I-ON DIGITAL CORP.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2022
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______________________ to ______________________
Commission file number: 333-206745
(Exact name of registrant as specified in its charter)
(formerly known as I-ON Communications Corp.)
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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(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 $0.0001
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.
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Large accelerated filer ☐
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Accelerated filer ☐
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Smaller reporting company
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Emerging growth company
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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:
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Title of each class
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Trading
Symbol(s)
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Name of each exchange on which
registered
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The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class
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Outstanding as of May 13, 2022
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Common Stock, $0.0001 par value per share
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PART I – FINANCIAL INFORMATION
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Item 1.
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2
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Item 2.
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20 | |
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Item 3.
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25 | |
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Item 4.
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25 | |
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PART II – OTHER INFORMATION
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Item 1.
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26 | |
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Item 2.
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26 | |
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Item 3.
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26 | |
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Item 4.
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26 | |
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Item 5.
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26 | |
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Item 6.
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26 | |
| 27 |
PART 1 – FINANCIAL INFORMATION
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
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Consolidated Financial Statements (UNAUDITED)
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4
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5
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6
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7
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8
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I-ON Digital Corp. and Subsidiary
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March 31,
2022
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December 31,
2021
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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$
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Restricted cash
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Short-term financial instruments
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Short-term loan receivable
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Accounts receivables, net of allowance for doubtful accounts $
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Deferred tax assets - current
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Prepaid expenses and other current assets
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Total current assets
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Non-current assets:
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Investments
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Property and equipment, net
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Intangible assets, net
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Deposits
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Deferred tax assets - non current
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Total non-current assets
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Total Assets
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$
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$
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Liabilities and Stockholders’ Equity
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Current liabilities:
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||||||||
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Accounts payable
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$
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$
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Accrued expenses and other
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Value added tax payable
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Income tax payable
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Short-term loan payable
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| Government grants outstanding for usage of future projects |
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Total current liabilities
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Total liabilities
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Commitments and contingencies
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Stockholders’ Equity
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Common stock - $
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Treasury stock
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(
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)
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(
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)
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Additional paid-in-capital
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| Accumulated other comprehensive loss |
(
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)
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(
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)
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Accumulated retained earnings
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Total company stockholders’ equity
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Preferred stock (I-ON Korea and eformworks) - $
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Non-controlling interests
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(
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)
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(
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)
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Total stockholders’ equity
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Total Liabilities and Stockholders’ Equity
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$
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$
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||||
See accompanying notes to unaudited condensed consolidated financial statements.
I-ON Digital Corp. and Subsidiary
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Three months ended March 31,
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2022
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2021
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Net sales
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$
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$
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Cost of goods sold
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Gross profit
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Operating expense:
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Research and development
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General and administrative
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Total operating expense
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| Income (loss) from operations |
(
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)
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(
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)
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Other income (expense):
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Interest income
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Foreign currency transaction gain (loss)
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(
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| Miscellaneous income, net |
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Interest expense
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(
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)
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(
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Total other income (expense), net
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| Income (loss) before provision for income taxes, and non-controlling interest |
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(
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)
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Provision for (benefit from) income tax
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| Net income (loss) before non-controlling interest |
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(
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)
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Non-controlling interest loss
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(
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)
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(
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)
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Net income (loss)
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$
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$
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(
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)
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Comprehensive income statement:
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Net income (loss)
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$
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$
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(
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)
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| Foreign currency translation loss |
(
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(
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)
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| Total comprehensive income (loss) |
$
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$
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(
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)
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Earnings per share - Basic
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Net loss before non-controlling interest
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$
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$
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(
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)
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Non-controlling interest
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$
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(
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) |
$
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(
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) |
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Earnings per share to stockholders
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$
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$
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(
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)
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Earnings per share - Diluted
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||||||||
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Net loss before non-controlling interest
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$
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$
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(
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)
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Non-controlling interest
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$
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(
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) |
$
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(
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) |
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Earnings per share to stockholders
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$
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$
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(
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)
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Weighted average number of common shares outstanding:
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Basic
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Diluted
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See accompanying notes to unaudited condensed consolidated financial statements.
