange during the reporting period. All differences are reflected in profit or loss. As of March 31, 2019 and December 31, 2018, the exchange rate was JPY 10.28 and JPY 10.13 per KRW, respectively.
The average exchange rate for the three months ended March 31, 2019 and 2018 was JPY 10.22 and JPY 9.89 per KRW, respectively.
Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at the balance sheet
date. The results of operations are translated from KWR to US Dollar at the weighted average rate of exchange during the reporting period. The registered equity capital denominated in the functional currency is translated at the historical rate
of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency, US Dollar, are dealt with as a component of accumulated other comprehensive
income. Translation adjustments net of tax were a net loss of $95,839 and net gain of $136,000 for the three-months ended March 31, 2019 and 2018, respectively. As of March 31, 2019 and December 31, 2018, the exchange rate was KRW 1,137.80 and
KRW 1,118.10 per US Dollar, respectively. The average exchange rate for the three months ended March 31, 2019 and 2018 was KRW 1,125.08 and KRW 1,072.29, respectively.
Segment Reporting
FASB ASC 280,
Segment Reporting
, requires public companies to
report financial and descriptive information about their reportable operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company’s chief executive officer has been identified as the chief decision
maker.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
The Company
generates revenues from two geographic areas, consisting of Korea and
Japan. The following enterprise-wide disclosure is prepared on a basis consistent with the preparation of the consolidated financial statements:
|
|
Three-months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Korea
|
|
|
|
|
|
|
Current assets
|
|
$
|
6,061,305
|
|
|
$
|
7,181,043
|
|
Non-current assets
|
|
|
2,039,230
|
|
|
|
1,479,647
|
|
Current liabilities
|
|
|
1,482,156
|
|
|
|
1,403,043
|
|
Non-current liabilities
|
|
|
395,430
|
|
|
|
281,294
|
|
Net Sales
|
|
|
1,497,063
|
|
|
|
1,154,316
|
|
Japan
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
150,372
|
|
|
$
|
144,074
|
|
Non-current assets
|
|
|
277
|
|
|
|
291
|
|
Current liabilities
|
|
|
113,042
|
|
|
|
11,354
|
|
Non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
Net Sales
|
|
|
142,556
|
|
|
|
143,427
|
|
Revenue Recognition
Adoption of ASC Topic 606, “Revenue from Contracts with Customers”
Revenues are recognized when control of the promised services is transferred to the Company’s customers, in an amount that reflects the consideration the
Company expects to be entitled to in exchange for those services.
The Company’s revenue consists of services provided and commissions. These revenue sources are as follows:
|
•
|
Royalty – the Company receives a fixed amount of royalties from company in Japan for providing rights to sell the Company’s products in Japanese market. Revenue is
recognized over the contract and service period and when collectability is reasonably assured.
|
|
•
|
License Solution & Services – the Company recognizes revenue on installation of the web-content management software, services provided for installation, and
customization.
|
|
•
|
Customizing Services – the Company recognizes revenue from processing transactions between businesses and their customers.
Revenue is recognized over the contract and service period and when collectability is reasonably assured.
|
|
•
|
Maintenance – the Company recognizes revenue over the contract term based on percentage-of-completion method.
|
Cash, Cash Equivalents, and Restricted Cash
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Restricted cash represents cash deposits which is restricted by the financial institutions for the loans the financial institutions having with the Company’s
chief executive officer. The loans with the financial institutions are amounted to approximately $1,529,267 and $1,631,505 at March 31, 2019 and 2018, respectively, and expires on various days during 2019, unless extended. The loans, bearing
various interest rates, are guaranteed by the Company and the restricted cash deposits of the Company are provided to the financial institutions as collateral. The Company’s chief executive officer pays interest from the loans without any default
at March 31, 2019 and 2018.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheet that sum to the total of the
same such amounts shown in the consolidated statements of cash flows.
