Company Quick10K Filing
Quick10K
I-On Communications
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-02 Amend Bylaw, Exhibits
8-K 2018-08-22 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
8-K 2018-08-10 Officers
8-K 2018-06-11 Accountant, Exhibits
8-K 2018-02-01 Enter Agreement, M&A, Earnings, Sale of Shares, Control, Officers, Amend Bylaw, Exhibits
TRMK Trustmark 2,270
BOOM Dynamic Materials 1,030
SPN Superior Energy Services 488
AMBR Amber Road 272
LLEX Lilis Energy 104
HZN Horizon Global 69
APOP Cellect Biotechnology 5
ORM Owens Realty Mortgage 0
NEPH Nephros 0
ICFN Icagen 0
ALES 2019-03-31
Part 1 - Financial Information
Item 1. Interim Consolidated Financial Statements
Note 1. Organization and Operations
Note 2. Summary of Significant Accounting Policies
Note 3. Long-Term Debt
Note 4. Line of Credit
Note 5. Short Term Loan Payable
Note 6. Convertible Debt, Beneficial Conversion Feature, and Common Stock Warrant
Note 7. Investments
Note 8. Equity Purchase Agreement - Put Option
Note 9. Commitments and Contingencies
Note 10. Related Party Transactions
Note 11. Earnings per Share
Note 12. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31_1.htm
EX-32.1 ex32_1.htm

I-On Communications Earnings 2019-03-31

ALES 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q.htm 10-Q
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


Table of Contents

 
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

Table of Contents


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 non-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.

Restricted Cash

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

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.

Compensated Absences

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 available-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.

Value Added Tax

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)


Note 3.
Long-term Debt

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.

Note 4.
Line of Credit

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.

Note 7.
Investments

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)
   
Ending
Equity Investment
Basis
 
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
 
Percentage of
Ownership
   
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.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions.

While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. Except as required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Our unaudited interim consolidated financial statements for the three months ended March 31, 2019 and 2018 and as of March 31, 2019 and December 31, 2018 are expressed in US dollars and are prepared in accordance with generally accepted accounting principles in the United States of America. They reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for fair presentation of our interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter. Our unaudited consolidated financial statements and notes included therein have been prepared on a basis consistent with and should be read in conjunction with our audited financial statements and notes for the year ended December 31, 2018, as filed in our annual report on Form 10-K.

The following discussion should be read in conjunction with our interim financial statements and the related notes that appear elsewhere in this quarterly report.

Business Overview

Organization and Corporate History

I-ON Digital Corp. (formerly known as I-ON Communications Corp.) was incorporated under the laws of the State of Delaware on June 18, 2013 as ALPINE 3 Inc. Alpine 3 Inc. was set up to serve as a vehicle to effect an asset acquisition, merger, exchange of capital stock or other business combination with a domestic or foreign business. ALPINE 3 did not undertake any effort to cause a market to develop in its securities, either debt or equity, before it successfully concluded a business combination. On April 4, 2014, The Michael J. Rapport Trust (the “Trust”) purchased 10,000,000 shares of common stock which was all of the outstanding shares of Alpine 3, Inc., and subsequently changed the name to Evans Brewing Company Inc. (“EBC”) on May 29, 2014. On October 9, 2014 the Trust agreed to the cancellation of 9,600,000 of the shares of common stock that it had acquired and retained 400,000 shares of common stock.

On October 15, 2014, Bayhawk and EBC entered into an Asset Purchase and Share Exchange Agreement (the “Agreement”), subject to receiving approval of the independent Bayhawk shareholders who voted on the transaction. On September 17, 2015, the independent Bayhawk shareholders approved the agreement and Bayhawk sold to EBC and EBC purchased from Bayhawk assets of Bayhawk, including but not limited to the assets relating to the Bayhawk Ales label and the Evans Brands (collectively, the “Transferred Assets”). Bayhawk retained ownership of 100% of the stock in Evans Brewing Co. (CA) (“Evans Brewing California”) which has the brewers license at City Brewery in Lacrosse, WI. Based on the affirmative vote by the independent Bayhawk shareholders to approve the Asset Purchase transaction, EBC proceeded with the share exchange and tender offer to the Bayhawk shareholders, pursuant to which EBC offered to exchange shares of EBC common stock for shares of Bayhawk common stock, on a one-for-one basis (the “Exchange Offer”). At the close of the share exchange on December 2, 2015, 4,033,863 Bayhawk shares were accepted and exchanged for 4,033,863 shares of EBC common stock.