I-ON Digital Corp. and Subsidiary
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Common Stock
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Shares
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Amount
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Additional
Paid-In Capital
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Retained
Earnings
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Treasury
Stock
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Accumulated
Other
Comprehensive
Income (Loss)
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Total
Company
Stockholders’
Equity
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Non-
Controlling
Interst
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Preferred
Stock
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Total
Stockholders’
Equity
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Balance at December 31, 2020
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$
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$
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$
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$
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(
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)
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$
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$
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$
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$
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$
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Foreign currency translation loss
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-
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(
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(
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(
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Net income (loss)
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- |
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(
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)
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(
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)
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(
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(
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Balance at March 31, 2021
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$
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$
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$
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$
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(
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)
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$
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(
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$
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$
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$
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$
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Common Stock
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Shares
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Amount
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Additional
Paid-in
Capital
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Retained
Earnings
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Treasury
Stock
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Accumulated
Other
Comprehensive
Loss
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Total
Company
Stockholders’
Equity
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Non-
Controlling
Interest
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Preferred
Stock
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Total
Stockholders’
Equity
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Balance at December 31, 2021
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(
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)
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(
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)
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(
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Foreign currency translation loss
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(
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)
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(
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(
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Net income (loss)
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-
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Balance at March 31, 2022
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$
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$
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$
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$
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(
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)
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$
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(
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)
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$
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$
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(
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)
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$
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$
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See accompanying notes to unaudited condensed consolidated financial statements.
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Three Months
ended March 31,
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2022
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2021
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Cash flows from operating activities:
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| Net income (loss) |
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(
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)
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Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
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Non-controlling interest
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(
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)
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(
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Depreciation - fixed assets
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Amortization of intangible assets
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| Foreign currency transaction gain (loss) | ( |
) | ||||||
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Changes in operating assets and liabilities:
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Account receivable, net
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Prepaid expenses and other current assets
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(
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(
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Deposit
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(
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(
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Deferred taxes
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Account payable
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Accrued expenses and other
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(
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)
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(
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)
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Value added tax payable
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(
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)
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(
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)
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Income tax payable
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(
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)
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| Net cash provided by (used in) operating activities |
(
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)
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Cash flows from investing activities:
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| Purchases of investments |
( |
) | ( |
) | ||||
| Proceeds from investments | ||||||||
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Purchases of property and equipment
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(
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)
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(
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)
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Purchases of intangible assets
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(
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)
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| Net cash provided by (used in) investing activities |
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(
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Cash flows from financing activities:
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Principal payments on long-term debt
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(
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)
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| Usage of government grants |
(
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)
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(
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)
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| Net cash used in financing activities |
(
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)
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(
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)
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Effect of foreign currency translation on cash and cash equivalents
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(
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)
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(
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)
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| Net decrease in cash and cash equivalents |
(
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)
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(
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)
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Cash and cash equivalents including restricted cash, beginning of period
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Cash and cash equivalents including restricted cash, end of period
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$
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$
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Supplemental disclosure of cash flow information:
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Interest paid
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$
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$
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Taxes paid
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$
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$
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||||
See accompanying notes to unaudited condensed consolidated financial statements.
| NOTE 1: |
Organization and Operations
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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.
On or
about August 1, 2021, the Company’s wholly-owned subsidiary I-ON Communications, Ltd. (“Communications”) formed a new subsidiary named eformworks Co., Ltd. (“e.Form”) into which Communications moved its electronic signature
operations. Communications contributed approximately $253,000 on August 1, 2021 to e.Form to subscribe for its founders
shares and owns 57.5 % of the outstanding capital stock of e.Form.
On March 1, 2022, the Company’s wholly-owned
subsidiary I-ON Communications, Ltd. (“Communications”) formed a new subsidiary named Metaflyer Co. Ltd.(“Metaflyer”), which performs e-Commerce services. Communications contributed approximately $165,000 on March 1, 2022 to Metaflyer to subscribe for its founders shares and owns 66.66 % of the outstanding capital stock of Metaflyer.
| 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 unaudited condensed consolidated financial statements.
Principles of Consolidation and Basis of Presentation
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 accompanying consolidated financial
statements and the notes hereto are reported in US Dollars.
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.
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, 2021 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. 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 to be expected for any other interim period or the full year.
Use of Estimates in the Preparation of Financial Statements
The
preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting
periods. As a result, actual results could materially differ from these estimates.
8
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
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.
| ● |
I-ON, Ltd (Japanese subsidiary)
– 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, 2022, and December 31, 2021, the exchange rate was JPY
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| ● |
Consolidation – 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. As of March 31, 2022, and December 31, 2021, the exchange rate was KRW
|
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.
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:
|
March 31,
2022
|
December 31,
2021
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Korea
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Current assets
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$
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$
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||||
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Non-current assets
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Current liabilities
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Non-current liabilities
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Japan
|
||||||||
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Current assets
|
$
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$
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|
||||
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Non-current assets
|
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|
||||||
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Current liabilities
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||||||
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Non-current liabilities
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||||||
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Three-months
Period
Ended March 31,
|
||||||||
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2022
|
2021
|
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Korea
|
||||||||
|
Net Sales
|
$
|
|
$
|
|
||||
|
Japan
|
||||||||
|
Net Sales
|
$
|
|
$
|
|
||||
9
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
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 a company in Japan for providing rights to sell the Company’s products in Japanese market.