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
355,427
|
|
|
$
|
1,709,210
|
|
Restricted cash
|
|
|
1,669,889
|
|
|
|
1,699,331
|
|
Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows
|
|
$
|
2,025,316
|
|
|
$
|
3,408,541
|
|
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
This arrangement could be considered as a violation of Section 402 of the Sarbanes-Oxley Act of 2002 amended the Securities Exchange Act of 1934 to
prohibit U.S. and foreign companies with securities traded in the United States from making, or arranging for third parties to make, nearly any type of personal loan to their directors and executive officers. Violations of the Sarbanes-Oxley loan
prohibition are subject to the civil and criminal penalties applicable to violations of the Exchange Act.
Short-Term Loans Receivables
The Company had short-term loans receivables form a third-parties
with interest bearing 9% per annum that expires in 2018, unless extended. Interest income was $23,683 and $12,798 for the three-months ended March 31, 2019 and 2018, respectively.
Research and development costs are expensed as incurred. Research and development costs include travel, payroll, and other general expenses specific to
research and development activities. Research and development cost for three months ended March 31, 2019 and 2018 was $218,507 and $308,672, respectively.
Severance and Retirement Benefits
In accordance with the Korean Labor Standard Law, employees and directors with at least one year of service are entitled to receive a lump-sum payment upon
termination of their employment, based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent an amount which would be payable assuming all eligible employees and directors were to terminate
their employment as of the balance sheet date. The annual severance benefits expense charged to operations is calculated based upon the net change in the accrued severance benefits payable at the balance sheet date based on the guidance of FASB ASC
960,
Accounting – Defined Benefit Pension Plans
.
The Company’s retirement pension plan is a defined contribution plan, and the Company pays the defined contribution regardless of the results of the
operation of the plan. The Company recognizes the contributions to be paid in the current accounting period as retirement benefits expense. The amounts recognized as costs related to defined contribution plans for three-months ended March 31,
2019 and 2018 was $93,168 and $119,488, respectively.
Employees of the Company are entitled to be compensated for absences depending on job classification, length of service, and other factors. At March 31,
2019 and December 31, 2018, the amounts were deemed to be immaterial.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Impairment analysis for long-lived assets and intangible assets
The Company’s long-lived assets and other assets (consisting of property and equipment and purchased intangible assets) are reviewed for impairment in
accordance with the guidance of the FASB ASC 360,
Property, Plant, and Equipment
and FASB ASC 205
Presentation of Financial Statements
. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows.
Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including
discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. The Company had not experienced impairment losses on its long-lived assets and intangible assets during any of the periods
presented.
Earnings Per Share
FASB ASC Topic 260,
Earnings Per Share
, requires a
reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations. Basic earnings (loss) per share are computed by dividing net earnings available to common shareholders by the weighted-average
number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional common shares were dilutive. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because
their inclusion would be anti-dilutive.
Fair Value Measurements
The Company follows FASB ASC Topic 820,
Fair Value Measurements
.
ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would
be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
ASC 820 establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect
market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available.
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The
standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Company for financial
instruments measured at fair value on a recurring basis.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
The three levels of inputs are as follows:
|
Level 1
|
Quoted prices in active markets for identical assets or liabilities that the Company has an ability to access as of the measurement date.
|
|
Level 2
|
Inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities.
|
|
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
Our financial instruments include cash and cash equivalents, restricted cash, short-term financial instruments, short-term loans, accounts receivable, investments,
accounts payables and debt. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of our debt approximates fair value because the interest rates on these instruments
approximate the interest rate on debt with similar terms available to us.
The Company also has financial instruments classified within the fair value hierarchy, which consists of the following:
|
•
|
Investments in privately-held companies, where quoted market prices are not available, accounted for as a
vailable-for-sale securities, classified as Level 3 within the fair value hierarchy, and are recorded as an asset on the consolidated balance sheet
|
|
•
|
Detachable warrants issued in connection with the convertible debt that meets the definition of a derivative, classified as Level 2
within the fair value hierarchy, which is recorded as additional paid-in-capital on the consolidated balance sheet
|
|
•
|
An equity purchase put option that meets the definition of a derivative, classified as Level 3 within the fair value hierarchy, which
is recorded as an asset on the consolidated balance sheet
|
The derivatives are evaluated under the hierarchy of ASC 480-10, ASC Paragraph 815-25-1 and ASC Subparagraph 815-10-15-74 addressing embedded derivatives.
The fair value of the Level 3 financial instruments was determined with the assistance of an independent third-party valuation specialist using an Option Pricing Model.
