The unaudited interim consolidated financial statements of I-ON Communications Corp. (“we”, “our”, “us”, the “Company”) follow. All currency references in this report are to US dollars unless otherwise noted.
Notes to Consolidated Financial Statements
Note 1 – Organization and Operations
I-ON Communications Co., Ltd (“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 $424,115. The Company has 99.5% ownership of I-ON, Ltd. PT ION-soft is the Indonesian affiliate of the Company incorporated in October 2011. The Company has 20% of ownership of PT I-ON-soft, which is accounted for under the equity method.
Note 2 – Summary of Significant Accounting Policies
The summary of significant accounting policies of the Company is presented to assist in understanding the Company’s consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s
management, who is responsible for integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements. The accompanying consolidated financial statements and the notes hereto are reported in US Dollars.
Principles of Consolidation and 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 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 Company is also required to consolidate any variable interest entities (VIEs), of which it is the primary beneficiary, as defined. Based on the Company’s analysis pursuant to ASC 810-10-25,
Consolidations
, the Company does not have any VIEs that need to be consolidated at this time. When the Company does not have a controlling interest in an entity, but exerts a significant influence over the entity, the Company would apply the equity method of accounting.
Foreign Currency Transaction and Translation
The Company’s principal country of operations is Korea. The financial position and results of operations of the Company are determined using the local currency, Korean Won (“KRW”), as the functional currency.
The financial position and results of operations of I-ON, Ltd, the Japanese subsidiary of the Company, are initially recorded using its local currency, Japanese Yen (“JPY”). Assets and liabilities denominated in foreign currency are translated to the functional currency at the functional currency rate of exchange at the balance sheet date. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period. All differences are reflected in profit or loss. As of June 30, 2018 and December 31, 2017, the exchange rate was JPY 10.15 and JPY 9.49 per KRW, respectively. The average exchange rate for the periods ended June 30, 2018 and 2017 was JPY 9.89 and JPY 10.16 per KRW, respectively.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies (continued)
Foreign Currency Transaction and Translation (continued)
Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at the balance sheet date. The results of operations are translated from KWR to US Dollar at the weighted average rate of exchange during the reporting period. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency, US Dollar, are dealt with as a component of accumulated other comprehensive income. Translation adjustments net of tax were a net loss of $179,300 and net gain of $8,355 for the six-months ended June 30, 2018 and 2017, respectively. Translation adjustments net of tax were a net gain of $15,451 and net loss of $1,608 for the three-months ended June 30, 2018 and 2017, respectively. As of June 30, 2018 and December 31, 2017, the exchange rate was KRW 1,121.70 and KRW 1,071.40 per US Dollar, respectively. The average exchange rate for the six months ended June 30, 2018 and 2017 was KRW 1,075.40 and KRW 1,142.06, respectively.
Segment Reporting
FASB ASC 280,
Segment Reporting
, requires public companies to report financial and descriptive information about their reportable operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available and that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company’s chief executive officer has been identified as the chief decision maker.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies (continued)
Segment Reporting (continued)
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:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Korea
|
|
|
|
|
|
|
Current assets
|
|
$
|
6,223,388
|
|
|
$
|
8,454,367
|
|
Non-current assets
|
|
|
1,383,501
|
|
|
|
1,552,148
|
|
Current liabilities
|
|
|
1,113,030
|
|
|
|
1,728,657
|
|
Non-current liabilities
|
|
|
490,327
|
|
|
|
280,007
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
423,838
|
|
|
$
|
191,594
|
|
Non-current assets
|
|
|
277
|
|
|
|
272
|
|
Current liabilities
|
|
|
318,075
|
|
|
|
172,582
|
|
Non-current liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
Six-months Period
Ended June 30,
|
|
|
Three-months Period
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Korea
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
2,353,208
|
|
|
$
|
4,414,857
|
|
|
$
|
1,198,893
|
|
|
$
|
2,210,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
248,013
|
|
|
$
|
207,642
|
|
|
$
|
104,586
|
|
|
$
|
89,672
|
|
Restricted Cash
Restricted cash represents cash deposits which is restricted by the financial institutions for the loans the financial institutions having with the Company’s chief executive officer. The loans with the financial institutions are amounted to approximately $1,551,000 and $1,624,000 at June 30, 2018 and December 31, 2017, respectively, and expires on various days during 2018 and 2019, unless extended. The loans, bearing various interest rates, are guaranteed by the Company and the restricted cash deposits of the Company are provided to the financial institutions as collateral. The Company’s chief executive officer pays interest from the loans without any default at June 30, 2018 and 2017. The amount of restricted cash as of June 30, 2018 and December 31, 2017 was $1,693,858 and $1,795,781, 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.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Short-Term Loans
The Company had short-term loan receivables form a third-party with interest bearing 9% per annum that expires in 2018, unless extended. Interest income was $10,716 and 11,079 for the three-months ended June 31, 2018 and 2017, respectively. Interest income was $23,514 and $23,141 for the six-months ended June 30, 2018 and 2017, respectively.
