I-ON Digital Corp. - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________________ to ______________________

Commission file number: 333-206745

I-ON DIGITAL CORP.

(Exact name of registrant as specified in its charter)

(formerly known as I-ON Communications Corp.)

Delaware		46-3031328
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

15, Teheran-ro 10-gil, Gangnam-gu, Seoul, Korea 06234

(Address of principal executive offices, including zip code)

+82-2-3430-1200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, Par Value $0.0001

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.0001 par value per share		IONI		OTC Markets

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of November 10, 2020
Common Stock, $0.0001 par value per share		35,030,339 shares

Table of Contents

	PART I – FINANCIAL INFORMATION

Item 1.	Interim Consolidated Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	26
Item 2.	Unregistered Sales of Equity Securities	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Mine Safety Disclosures	26
Item 5.	Other Information	26
Item 6.	Exhibits	26

	SIGNATURES	27

Table of Contents

PART 1 – FINANCIAL INFORMATION

Item 1.

Interim Consolidated Financial Statements

The unaudited interim consolidated financial statements of I-ON Digital Corp. and subsidiary (“we”, “our”, “us”, the “Company”) follow. All currency references in this report are to US dollars unless otherwise noted.

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I-ON Digital Corp. and Subsidiary

Table of Contents

Consolidated Financial Statements (UNAUDITED)

Condensed Consolidated Balance Sheets (UNAUDITED)	4

Condensed Consolidated Statements of Operations (UNAUDITED)	5

Condensed Consolidated Statements of Stockholders’ Equity (UNAUDITED)	6

Condensed Consolidated Statements of Cash Flows (UNAUDITED)	7

Notes to Condensed Consolidated Financial Statements (UNAUDITED)	8

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I-ON Digital Corp. and Subsidiary

Condensed Consolidated Balance Sheets (Unaudited)

	September 30, 2020			December 31, 2019

ASSETS

Current assets:
Cash and cash equivalents	$	3,512,005		$	1,337,741
Restricted cash		1,619,088			1,641,043
Short-term financial instruments		707,286			716,013
Short-term loan receivable		152,488			197,741
Accounts receivables, net of allowance for doubtful accounts $711,512 and $721,160, respectively		1,244,304			2,875,384
Deferred tax assets - current		229,652			232,766
Prepaid expenses and other current assets		1,263,770			1,055,553
Total current assets		8,728,593			8,056,241

Non-current assets:
Investments		145,782			105,437
Property and equipment, net		127,111			203,754
Intangible assets, net		202,620			192,868
Deposits		366,778			354,300
Derivative asset		104,181			105,594
Deferred tax assets - non current		683,844			774,307
Total non-current assets		1,630,316			1,736,260

Total Assets	$	10,358,909		$	9,792,501

Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	387,049		$	48,802
Accrued expenses and other		1,338,769			1,705,485
Value added tax payable		183,036			107,717
Income tax payable		-			8,179
Short-term loan payable		468,683			475,039
Current portion of long term debt		74,555			194,300
Government grants outstanding		517,287			-
Total current liabilities		2,969,379			2,539,522
Long term debt, net of current portion		191,700			194,300

Total liabilities		3,161,079			2,733,822

Commitments and contingencies

Stockholders’ Equity
Common stock - $0.0001 par value; authorized 100,000,000 shares; 35,030,339 shares issued and outstanding at September 30, 2020 and December 31, 2019		3,503			3,603
Treasury stock		(709,478	)		(709,478	)
Additional paid-in-capital		3,713,370			3,646,740
Accumulated other comprehensive loss		(344,885	)		(259,960	)
Accumulated retained earnings		4,054,461			3,897,337
Total company stockholders’ equity		6,716,971			6,578,242
Preferred stock (I-ON Korea) - $.4380 par value; authorized 2,000,000 shares; 157,142 shares issued and outstanding at September 30, 2020 and none at December 31, 2019.		475,036			475,036
Non-controlling interests		5,823			5,401
Total stockholders’ equity		7,197,830			7,058,679

Total Liabilities and Stockholders’ Equity	$	10,358,909		$	9,792,501

See accompanying notes to unaudited condensed consolidated financial statements.