The following table summarize the Company’s fair value measurements by level at March 31, 2019 for the assets measured at fair value on a recurring basis:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
97,074
|
|
Common stock purchase warrant
|
|
|
-
|
|
|
|
89,788
|
|
|
|
-
|
|
Equity purchase put option
|
|
|
-
|
|
|
|
-
|
|
|
|
107,450
|
|
Fair value, at March 31, 2019
|
|
$
|
-
|
|
|
$
|
89,788
|
|
|
$
|
204,524
|
|
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
The following table summarize the Company’s fair value measurements by level at December 31, 2018 for the assets measured at fair value on a recurring
basis:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
98,784
|
|
Common stock purchase warrant
|
|
|
-
|
|
|
|
89,788
|
|
|
|
-
|
|
Equity purchase put option
|
|
|
-
|
|
|
|
-
|
|
|
|
109,343
|
|
Fair value, at December 31, 2018
|
|
$
|
-
|
|
|
$
|
89,788
|
|
|
$
|
208,127
|
|
Advertising
Costs associated with advertising and promotions are expensed as incurred. Advertising expense amounted to $10,723 and $7,817 for three-months ended March
31, 2019 and 2018, respectively.
Employee Stock Based Compensation
The Company accounts for its share-based compensation plan in accordance with FASB ASC 718,
Stock Compensation,
which establishes a fair value method of accounting for stock-based compensation plans. The Company records stock compensation expense based on the value of the number of shares vesting specified
periods over three years.
Stock based compensation issued to employees and members of our board of directors is measured at the date of grant based on the estimated fair value of
the award, net of estimated forfeitures. The grant date fair value of a stock-based award is recognized as an expense over the requisite service period of the award on a straight-line basis.
For purposes of determining the variables used in the calculation of stock based compensation issued to employees
,
the Company performs an analysis of current market data and historical data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With
the exception of the expected forfeiture rate, which is not an input, we use these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of stock options granted any fluctuations in these calculations could
have a material effect on the results presented in our consolidated statements of operations. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our consolidated financial
statements.
Non-controlling Interests
Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date.
National Tax Service in Korea administered Value Added Tax under the Tax Reform Act of 1976
promulgated by the National Assembly. Value added tax is imposed on goods sold in or imported into Korea and on services provided within Korea. Value added tax in Korea is charged on an aggregated basis at a rate of 10% on the full price
collected for the goods sold or for the taxable services provided. Value added tax paid
for the three-months ended March 31, 2019 and 2018 were
$74,274 and $127,442
,
respectively.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Recently Issued Accounting Pronouncements
Pronouncements Not Yet Effective
In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808)—Clarifying the Interaction between Topic 808 and Topic
606 (“ASU 2018-18”). The amendments in ASU 2018-18 clarify that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the
context of a unit of account. The amendments under ASU 2018-18 are effective for interim and annual fiscal periods
beginning after December 15,
2019
, with early adoption permitted. The amendments in ASU 2018-18 should be applied retrospectively to the date of initial application of ASC 606. The Company does not expect the adoption of this ASU to have a material impact on its
consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-17, “Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest
Entities” (“ASU 2018-17”). This ASU reduces the cost and complexity of financial reporting associated with consolidation of variable interest entities (VIEs). A VIE is an organization in which consolidation is not based on a majority of voting
rights. The new guidance supersedes the private company alternative for common control leasing arrangements issued in 2014 and expands it to all qualifying common control arrangements. The amendments in this ASU are effective for fiscal years
beginning after December 15, 2019
, and interim periods within those fiscal years. The Company does not expect the adoption of this ASU to have
a material impact on its consolidated financial statements.
