I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
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 year ended December 31, 2018 and 2017.
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. The Company has never experienced any losses
related to these balances.
A
dvertising
Costs associated with advertising and promotions are expensed as incurred. Advertising expense amounted to $43,158 and $39,772 for the years
ended December 31, 2018 and 2017, 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.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
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.
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 were no amounts of government grants outstanding as of December 31, 2018 and 2017.
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 $466,338 and $462,764 for the years ended December 31, 2018 and 2017, respectively.
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 adoption of this standard did not have a material impact to our consolidated financial statements and related disclosures.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
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.
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.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
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 May 2014, the FASB issued ASU 2014-09, which is codified in ASC 606 “Revenue from Contracts with Customers” and supersedes both the
revenue recognition requirement in ASC 605 “Revenue Recognition” and most industry-specific guidance. The core principle of ASC 606 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. To achieve that core principle, an entity should apply the five steps set forth in ASC 606. An entity must also
disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative information
about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. These provisions can be implemented using a full retrospective or modified retrospective
approach and the FASB has clarified this guidance in various updates (e.g., ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-05). The effective date for ASC 606 for public business entities is annual reporting
periods beginning after December 15, 2017. The effective date for all other entities is annual reporting periods beginning after December 15, 2018. As part of the IPO relief provided to emerging growth companies (EGC), an EGC may elect to adopt
new standards on the timeline afforded a private company. The Company elects to adopt the new standard in annual reporting period beginning after December 15, 2018, and is currently assessing the impact of this standard on the Company’s
consolidated financial statements.
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.
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.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
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.
Note 4.
|
Property and Equipment
|
Property and equipment consist of the following:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Facilities
|
|
$
|
192,115
|
|
|
$
|
200,489
|
|
Vehicles
|
|
|
41,409
|
|
|
|
23,614
|
|
Equipment
|
|
|
1,355,710
|
|
|
|
1,190,899
|
|
Government grants
|
|
|
(109,272
|
)
|
|
|
(140,441
|
)
|
Total property and equipment
|
|
|
1,479,962
|
|
|
|
1,274,561
|
|
Less: Accumulated depreciation
|
|
|
(1,315,967
|
)
|
|
|
(1,205,106
|
)
|
Property and equipment, net
|
|
$
|
163,995
|
|
|
$
|
69,455
|
|
Depreciation expense for December 31, 2018 and 2017 were $56,295 and $100,151, 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:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
174,823
|
|
|
$
|
93,631
|
|
Other intangible assets
|
|
|
568,276
|
|
|
|
593,046
|
|
Government grants
|
|
|
(13,428
|
)
|
|
|
(20,337
|
)
|
Total intangible assets
|
|
|
729,671
|
|
|
|
666,340
|
|
Less: Accumulated amortization
|
|
$
|
(593,239
|
)
|
|
|
(591,698
|
)
|
Intangible assets, net
|
|
$
|
136,432
|
|
|
$
|
74,642
|
|
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Amortization expense for December 31, 2018 and 2017 were $20,523 and $15,004, respectively.
Future amortization expense of the Company’s intangible assets at December 31 2018 is expected to be as follows:
Years ending December 31,
|
|
|
|
|
|
|
|
2019
|
|
$
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
2023
|
|
|
-
|
|
Total
|
|
$
|
-
|
|
As noted in Note 2, the government grants received is against the values of assets acquired or the expenses incurred.
Total long-term debt consisted of the following:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
A note payable to a financial institution bearing interest at 2.75% and 2.81% at December 31, 2018
and 2017, respectively, and guaranteed by the officer of the Company. The Company was required to make interest-only payments until December 2018, then monthly payments of both principal and interest starting from January 2019.
|
|
$
|
491,906
|
|
|
$
|
280,007
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
491,906
|
|
|
$
|
280,007
|
|
Less: current portion
|
|
|
(89,509
|
)
|
|
|
-
|
|
Long-term debt, net of current portion
|
|
$
|
402,397
|
|
|
$
|
280,007
|
|
Future minimum payments on debt consists of the following:
Years ending December 31,
|
|
|
|
|
|
|
|
2019
|
|
$
|
89,509
|
|
2020
|
|
$
|
201,198
|
|
2021
|
|
$
|
201,199
|
|
Total
|
|
$
|
491,906
|
|
The long-term debts contain certain covenants, and the Company was in compliance with the covenants.
The Company has lines of credit with financial institutions for total amount of approximately $3,600,000 that expires in various months in
2018, unless extended. There was no outstanding balance under the credit lines at December 31, 2018 and 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 $5,400,000 and $5,300,000 as of December 31, 2018 and 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 December 31, 2018 and 2017, respectively. The maturity
date of the arrangement varies on the dates of the original transactions.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 8.
|
Convertible Debt, Beneficial Conversion Feature, and Common Stock Warrant
|
The Company entered into a securities purchase agreement (the “SPA”) with Peak One Opportunity Fund, L.P. (“Peak One”) on August 13, 2018. The
financing arrangement between the Company and Peak One stipulates that Peak One will invest up to $540,000 in the Company through three separate tranches. Each tranche will be funded in exchange for a convertible debt instrument issued at a 10%
discount, with a face value of $200,000. On this same date, the first tranche closed and the Company issued a convertible debt instrument to Peak One for $200,000 at a 10% discount. The convertible debt issued has the following significant
terms:
|
·
|
Term: The principal amount is repayable on August 13, 2021 (“Maturity Date”). All unpaid principal due and payable on the Maturity Date shall be paid in the form of
common stock of the Company. Any amount of principal or interest that is due under the convertible debt, which is not paid by the Maturity Date, will bear interest at the rate of 18% per annum until it is satisfied.
|
|
·
|
Conversion Rights: The Holder has the right to convert the amount outstanding plus any accrued interest into common stock of the Company after 180 calendar days from
the issuance date.
|
|
·
|
Conversion Price: Conversion price is equal to the lesser of (i) $2.75 or (ii) 70% of the lowest traded price of the common stock of the Company for the 20 trading
days immediately preceding the date of the date of conversion of the Debts.
|
|
·
|
Redemption by Issuer: The Company has the option to redeem the convertible debt prior to the Maturity Date. The convertible debt called for redemption shall be
redeemable by the Company, upon not more than 2 days written notice, for an amount (the “Redemption Price”) equal to:
|
|
(i)
|
if the date of redemption is 90 days or less from the issuance date, 110% of the sum of the principal amount so redeemed plus accrued interest, if any;
|
|
(ii)
|
if the date of redemption is greater than or equal to 91 days from the issuance date and less than or equal to 120 days from the issuance date, 120% of the sum of the
amount so redeemed plus accrued interest, if any;
|
|
(iii)
|
if the date of redemption is greater than or equal to 121 days from the issuance date and less than or equal to 180 days from the issuance date, 130% of the sum of the
amount so redeemed plus accrued interest, if any; and
|
|
(iv)
|
if either (1) the convertible debts are in default but the Holder consents to the redemption notwithstanding such default or (2) the date of redemption is greater than
or equal to 181 days from the issuance date, 140% of the sum of the amount so redeemed plus accrued interest, if any.
|
|
·
|
Ratchet Provision: If, at any time while any portion of the convertible debts remains outstanding, the Company effectuates a stock split or reverse stock split of its
common stock or issues a dividend on its common stock consisting of shares of common stock or otherwise recapitalizes its common stock, the conversion price of the convertible debts shall be equitably adjusted to reflect such
action.
|
|
·
|
Default: In the event of default by the Company on these convertible debts, the Holder will have the option and discretion to accelerate the full indebtedness under
the convertible debts, in an amount equal to 140% of the outstanding principal amount and accrued and unpaid interest.
|
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
The embedded conversion feature was determined to be a derivative that does not require bifurcation pursuant to ASC 815, but was determined to be a
beneficial conversion feature that requires recognition within equity on the commitment date. The beneficial conversion feature is recognized at its intrinsic value on the commitment date, limited to the proceeds allocated to the convertible
debt. As such, the Company recorded $89,788 within additional paid-in-capital on the consolidated balance sheet for the beneficial conversion feature identified. The debt discount arising from recognition of the beneficial conversion feature
will be amortized as interest expense over the term of the convertible debt. As of December 31, 2018, amortization expense of debt discount related to the beneficial conversion feature was not significant.
In connection with the convertible debt issuance, the Company also issued a detachable common stock warrant on August 13, 2018 that allows Peak One to
purchase up to 50,000 shares of common stock at an exercise price of $2.75 per share, subject to adjustments as stated in the warrant agreement. The common stock warrant expires 5 years from the issuance date. The common stock warrant was
determined to meet equity classification pursuant to ASC 480 and ASC 815. As such, the fair value of the common stock warrant is recorded as additional paid-in-capital on the consolidated balance sheet, which was determined to be $89,788, net
of issuance costs allocated to the warrant, on the issuance date. The debt discount arising from recognition of the common stock warrant will be amortized as interest expense over the term of the convertible debt. As of December 31, 2018,
amortization expense of debt discount related to the common stock warrant was not significant.
The Company has the following convertible debt instruments outstanding as of December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
A $200,000 convertible note, issued at 10% discount, five year term, no monthly interest due, maturing
August 13, 2021
|
|
$
|
200,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Long-term convertible debt
|
|
$
|
200,000
|
|
|
$
|
-
|
|
Less: debt discount
|
|
|
(175,000
|
)
|
|
|
-
|
|
Long-term convertible debt, net of debt discount
|
|
$
|
25,000
|
|
|
$
|
-
|
|
Interest expense related to the convertible debt for the years ended December 31, 2018 and 2017 amounted to approximately $23,000 and $0,
respectively.
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 December 31, 2018 and 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
The following is the roll-forward basis of equity investment accounted under the equity method:
|
|
Year ended December 31, 2018
|
|
Equity investee
|
|
Beginning
Equity Investment
Basis
|
|
|
Proportional
Share of the
Equity Accounted
Affiliate’s
Net Income (loss)
|
|
|
Ending
Equity Investment
Basis
|
|
|
|
|
|
|
|
|
|
$
|
30,926
|
|
|
|
(33,515
|
)
|
|
$
|
(2,589
|
)
|
|
|
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:
December 31,
|
|
2018
|
|
|
2017
|
|
Total current assets
|
|
$
|
175,272
|
|
|
$
|
48,483
|
|
Total assets
|
|
|
344,468
|
|
|
|
222,096
|
|
Total current liabilities
|
|
|
520,198
|
|
|
|
238,017
|
|
Total liabilities
|
|
|
106,482
|
|
|
|
332,453
|
|
Years ended December 31,
|
|
|
2018
|
|
|
|
2017
|
|
Net sales
|
|
$
|
151,981
|
|
|
$
|
141,096
|
|
Gross profit
|
|
|
(166,016
|
)
|
|
|
141,096
|
|
Income (loss) from operations
|
|
|
(166,393
|
)
|
|
|
(287,963
|
)
|
Net income (loss)
|
|
|
(167,577
|
)
|
|
|
(289,331
|
)
|
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 December 31, 2018 and 2017:
Available-for-sale securities
|
|
Percentage of
Ownership
|
|
|
2018
|
|
|
2017
|
|
4Grit
|
|
|
2.50
|
%
|
|
$
|
44,723
|
|
|
$
|
46,672
|
|
E-channel
|
|
|
0.07
|
%
|
|
$
|
42,299
|
|
|
$
|
44,143
|
|
KSFC
|
|
|
0.00
|
%
|
|
$
|
11,762
|
|
|
$
|
12,275
|
|
Total investment securities
|
|
|
|
|
|
$
|
98,784
|
|
|
$
|
103,090
|
|
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 10.
|
Equity Purchase Agreement – Put Option
|
On August 13, 2018 (the “Closing Date”), the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”) with the convertible
debenture holder (the “Holder”), whereby, upon the terms and subject to the conditions thereof, the Holder is committed to purchase shares of the Company’s common stock, par value $0.001 per share (the “Purchase Shares”), at an aggregate
price of up to $10,000,000 (the “Total Commitment Amount”) over the course of a 24- month term. The significant terms of the Purchase Agreement are given below:
|
·
|
Put Provision: From time to time over the 24-month term of the Purchase Agreement, commencing on the date on which a registration statement registering the Purchase
Shares (the “Registration Statement”) becomes effective, the Company may, in its sole discretion, provide the Buyer with a put notice (each a “Put Notice”) to purchase a specified number of the Purchase Shares (each a “Put
Amount Requested”) subject to the limitations contained in the Purchase Agreement.
|
The actual amount of proceeds the Company receives pursuant to each Put Notice (each, the “Put Amount”) is to be determined by the
lesser of (i) 88% of the lowest closing bid price of the Company’s Common Stock on the trading day immediately preceding the respective date of the Put Notice and (ii) 88% of the lowest closing bid price during the Valuation Period (the period
of 7 trading days immediately following the clearing date associated with the applicable Put Notice).
The Put Amount Requested pursuant to any single Put Notice must have an aggregate value of at least $20,000, and cannot exceed the
lesser of (i) 250% of the average daily trading value of the common stock in the 10 trading days immediately preceding the Put Notice or (ii) such number of shares of common stock that has an aggregate value of $500,000.
|
·
|
Term: Unless earlier terminated, the Purchase Agreement will terminate automatically on the earlier to occur of: (i) 24 months after the initial effectiveness of the
Registration Statement, (ii) the date on which the Buyer has purchased or acquired all of the Purchase Shares, or (iii) the date on which certain bankruptcy proceedings are initiated with respect to the Company.
|
Upon execution of the Purchase Agreement, the Company issued 100,000 shares of common stock with a par value of $0.001 to the Holder.
The Company adopted the provisions of FASB ASC Topic 480 and Topic 815, to determine the proper classification of the Purchase Agreement. The Company
determined the put option meets the definition of a derivative under ASC 815 but is outside the scope of ASC 480. Under ASC 816-40, the Company determined the derivate does not meet equity classification and accordingly, is classified as an
asset on the consolidated balance as a Level 3 financial instrument. The Company used an independent third-party valuation firm to determine the fair value of the derivative asset using an Option Pricing Model.
Changes to fair value at the end of each reporting period
is recorded as other income or expense in the consolidated statements of income.
The following table summarizes the changes in the Level 3 financial instrument related to the derivate asset for the equity put option:
Fair value, at December 31, 2017
|
|
$
|
-
|
|
Issuance of equity purchase put option
|
|
|
109,343
|
|
Change in fair value
|
|
|
-
|
|
Fair value, at December 31, 2018
|
|
$
|
109,343
|
|
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Note 11.
|
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 years ended December 31, 2018 and 2017 were approximately
$181,000 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 as of December 31, 2018 are as follows:
December 31,
|
|
Amount
|
|
2019
|
|
$
|
152,686
|
|
2020
|
|
|
152,686
|
|
Total
|
|
$
|
305,372
|
|
Rent expense for all operating leases were $152,686 and $148,562 for the years ended December 31, 2018 and 2017, respectively.
Note 12.
|
Related Party Transactions
|
The following are material related party transactions that have occurred during December 31, 2018 and 2017, but because the consolidated financial
statements are presented on a consolidated basis, the transactions and balances have been eliminated.
|
|
2018
|
|
|
2017
|
|
Sales to affiliate
|
|
$
|
525,881
|
|
|
$
|
494,338
|
|
Receivable from affiliate
|
|
$
|
161,079
|
|
|
$
|
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 13.
|
Earnings Per Share
|
The Company calculates earnings per share in accordance with FASB ASC 260,
Earnings Per Share
, which requires a dual presentation of basic and diluted earnings per share. Basic earnings per share are computed using the weighted average number of shares outstanding during the fiscal year. Potentially
dilutive common shares consist of stock options outstanding (using the treasury method).
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
The following table sets forth the computation of basic and diluted net income per common share:
Years Ended December 31,
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net income before non-controlling interest
|
|
$
|
82,004
|
|
|
$
|
19,018
|
|
Non-controlling interest
|
|
|
167
|
|
|
|
91
|
|
Net income
|
|
|
82,171
|
|
|
|
19,109
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common stock outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,030,339
|
|
|
|
26,000,000
|
|
Dilutive effect of common stock equivalents arising from
|
|
|
|
|
|
|
|
|
share option, excluding antidilutive effect from loss
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares
|
|
|
35,030,339
|
|
|
|
26,000,000
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic
|
|
|
|
|
|
|
|
|
Net income before non-controlling interest
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Non-controlling interest
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Earnings per share to stockholders
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Diluted
|
|
|
|
|
|
|
|
|
Net income before non-controlling interest
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Non-controlling interest
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Earnings per share to stockholders
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
No non-vested share awards or non-vested share unit awards were antidilutive for the years ended December 31, 2018 and 2017.
Income taxes consist of the following:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Current income tax expense:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
Foreign
|
|
|
17,988
|
|
|
|
37,240
|
|
|
|
|
17,988
|
|
|
|
37,240
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(441,081
|
)
|
|
|
109,661
|
|
|
|
|
(441,081
|
)
|
|
|
109,661
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(423,093
|
)
|
|
$
|
146,901
|
|
Current income tax expense
is based on taxable income for federal and state tax
reporting purposes. Deferred income tax expense is provided for certain income and expenses which are recognized in different periods for tax and financial reporting purposes.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
Deferred income tax assets and liabilities are computed annually for differences between the consolidated financial statements and tax basis of assets
and liabilities that will result in taxable or deductible amount in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income. Valuation allowances are established
when necessary to reduce deferred income tax assets to the amount expected to be realized.
The significant components of deferred income tax assets and liabilities are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
Allowance for bad debt
|
|
$
|
122,715
|
|
|
$
|
108,796
|
|
Allowance for short-term loans
|
|
|
-
|
|
|
|
16,431
|
|
Intangible assets
|
|
|
-
|
|
|
|
1,923
|
|
Government grants
|
|
|
27,814
|
|
|
|
36,227
|
|
Available-for-sale securities
|
|
|
10,371
|
|
|
|
10,823
|
|
Development costs
|
|
|
235,523
|
|
|
|
181,622
|
|
Loss on equity investments
|
|
|
35,778
|
|
|
|
29,765
|
|
Tax credits
|
|
|
714,449
|
|
|
|
391,008
|
|
Net operating loss
|
|
|
-
|
|
|
|
18,188
|
|
Retirement benefits
|
|
|
72,881
|
|
|
|
91,413
|
|
Total deferred income tax assets
|
|
|
1,219,531
|
|
|
|
886,196
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(7,910
|
)
|
|
|
(6,239
|
)
|
Total deferred income tax liabilities
|
|
|
(7,910
|
)
|
|
|
(6,239
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
1,211,621
|
|
|
|
879,957
|
|
Net deferred income tax assets at end of year
|
|
$
|
1,211,621
|
|
|
$
|
879,957
|
|
Net deferred income tax assets at beginning of year
|
|
$
|
879,957
|
|
|
$
|
882,743
|
|
The difference between the change in net deferred tax assets and the deferred income tax expenses is mainly due to remeasurement of deferred tax assets
and liabilities reflecting currency exchange rates at the balance sheet dates. The related tax impact was recorded through other comprehensive income.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.
In assessing the realization of gross deferred income tax assets, management considers whether it is more likely than not that some portion or all its
deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
The effective tax rates for the reporting periods are as follows:
|
|
2018
|
|
|
2017
|
|
Profit (loss) before taxes
|
|
$
|
(307,574
|
)
|
|
$
|
220,019
|
|
Statutory tax rate
|
|
|
22
|
%
|
|
|
22
|
%
|
Statutory income tax (benefit) expense
|
|
$
|
(67,666
|
)
|
|
$
|
48,404
|
|
|
|
|
|
|
|
|
|
|
Book
to tax reconciliation:
|
|
|
|
|
|
|
|
|
Tax credits to be used:
|
|
|
(419,044
|
)
|
|
|
95,924
|
|
Foreign tax
|
|
|
17,988
|
|
|
|
37,239
|
|
Others
|
|
|
45,629
|
|
|
|
(34,666
|
)
|
Total book to tax reconciliation
|
|
|
(355,427
|
)
|
|
|
98,497
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax expense
|
|
$
|
(423,093
|
)
|
|
$
|
146,901
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
137.56
|
%
|
|
|
66.77
|
%
|
The Company adopted the guidance in ASC 740 for uncertain tax positions, which requires that realization of an uncertain income tax position
must be more likely than not before it can be recognized in the financial statements. This guidance in ASC 740 further prescribes the benefits or liabilities to be recorded in the financial statements as the amounts are cumulatively more likely
than not to be realized assuming a review by tax authorities having all relevant information and applying current conventions. The guidance also clarifies the financial statement classification of tax-related penalties and interest and sets
forth new disclosure regarding unrecognized tax benefits or liabilities. Differences between the amounts recognized in the consolidated financial statements prior to the adoption of the guidance in ASC 740 for unrecognized tax benefits and the
amounts reported after adoption would be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings.
As of December 31, 2018 and 2017, the Company identified no material unrecognized tax benefits and does not expect material change within the
next twelve-months. The Company’s policy is to recognize tax penalties and interest in tax expense, if any.
The Company recorded tax deferred assets for its R&D tax credits in the amount of $787,050 and $391,008 as of December 31, 2018 and 2017,
respectively. The tax credits are carried forward for five years.
Tax years 2011 and forward are open to examination by the Korean National Tax Service (NTS). NTS conducted tax examination in 2012 and no
penalties were charged to the Company.
Note 15.
|
Stock Compensation
|
The Company's
wholly-owned subsidiary
,
I-ON Communications
,
Ltd
., has a Stock Option Plan (“Plan”) that allows grants to officers and key employees shares of common stock. The options have vesting
schedules of three years from the date of grant, and are exercisable within seven years from the end of the vesting period. Stock options granted and outstanding as of December 31, 2018 and 2017 may be exercised after one year from the date of
the Company’s public listing. If the Company’s not publicly listed, these options will be cancelled.
The Company recognized approximately $87,000 and $62,000 of stock-based compensation related to options granted to employees for the years ended
December 31, 2018 and 2017, respectively.
I-ON Communications Co., Ltd and Subsidiary
Notes to Consolidated Financial Statements
The fair value of each award to employees in 2017 is estimated on the date of grant using the Binomial option pricing model with the following
weighted-average assumptions: expected life of approximately 6.25 years, risk-free interest rate of approximately 2.85
percent, expected volatility of
16.38% and no dividends during the expected life. Expected volatility is based on historical volatilities of public companies operating in the Company’s industry. The
expected life of the options represents the period of time options are expected to be outstanding and is estimated considering vesting terms and employees’ historical exercise and post-vesting employment termination behavior. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.
The Company did not provide any new stock option grants in 2018.
A summary of the status of the Company’s stock option plan is presented as follows:
|
|
Number of
Shares
|
|
|
Weighted-
Average Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual Live
(In Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding, December 31, 2016
|
|
|
82,928
|
|
|
$
|
1.49
|
|
|
|
4.22
|
|
|
|
|
Granted
|
|
|
150,000
|
|
|
|
1.88
|
|
|
|
|
|
|
|
|
Excercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(72,812
|
)
|
|
|
1.63
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
160,116
|
|
|
|
1.63
|
|
|
|
9.18
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Excercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
160,116
|
|
|
|
1.69
|
|
|
|
8.18
|
|
|
$
|
64,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2018
|
|
|
91,044
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2018
|
|
|
91,044
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
As of December 31, 2018 and 2017, there were approximately
$177,000 and
$223,000, respectively,
of total unrecognized compensation expense related to nonvested share option awards granted. That expense is expected to be recognized over a weighted-average period of 1.25 and 3 years as of December 31, 2018
and 2017, respectively.
Note 16.
|
Subsequent Events
|
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the financial statements are available to be
issued. Any material events that occur between the balance sheet date and the date that the financial statements were available for issuance are disclosed as subsequent events, while the financial statements are adjusted to reflect any
conditions that existed at the balance sheet date. Based upon this review, except as disclosed within the footnotes or as discussed below, the Company did not identify any recognized or non-recognized subsequent events that would have required
adjustment or disclosure in the financial statements.
On
February 15, 2019 the Company redeemed the Convertible Debenture Dated
August 13, 2018 (the “Debenture”) from
Peak One Opportunity Fund, L.P for the
Redemption Price of $255,000. The aggregate principal amount
of the Debenture of $200,000 was redeemed for full and final satisfaction of the Debenture.
On April 2, 2019, I-ON Communications Corp. (the “Registrant”)
amended its Certificate of Incorporation to change the name of the Registrant to “I-ON Digital Corp.”
29