Revenue is recognized over the contract and service period.
|
| ● |
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 service for the contract is completed.
|
| • |
Maintenance – the Company recognizes revenue over the contract term based on percentage-of-completion method.
|
Cash, Cash Equivalents
The Company
considers all money market funds and highly liquid financial investments with maturities of three months or less when acquired to be cash equivalents.
Restricted Cash
Restricted cash represents cash deposits which are restricted by the financial institutions for the loans the financial institutions have
with the Company’s chief executive officer. The loans with the financial institutions are amounted to approximately $1,569,210 and
$1,602,699 at March 31, 2022 and December 31, 2021, respectively, and expires on various days during 2022, 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, 2022 and December 31, 2021. The amount of restricted cash as of March 31, 2022 and December 31, 2021 was $1,569,210
and $1,602,699 , respectively.
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 Financial Instruments
Short-term financial instruments represent interest-bearing certificates of deposits with original maturities between three months to year.
Accounts Receivable
Accounts receivables are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivables are included in
net cash provided by operating activities in the consolidated cash flow statements. The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the trade accounts receivable. Management primarily
determines the allowance based on the aging of accounts receivable balances, historical write-off experience, customer concentrations, customer credit worthiness and current industry and economic trends. The Company’s provision for
uncollectible receivables is included in selling, marketing, general and administrative expense in the consolidated statements of income and comprehensive income. At March 31, 2022 and December 31, 2021, allowance for doubtful accounts was
approximately $832,000 and $645,000 ,
respectively. The Company does not have any off-balance sheet exposure related to its customers.
10
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Property and Equipment
Property and equipment are recorded at cost. Depreciation of property and equipment is computed using the double declining balance method,
based on the estimated useful lives as follows:
|
Facility equipment
|
|
|
Automobile
|
|
|
Office equipment
|
|
Repairs and maintenance are expensed as incurred. Expenditures that increase the value or productive capacity of assets are capitalized.
When property and equipment are retired, sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts, and any gain or loss is included in operations.
The Company is working on a government research project and many other technical innovation projects. The Company receives government grants
that it uses to offset the amount of assets acquired or expenses incurred.
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, 2022 and 2021 was $200,308
and $262,625 , respectively.
Intangible Assets
When the Company acquires an intangible asset, it is recorded at acquisition cost (the purchase price of the intangible asset and the costs
directly related to the preparation of the asset for its intended purpose). The cost of an intangible asset acquired in a business combination is measured at the fair value at the acquisition date according to the accounting standards for
business combinations. Intangible assets with a finite life are amortized using the straight-line method over their estimated useful lives.
The estimated useful lives of the respective asset categories are as follows:
|
Development costs
|
|
|
Intangible assets excluding development costs
|
|
|
Other Intangible assets
|
|
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 result
of the operations of the Company. 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 were $87,505 and $118,297 for the three
months ended March 31, 2022 and 2021, 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, 2022 and December 31, 2021, the amounts were deemed to be immaterial.
11
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 undiscounted 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.
Government Grants
Government grants are not recognized unless there is reasonable assurance that the Company will comply with the grants’ conditions and that
the grants will be received. Government borrowings, which are lower than the market interest rate, are regarded as government grants. The grant is measured from the difference between the fair values of the government borrowings computed
using the market interest rate and the acquisition cost of the grant. Government grants whose primary condition is that the Company purchase, construct or otherwise acquire long-term assets are deducted in calculating the carrying amount of
the asset. The grant is recognized in profit or loss over the life of a depreciable asset as a reduced depreciation expense.
Government grants which are intended to compensate the Company for expenses incurred are recognized as other income in profit or loss over
the periods in which the Company recognizes the related costs as expenses. There are government grants outstanding of $22,388 and $89,741 as of March 31, 2022 and 2021, respectively.
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.
12
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
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.