In August 2018, The FASB issued ASU No. 2018-13,
Fair Value
Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
, or ASU 2018-13. The amendments in ASU 2018-13 eliminate, add, and modify certain disclosure requirements for fair value
measurements. The amendments are effective for interim and annual reporting periods
beginning after December 15, 2019
, with early
adoption permitted for either the entire ASU or only the provisions that eliminate or modify requirements. The amendments with respect to changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs
used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively. All other amendments are to be applied retrospectively to all periods presented. The Company does not
expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These
amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in
quarterly reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are
effective for all filings made on or after November 5, 2018
. In light of the anticipated timing of effectiveness of the amendments and expected proximity of
effectiveness to the filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, (“CDI – Question 105.09”), that provides transition
guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after
the effective date of the amendments. As such, the Company adopted these SEC amendments on November 30, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its May 31, 2019 Form 10-Q. The
Company does not anticipate that the adoption of these SEC amendments will have a material effect on the Company’s consolidated financial statements.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
In August 2018, the FASB issued ASU No. 2018-15,
Intangible-Goodwill
and Other Internal-Use Software (Subtopic 350-40)
(“ASU 2018-15”). ASU 2018-15 updates guidance regarding accounting for implementation costs associated with a cloud computing arrangement that is a service contract. The amendments under
ASU 2018-15 are effective for interim and annual fiscal periods
beginning after December 15, 2019
, with early adoption permitted. The
Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued accounting standards update ASU 2018-13, (Topic 820) - “Fair Value Measurement”, which changes the unrealized gains and
losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or
annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments in this update are effective for fiscal years, and interim
periods within those fiscal years,
beginning after December 15, 2019
. Early adoption is permitted upon issuance. The Company does not
expect the adoption of this ASU to have a material impact on its consolidated financial statements.
In June 2018, FASB issued accounting standards update ASU 2018-07, (Topic 505) – “Shared-Based Payment Arrangements with Nonemployees”, which simplifies
the accounting for share-based payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees will be aligned with the requirements for share-based payments granted to employees. Under
the ASU 2018-07, the measurement of equity-classified nonemployee share-based payments will be fixed on the grant date, as defined in ASC 718, and will use the term nonemployee vesting period, rather than requisite service period. The amendments in
this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years
beginning after December 15, 2019
, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted if financial statements have not yet been
issued. The Company has evaluated the impact of the adoption of ASU 2018-07, which has no effect on the Company’s financial statements.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. ASU 2016-13 will require immediate recognition of estimated credit
losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. ASU 2016-13 is effective for the Company's
fiscal year
beginning March 1, 2020 and subsequent interim periods
. The Company does not expect the adoption of this ASU to have a
material impact on its consolidated financial statements.
The Company does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect
on the accompanying consolidated financial statements. All other newly issued accounting pronouncements, but not yet effective, have been deemed either immaterial or not applicable.
Recently Adopted Accounting Pronouncements
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the
interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases
to be classified as a sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related updates were effective for fiscal years
beginning after
December 15, 2018
, and interim
periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2016-02 effective January 1, 2019; such adoption had no material impact on the Company’s financial statements, given that the noncancelable term of the
Company’s current lease is less than 12 months.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 aligns the accounting for
share-based payment awards to employees and non-employees. Under ASU 2018-07 the existing employee guidance will apply to nonemployee share-based transactions, except for specific guidance related to the attribution of compensation cost. ASU
2018-07 should be applied to all new awards granted after the date of adoption. ASU 2018-07 is effective for annual and interim periods
beginning
after December 15, 2018
, and early adoption is permitted. The Company adopted ASU 2018-07 effective January 1, 2019; such adoption had no material impact on the Company’s consolidated financial statements.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220) (ASU 2018-02),
which amends existing standards for income statement-reporting comprehensive income to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Cuts and Jobs Act and
improve the usefulness of information reported to financial statements users. ASU 2018-02 will be effective for
beginning after December 15,
2018
, and early adoption is permitted. The Company adopted ASU 2018-02 effective January 1, 2019; such adoption had no material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash
Flows: Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For public
entities, the standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years
beginning after December 15, 2018
, and interim periods within fiscal years beginning after December 15, 2019. The Company adopted ASU 2016-15 effective January 1,
2018; such adoption had no material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance
sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years
beginning after December 15, 2018
, including interim periods within those fiscal years. Early application is permitted. The Company can
elect to record a cumulative-effect adjustment as of the beginning of the year of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments will be subject to the
new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption. The Company adopted ASU 2016-02 effective January 1, 2019; such adoption had no material impact on the Company’s financial statements, given
that the noncancelable term of the Company’s current lease is less than 12 months.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Long-term debt consisted of the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
A note payable to a financial institution bearing interest at 2.81% and 2.75% at March 31, 2019 and
December 31, 2018, respectively, and guaranteed by the officer of the Company. The Company was required to make interest-only payments until December 2018, then monthly payments of both principal and interest starting from January 2019.