On January 25, 2018, Evans Brewing Company, Inc. consummated an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”), with I-ON Communications Co., Ltd., a company organized under the laws of the Republic of Korea (South Korea) (“I-ON”) and I-ON Acquisition Corp., a wholly-owned subsidiary of the Company (“Acquisition”). Pursuant to the terms of the Merger Agreement, Acquisition merged with and into I-ON in a statutory reverse triangular merger (the “Merger”) with I-ON surviving as a wholly-owned subsidiary of the Registrant.  As consideration for the Merger, the Registrant agreed to issue the shareholders of I-ON (the “I-ON Holders”) an aggregate of 26,000,000 shares of our Common Stock, in accordance with their pro rata ownership of I-ON capital stock.  Following the Merger, the Registrant adopted the business plan of I-ON in information technology consultancy and software development.  On December 14, 2017, in connection with the Merger, the Company’s Board of Directors approved an amendment to its Certificate of Incorporation (the “Amendment”) to change its name to I-ON Communications Corp.

At the effective time of the Merger, our board of directors and officers were reconstituted by the appointment of Jae Cheol James Oh as Chairman, Chief Executive Officer, and Chief Financial Officer, Hong Rae Kim as Executive Director and Jae Ho Cho as Director.  Michael Rapport resigned as President, Chief Executive Officer, and Chairman in connection with the Transaction and Evan Rapport resigned as Vice President and Director, Kenneth Wiedrich resigned as Chief Financial Officer and Director and Kyle Leingang resigned as Secretary. Roy Robertson, Mark Lamb, Joe Ryan, and Kevin Hammons resigned as members of the Board of Directors and their respective committees.

On March 21, 2019, the Company’s Board of Directors approved an amendment to the Company’s Certificate of Incorporation to change the name of the Company to I-ON Digital Corp.

I-ON Digital

Following the Merger, as described more fully herein, the Company adopted the business plan of I-ON. I-ON was founded by Jae Cheol James Oh, who currently serves as CEO. The Company’s roots are in IT consultancy and software development. I-ON services South Korea’s enterprise content management system’s (CMS) market and specializes in advancing market-leading internet software applications to capitalize on rapidly growing market sectors.

After being awarded its first of numerous international patents in 2003, I-ON has since evolved into an industry-leading and recognized software developer and provider of on-premise and cloud-based enterprise-class unstructured data management, digital experience and digital marketing software and solutions.  I-ON’s portfolio of software and solutions serves the digital marketing and technology needs of organizations, enabling clients to create, measure, and optimizes digital experiences for their audiences across marketing channels and devices.  We believe these solutions help clients reduce the cost of content management and delivery, while increasing the return on their investments in digital communication and marketing spend.   As of its founding, the Company has serviced and continues to service over 1,000 blue-chip and middle-market clients across virtually all verticals in both private and public sectors.  The Company has meaningfully expanded its reach over the past decade and now currently markets, licenses and sells its products and services directly to clients in South Korea and Japan, as well as in Singapore, Malaysia, Indonesia, Thailand, Vietnam, and the U.S. through value-added resellers and partnerships.

I-ON currently holds 6 international and over 20 domestic patents for both products and methodologies built into the 10 product offerings the Company currently has at market.  These encompass enterprise CMS, digital experience and service delivery software, digital marketing, smart mobility and analytics tools, and, more recently, energy management solutions as well as sports software and IT convergence services.  Beginning in the fourth quarter of 2018, the Company started endorsing its 7th generation cloud based Digital Experience (DXP) platform as a service offering known as ICE, which encompasses a more feature-rich front and back end CMS.  The Company has designed and developed industry-leading technologies that are compliant with global standards including GS (Good Software) and NET (New Excellent Technology).  I-ON also holds numerous domestic and global industry awards, earning high rankings and recognition from the likes of Gartner (Magic Quadrant 2014) and Red Herring (2014 Asia Top 100 Winner), among many others.