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I-ON Digital Corp. and Subsidiary

Condensed Consolidated Statements of Operations (Unaudited)

	Three-Month Ended September 30,						Nine-Month Ended September 30,
	2020			2019			2020			2019

Net sales	$	2,306,668		$	1,818,347		$	6,263,131		$	5,283,268
Cost of goods sold		1,497,499			1,071,363			4,235,923			4,240,030
Gross profit		809,169			746,984			2,027,208			1,043,238

Operating expense:
Research and development		96,932			63,312			501,093			441,906
General and administrative		389,215			534,672			1,310,845			1,540,467
Total operating expense		486,147			597,984			1,811,938			1,982,373

Income (loss) from operations		323,022			149,000			215,270			(939,135	)

Other income (expense):
Loss on extinguishment of debt		-			-			-			(160,419	)
Interest income		10,037			-			33,007			-
Foreign currency transaction gain (loss)		(535	)		-			10,443			-
Miscellaneous income (expense), net		(8,977	)		4,095			50,229			43,477
Interest expense		(5,194	)		-			(18,470	)		(45,147	)
Total other income (expense), net		(4,669	)		4,095			75,209			(162,089	)

Income (loss) before provision for income taxes, loss on equity investments in affiliates, and non-controlling interest		318,353			153,095			290,479			(1,101,224	)

Provision for income tax		24,748			(53,176	)		132,933			10,801

Net income (loss) before income or loss on equity investments in affiliates and non-controlling interest		293,605			206,271			157,546			(1,112,025	)

Income (loss) on equity investments		-			7,062			-			-

Net income (loss) before non-controlling interest		293,605			213,333			157,546			(1,112,025	)

Non-controlling interest income (loss)		25			(90	)		422			574

Net income (loss)	$	293,580		$	213,423		$	157,124		$	(1,111,451	)

Comprehensive income statement:
Net income (loss)		293,605			213,333			157,546			(1,112,025	)
Foreign currency translation loss		(162,903	)		(259,523	)		(84,925	)		(476,180	)
Total comprehensive income (loss)		456,508			(46,190	)		72,621			(1,588,205	)

Earnings per share – Basic
Net income (loss) before non-controlling interest		0.01			0.01			0.01			(0.03	)

Non-controlling interest	0.00	(0.00	)	0.00	0.00
Earnings per share to stockholders	0.01	0.01		0.01	(0.03	)

Earning per share – Diluted
Net income (loss) before non-controlling interest	0.01	0.01		0.01	(0.03	)
Non-controlling interest	0.00	(0.00	)	0.00	0.00
Earning per share to stockholders	0.01	0.01		0.01	(0.03	)

Weighted average number of common shares outstanding :
Basic	35,030,339	35,030,339		35,030,339	35,030,339
Diluted	35,030,339	35,030,339		35,030,339	35,030,339

See accompanying notes to unaudited condensed consolidated financial statements.

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I-ON Digital Corp. and Subsidiary

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

	Common Stock
	Shares		Amount			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Company Stockholders' Equity		Non-Controlling Interst		Preferred Stock		Total Stockholders' Equity

Balance at July 1, 2020		35,030,339	$	3,603		$	3,691,093	$	3,760,881	$	(709,478	)	$	(507,788	)	$	6,238,311	$	5,798	$	475,036	$	6,719,145

Reclassification of issuance of common stock in connection with equity purchase agreement		-		(100	)		100		-		-			-			-		-		-		-
Foreign currency translation		-		-			-		-		-			162,903			162,903		-		-		162,903
Stock compensation expense		-		-			22,177				-			-			22,177		-		-		22,177
Net income (loss)		-		-			-		293,580		-			-			293,580		25		-		293,605

Balance at September 30, 2020		35,030,339	$	3,503		$	3,713,370	$	4,054,461	$	(709,478	)	$	(344,885	)	$	6,716,971	$	5,823	$	475,036	$	7,197,830

	Common Stock
	Shares		Amount		Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Company Stockholders' Equity			Non-Controlling Interst			Preferred Stock		Total Stockholders' Equity

Balance at July 1, 2019		35,030,339	$	3,603	$	3,624,497	$	3,284,427	$	(709,478	)	$	(268,850	)	$	5,934,199		$	1,083		$	481,862	$	6,417,144
Foreign currency translation		-		-		-		-		-			(259,523	)		(259,523	)		-			-		(259,523	)
Stock compensation expense		-		-		22,243		-		-			-			22,243			-			-		22,243
Net income (loss)		-		-		-		213,333		-			-			213,333			(90	)		-		213,243

Balance at September 30, 2019		35,030,339	$	3,603	$	3,646,740	$	3,497,760	$	(709,478	)	$	(528,373	)	$	5,910,252		$	993		$	481,862	$	6,393,107

	Common Stock
	Shares		Amount			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Company Stockholders' Equity			Non-Controlling Interst		Preferred Stock		Total Stockholders' Equity

Balance at January 1, 2020		35,030,339	$	3,603		$	3,646,740	$	3,897,337	$	(709,478	)	$	(259,960	)	$	6,578,242		$	5,401	$	475,036	$	7,058,679