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 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.
|
The following table summarize the Company’s fair value measurements by level at March 31, 2022 for the assets measured at fair value on a
recurring basis:
|
Level 1
|
Level 2
|
Level 3
|
||||||||||
|
Available-for-sale securities
|
$
|
|
$
|
|
$
|
|
||||||
|
Common stock purchase warrant
|
|
|
|
|||||||||
|
Equity purchase put option
|
|
|
|
|||||||||
|
Fair value, at March 31,
2022
|
$
|
|
$
|
|
$
|
|
||||||
The following table summarize the Company’s fair value measurements by level at December 31, 2021 for the assets measured at fair value on a
recurring basis:
|
Level 1
|
Level 2
|
Level 3
|
||||||||||
|
Available-for-sale securities
|
$
|
|
$
|
|
$
|
|
||||||
|
Common stock purchase warrant
|
|
|
|
|||||||||
|
Equity purchase put option
|
|
|
|
|||||||||
|
Fair value, at December 31, 2021
|
$
|
|
$
|
|
$
|
|
||||||
13
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consists of
taxes currently due and deferred taxes. Deferred taxes are recognized for the differences between the basis of assets and liabilities for financial statement and income tax purposes.
The Company follows FASB ASC 740, Income
Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates,
applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
FASB ASC 740-10-25 provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax
position. The Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The Company did not
recognize additional liabilities for uncertain tax positions pursuant to FASB ASC 740-10-25 for the years ended December 31, 2021 and 2020.
Contingencies
Accounting guidance requires that the Company record an estimated loss from a loss contingency when information
available prior to issuance of the consolidated financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the consolidated financial statements and the amount of the
loss can be reasonably estimated. Accounting for contingencies such as legal matters requires significant judgment. Many of these legal matters can take years to resolve. Generally, as the time period increases over which the uncertainties
are resolved, the likelihood of changes to the estimate of the ultimate outcome increases.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are cash and trade
receivable arising from its normal business activities. The Company deposits its cash in high credit quality institutions. The Company performs ongoing credit evaluations to its customers and establishes allowances when appropriate.
Cash and cash equivalents are maintained at various financial institutions located in Korea and Japan. The Company
has never experienced any losses related to these balances.
Advertising
Costs associated with advertising and promotions are expensed as incurred. Advertising expense amounted to $4,790 and $34,694 for the three
months ended March 31, 2022 and 2021, 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 and is adjusted at each reporting date for the net income (loss) attributable to that non-controlling interest during that
period.
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 were $73,572 and $224,105 for the three months ended March 31,
2022 and 2021, respectively.
14
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Recently Issued Accounting Pronouncements
| ● |
Reference Rate Reform
|
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of
Reference Rate Reform on Financial Reporting. This standard provides optional guidance for a limited time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The
amendments in this standard apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do
not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in this standard are elective and are effective upon issuance for all entities. The Company is evaluating the
expedients and exceptions provided by the amendments in this standard to determine their impact.
Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial
Statements.
| ● |
Fair Value Measurements
|
In August 2018, the FASB amended “Fair Value Measurements” to modify the disclosure requirements related to fair
value. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation
processes used in level 3 measurements. It clarifies that, for investments measured at net asset value, disclosure of liquidation timing is only required if the investee has communicated the timing either to us or publicly. It also
clarifies that the narrative disclosure of the effect of changes in level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of
significant unobservable inputs used in level 3 measurements. The guidance is effective for the Company with the Company’s quarterly filing for the period ended March 31, 2021 and the Company made the required disclosure changes in that
filing and going forward. Adoption did not have an impact on the Company’s consolidated results of operations, consolidated financial position, and cash flows.
| ● |
Leases (ASU 2019-01)
|
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 update was 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.
15
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
| NOTE 3: |
Investments
|
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.
The following table summarize the Company’s investment securities:
|
Available-for-sale securities
|
Percentage of
Ownership
|
March 31,
2022
|
December 31, 2021
|
|||||||||
|
4Grit
|
|
%
|
$
|
|
$
|
|
||||||
|
E-channel
|
|
%
|
$
|
|
$
|
|
||||||
|
KSFC
|
|
%
|
$
|
|
$
|
|
||||||
|
Total investment securities
|
$
|
|
$
|
|
||||||||
| Note 4: |
Property and Equipment
|
Property and equipment consist of the following:
|
March 31,
2022
|
December 31, 2021
|
|||||||
|
Facilities
|
$
|
|
$
|
|
||||
|
Vehicles
|
|
|
||||||
|
Equipment
|
|
|
||||||
|
Government grants
|
(
|
)
|
(
|
)
|
||||
|
Total property and equipment
|
|
|
||||||
|
Less: accumulated depreciation
|
(
|
)
|
(
|
)
|
||||
|
Property and equipment, net
|
$
|
|
$
|
|
||||
Depreciation expense
for three months ended March 31, 2022 and 2021 were $8,846 and $17,617 respectively.