In addition to South Korea, Japan has particularly helped fuel I-ON’s growth over the past 10 years owing to the success of an exclusive licensing deal with Ashisuto, a large Japan-based technology services firm that employs approximately 800 technical, engineering and marketing staff across 9 office locations.  Ashisuto, which has provided technology services to Japan’s enterprises and government entities since 1973, currently white labels and sells I-ON’s core CMS offering ICS6 to over 600 clients as NOREN 6.

As a result of global enterprise digital marketing trends and I-ON’s nearly 20 -year track record in South Korea, Japan and now, Southeast Asia, the Company’s objective is to continue to gain market share in these markets. I-ON will continue to closely engage and consult with existing and prospective clients as their subject matter expert and digital strategist of choice across multiple touchpoints in the digital marketing and technology ecosystem, helping Chief Marketing Officers (CMO) and Chief Information Officers (CIO) drive critical change and growth for their organizations.

I-ON has invested and continues to spend substantial revenue on research and development.  The Company has over 100 employees as of December 31, 2018, approximately 90% of whom are considered full-time.  Research and development typically comprises of approximately 80 junior, mid to senior level engineers and developers, most of whom are based at the Company’ headquarters located at 15 Teheran-ro 10-gil, Gangnam-gu, Seoul, South Korea, 06234.

Results of Operations

Comparison of results of operations for the three months ended March 31, 2019 as Compared to the three months ended March 31, 2018

The following table sets forth selected items from our interim unaudited condensed consolidated statements of operations by dollar and as a percentage of our net sales for the periods indicated:

 
 
Quarter-ended March 31,
             
 
 
2019
   
2018
   
Changes
 
 
 
Amount
   
% of
Net sales
   
Amount
   
% of
Net sales
   
Amount
   
%
 
 
                                   
Net sales
 
$
1,639,619
     
100.0
%
 
$
1,297,742
     
100.0
%
 
$
341,877
     
26.3
%
Cost of sales
   
1,815,355
     
110.7
%
   
1,889,719
     
145.6
%
   
(74,364
)
   
-3.9
%
Gross profit (loss)
   
(175,736
)
   
-10.7
%
   
(591,977
)
   
-45.6
%
   
416,241
     
-70.3
%
 
                                               
Operating expense:
                                               
Research and development
   
218,507
     
13.3
%
   
308,672
     
23.8
%
   
(90,165
)
   
-29.2
%
General and administrative
   
484,062
     
29.5
%
   
500,751
     
38.6
%
   
(16,689
)
   
-3.3
%
Total operating expense
   
702,569
     
42.8
%
   
809,423
     
62.4
%
   
(106,854
)
   
-13.2
%
 
                                               
Loss from operations
   
(878,305
)
   
-53.6
%
   
(1,401,400
)
   
-108.0
%
   
523,095
     
-37.3
%
 
                                               
Other income (expense):
                                               
Loss on extinguishment of debt
   
(160,419
)
   
-9.8
%
   
-
     
0.0
%
   
(160,419
)
 
N/A
 
Miscellaneous income, net
   
14,083
     
0.9
%
   
167,000
     
12.9
%
   
(152,917
)
   
-91.6
%
Interest expense
   
(45,147
)
   
-2.8
%
   
-
     
0.0
%
   
(45,147
)
 
N/A
 
Total other income (expense), net
   
(191,483
)
   
-11.7
%
   
167,000
     
12.9
%
   
(358,483
)
   
-214.7
%
 
                                               

                                               
Loss before provision for income taxes, loss on equity investments in affiliates, and on-controlling interest
   
(1,069,788
)
   
-65.2
%
   
(1,234,400
)
   
-95.1
%
   
164,612
     
-13.3
%
 
                                               
Provision for income tax
   
24,543
     
1.5
%
   
44,958
     
3.5
%
   
(20,415
)
   
-45.4
%
 
                                               
Net loss before income or loss on equity investments in affiliates and non-controlling interest
   
(1,094,331
)
   
-66.7
%
   
(1,279,358
)
   