Reclassification of issuance of common stock in connection with equity purchase agreement		-		(100	)		100		-		-			-			-			-		-		-
Foreign currency translation		-		-			-		-		-			(84,925	)		(84,925	)		-		-		(84,925	)
Stock compensation expense		-		-			66,530		-		-			-			66,530			-		-		66,530
Net income (loss)		-		-			-		157,124		-			-			157,124			422		-		157,546

Balance at September 30, 2020		35,030,339	$	3,503		$	3,713,370	$	4,054,461	$	(709,478	)	$	(344,885	)	$	6,716,971		$	5,823	$	475,036	$	7,197,830

	Common Stock
	Shares		Amount		Additional Paid-In Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Company Stockholders' Equity			Non-Controlling Interst		Preferred Stock		Total Stockholders' Equity

Balance at January 1, 2019		35,030,339	$	3,603	$	3,582,987	$	4,609,785		$	(709,478	)	$	(52,193	)	$	7,434,704		$	419	$	-	$	7,435,123
Issuance of non-controlling interest - Preferred stock		-		-		-		-			-			-			-			-		481,862		481,862
Foreign currency translation		-		-		-		-			-			(476,180	)		(476,180	)		-		-		(476,180	)
Stock compensation expense		-		-		63,753		-			-			-			63,753			-		-		63,753
Net income (loss)		-		-		-		(1,112,025	)		-			-			(1,112,025	)		574		-		(1,111,451	)

Balance at September 30, 2019		35,030,339	$	3,603	$	3,646,740	$	3,497,760		$	(709,478	)	$	(528,373	)	$	5,910,252		$	993	$	481,862	$	6,393,107

The accompanying notes are an integral part of these financial statements

See accompanying notes to unaudited condensed consolidated financial statements.

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I-ON Digital Corp. and Subsidiary

Condensed Consolidated Statements of Cash Flows (Unaudited)

	September 30, 2020			September 30, 2019

Cash flows from operating activities:
Net income (loss)	$	157,124		$	(1,111,451	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Non-controlling interest		422			574
Depreciation - fixed assets		81,576			237,656
Amortization of intangible assets		21,914			17,018
Stock options expense		66,530			63,753
Foreign exchange gain (loss)		-			6,551

Changes in operating assets and liabilities:
Account receivable, net		1,644,070			202,824
Prepaid expenses and other current assets		(217,295	)		(683,243	)
Deposit		(16,827	)		(8,529	)
Deferred taxes		78,287			(6,036	)
Account payable		243,618			242,113
Accrued expenses and other		(336,097	)		89,983
Value added tax payable		75,019			37,960
Income tax payable		(7,887	)		2,618
Net cash provided by (used in) operating activities		1,790,454			(908,209	)

Cash flows from investing activities:
Proceeds from sale (purchases of) investments		(41,641	)		14,129
Purchases of property and equipment		(9,336	)		(286,811	)
Purchases of intangible assets		(33,966	)		(32,122	)
Payments received from short-term loan receivable		83,282			14,582
Loans provided under short-term loans		(41,641	)		(201,300	)
Net cash used in investing activities		(43,302	)		(491,522	)

Cash flows from financing activities:
Payments on short-term loan payable		-			(129,068	)
Principal payments on long-term debt		(114,488	)		(64,611	)
Principal payments on convertible debt		-			(200,000	)
Proceeds from issuance of non-controlling interest preferred shares issued by subsidiary		-			473,246
Net receipt of government grants		505,552			-
Net cash provided by financing activities		391,064			79,567

Effect of foreign currency translation on cash and cash equivalents		14,093			(8,606	)

Net increase (decrease) in cash and cash equivalents		2,152,309			(1,328,770	)

Cash and cash equivalents including restricted cash, beginning of year		2,978,784			3,408,541

Cash and cash equivalents including restricted cash, end of year	$	5,131,093		$	2,079,771

Supplemental disclosure of cash flow information:
Interest paid	$	18,470		$	6,750
Taxes paid	$	19,764		$	6,757

See accompanying notes to unaudited condensed consolidated financial statements.

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I-ON Digital Corp. and Subsidiary

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1:

Organization and Operations

I-ON Digital Corp. (“the Company”) was incorporated on July 5, 1999 and is engaged in developing and supplying computerized system. The corporate headquarter is located at 15 Teheran-ro 10-gil Gangnam-gu Seoul, South Korea. The Company provides enterprise content management services to customers primarily in Korea, Japan and Indonesia, by developing industry-leading products such as ICS (web content management system), iDrive (e-document management system), LAMS (load aggregator’s management system), e.Form (mobile contract system), IDAS (digital asset management system) and ICE (content delivery system).