Research and development costs are expensed as incurred. Research and development costs include travel, payroll, and other general expenses specific to research and development activities. Research and development cost for the three months ended June 30, 2018 and 2017 were $269,784 and $283,613, respectively. Research and development cost for six months ended June 30, 2018 and 2017 were $578,456 and $592,043, respectively.
Severance and Retirement Benefits
In accordance with the Korean Labor Standard Law, employees and directors with at least one year of service are entitled to receive a lump-sum payment upon termination of their employment, based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent an amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the balance sheet date. The annual severance benefits expense charged to operations is calculated based upon the net change in the accrued severance benefits payable at the balance sheet date based on the guidance of FASB ASC 960,
Accounting – Defined Benefit Pension Plans
.
The Company’s retirement pension plan is a defined contribution plan, and the Company pays the defined contribution regardless of the results of the operation of the plan. The Company recognizes the contributions to be paid in the current accounting period as retirement benefits expense. The amounts recognized as costs related to defined contribution plans were $123,841 and $115,428 for the three-months ended June 30, 2018 and 2017, respectively, and $243,329 and $217,003 for the six-months ended June 30, 2018 and 2017, respectively.
Employees of the Company are entitled to be compensated for absences depending on job classification, length of service, and other factors. At June 30, 2018 and December 31, 2017, the amounts were deemed to be immaterial.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies (continued)
Impairment analysis for long-lived assets and intangible assets
The Company’s long-lived assets and other assets (consisting of property and equipment and purchased intangible assets) are reviewed for impairment in accordance with the guidance of the FASB ASC 360,
Property, Plant, and Equipment
and FASB ASC 205
Presentation of Financial Statements
. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. The Company had not experienced impairment losses on its long-lived assets and intangible assets during any of the periods presented.
Earnings Per Share
FASB ASC Topic 260,
Earnings Per Share
, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations. Basic earnings (loss) per share are computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
Fair Value Measurements
The Company follows FASB ASC Topic 820,
Fair Value Measurements
. ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.
ASC 820 establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available.
Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Company for financial instruments measured at fair value on a recurring basis.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies (continued)
Fair Value Measurements (continued)
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.
A
dvertising
Costs associated with advertising and promotions are expensed as incurred. Advertising expense amounted to $6,312 and insignificant for the three-months ended June 30, 2018 and 2017, respectively, and $14,129 and $20,414 for the six-months ended June 30, 2018 and 2017, respectively.
Non-controlling Interests
Non-controlling interests are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date.