As noted in Note 2, the
government grants received is against the values of assets acquired or the expenses incurred.
| Note 5: |
Intangible Assets
|
Intangible assets
consist of the following:
|
March 31,
2022
|
December 31,
2021
|
|||||||
|
Patents
|
$
|
|
$
|
|
||||
|
Trademark
|
|
|
||||||
|
Start-Up Cost
|
|
|
||||||
|
Software
|
|
|
||||||
|
Government grants
|
|
(
|
)
|
|||||
|
Total intangible assets
|
|
|
||||||
|
Less: Accumulated amortization
|
$
|
(
|
)
|
(
|
)
|
|||
|
Intangible assets, net
|
$
|
|
$
|
|
||||
Amortization expense
for three months ended March 31, 2022 and 2021 were $18,807 and $7,935 , respectively.
Future amortization
expense of the Company’s intangible assets at March 31, 2022 is expected to be as follows:
|
Years ending December 31,
|
||||
|
2022 (remaining nine months)
|
$
|
|
||
|
2023
|
|
|||
|
2024
|
|
|||
|
2025
|
|
|||
|
2026
|
|
|||
|
Thereafter
|
|
|||
|
Total
|
$
|
|
||
As noted in Note 2, the
government grants received is against the values of assets acquired or the expenses incurred.
16
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
| NOTE 6: |
Short Term Loan Payable
|
The Company has a short-term loan with a financial institution bearing interest rate of 2.58 % expiring July 17, 2022 . All amounts outstanding
are due on July 17, 2022 , however, the Company may make earlier payments without any penalty. The total amount outstanding was
approximately $330,000 and $337,000
at March 31, 2022 and December 31, 2021, respectively. The short-term loan is guaranteed by the officer of the Company.
17
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
| NOTE 7: |
Miscellaneous Income
|
There is the Collaborative R&D Program (“CRP") in Korea that big firms support for small businesses’ research & development projects.
One of the big firms in Korea, SK E&S Co., Ltd. decided to support for ION through CRP. ION received approximately $941,118 of fund
from SK E&S on February 9, 2022.
| NOTE 8: |
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 2022. The lease is automatically
extended upon agreement of both parties. Rent expense for all operating leases for the three-months ended March 31, 2022 and 2021 was $34,856
and $37,700 , respectively.
| NOTE 9: |
Related Party Transactions
|
The Company receives loan guarantees from the chief executive officer with regards to its long-term borrowing, and the Company’s
restricted cash is provided as collateral to the Company’s chief executive officer’s loans.
18
I-ON Digital Corp. and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
| NOTE 10: |
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).
The following table
sets forth the computation of basic and diluted net income per common share:
|
Three-months Period
Ended March 31,
|
||||||||
|
Periods Ended
|
2022
|
2021
|
||||||
|
Net income (loss) before non-controlling interest
|
$
|
|
$
|
(
|
)
|
|||
|
Non-controlling interest loss
|
(
|
)
|
(
|
)
|
||||
|
Net income (loss)
|
|
(
|
)
|
|||||
|
Weighted-average shares of common stock outstanding:
|
||||||||
|
Basic
|
|
|
||||||
|
Dilutive effect of common stock equivalents arising from share option, excluding antidilutive effect from loss
|
|
|
||||||
|
Dilutive shares
|
|
|
||||||
|
Earnings per share - Basic
|
||||||||
|
Net income (loss) before non-controlling interest
|
$
|
|
$
|
(
|
)
|
|||
|
Non-controlling interest
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Earnings per share to stockholders
|
$
|
|
$
|
(
|
)
|
|||
|
Earnings per share - Diluted
|
||||||||
|
Net income (loss) before non-controlling interest
|
$
|
|
$
|
(
|
)
|
|||
|
Non-controlling interest
|
$
|
(
|
)
|
$
|
(
|
)
|
||
|
Earnings per share to stockholders
|
$
|
|
$
|
(
|
)
|
|||
| NOTE 11: |
Non-Controlling Interest-Issuance of Preferred Stock by Subsidiary
|
On April 9,
2019, The Company’s subsidiary, I-ON Communication Korea issued 157,142 shares of redeemable convertible preferred stock at
a price of KRW 3,500 per share for proceeds of KRW 549,997,000 . The convertible preferred stock agreement contain provisions as follows:
| ● |
Voting rights – The
preferred shareholder may have same voting rights as common stock shareholder (
|
| ● |
|
| ● |
Liquidating rights
|
| ● |
Conversion rights to common
stock
|
| ● |
Call option by preferred
shareholder – Preferred stock may be converted to common stock anytime at a fixed conversion price of KRW
|
| ● |
Call option by I-ON
Communication – Should I-ON Communication exercise to redeem preferred stock, I-ON Communication is required to re-purchase for KRW
|
The
convertible preferred shares meet definition of equity instrument and contain a put option that is not outside the Company’s control and the conversion to common stock is at a fixed, determinable share conversion price of KRW 3,500 per share.