|
|
$
|
461,320
|
|
|
$
|
491,906
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
461,320
|
|
|
$
|
491,906
|
|
Less: current portion
|
|
|
(65,890
|
)
|
|
|
(89,509
|
)
|
Long-term debt, net of current portion
|
|
$
|
395,430
|
|
|
$
|
402,397
|
|
The long-term debts contain certain covenants, and the Company was in compliance with the covenants.
The Company has lines of credit with financial institutions for total amount of approximately $3,500,000 that expires in various months in 2018, unless
extended. There was no outstanding balance under the credit lines at March 31, 2019 and December 31, 2018. The lines of credit, bearing various interest rates are guaranteed by the officer of the Company.
The Company has an arrangement with its customers and a financial institution, in which the Company’s customers issue electronic invoices with the
Company as the recipient. The Company can use these receivables as collaterals for loans up to approximately $5,200,000 and $5,400,000 as of March 31, 2019 and December 31, 2018, respectively. The Company receives its payments due when the
customer fully pays the invoices to the financial institution. The interest rates vary depending on the Company’s customers’ credit ratings. The Company has no borrowings outstanding as of March 31, 2019 and December 31, 2018, respectively. The
maturity date of the arrangement varies on the dates of the original transactions.
Note 5.
|
Short Term Loan Payable
|
The Company has a short-term loan with a financial institution bearing interest rate of 3.2% expiring July 30, 2019. All amounts outstanding is
due on July 30, 2019, however, the Company may make earlier payments without any penalty. The total amount outstanding was approximately $483,000 and $626,000 at March 31, 2019 and December 31, 2018, respectively. The short-term loan is
guaranteed by the officer of the Company.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 6.
|
Convertible Debt, Beneficial Conversion Feature, and Common Stock Warrant
|
The Company entered into a securities purchase agreement (the “SPA”) with Peak One Opportunity Fund, L.P. (“Peak One”) on August 13, 2018. The financing
arrangement between the Company and Peak One stipulates that Peak One will invest up to $540,000 in the Company through three separate tranches. Each tranche will be funded in exchange for a convertible debt instrument issued at a 10% discount,
with a face value of $200,000. On this same date, the first tranche closed and the Company issued a convertible debt instrument to Peak One for $200,000 at a 10% discount. The convertible debt issued has the following significant terms:
|
•
|
Term: The principal amount is repayable on August 13, 2021 ("Maturity Date"). All unpaid principal due and payable on the Maturity
Date shall be paid in the form of common stock of the Company. Any amount of principal or interest that is due under the convertible debt, which is not paid by the Maturity Date, will bear interest at the rate of 18% per annum until it
is satisfied.
|
|
•
|
Conversion Rights: The Holder has the right to convert the amount outstanding plus any accrued interest into common stock of the
Company after 180 calendar days from the issuance date.
|
|
•
|
Conversion Price: Conversion price is equal to the lesser of (i) $2.75 or (ii) 70% of the lowest traded price of the common stock of
the Company for the 20 trading days immediately preceding the date of the date of conversion of the Debts.
|
|
•
|
Redemption by Issuer: The Company has the option to redeem the convertible debt prior to the Maturity Date. The convertible debt called for redemption shall be redeemable
by the Company, upon not more than 2 days written notice, for an amount (the "Redemption Price") equal to:
|
|
(i)
|
if the date of redemption is 90 days or less from the issuance date, 110% of the sum of the principal amount so redeemed plus accrued
interest, if any;
|
|
(ii)
|
if the date of redemption is greater than or equal to 91 days from the issuance date and less than or equal to 120 days from the
issuance date, 120% of the sum of the amount so redeemed plus accrued interest, if any;
|
|
(iii)
|
if the date of redemption is greater than or equal to 121 days from the issuance date and less than or equal to 180 days from the
issuance date, 130% of the sum of the amount so redeemed plus accrued interest, if any; and
|
|
(iv)
|
if either (1) the convertible debts are in default but the Holder consents to the redemption notwithstanding such default or (2) the
date of redemption is greater than or equal to 181 days from the issuance date, 140% of the sum of the amount so redeemed plus accrued interest, if any.