I-ON, Ltd is the Japanese subsidiary of the Company incorporated in 2002. The total assets of I-ON, Ltd is approximately $831,878. The Company has 99.5% ownership of I-ON, Ltd.

NOTE 2:

Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of I-ON Communication Co., Ltd. and its 99.5% owned subsidiary, I-ON, Ltd. All intercompany accounts, transactions, and profits have been eliminated upon consolidation. The accompanying consolidated financial statements and the notes hereto are reported in US Dollars.

The consolidated financial statements were prepared and presented in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. Non-controlling interests represent the portion of earnings that is not within the parent Company’s control. These amounts are required to be reported as equity instead of as a liability on the consolidated balance sheet. ASC requires net income or loss from non-controlling minority interests to be shown separately on the consolidated statements of operations.

The consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted pursuant to such rules and regulations. These consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The unaudited information contained herein has been prepared on the same basis as the Company’s audited consolidated financial statements, and, in the opinion of the Company’s management, includes all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2020 or any future period.

Use of Estimates in the Preparation of Financial Statements

The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from these estimates.

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I-ON Digital Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Foreign Currency Transaction and Translation

The Company’s principal country of operations is Korea. The financial position and results of operations of the Company are determined using the local currency, Korean Won (“KRW”), as the functional currency.

●

I-ON, Ltd (Japanese subsidiary) – The financial position and results of operations of I-ON, Ltd, the Japanese subsidiary of the Company, are initially recorded using its local currency, Japanese Yen (“JPY”). Assets and liabilities denominated in foreign currency are translated to the functional currency at the functional currency rate of exchange at the balance sheet date. The results of operations denominated in foreign currency are translated at the average rate of exchange during the reporting period. All differences are reflected in profit or loss. As of September 30, 2020 and December 31, 2019, the exchange rate was JPY 11.12 and JPY 10.63 per KRW, respectively. The average exchange rate for the three months ended September 30, 2020 and 2019 was JPY 11.17 and JPY 11.12 per KRW, respectively. The average exchange rate for the nine months ended September 30, 2020 and 2019 was JPY 11.17 and JPY 10.66 per KRW, respectively.

●

Consolidation – Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rates prevailing at the balance sheet date. The results of operations are translated from KWR to US Dollar at the weighted average rate of exchange during the reporting period. The registered equity capital denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. All translation adjustments resulting from the translation of the financial statements into the reporting currency, US Dollar, are dealt with as a component of accumulated other comprehensive income. As of September 30, 2020 and December 31, 2019, the exchange rate was KRW 1,173.50 and KRW 1,157.80 per US Dollar, respectively. The average exchange rate for the three months ended September 30, 2020 and 2019 was KRW 1207.10 and KRW 1,193.24, respectively. The average exchange rate for the nine months ended September 30, 2020 and 2019 was KRW 1,200.74 and KRW 1,162.18, respectively.

Translation adjustments net of tax were a net gain of $44,864.00 and net loss of $259,523 for the three-months ended September 30, 2020 and 2019, respectively, and a net gain of $292,692 and net loss of $476,180 for the nine-months ended September 30, 2020 and 2019, 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.

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:

	September 30, 2020		December 31, 2019
Korea
Current assets	$	8,212,307	$	7,821,531
Non-current assets		1,630,025		1,735,978
Current liabilities		2,675,984		2,437,550
Non-current liabilities		191,700		194,300

Japan
Current assets	$	216,286	$	234,710
Non-current assets		291		282
Current liabilities		293,395		101,972
Non-current liabilities		-		-

	Nine-months Ended September 30,				Three-months Ended September 30,
	2020		2019		2020		2019
Korea
Net Sales	$	4,882,750	$	4,614,262	$	2,004,711	$	1,652,572

Japan
Net Sales	$	1,380,381	$	669,006	$	301,957	$	165,775

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I-ON Digital Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Revenue Recognition – Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

Revenues are recognized when control of the promised services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.

The Company’s revenue consists of services provided and commissions. These revenue sources are as follows:

●

Royalty – the Company receives a fixed amount of royalties from company in Japan for providing rights to sell the Company’s products in Japanese market. Revenue is recognized over the contract and service period and when collectability is reasonably assured.

●

License Solution & Services – the Company recognizes revenue on installation of the web-content management software, services provided for installation, and customization.

●

Customizing Services – the Company recognizes revenue from processing transactions between businesses and their customers. Revenue is recognized over the contract and service period and when collectability is reasonably assured.

●

Maintenance – the Company recognizes revenue over the contract term based on percentage-of-completion method.

Cash, Cash Equivalents, and Restricted Cash

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted cash represents cash deposits which is restricted by the financial institutions for the loans the financial institutions having with the Company’s chief executive officer. The loans with the financial institutions are amounted to approximately $1,619,088 and $1,641,043 at September 30, 2020 and December 31, 2019, respectively, and expires on various days during 2020, 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.