-98.6
%
   
185,027
     
-14.5
%
 
                                               
Loss on equity investments in affiliates
   
(3,556
)
   
-0.2
%
   
(8,152
)
   
-0.6
%
   
4,596
     
-56.4
%
 
                                               
Net loss before non-controlling interest
   
(1,097,887
)
   
-67.0
%
   
(1,287,510
)
   
-99.2
%
   
189,623
     
-14.7
%
 
                                               
Non-controlling interest income (loss)
   
190
     
0.0
%
   
(279
)
   
0.0
%
   
469
     
-168.1
%
 
                                               
Net loss
 
$
(1,097,697
)
   
-66.9
%
 
$
(1,287,789
)
   
-99.2
%
 
$
190,092
     
-14.8
%
 
                                               
Comprehensive income statement:
                                               
Net loss
 
$
(1,097,697
)
   
-66.9
%
 
$
(1,287,789
)
   
-99.2
%
 
$
190,092
     
-14.8
%
Foreign currency translation
   
(95,839
)
   
-5.8
%
   
136,150
     
10.5
%
   
(231,989
)
   
-170.4
%
Total Comprehensive loss
 
$
(1,193,536
)
   
-72.8
%
 
$
(1,151,639
)
   
-88.7
%
 
$
(41,897
)
   
3.6
%

Net Sales

Net sales increased by $341,877, or 26.3%, to $1,639,619 for the three months ended March 31, 2019 from $1,297,742 for the three months ended March 31, 2018. The change in net sales reflected the following:

- License customization revenue increased by approximatley $871,000 from approximatley $136,000 for the three months ended March 31, 2018 to $1,007,000 for the three months ended March 31, 2019 due to the Company focusing in sales effort in this area and signing up approximatley 21 new projects with various customers since March 31, 2018 to March 31, 2019.

- Development revenue decreased by approximately $645,000 from approximatly $750,000 for the three months ended March 31, 2018 to $105,000 for the three months ended March 31, 2019 due to the Company not focusing in this revenue area as the profit margin is not favorable compared to other revenue projects.  The Company plans to exit this project going forward.

Cost of Sales

Cost of sales decreased by $74,364 or 3.9%, to $1,815,355 for the three months ended March 31, 2019 from 1,889,719 for the three months ended March 31, 2018.  The decrease was primarily due to foreign exchange currency translation when converting from Korean Won to US dollar.

Gross Profit (Loss)

Gross loss decreased by $416,241, or 70.3%, to gross loss of 175,736, or 13.7% of net sales, for the three months ended March 31, 2019, from gross loss of $591,977, or 46.0% of net sales, for the three months ended March 31, 2018.

The decrease was due to higher profit margin on license customization revenue increase and decrease in less profitable margin revneue of customization.

Research and Development

Research and development expenses decreased by $90,165 or 29.2%, to $218,507 for the three months ended March 31, 2019 from $308,672 for the three months ended March 31, 2018.  The decrease was due to decrease in head count.

General and Administrative

General and administrative expenses decreased by $16,689 or 3.3%, to $484,062 for the three months ended March 31, 2019 from $500,751 for the three months ended March 31, 2018.  The change was consistent with previous period.

Other Income (Expense)

Other income (expense) change was primarily due to loss on extinguishment of debt in the amount of $160,419 due to pay-off of convertible debt.

Provision for Income Tax

Change in tax provision was not material.

Comprehensive income - Foreign currency translation

Foreign currency translation loss was $95,839 for the three months ended March 31, 2019 compared to income of $136,150.  The change of $231,989 or 170.4% was due to devaluation of Korean Won compared to US dollar in three months ended March 31, 2019 compared to March 31, 2018.  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.


Liquidity and Capital Resources

At March 31, 2019, the Company had cash and cash equivalents of $170,293. We estimate that we will require up to $3,000,000 of capital for the next twelve months of operations. We estimate that our expenses will be comprised primarily of general expenses including particularly marketing, research and development costs, overhead, legal and accounting fees.