|
|
•
|
Ratchet Provision: If, at any time while any portion of the convertible debts remains outstanding, the Company effectuates a stock
split or reverse stock split of its common stock or issues a dividend on its common stock consisting of shares of common stock or otherwise recapitalizes its common stock, the conversion price of the convertible debts shall be equitably
adjusted to reflect such action.
|
|
•
|
Default: In the event of default by the Company on these convertible debts, the Holder will have the option and discretion to
accelerate the full indebtedness under the convertible debts, in an amount equal to 140% of the outstanding principal amount and accrued and unpaid interest.
|
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
The embedded conversion feature was determined to be a derivative that does not require bifurcation pursuant to ASC 815, but was determined to be a
beneficial conversion feature that requires recognition within equity on the commitment date. The beneficial conversion feature is recognized at its intrinsic value on the commitment date, limited to the proceeds allocated to the convertible debt.
As such, the Company recorded $89,788 within additional paid-in-capital on the consolidated balance sheet for the beneficial conversion feature identified. The debt discount arising from recognition of the beneficial conversion feature will be
amortized as interest expense over the term of the convertible debt. As of March 31, 2019 and December 31, 2018, amortization expense of debt discount related to the beneficial conversion feature was not significant.
In connection with the convertible debt issuance, the Company also issued a detachable common stock warrant on August 13, 2018 that allows Peak One to
purchase up to 50,000 shares of common stock at an exercise price of $2.75 per share, subject to adjustments as stated in the warrant agreement. The common stock warrant expires 5 years from the issuance date. The common stock warrant was
determined to meet equity classification pursuant to ASC 480 and ASC 815. As such, the fair value of the common stock warrant is recorded as additional paid-in-capital on the consolidated balance sheet, which was determined to be $89,788, net of
issuance costs allocated to the warrant, on the issuance date. The debt discount arising from recognition of the common stock warrant will be amortized as interest expense over the term of the convertible debt. As of March 31, 2019 and December 31,
2018, amortization expense of debt discount related to the common stock warrant was not significant.
The Company has the following convertible debt instruments outstanding as of March 31, 2019 and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
A $200,000 convertible note, issued at 10% discount, five year term, no monthly interest due, maturing
August 13, 2021
|
|
$
|
-
|
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Long-term convertible debt
|
|
$
|
-
|
|
|
$
|
200,000
|
|
Less: debt discount
|
|
|
-
|
|
|
|
(175,000
|
)
|
Long-term convertible debt, net of debt discount
|
|
$
|
-
|
|
|
$
|
25,000
|
|
On February 19, 2019, the Company redeemed all the outstanding convertible debt at
a 30% premium for a total redemption price of $255,000. The redemption was accounted for as an extinguishment of debt. Accordingly, the beneficial conversion feature recognized in conjunction with the convertible debt was de-recognized.
The
Company recorded approximately $160,419 of loss on extinguishment of convertible debt, which reported in the consolidated statement of income.