National Tax Service in Korea administered Value Added Tax under the Tax Reform Act of 1976 promulgated by the National Assembly. Value added tax is imposed on goods sold in or imported into Korea and on services provided within Korea. Value added tax in Korea is charged on an aggregated basis at a rate of 10% on the full price collected for the goods sold or for the taxable services provided. Value added tax paid were $102,868 and $170,111 for the three-months ended June 30, 2018 and 2017, respectively, and $224,697 and $223,743 for the six-months ended June 30, 2018 and 2017, respectively.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncement
Pronouncements adopted in 2018
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall
(Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”). ASU 2016-01 applies to all entities that hold financial assets or owe financial liabilities and is intended to provide more useful information on the recognition, measurement, presentation and disclosure of financial instruments. Among other things, ASU 2016-01 (i) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (iii) eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (iv) eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (v) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (vi) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (vii) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. For public business entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating ASU 2016-01 to determine the potential impact to its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation
(Topic 718) (“ASU 2016-09”),
which includes multiple provisions intended to simplify various aspects of accounting for share-based payments. The new guidance will require entities to recognize all income tax effects of awards in the income statement when the awards vest or are settled. It also will allow entities to make a policy election to account for forfeitures as they occur. ASU 2016-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect this standard will have a significant impact on our consolidated financial statements and related disclosures.
In May 2016, the FASB issued ASU No. 2016-11,
Revenue Recognition
(Topic 605) and Derivatives and Hedging (Topic 815) (“ASU 2016-11”) which clarifies guidance on assessing whether an entity is a principal or an agent in a revenue transaction. This conclusion impacts whether an entity reports revenue on a gross or net basis. ASU 2016-11 is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. Adoption of this ASU is not expected to have a significant impact on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows
(Topic 230) (“ASU 2016-15”). Stakeholders indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of this ASU is not expected to have a significant impact on our consolidated statement of cash flows.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
In January 2017, the FASB issued ASU 2017-1,
Clarifying the Definition of a Business
(Topic 805)
(“ASU 2017-1”). The new guidance that changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years. Adoption of this ASU is not expected to have a significant impact on our consolidated results of operations, cash flows and financial position.
In May 2017, the FASB issued ASU 2017-09,
Scope of Modification Accounting
(Topic 718) (“ASU 2017-09”). The guidance clarifies the accounting for when the terms of a share-based award are modified. The ASU is effective for annual reporting periods beginning after December 15, 2017, and for interim periods within those years, with early adoption permitted. This new guidance would only impact our consolidated financial statements if, in the future, we modified the terms of any of our share-based awards.
Pronouncements Not Yet Effective
In February 2016, the
FASB
issued ASU No. 2016-02,
Lease
(Topic 842) (“ASU 2016-02”) which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. Lessor accounting is similar to the current model, but updated to align with certain changes to the lessee model and the new revenue recognition standard. ASU 2016-02 is effective for fiscal years beginning after December 18, 2018, including interim periods within those fiscal years. We are currently evaluating the potential impact this standard will have on our consolidated financial statements and related disclosures.
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers
(Topic 606) (“ASU 2016-10”) clarify identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. As permitted under the standard for emerging growth companies, the Company plans to adopt this ASU in the first quarter of 2019 using the modified retrospective approach and recognize the cumulative effect to existing contracts in opening retained earnings on the effective date. The Company is currently reviewing and evaluating this guidance and its impact on its consolidated financial statements, therefore, the Company’s results may not be comparable with others in the industry until this ASU is adopted.
In May 2016, the
FASB
issued
ASU No.
2016-12
,
Revenue from Contracts with Customers
(Topic 606) (“ASU 2016-12”).