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.

The Company’s restricted cash relates to the Company’s Chief Executive Officer’s personal loan arrangements with a bank which is typically in compliance with the law of Korea. This restrictions on cash may be considered a violation of Section 402 of the Sarbanes-Oxley Act of 2002. The Company is in process with the bank to potentially have the restrictions removed which may be by end of the fiscal year 2020.

Research and Development

Research and development costs are expensed as incurred. Research and development costs include travel, payroll, and other general expenses specific to research and development activities. Research and development cost for three months ended September 30, 2020 and 2019 was $96,932 and $63,312, respectively, and for the nine months ended September 30, 2020 and 2019 was $501,093 and $441,906, respectively.

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.

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I-ON Digital Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Fair Value Measurements

The Company follows FASB ASC Topic 820, Fair Value Measurements. ASC 820 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820 as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820 establishes a hierarchy of valuation inputs based on the extent to which the inputs are observable in the marketplace. Observable inputs reflect market data obtained from sources independent of the reporting entity and unobservable inputs reflect the entity’s own assumptions about how market participants would value an asset or liability based on the best information available. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.

The following describes the hierarchy of inputs used to measure fair value and the primary valuation methodologies used by the Company for financial instruments measured at fair value on a recurring basis.

The three levels of inputs are as follows:

Level 1

Quoted prices in active markets for identical assets or liabilities that the Company has an ability to access as of the measurement date.

Level 2

Inputs that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the same term of the assets or liabilities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our financial instruments include cash and cash equivalents, restricted cash, short-term financial instruments, short-term loans, accounts receivable, investments, accounts payables and debt. The carrying values of these financial instruments approximate their fair value due to their short maturities. The carrying amount of our debt approximates fair value because the interest rates on these instruments approximate the interest rate on debt with similar terms available to us.

The Company also has financial instruments classified within the fair value hierarchy, which consists of the following:

•

Investments in privately-held companies, where quoted market prices are not available, accounted for as available-for-sale securities, classified as Level 3 within the fair value hierarchy, and are recorded as an asset on the consolidated balance sheet

•

Detachable warrants issued in connection with the convertible debt that meets the definition of a derivative, classified as Level 2 within the fair value hierarchy, which is recorded as additional paid-in-capital on the consolidated balance sheet

•

An equity purchase put option that meets the definition of a derivative, classified as Level 3 within the fair value hierarchy, which is recorded as an asset on the consolidated balance sheet

The derivatives are evaluated under the hierarchy of ASC 480-10, ASC Paragraph 815-25-1 and ASC Subparagraph 815-10-15-74 addressing embedded derivatives. The fair value of the Level 3 financial instruments was determined with the assistance of an independent third-party valuation specialist using an Option Pricing Model.

The following table summarize the Company’s fair value measurements by level for the assets measured at fair value on a recurring basis:

	Level 1		Level 2		Level 3

Available-for-sale securities	$	-	$	-	$	145,782
Equity purchase put option		-		-		104,181
Fair value, at September 30, 2020	$	-	$	-	$	249,963

The following table summarize the Company’s fair value measurements by level at December 31, 2019 for the assets measured at fair value on a recurring basis:

	Level 1		Level 2		Level 3

Available-for-sale securities	$	-	$	-	$	105,437
Equity purchase put option		-		-		105,594
Fair value, at December 31, 2019	$	-	$	-	$	211,031

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I-ON Digital Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Recently Issued Accounting Pronouncements

Pronouncements Not Yet Effective

●

Fair Value Measurements

In August 2018, the FASB amended “Fair Value Measurements” to modify the disclosure requirements related to fair value. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation processes used in level 3 measurements. It clarifies that, for investments measured at net asset value, disclosure of liquidation timing is only required if the investee has communicated the timing either to us or publicly. It also clarifies that the narrative disclosure of the effect of changes in level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of significant unobservable inputs used in level 3 measurements. The guidance is effective for the Company with the Company’s quarterly filing for the period ended March 31, 2020 and the Company will make the required disclosure changes in that filing. Adoption will not have an impact on the Company’s consolidated results of operations, consolidated financial position, and cash flows.

●

Retirement Plans

In August 2018, the FASB amended “Retirement Plans” to modify the disclosure requirements for defined benefit plans. For the Company, the amendment requires the disclosure of the weighted average interest crediting rate used for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. It removes the requirement to disclose the approximate amount of future benefits covered by insurance contracts. The guidance is effective for the Company with the Company’s annual filing for the year ended December 31, 2020 and the Company will make the required disclosure changes in that filing. Adoption will not have an impact on the Company’s consolidated results of operations, consolidated financial position, and cash flows.