On November 22, 2021, the
Company’s subsidiary, e.form Works Co., Ltd. (Korea) issued redeemable convertible preferred stock with proceeds of KRW 733,270,800
and issued 443,600 shares of preferred stock at a price of KRW 1,653 per share. The convertible preferred stock agreement contain provisions as follows:
| ● |
Voting rights – The
preferred shareholder may have same voting rights as common stock shareholder (
|
| ● |
|
| ● |
Liquidating rights
|
| ● |
Conversion rights to
common stock
|
| ● |
Call option by
preferred shareholder – Preferred stock may be converted to common stock anytime at a fixed conversion price of KRW
|
| ● |
Call option by I-ON
Digital – Should I-ON Digital exercise to redeem preferred stock, I-ON Digital is required to repurchase for KRW
|
The
convertible preferred shares meet definition of equity instrument and contain a put option that is not outside the Company’s control and the conversion to common stock is at a fixed determinable share conversion price at KRW 1,653 per share.
The Company
accounted the issuance of preferred stock under ASC 810-10-45-23, Consolidation, and was accounted for as equity transaction as the parent’s ownership interest retains control of a subsidiary. The preferred stock issuance by a
subsidiary to noncontrolling interest holders should be reflected as a noncontrolling interest in the financial statements of the parent at the amount of the cash proceeds received.
| NOTE 12: |
Termination of Merger Agreement
|
On April 28, 2021, I-ON Digital Corp. a Delaware corporation (the “Company”), entered into an Agreement and Plan of Merger and
Reorganization (the “Agreement”) with CDI Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of the Company (“Acquisition”), Cardio Diagnostics, Inc., a Delaware corporation (“CDI”), and the shareholders of CDI (the
“CDI Shareholders”). Pursuant to the terms of the Agreement, Acquisition will merge with and into CDI (the “Merger”) with CDI becoming the surviving entity and a wholly-owned subsidiary of the Company. In consideration for the Merger, the
CDI Shareholders shall receive 25,000,000 newly issued shares of common stock of the Company, par value $0.0001 (“I-On Common Stock”) to be issued to the CDI Shareholders in accordance with their pro rata ownership of CDI prior to the Merger.
Simultaneously with the Merger, all of the equity interests in I-On Communications, Ltd., a company organized under the laws of the Republic of South Korea (“Communications”), the Company’s wholly-owned subsidiary, shall be transferred by
the Company to certain other shareholders of the Company (collectively, the “Communications Shareholders”) in exchange for the return of Twenty Million (20,000,000 ) shares of the I-On Common Stock held by the Communications Shareholders (the “Spinoff”). The Merger is contingent upon the approval by a majority of the Company’s shareholders of the Spinoff
and an amendment to the Company’s Certificate of Incorporation to change the name of the Company to “Cardio Diagnostics Holdings, Inc.” and effectuate the reverse split of the number of outstanding I-On Common Stock on the basis of one
share for a range of per every ten (10 ) to (15) shares of I-On Common Stock outstanding.
The Termination Date of the Merger Agreement was amended to September 30, 2021 on August 29, 2021 wherein CDI reimbursed the Company expenses in
the amount of $28,600 for its June 30, 2021 Form 10-Q filing and related expenses. On October 11, 2021, the Company and CDI
again agreed to extend the Termination Date to December 31, 2021 wherein CDI agreed to reimburse the Company for any and all expenses in connection with the Company’s Form 10-Q filing for the period ending September 30, 2021. On
December 28, 2021, the Company and CDI agreed to extend the Termination Date of the Agreement to February 28, 2022 wherein CDI agreed to reimburse the Company for any and all expenses in connection with the Company’s Form 10-K filing
for the year ending December 31, 2021. CDI has advised the Company that it will not grant another extension to the Agreement and considers the Agreement expired.