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-12 provides clarification on assessing collectability, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications. This ASU is effective for annual reporting periods beginning after December 15, 2017, with the option to adopt as early as December 15, 2016. As permitted under the standard for emerging growth companies, the Company plans to adopt this ASU in the first quarter of 2019 using the modified retrospective approach and recognize the cumulative effect to existing contracts in opening retained earnings on the effective date. The Company is currently reviewing and evaluating this guidance and its impact on its consolidated financial statements, therefore, the Company’s results may not be comparable with others in the industry until this ASU is adopted.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(Topic 350) (“ASU 2017-04”). The guidance removes “Step Two” of the goodwill impairment test, which required a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The ASU is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those years, with early adoption permitted. We do not expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 2 – Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncement (continued)
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share
(Topic 260),
Distinguishing Liabilities from Equity
(Topic 480) and
Derivatives and Hedging
(Topic 815) (“ASU 2017-11”). The guidance eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. Our warrants issued with our convertible notes are treated as derivative instruments, because they include a “down round” feature. The ASU is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early adoption permitted. Early adoption of this guidance could have a significant impact on our financial statements, as it would effectively eliminate the warrant derivative liability and the gain or loss from changes in the fair value of the warrant derivative liability. We do not expect this ASU to have a significant impact on our consolidated financial statements and related disclosures.
Note 3 – Merger and Plan of Reorganization
On January 25, 2018, The Company entered into an agreement of merger and plan of reorganization (“Merger Agreement”) with Evans Brewing Company, Inc. (“Evans”), current registrant in the Securities and Exchange Commission. Pursuant to the terms of the Merger Agreement, Evans merged into the Company in a statutory reverse merger (“Merger”) and the Company is a surviving entity as a wholly-owned subsidiary of Evans. As a consideration for the Merger, Evans agreed to issue the shareholders of the Company an aggregate of 26,000,000 shares of common stock, par value $0.001 per share in accordance with the pro rata ownership of the Company’s capital stock. Following the Merger, Evans adopted the business plan of the Company in information technology consultancy and software development.
Immediately prior to the Merger, the Registrant had 4,784,293 shares of common stock issued and outstanding. In connection with the Merger, the shareholders of Evans agreed to convert 1,000,000 shares of preferred stock and forgive $1,000,000 in unpaid advances in exchange for the spin-off of the Evans’ current operations. (“Spin-Off”) Following the consummation of the Merger, and upon the issuance of the shares from the Merger and the shares to be issued in connection with the Spin-Off, Evans will have approximately 32,000,000 shares of common stock issued and outstanding and the shareholders of the Company will beneficially own 26,000,000 shares, or approximately eighty-one percent of such issued and outstanding common stock.
The Company’s shares as of December 31, 2017 have been retroactively restated to reflect the share exchange of the merger.
Upon the completion of the Merger, the historical financial statements of the Company are the historical financial statements of the registrant.
Note 4 – Long-term Debt
Total long-term debt consisted of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
A note payable to a financial institution bearing interest rate at 2.78% as of June 30, 2018 and at 2.81% as of December 31, 2017, and guaranteed by the officer of the Company. The Company was required to make interest-only payments until December 2018, then monthly payments of both principal and interest from January 2019.
|
|
$
|
490,327
|
|
|
$
|
280,007
|
|
Total debt
|
|
$
|
490,327
|
|
|
$
|
280,007
|
|
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 4 – Long-term Debt (continued)
Future minimum payments on debt consists of
the following:
2019
|
|
$
|
89,221
|
|
2020
|
|
|
200,553
|
|
2021
|
|
|
200,553
|
|
Total
|
|
$
|
490,327
|
|
The long-term debts contain certain covenants, and the Company was in compliance with the covenants
.
Note 5 – Line of Credit
The Company has lines of credit with financial institutions for total amount of approximately $3,600,000 that expires in various months in 2018, unless extended. There was no outstanding balance under the credit lines at June 30, 2018 and December 31, 2017. The lines of credit, bearing various interest rates are guaranteed by the officer of the Company.
The Company has an arrangement with its customers and a financial institution, in which the Company’s customers issue electronic invoices with the Company as the recipient. The Company can use these receivables as collaterals for loans up to approximately $5,000,000 and $5,300,000 as of June 30, 2018 and December 31, 2017, respectively. The Company receives its payments due when the customer fully pays the invoices to the financial institution. The interest rates vary depending on the Company’s customers’ credit ratings. The Company has no borrowings outstanding as of June 30, 2018 and December 31, 2017, respectively. The maturity date of the arrangement varies on the dates of the original transactions.