●

Intangibles – Goodwill and other – Internal-Use Software

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This standard aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company’s accounting for the service element of a hosting arrangement that is a service contract is not affected by the proposed amendments and will continue to be expensed as incurred in accordance with existing guidance. This standard does not expand on existing disclosure requirements except to require a description of the nature of hosting arrangements that are service contracts. This standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively or retrospectively. The Company plans to adopt the updated disclosure requirements of ASU No. 2018-15 prospectively in the first quarter of fiscal 2020, coinciding with the standard’s effective date, and expects the impact from this standard to be immaterial.

●

Improvements to Nonemployee Share-based Payment Accounting

In June 2018, the FASB issued ASU No. 2018-07 “Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 aligns the accounting for share-based payment awards to employees and non-employees. Under ASU 2018-07 the existing employee guidance will apply to nonemployee share-based transactions, except for specific guidance related to the attribution of compensation cost. ASU 2018-07 should be applied to all new awards granted after the date of adoption. ASU 2018-07 is effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. The Company adopted ASU 2018-07 effective January 1, 2019; such adoption had no material impact on the Company’s consolidated financial statements.

●

Income Statement – Reporting Comprehensive Income

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220) (ASU 2018-02), which amends existing standards for income statement-reporting comprehensive income to allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from Tax Cuts and Jobs Act and improve the usefulness of information reported to financial statements users. ASU 2018-02 will be effective for beginning after December 15, 2018, and early adoption is permitted. The Company adopted ASU 2018-02 effective January 1, 2019; such adoption had no material impact on the Company’s consolidated financial statements.

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I-ON Digital Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

●

Goodwill

In January 2017, the FASB amended “Goodwill” to simplify the subsequent measurement of goodwill. The amended guidance eliminates Step 2 from the goodwill impairment test. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill of the reporting unit. The new guidance is effective for the Company on January 1, 2020 and is not expected to have an impact on our consolidated results of operations, consolidated financial position, and cash flows.

●

Financial Instruments

In June 2016, the FASB amended “Financial Instruments” to provide financial statement users with more decision-useful information about the expected credit losses on debt instruments and other commitments to extend credit held by a reporting entity at each reporting date. During November 2018 and April 2019, the FASB made amendments to the new standard that clarified guidance on several matters, including accrued interest, recoveries, and various codification improvements. The new standard, as amended, replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to support credit loss estimates. The new guidance is effective for us on January 1, 2020, and in the first half of 2019, we established an implementation team and began analyzing the impact on our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard. The implementation team reports findings and progress of the project to management on a frequent basis. Through this process, we have identified appropriate changes to our processes, systems, and controls to support recognition and disclosure under the new standard. The Company is still evaluating the impact of the new standard on the Company’s consolidated results of operations, consolidated financial position, and cash flows.

Other recently issued accounting updates are not expected to have a material impact on the Company’s Interim Financial Statements.

Recently Adopted Accounting Pronouncements

●

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For public entities, the standard is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company adopted ASU 2016-15 effective January 1, 2018; such adoption had no material impact on the Company’s consolidated financial statements.

●

Leases (ASU 2019-01)

In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which removed the requirement for an entity to disclose in the interim periods after adoption, the effect of the change on income from continuing operations, net income, any other affected financial statement line item, and any affected per share amount. For lessors, the new leasing standard requires leases to be classified as a sales-type, direct financing or operating leases. These criteria focus on the transfer of control of the underlying lease asset. This standard and related update was effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2016-02 effective January 1, 2019; such adoption had no material impact on the Company’s financial statements, given that the noncancelable term of the Company’s current lease is less than 12 months.

●

Leases (ASU 2016-02)

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities on the balance sheet by lessees for those leases currently classified as operating leases under ASC 840 “Leases.” These amendments also require qualitative disclosures along with specific quantitative disclosures. These amendments are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company can elect to record a cumulative-effect adjustment as of the beginning of the year of adoption or apply a modified retrospective transition approach. The Company expects that substantially all of its operating lease commitments will be subject to the new guidance and will be recognized as operating lease liabilities and right-of-use assets upon adoption. The Company adopted ASU 2016-02 effective January 1, 2019; such adoption had no material impact on the Company’s financial statements, given that the noncancelable term of the Company’s current lease is less than 12 months.