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, 2022 and 2021 and as of March 31, 2022 and December 31, 2021 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, 2021, 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 120 employees as of March 31, 2022, 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, 2022 as Compared to the three months ended March 31, 2021
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,
|
||||||||||||||||||||||||
|
2022
|
2021
|
Change
|
||||||||||||||||||||||
|
Amount
|
% of
Revenue
|
Amount
|
% of
Revenue
|
Amount
|
%
|
|||||||||||||||||||
|
Net sales
|
$
|
2,465,628
|
100.0
|
%
|
$
|
4,049,524
|
100.0
|
%
|
$
|
(1,583,896
|
)
|
-39.1
|
%
|
|||||||||||
|
Cost of goods sold
|
2,292,526
|
93.0
|
%
|
3,474,553
|
85.8
|
%
|
(1,182,027
|
)
|
-34.0
|
%
|
||||||||||||||
|
Gross profit
|
173,102
|
7.0
|
%
|
574,971
|
14.2
|
%
|
(401,869
|
)
|
-69.9
|
%
|
||||||||||||||
|
Operating expense:
|
||||||||||||||||||||||||
|
Research and development
|
200,308
|
8.1
|
%
|
262,625
|
6.5
|
%
|
(62,317
|
)
|
-23.7
|
%
|
||||||||||||||
|
General and administrative
|
674,986
|
27.4
|
%
|
559,457
|
13.8
|
%
|
115,529
|
20.7
|
%
|
|||||||||||||||
|
Total operating expense
|
875,294
|
35.5
|
%
|
822,082
|
20.3
|
%
|
53,212
|
6.5
|
%
|
|||||||||||||||
|
Loss from operations
|
(702,192
|
)
|
-28.5
|
%
|
(247,111
|
)
|
-6.1
|
%
|
(455,081
|
)
|
184.2
|
%
|
||||||||||||
|
Other income (expense):
|
||||||||||||||||||||||||
|
Interest income
|
15,402
|
0.6
|
%
|
11,397
|
0.3
|
%
|
4,005
|
35.1
|
%
|
|||||||||||||||
|
Foreign currency transaction gain (loss)
|
1,595
|
0.1
|
%
|
(13,735
|
)
|
-0.3
|
%
|
15,330
|
-111.6
|
%
|
||||||||||||||
|
Miscellaneous income, net
|
959,316
|
38.9
|
%
|
19,740
|
0.5
|
%
|
939,576
|
4,759.8
|
%
|
|||||||||||||||
|
Interest expense
|
(2,162
|
)
|
-0.1
|
%
|
(4,415
|
)
|
-0.1
|
%
|
2,253
|
-51.0
|
%
|
|||||||||||||
|
Total other income (expense), net
|
974,151
|
39.5
|
%
|
12,987
|
0.3
|
%
|
961,164
|
7,401.0
|
%
|
|||||||||||||||
|
Income (loss) before provision for income taxes, and non-controlling interest
|
271,959
|
11.0
|
%
|
(234,124
|
)
|
-5.8
|
%
|
506,083
|
-216.2
|
%
|
||||||||||||||
|
Provision for (benefit from) income tax
|
-
|
0.0
|
%
|
40,757
|
1.0
|
%
|
(40,757
|
)
|
-100.0
|
%
|
||||||||||||||
|
Net income (loss) before non-controlling interest
|
271,959
|
11.0
|
%
|
(274,881
|
)
|
-6.8
|
%
|
546,840
|
-198.9
|
%
|
||||||||||||||
|
Non-controlling interest income (loss)
|
(140,515
|
)
|
-5.7
|
%
|
(889
|
)
|
0.0
|
%
|
(139,626
|
)
|
15,706.0
|
%
|
||||||||||||
|
Net income (loss)
|
$
|
412,474
|
16.7
|
%
|
$
|
(273,992
|
)
|
-6.8
|
%
|
$
|
686,466
|
-250.5
|
%
|
|||||||||||
| Comprehensive income statement: |
||||||||||||||||||||||||
| Net income |
271,959 |
11.0 |
% |
(274,881 |
) | -6.8 |
% | 546,840 |
-198.9 |
% | ||||||||||||||
| Foreign currency translation gain (loss) |
(227,991 |
) |
-9.2 |
% | (558,140 |
) | -13.8 |
% | 330,149 |
-59.2 |
% | |||||||||||||
| Total comprehensive income (loss) |
$ |
43,968 |
1.8 |
% | $ |
(833,021 |
) | -20.6 |
% | $ |
876,989 |
-105.3 |
% | |||||||||||
Net Sales
Net sales decreased by $1,583,896 or 39.1%, to $2,465,628 for the three months ended March 31, 2022 from $4,049,524 for the three months ended March 31, 2021. The change in net sales reflected
the following:
- Customization revenue decreased by approximately $730,000 from approximately $2,260,000 for the three months ended March 31, 2021 to $1,530,000 for the three months ended March 31, 2022 due to
decrease in new contracts.
- Installation revenue decreased by approximately $650,000 from approximately $770,000 for the three months ended March 31, 2021 to $120,000 for the three months ended March 31, 2022 due to
decrease in new contracts.