Note 6 – Investments
Equity Method
The Company applies the equity method for investments in affiliate, which a privately-held company where quoted market prices are not available, in which it has the ability to exercise significant influence over operating and financial policies of the affiliate. Significant influence is generally defined as 20% to 50% ownership in the voting stock of an investee. Under the equity method, the Company initially records the investment at cost and then adjusts the carrying value of the investment to recognize the proportional share of the equity-accounted affiliate’s net income (loss) including changes in capital of the affiliate.
The Company had the following equity investment accounted under the equity method:
|
As of June 30, 2018 and December 31, 2017
|
|
Equity investee
|
Type of
Shares
Owned
|
|
Number
of Shares
Owned
|
|
|
Original
Investment
Amount
|
|
|
Equity
Investment
Ownership
|
|
PT IONSOFT
|
Common stock
|
|
|
160,000
|
|
|
$
|
160,000
|
|
|
|
20
|
%
|
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 6 – Investments (continued)
The following is the roll-forward basis of equity investment accounted under the equity method:
|
|
Year ended June 30, 2018
|
|
Equity investee
|
|
Beginning
Equity Investment
Basis
|
|
|
Proportional
Share of the
Equity Accounted
Affiliate’s
Net Income (loss)
|
|
|
Ending
Equity Investment
Basis
|
|
PT IONSOFT
|
|
$
|
30,926
|
|
|
|
(18,698
|
)
|
|
$
|
12,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
Equity investee
|
|
Beginning
Equity Investment
Basis
|
|
|
Proportional
Share of the
Equity Accounted
Affiliate’s
Net Income (loss)
|
|
|
Ending
Equity Investment
Basis
|
|
PT IONSOFT
|
|
$
|
85,026
|
|
|
|
(54,100
|
)
|
|
$
|
30,926
|
|
Summarized audited financial information of significant equity investments in affiliate are as follows:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Total current assets
|
|
$
|
56,145
|
|
|
$
|
48,483
|
|
Total assets
|
|
|
230,603
|
|
|
|
222,096
|
|
Total current liabilities
|
|
|
322,675
|
|
|
|
238,017
|
|
Total liabilities
|
|
|
117,110
|
|
|
|
332,453
|
|
|
|
Three-months Period
Ended June 30,
|
|
|
Six-months Period
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net sales
|
|
$
|
35,293
|
|
|
$
|
3,792
|
|
|
$
|
88,280
|
|
|
$
|
5,099
|
|
Gross profit
|
|
|
(52,382
|
)
|
|
|
(93,493
|
)
|
|
|
(92,610
|
)
|
|
|
(221,434
|
)
|
Income from operations
|
|
|
(52,382
|
)
|
|
|
(93,503
|
)
|
|
|
(92,610
|
)
|
|
|
(222,225
|
)
|
Net income
|
|
|
(52,733
|
)
|
|
|
(93,503
|
)
|
|
|
(93,491
|
)
|
|
|
(222,225
|
)
|
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 at June 30, 2018:
Company
|
|
Balance
|
|
|
Percentage of
Ownership
|
|
4GRIT
|
|
$
|
44,579
|
|
|
|
2.50
|
%
|
E-channel
|
|
|
42,164
|
|
|
|
0.07
|
%
|
KSFC
|
|
|
11,724
|
|
|
|
0.00
|
%
|
Total investment securities
|
|
$
|
98,467
|
|
|
|
|
|
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 6 – Investments (continued)
The following table summarize the Company’s investment securities at December 31, 2017:
Company
|
|
Balance
|
|
|
Percentage of
Ownership
|
|
4GRIT
|
|
$
|
46,672
|
|
|
|
2.50
|
%
|
E-channel
|
|
|
44,143
|
|
|
|
0.07
|
%
|
KSFC
|
|
|
12,275
|
|
|
|
0.00
|
%
|
Total investment securities
|
|
$
|
103,090
|
|
|
|
|
|
Note 7 – Fair Value Measurements
The Company adopted the provisions of FASB ASC 820, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.