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I-ON Digital Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

NOTE 3:

Long-term Debt

Long-term debt consisted of the following:

	September 30, 2020			December 31, 2019

A note payable to a financial institution bearing interest at 2.81% and 2.54% at September 30, 2020 and December 31, 2019, respectively, and guaranteed by the officer of the Company. The Company was required to make interest-only payments until December 2019, then monthly payments of both principal and interest starting from January 2020.	$	266,255		$	388,600

Long-term debt	$	266,255		$	388,600
Less: current portion		(74,555	)		(194,300
Long-term debt, net of current portion	$	191,700		$	194,300

The long-term debts contain certain covenants, and the Company was in compliance with the covenants.

NOTE 4:

Line of Credit

The Company has lines of credit with financial institutions for total amount of approximately $3,400,000 that expires in various months in 2020, unless extended. There was no outstanding balance under the credit lines at December 31, 2019. 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 $5,100,000 and $5,100,000 as of September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019, respectively. The maturity date of the arrangement varies on the dates of the original transactions.

NOTE 5:

Short Term Loan Payable

The Company has a short-term loan with a financial institution bearing interest rate of 2.54% expiring July 16, 2021. All amounts outstanding is due on July 16, 2021, however, the Company may make earlier payments without any penalty. The total amount outstanding was approximately $469,000 and $475,000 at September 30, 2020 and December 31, 2019, respectively. The short-term loan is guaranteed by the officer of the Company.

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I-ON Digital Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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 September 30, 2020 and December 31, 2019

Equity investee

Type of

Owned

Number

of Shares

Owned

Original

Investment

Amount

Equity

Investment

Ownership

ACDC Consulting VN PTE Ltd

Common stock

9,507.85

Since, ACDC Consulting VN PTE Ltd. does not quarterly book closing, the Company cannot get the financial information of ACDC Consulting VN PTE Ltd. ACDC Consulting VN PTE Ltd. recognized $30.75 as the operation income in 2019.

Available-for-sale securities

The Company’s investments also include privately-held companies, where quoted market prices are not available, and the cost method, combined with other intrinsic information, is used to assess the fair value of the investment.

The following table summarize the Company’s investment securities:

Available-for-sale securities	Percentage of Ownership			September 30, 2020		December 31, 2019
4Grit		2.50	%	$	42,611	$	43,189
E-channel		0.07	%	$	40,303	$	40,849
KSFC		0.00	%	$	11,207	$	11,359
ACDC Consulting VN PTE LTD		20.00	%	$	9,906	$	10,040
Jayoo Soft		98.00	%	$	41,755		-
Total investment securities				$	145,782	$	105,437

Note 7.

Beneficial Conversion Feature and Common Stock Warrant

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.

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I-ON Digital Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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, 2019	$	105,594
Issuance of equity purchase put option		-
Change in fair value		(1,413	)
Fair value, at September 30, 2020	$	104,181

NOTE 8:

Commitments and Contingencies

Royalty

On February 15, 2006, the Company agreed to provide the rights to Ashisuto to sell the products in the Japanese market. Per the agreement, the contract period is automatically extended by 5 years up to 20 years.

Operating Leases

The Company leases its office under non-cancelable operating leases that expire on dates through December 2020. The lease is automatically extended upon agreement of both parties. Rent expense for all operating leases for the three-months ended September 30, 2020 and 2019 was $23,962 and $35,119 respectively, and for the nine-months ended September 30, 2020 and 2019 was $59,150 and $108,417, respectively.

NOTE 9:

Related Party Transactions

The Company receives loan guarantees from the chief executive officer with regards to its long-term borrowing, and the Company’s restricted cash 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).

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I-ON Digital Corp. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

The following table sets forth the computation of basic and diluted net income per common share:

	Three Months Ended September 30,					Nine Months Ended September 30,
Periods Ended	2020		2019			2020		2019

Net income (loss) before non-controlling interest	$	293,605	$	213,333		$	157,546	$	(1,112,025	)
Non-controlling interest		25		(90	)		422		574
Net income (loss)		293,580		213,423			157,124		(1,111,451	)

Weighted-average shares of common stock outstanding:
Basic		35,030,339		35,030,339			35,030,339		35,030,339
Dilutive effect of common stock equivalents arising from share option, excluding antidilutive effect from loss		-		-			-		-
Dilutive shares		35,030,339		35,030,339			35,030,339		35,030,339

Earnings per share - Basic
Net income (loss) before non-controlling interest	$	0.01	$	0.01		$	0.01	$	(0.03	)
Non-controlling interest	$	0.00	$	0.00		$	0.00	$	0.00
Earnings per share to stockholders	$	0.01	$	0.01		$	0.01	$	(0.03	)

Earnings per share - Diluted
Net income (loss) before non-controlling interest	$	0.01	$	0.01		$	0.01	$	(0.03	)
Non-controlling interest	$	0.00	$	0.00		$	0.00	$	0.00
Earnings per share to stockholders	$	0.01	$	0.01		$	0.01	$	(0.03	)

No non-vested share awards or non-vested share unit awards were antidilutive for the nine months ended September 30, 2020 and 2019.