Equity Method
The Company applies the equity method for investments in affiliate, which a privately-held company where quoted market prices are not available, in which
it has the ability to exercise significant influence over operating and financial policies of the affiliate. Significant influence is generally defined as 20% to 50% ownership in the voting stock of an investee. Under the equity method, the Company
initially records the investment at cost and then adjusts the carrying value of the investment to recognize the proportional share of the equity-accounted affiliate’s net income (loss) including changes in capital of the affiliate.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
The Company had the following equity investment accounted under the equity method:
|
As of March 31, 2019 and December 31, 2018
|
|
Equity investee
|
Type of
Shares
Owned
|
|
Number
of Shares
Owned
|
|
|
Original
Investment
Amount
|
|
|
Equity
Investment
Ownership
|
|
PT IONSOFT
|
Common stock
|
|
|
160,000
|
|
|
$
|
160,000
|
|
|
|
20
|
%
|
The following is the roll-forward basis of equity investment accounted under the equity method:
|
|
Period ended Mar 31, 2019
|
|
Equity investee
|
|
Beginning
Equity Investment
Basis
|
|
|
Proportional
Share of the
Equity Accounted
Affiliate's
Net Income (loss)
|
|
|
Ending
Equity Investment
Basis
|
|
PT IONSOFT
|
|
$
|
(2,589
|
)
|
|
|
(3,556
|
)
|
|
$
|
(6,146
|
)
|
|
|
Year ended December 31, 2018
|
|
Equity investee
|
|
Beginning
Equity Investment
Basis
|
|
|
Proportional
Share of the
Equity Accounted
Affiliate's
Net Income (loss)
|
|
|
|
|
PT IONSOFT
|
|
$
|
30,926
|
|
|
|
(33,515
|
)
|
|
$
|
(2,589
|
)
|
Summarized audited financial information of significant equity investments in affiliate are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total current assets
|
|
$
|
132,877
|
|
|
$
|
175,272
|
|
Total assets
|
|
|
267,918
|
|
|
|
344,468
|
|
Total current liabilities
|
|
|
440,852
|
|
|
|
520,198
|
|
Total liabilities
|
|
|
108,862
|
|
|
|
106,482
|
|
Three-months ended March 31,
|
|
2019
|
|
|
2018
|
|
Net sales
|
|
$
|
6,647
|
|
|
$
|
52,987
|
|
Gross profit
|
|
|
(17,096
|
)
|
|
|
(40,228
|
)
|
Income (loss) from operations
|
|
|
(17,752
|
)
|
|
|
(40,228
|
)
|
Net income (loss)
|
|
|
(17,781
|
)
|
|
|
(40,758
|
)
|
Available-for-sale securities
The Company’s investments also include privately-held companies, where quoted market prices are not available, and the cost method, combined with other
intrinsic information, is used to assess the fair value of the investment.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
The following table summarize the Company’s investment securities at March 31, 2019 and December 31, 2018:
Available-for-sale securities
|
|
|
|
|
3/31/2019
|
|
|
12/31/2018
|
|
4Grit
|
|
|
2.50
|
%
|
|
$
|
43,948
|
|
|
$
|
44,723
|
|
E-channel
|
|
|
0.07
|
%
|
|
$
|
41,567
|
|
|
$
|
42,299
|
|
KSFC
|
|
|
0.00
|
%
|
|
$
|
11,558
|
|
|
$
|
11,762
|
|
Total investment securities
|
|
|
|
|
|
$
|
97,074
|
|
|
$
|
98,784
|
|
Note 8.
|
Equity Purchase Agreement – Put Option
|
On August 13, 2018 (the "Closing Date"), the Company entered into an Equity Purchase Agreement (the "Purchase Agreement") with the convertible debenture
holder (the “Holder”), whereby, upon the terms and subject to the conditions thereof, the Holder is committed to purchase shares of the Company's common stock, par value $0.001 per share (the "Purchase Shares"), at an aggregate price of up to
$10,000,000 (the "Total Commitment Amount") over the course of a 24- month term. The significant terms of the Purchase Agreement are given below:
|
•
|
Put Provision: From time to time over the 24-month term of the Purchase Agreement, commencing on the date on which a registration
statement registering the Purchase Shares (the "Registration Statement") becomes effective, the Company may, in its sole discretion, provide the Buyer with a put notice (each a "Put Notice") to purchase a specified number of the
Purchase Shares (each a "Put Amount Requested") subject to the limitations contained in the Purchase Agreement.
|
The actual amount of proceeds the Company receives pursuant to each Put Notice (each, the "Put Amount") is to be determined by the
lesser of (i) 88% of the lowest closing bid price of the Company's Common Stock on the trading day immediately preceding the respective date of the Put Notice and (ii) 88% of the lowest closing bid price during the Valuation Period (the period of
7 trading days immediately following the clearing date associated with the applicable Put Notice).