 
 
Three Months Ended March 31,
   
Changes
 
 
 
2019
   
2018
   
Amount
   
%
 
Net cash used in operating activities
   
(896,933
)
   
(742,495
)
   
(154,438
)
   
20.8
%
Net cash used in investing activities
   
(112,626
)
   
(54,376
)
   
(58,250
)
   
107.1
%
Net cash used in financing activities
   
(355,642
)
   
-
     
(355,642
)
 
N/A
 
Effect of foreign currency translation on cash and cash equivalents
   
(18,024
)
   
(13,384
)
   
(4,640
)
   
34.7
%
Net decrease in cash and cash equivalents
   
(1,383,225
)
   
(810,255
)
   
(572,970
)
   
70.7
%

Operating Activities

Cash used in operating activities for the three months ended March 31, 2019 was $896,933, compared to $742,495 for the three months ended March 31, 2018, an increase of $154,438, or approximately 20.8%.  The increase in cash used in operating activities was due to primarily decrease in accrued expenses of $229,955 for the three months ended March 31, 2019 compared to decrease in accrued expenses of $634,088 for the three months ended March 31, 2018.

Investing Activities

Cash used in investing activities for the three months ended March 31, 2019 was $112,626, compared to $54,376 for the three months ended March 31, 2018, an increase of $58,250, or approximately 107.1%.  The increase in cash used in investing activities was due to increase in purchases of property and equipment of $69,109 for the three months ended March 31, 2019 compared to $5,008 for the three months ended March 31, 2019.

Financing Activities

Cash used in financing activities for the three months ended March 31, 2019 was $355,642, compared to none for the three months ended March 31, 2018, an increase of $335,643.  The increase was due to payment of short-term borrowings, redemption of convertible debt, and repayments of loan payable for the three months ended March 31, 2019 and none in the previous same quarter of prior year.

Critical Accounting Policies

Our unaudited condensed consolidated interim financial statements are affected by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 2 of the notes to our unaudited interim condensed consolidated financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by our management.  Management has carefully considered the recently issued accounting pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.

Item 3.
Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.

Item 4.
Controls and Procedures

Disclosure Controls

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) designed to provide reasonable assurance the information required to be reported in our Exchange Act filings is recorded, processed, summarized and reported within the time periods specified and pursuant to Securities and Exchange Commission (“SEC”) rules and forms, including controls and procedures designed to ensure that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, our management, with the participation of our Chief Executive and Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures. Based upon this evaluation, our Chief Executive and Financial Officer concluded that our disclosure controls and procedures were not effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting. Under the supervision of our Chief Executive and Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2018 using the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of September 30, 2018, we determined that our disclosure controls and procedures are not effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time provided in the SEC rules and forms.

Management is currently evaluating remediation plans for the above control deficiencies.

Changes in Internal Control

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the nine months ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, as a result of the Company’s recent change of control, we have added several additional employees in accounting which we hope will improve the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION

Item 1.
Legal Proceedings

The Company is pending litigation against Financial News Corporation (the “Defendant”), a Korea-based financial newspaper company. The Company and the defendant originally agreed upon an arrangement on February 2014 for the Company to provide services and receive payments upon completion of each stage of the contract. Per management, the defendant arbitrarily requested changes in terms of the agreement and delayed payments. The Company, as a plaintiff, is claiming damages. The management does not believe the case will have material adverse effect on the consolidated financial statements as of September 30, 2018.

None of our directors, officers, affiliates, any owner of record or beneficially of more than 5% of our voting securities, or any associate of any such director, officer, affiliate or security holder are (i) a party adverse to us in any legal proceedings, or (ii) have a material interest adverse to us in any legal proceedings. We are not aware of any other legal proceedings that have been threatened against us.

Item 2.
Unregistered Sales of Equity Securities

None.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Mine Safety Disclosures

Not applicable.

Item 5.
Other Information

None

Item 6.
Exhibits

Exhibit
Number
 
Exhibit
Description
     
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
     
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **

* Filed herewith.

** Furnished herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 Date: May 14, 2019
I-ON COMMUNICATIONS CORP.
     
 
By:
/s/ Jae Cheol James Oh
   
Jae Cheol James Oh
   
Chief Executive Officer, Treasurer, Director (Principal Executive and Financial Officer)


32