The following tables summarize the Company’s fair value measurements by level at June 30, 2018 for the assets measured at fair value on a recurring basis:
June 30, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Available-for-sale securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
98,467
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
98,467
|
|
The following tables summarize the Company’s fair value measurements by level at December 31, 2017 for the assets measured at fair value on a recurring basis:
December 31, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Available-for-sale securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
103,090
|
|
Total assets at fair value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
103,090
|
|
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. Total royalty amounts received for the three-months period were not significant. Total royalty amounts received for the six-months period ended June 30, 2018 and 2017 were approximately $184,000 and $267,000, respectively.
Operating Leases
The Company leases its office under non-cancelable operating leases that expire on dates through December 2020. The lease is automatically extended upon agreement of both parties. Future minimum rental payments under the non-cancelable operating leases for June 30, 2018 are as follows:
December 31,
|
|
Amount
|
|
|
|
|
|
2018
|
|
$
|
156,221
|
|
2019
|
|
|
156,221
|
|
2020
|
|
|
117,166
|
|
Total
|
|
$
|
429,608
|
|
Rent expense for all operating leases were $38,941 and 37,165 for the three-months ended June 30, 2018 and 2017, respectively, and $78,110 and $73,551 for the six-months ended June 30, 2018 and 2017, respectively.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Litigation
The Company is pending litigation against Financial News Corporation (“the defendant”), a Korea-based financial newspaper company. The Company and the defendant originally agreed upon an arrangement on February 2014 for the Company to provide services and receive payments upon completion of each stage of the contract. Per management, the defendant arbitrarily requested changes in terms of the agreement and delayed payments. The Company, as a plaintiff, is claiming damages. The management does not believe the case will have material adverse effect on the consolidated financial statements as of June 30, 2018.
Note 9 – Related Party Transactions
The following are material related party transactions that have occurred during June 30, 2018 and December 31, 2017, but because the consolidated financial statements are presented on a consolidated basis, the transactions and balances have been eliminated.
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Sales to affiliate
|
|
$
|
250,902
|
|
|
$
|
494,338
|
|
Receivable from affiliate
|
|
$
|
240,545
|
|
|
$
|
139,188
|
|
The Company receives loan guarantees from the chief executive officer with regards to its long-term borrowing, and the Company’s restricted cash provided as collateral to the Company’s chief executive officer’s loans.
Note 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 June 30,
|
|
|
Six-months Period
Ended June 30,
|
|
Periods Ended
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before non-controlling interest
|
|
$
|
(482,239
|
)
|
|
$
|
205,846
|
|
|
$
|
(1,771,082
|
)
|
|
$
|
(97,016
|
)
|
Non-controlling interest
|
|
|
(406
|
)
|
|
|
(443
|
)
|
|
|
(553
|
)
|
|
|
(428
|
)
|
Net income (loss)
|
|
|
(481,833
|
)
|
|
|
206,289
|
|
|
|
(1,770,529
|
)
|
|
|
(96,588
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
31,784,293
|
|
|
|
26,000,000
|
|
|
|
31,784,293
|
|
|
|
26,000,000
|
|
Dilutive effect of common stock equivalents arising from share option, excluding antidilutive effect from loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares
|
|
|
31,784,293
|
|
|
|
26,000,000
|
|
|
|
31,784,293
|
|
|
|
26,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before non-controlling interest
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
Non-controlling interest
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Earnings per share to stockholders
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before non-controlling interest
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
Non-controlling interest
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Earnings per share to stockholders
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.00
|
)
|
No non-vested share awards or non-vested share unit awards were antidilutive for the three-months and six-months ended June 30, 2018 and 2017.
Note 11 – Subsequent Event
The Company evaluated all events or transactions that occurred after June 30, 2018 through the date the financial statements were available to be issued. During these periods, the Company did not have any material recognizable subsequent events required to be disclosed.