The Put Amount Requested pursuant to any single Put Notice must have an aggregate value of at least $20,000, and cannot exceed the
lesser of (i) 250% of the average daily trading value of the common stock in the 10 trading days immediately preceding the Put Notice or (ii) such number of shares of common stock that has an aggregate value of $500,000.
|
•
|
Term: Unless earlier terminated, the Purchase Agreement will terminate automatically on the earlier to occur of: (i) 24 months after
the initial effectiveness of the Registration Statement, (ii) the date on which the Buyer has purchased or acquired all of the Purchase Shares, or (iii) the date on which certain bankruptcy proceedings are initiated with respect to the
Company.
|
Upon execution of the Purchase Agreement, the Company issued 100,000 shares of common stock with a par value of $0.001 to the Holder.
The Company adopted the provisions of FASB ASC Topic 480 and Topic 815, to determine the proper classification of the Purchase Agreement. The Company
determined the put option meets the definition of a derivative under ASC 815 but is outside the scope of ASC 480. Under ASC 816-40, the Company determined the derivate does not meet equity classification and accordingly, is classified as an asset
on the consolidated balance as a Level 3 financial instrument. The Company used an independent third-party valuation firm to determine the fair value of the derivative asset using an Option Pricing Model.
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Changes to fair value at the end of each reporting period is recorded as other income or expense in the consolidated statements of income. The following
table summarizes the changes in the Level 3 financial instrument related to the derivate asset for the equity put option:
Fair value, at December 31, 2018
|
|
$
|
109,343
|
|
Issuance of equity purchase put option
|
|
|
-
|
|
Change in fair value
|
|
|
(1,893
|
)
|
Fair value, at Mar 31, 2019
|
|
$
|
107,450
|
|
Note 9.
|
Commitments and Contingencies
|
Royalty
On February 15, 2006, the Company agreed to provide the rights to Ashisuto to sell the products in the Japanese market. Per the agreement, the contract
period is automatically extended by 5 years up to 20 years.
Operating Leases
The Company leases its office under non-cancelable operating leases that expire on dates through December 2020. The lease is automatically extended upon
agreement of both parties. Rent expense for all operating leases for the three-months ended March 31, 2019 and 2018 was $37,331 and $39,169, respectively.
Note 10.
|
Related Party Transactions
|
The following are material related party transactions that have occurred during March 31, 2019 and December 31, 2018, but because the consolidated
financial statements are presented on a consolidated basis, the transactions and balances have been eliminated.
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Sales to affiliate
|
|
$
|
9,172
|
|
|
$
|
525,881
|
|
Receivable from affiliate
|
|
$
|
-
|
|
|
$
|
161,079
|
|
The Company receives loan guarantees from the chief executive officer with regards to its long-term borrowing, and the Company’s restricted cash provided
as collateral to the Company’s chief executive officer’s loans.
Note 11.
|
Earnings Per Share
|
The Company calculates earnings per share in accordance with FASB ASC 260,
Earnings Per Share
, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Potentially
dilutive common shares consist of stock options outstanding (using the treasury method).
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
The following table sets forth the computation of basic and diluted net income per common share:
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
|
|
|
|
|
|
|
Net income (loss) before non-controlling interest
|
|
$
|
(1,097,887
|
)
|
|
$
|
(1,287,510
|
)
|
Non-controlling interest
|
|
|
190
|
|
|
|
(279
|
)
|
Net income (loss)
|
|
|
(1,097,697
|
)
|
|
|
(1,287,789
|
)
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,030,039
|
|
|
|
31,784,293
|
|
Dilutive effect of common stock equivalents arising from
|
|
|
|
|
|
|
|
|
share option, excluding antidilutive effect from loss
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares
|
|
|
35,030,039
|
|
|
|
31,784,293
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic
|
|
|
|
|
|
|
|
|
Net income before non-controlling interest
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
Non-controlling interest
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Earnings per share to stockholders
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted
|
|
|
|
|
|
|
|
|
Net income before non-controlling interest
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
Non-controlling interest
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Earnings per share to stockholders
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
No non-vested share awards or non-vested share unit awards were antidilutive for the three-months ended March 31, 2019 and 2018.
Note 12.
|
Subsequent Events
|
The Company evaluated all events or transactions that occurred after March 31, 2019 up through the date the unaudited consolidated financial statements were
available to be filed. During these periods, the Company did not have any material recognizable subsequent events required to be disclosed as of and for the three months ended March 31, 2019.