Cost of Goods Sold
Cost of goods sold decreased by $1,182,027 or 34.0%, to $2,292,526 for the three
months ended March 31, 2022 from $3,474,553 for the three months ended March 31, 2021. The decrease was primarily due to outsourced
consulting fees. The outsourced consulting fees decreased by $1,494,232 or 68.33%, to $692,582 for the three months ended March 31, 2022 from $2,186,815 for the three months ended March 31, 2021.
Gross Profit
Gross profit decreased by $401,869, to $173,102, or 7.0% of net sales, for the three months ended March 31, 2022, from $574,971 or 14.2% of net sales, for the three months ended March 31, 2021.
The decrease in gross profit was mainly due to decreased Net Sales above.
Research and Development
Research and development expenses decreased by $62,317 or 23.7%, to $200,308 for the three months ended March 31, 2022 from $262,625 for the three months ended March 31, 2021. The decrease was
due to decrease in head count computer programmers at the research and development department.
General and Administrative
General and administrative expenses increased by $115,529 or 20.7%, to $674,986 for the three months ended March 31, 2022 from $559,457 for the three months ended March 31, 2021. The expenses
have been continuously increased mainly due to an increase in salary.
Other Income (Expense)
The increase in other income was primarily due to the $941,118 received from SK E&S for small businesses research and development projects.
Provision for Income Tax
Change in tax provision was not material.
Comprehensive income - Foreign currency translation
Foreign currency translation loss was $227,991 for the three months ended March 31, 2022 compared to loss of $558,140 for the three months ended March 31, 2021. The change of $330,149 was due
to devaluation of Korean Won compared to US dollar in three months ended March 31, 2022 compared to March 31, 2021. The average exchange rate for the three months ended March 31, 2022 and 2021 was KRW 1,204.95 and KRW 1,114.05, respectively.
Liquidity and Capital Resources
At March 31, 2022, the Company had cash and cash equivalents of $3,659,258. 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
|
|||||||||||||||
|
2022
|
2021
|
Amount
|
%
|
|||||||||||||
|
Net cash provided by (used in) operating activities
|
(105,460
|
) |
122,781
|
(228,241
|
)
|
-185.9
|
%
|
|||||||||
|
Net cash provided by (used in) investing activities
|
55,477
|
(23,076
|
)
|
78,553
|
-340.4
|
%
|
||||||||||
|
Net cash used in financing activities
|
(7,444
|
)
|
(401,739
|
)
|
394,295
|
-98.1
|
%
|
|||||||||
|
Effect of foreign currency translation on cash and cash equivalents
|
(22,749
|
)
|
(422,613
|
)
|
399,864
|
-94.6
|
%
|
|||||||||
|
Net decrease in cash and cash equivalents
|
(80,176
|
)
|
(724,647
|
)
|
644,471
|
-88.9
|
%
|
|||||||||
Operating Activities
Cash used in operating activities for the three months ended March 31, 2022 was $105,460, compared to cash provided by in operating activities $122,781
for the three months ended March 31, 2021, a decrease of $228,241, or approximately -185.9%. The increase in cash used in operating activities was primarily due to decrease in accrued expenses.
Investing Activities
Cash provided by investing activities for the three months ended March 31, 2022 was $55,477, compared to cash used in investing activities $23,076 for the three months ended March 31, 2021, an
increase of $78,553, or approximately 340.4%. The increase in cash provided by investing activities was due to proceeds from investments.
Financing Activities
Cash used in financing activities for the three months ended March 31, 2022 was $7,444, compared to $401,739 for the three months ended March 31, 2021, a decrease of $394,295. The decrease was
primarily due to decrease in usage of government grants.
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.
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.
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 March 31, 2022 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 March 31, 2022, 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 Three months ended March 31, 2022 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
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.
None.
None.
Not applicable.
None
|
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.
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 23, 2022
|
I-ON Digital Corp
|
|
|
By:
|
/s/ Jae Cheol Oh Jae Cheol Oh
|
|
|
Chief Executive Officer, Treasurer, Director (Principal Executive and Financial Officer)
|
||
27
TABLE OF CONTENTS
Part 1 Financial InformationItem 1. Interim Consolidated Financial StatementsNote 1: Organization and OperationsNote 2: Summary Of Significant Accounting PoliciesNote 3: InvestmentsNote 4: Property and EquipmentNote 5: Intangible AssetsNote 6: Short Term Loan PayableNote 7: Miscellaneous IncomeNote 8: Commitments and ContingenciesNote 9: Related Party TransactionsNote 10: Earnings Per ShareNote 11: Non-controlling Interest-issuance Of Preferred Stock By SubsidiaryNote 12: Termination Of Merger AgreementItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 2. Unregistered Sales Of Equity SecuritiesItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits