I-ON DIGITAL CORP. The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein and in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 . Readers should carefully review the risk factors disclosed in this Form 10-K and other documents filed by the Company with theSEC .
As used in this report, the terms "Company", "we", "our", and "us" refer to
PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the meaning of the
federal securities laws. These forward-looking statements can be identified by
the use of words such as "believes," "estimates," "intends", "plans", "could,"
"possibly," "probably," anticipates," "projects," "expects," "may," "will," or
"should," "designed to," "designed for," or other variations or similar words or
language. The forward-looking statements are based on the current expectations
of the Company and are subject to certain risks, uncertainties and assumptions,
including those set forth in the discussion under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this report.
Actual results may differ materially from results anticipated in these
forward-looking statements. We base the forward-looking statements on
information currently available to us, and we assume no obligation to update
them
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Organization and Corporate History
I-ON Digital Corp. (formerly known asI-ON Communications Corp. ) was incorporated under the laws of theState of Delaware onJune 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. OnApril 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 toEvans Brewing Company Inc. ("EBC") onMay 29, 2014 . OnOctober 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. OnSeptember 17, 2015 , the independent Bayhawk shareholders approved an Asset Purchase and Share Exchange Agreement (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"). OnJanuary 25, 2018 ,Evans Brewing Company, Inc. consummated an Agreement of Merger and Plan of Reorganization (the "Merger Agreement"), withI-ON Digital Corp. ., a company organized under the laws of theRepublic of Korea (South Korea ) ("I-ON") andI-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. OnDecember 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 toI-ON Digital Corp. OnMarch 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 toI-ON Digital Corp. The Company filed a Certificate of Amendment to effectuate the name change on or aboutApril 2, 2019 . OnSeptember 28, 2022 , the Company entered into a Series A Preferred Stock Purchase Agreement (the "Purchase Agreement") withI-ON Acquisition Corp. , aFlorida corporation ("IAC"). Pursuant to the terms of the Purchase Agreement, as amended, IAC acquired 3,600 shares of a newly created Series A Convertible Preferred Stock, par value$0.0001 per share (the "Series A Preferred") for proceeds in the amount of$250,000 (the "Subscription Amount") in the form of a promissory note (the "Note") which was secured by the pledge of the Series A Shares, the Series B Shares (as defined herein) and other assets of IAC in a Stock Pledge and Escrow Agreement (the "Pledge Agreement"). Each Series A Preferred Share is convertible into Ten Thousand (10,000) shares of the Company's common stock, par value$0.0001 per share (the "Common Stock" and is entitled to vote on matters as to which holders of the Common Stock shall be entitled to vote at a rate of One Hundred (100) votes per share of Series A Preferred.
Following the Merger but prior to the Sell-Off, as described more fully herein, the Company adopted the business plan of I-ON. I-ON was founded byJae Cheol Oh , who served as CEO. The Company's roots are in IT consultancy and software development. I-ON servicesSouth 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. OnSeptember 29, 2022 , the Company effectuated an Equity Transfer Agreement (the "Sell-Off Agreement") among the Company,Communications and JFJ Digital Corp. , aDelaware corporation ("JFJ"), whereby all of the outstanding equity of Communications was transferred to JFJ in exchange for the return of 15,306,119 shares of the Company's Common Stock held byJae Cheol Oh andHong Rae Kim , the Company's principal executive officer and members of the Board of Directors (the "Sell-Off") . Pursuant to the Sell-Off Agreement, in addition to acquiring all of the outstanding capital stock of Communications, JFJ assumed all responsibilities for any debts, obligations and liabilities of Communications and acquire all rights to any assets of Communications, including, but not limited to, the Subscription Amount. As a result of the Sell-Off, Communications ceased being a subsidiary of the Company. Accordingly, the operating results of Communications are reported in net loss from discontinued operations, net of income taxes in the Consolidated Statements of Operations for all periods presented. In addition, the related assets and liabilities held prior to the Sell-Off are reported as Assets and Liabilities of Discontinued Operations on the Consolidated Balance Sheets. All amounts and disclosures included in the Notes to Consolidated Financial Statements reflect only the Company's continuing operations unless otherwise noted. 13
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Results of Operations
Comparison of results of operations for the year ended
The following table sets forth selected items from our consolidated statements
of operations by dollar and as a percentage of our net sales for the periods
indicated:
Years Ended December 31,
2022 2021 Change
% of % of
Amount Revenue Amount Revenue Amount %
Net sales $ 7,578,685 100.0 % $ 16,199,710 100.0 % $ (8,621,025 ) -53.2 %
Cost of goods sold 6,923,957 91.4 % 10,834,719 66.9 % (3,910,762 ) -36.1 %
Gross profit 654,728 8.6 % 5,364,991 33.1 % (4,710,263 ) -87.8 %
Operating expense 2,714,315 35.8 % 3,558,698
22.0 % (844,383 ) -23.7 %
Other income (expense) 1,807,581 23.9 % (120,825 )
(0.7 )% 1,928,406 -1,596.0 %
Income (loss) before provision for income taxes, loss on equity investment, and non-controlling interest (252,006 ) (3.3 )% 1,685,468 10.4 % (1,937,474 ) -115.0 % Provision for (benefit from) income tax 30,002 0.4 % (306,780 ) (1.9 )% 336,782 -109.8 % Income (loss) before loss on equity investment and non-controlling interest (282,008 ) (3.7 )% 1,992,248 12.3 % (2,274,256 ) -114.2 % Loss on equity investment (18,725 ) (0.2 )% - 0.00 % (18,725 ) N/A Income (loss) before non-controlling interest (300,733 ) (4.0 )% 1,992,248 12.3 % (2,292,981 ) -115.1 % Non-controlling interest income (loss) (273,108 ) (3.6 )% (171,628 ) 1.1 % (101,480 ) 59.1 % Net income (loss) attributable to Parent Company from discontinued operations (27,625 ) 0.4 % 2,163,876
13.4 % (2,191,501 ) -101.3 %
Comprehensive income statement: Net income (loss) (300,733 ) (4.0 )% 1,992,248 12.3 % (2,292,981 ) -115.1 % Foreign currency translation loss (1,691,420 ) (22.3 )% (1,016,433 ) (6.3 )% (674,987 ) 66.4 % Total comprehensive income (loss)$ (1,992,153 ) (26.3 )%$ 975,815 6.0 % (2,967,968 ) -304.2 % 14
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Net sales decreased by
- Customization revenue decreased by approximately$3,854,000 from approximately$8,722,000 for the year endedDecember 31, 2021 to$4,868,000 for the year endedDecember 31, 2022 mainly due to decrease in new contracts and discontinued operation sinceSeptember 30, 2022 . - Installation revenue decreased by approximately$2,559,000 from approximately$3,153,000 for the year endedDecember 31, 2021 to$594,000 for the year endedDecember 31, 2022 mainly due to decrease in new contracts and discontinued operation sinceSeptember 30, 2022 .
Cost of Goods Sold
Cost of goods sold decreased by$3,910,762 or 36.1%, to$6,923,957 for the year endedDecember 31, 2022 from$10,834,719 for the year endedDecember 31, 2021 . The decrease was in aligned with the decrease of the revenue as illustrated above resulting from the discontinued operation.
Gross Profit
Gross profit decreased by$4,710,263 to$654,728 , or 8.6% of net sales, for the year endedDecember 31, 2022 , from$5,364,991 or 33.1% of net sales, for the year endedDecember 31 , 2021. The decrease in gross profit for the compared periods was primarily driven by decreased net sales.
Operating Expenses
Operating expenses consist of research and development expenses and general and administrative expenses.
Research and development expenses decreased by$975,606 or 65.0%, to$524,611 for the year endedDecember 31, 2022 from$1,500,217 for the year endedDecember 31, 2021 . The decrease was due to decrease in head count computer programmers at the research and development department. General and administrative expenses increased by$131,223 or 6.4%, to$2,189,704 for the year endedDecember 31, 2022 from$2,058,481 for the year endedDecember 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
Comprehensive income - Foreign currency translation
Foreign currency translation loss was$1,691,420 for the year endedDecember 31, 2022 compared to loss of$1,016,433 for the year endedDecember 31, 2021 . The change was due to devaluation of Korean Won compared to US dollar in year endedDecember 31, 2022 compared toDecember 31, 2021 . The average exchange rate for the year endedDecember 31, 2022 and 2021 wasKRW 1,278.7 andKRW 1,143.7 , respectively.
Liquidity and Capital Resources
As of the Sell-Off date, which was
Critical Accounting Estimates
Our consolidated 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 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.
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