NOTE 11:

Non-Controlling Interest-Issuance of Preferred Stock by Subsidiary

On April 9, 2019, The Company’s subsidiary, I-ON Communication Korea issued redeemable convertible preferred stock with proceed of KRW549,997,000 and issued 157,142 shares of preferred stock or at price of KRW3,500 per share. The convertible preferred stock agreement contain provisions as follows:

●

Voting rights – The preferred shareholder may have same voting rights as common stock shareholder (1:1)

●

2% annual dividend

●

Liquidating rights

●

Conversion rights to common stock

Call option by preferred shareholder - Preferred stock may be converted to common stock anytime at a fixed conversion price of KRW 3,500

Call option by I-ON Communication – Should I-ON Communication exercise to redeem preferred stock, I-ON Communication is required to re-purchase for KRW 3,500 per share and 7% annual interest compounded.

The Company accounted the issuance of preferred stock under ASC 810-10-45-23, Consolidation, and was accounted for as equity transaction as the parent’s ownership interest retains control of a subsidiary. The preferred stock issuance by a subsidiary to noncontrolling interest holders should be reflected as a noncontrolling interest in the financial statements of the parent at the amount of the cash proceeds received.

The convertible preferred shares meet definition of equity instrument and contain call option that is not outside the Company’s control and the conversion to common stock is at a fixed determinable share conversion price at KRW 3,500 per share.

NOTE 12:

Subsequent Events

The Company evaluated all events or transactions that occurred after September 30, 2020 up through the date the unaudited consolidated financial statements were available to be filed. During these periods, the Company did not have any material recognizable subsequent events required to be disclosed as of and for the nine months ended September 30, 2020.

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Item 2.

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

Forward Looking Statements

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

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

Our unaudited interim consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 and as of September 30, 2020 and December 31, 2019 are expressed in US dollars and are prepared in accordance with generally accepted accounting principles in the United States of America. They reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for fair presentation of our interim financial information. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter. Our unaudited consolidated financial statements and notes included therein have been prepared on a basis consistent with and should be read in conjunction with our audited financial statements and notes for the year ended December 31, 2019, as filed in our annual report on Form 10-K.

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

Business Overview

Organization and Corporate History

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

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

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

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

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

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I-ON Digital

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

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

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

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

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

I-ON has invested and continues to spend substantial revenue on research and development. The Company has over 100 employees as of December 31, 2019, approximately 90% of whom are considered full-time. Research and development typically comprises of approximately 80 junior, mid to senior level engineers and developers, most of whom are based at the Company’ headquarters located at 15 Teheran-ro 10-gil, Gangnam-gu, Seoul, South Korea, 06234.

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Results of Operations

Comparison of results of operations for the three months ended September 30, 2020 as Compared to the three months ended September 30, 2019

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

	Three Months Ended
	September 30, 2020						September 30, 2019						Change
	Amount			% of Revenue			Amount			% of Revenue			Amount			%

Net sales	$	2,306,668			100.0	%	$	1,818,347			100.0	%	$	488,321			26.9	%
Cost of goods sold		1,497,499			64.9	%		1,071,363			58.9	%		426,136			39.8	%
Gross profit		809,169			33.7	%		746,984			41.1	%		62,185			8.3	%

Operating expense:
Research and development		96,932			4.2	%		63,312			3.5	%		33,620			53.1	%
General and administrative		389,215			16.9	%		534,672			29.4	%		(145,457	)		27.2	%
Total operating expense		486,147			21.1	%		597,984			32.9	%		(111,837	)		18.47	%

Income from operations		323,022			14.0	%		149,000			8.2	%		174,022			116.8	%

Other income (expense):
Loss on extinguishment of debt		-			0.0	%		-			0.0	%		-			n/a
Interest income		10,037			0.4	%		-			0.0	%		10,037			n/a
Foreign currency transaction gain(loss)		(535	)		0.0	%								(535	)		n/a
Miscellaneous income (expense), net		(8,977	)		-0.4	%		4,905			0.2	%		(13,072	)		-319.2	%
Interest expense		(5,194	)		-0.2	%		-			0.0	%	(5,194		)		n/a
Total other income (expense), net		(4,669	)		-0.2	%		4,095			0.2	%		(8,764	)		-214.0	%

Income before provision for income taxes, loss on equity investments in affiliates, and non-controlling interest		318,353			13.8	%		153,095			8.4	%		165,258			107.9	%
Provision for income tax		24,748			1.1	%		(53,176	)		-2.9	%		77,924			-146.5	%

Net income before income or loss on equity investments in affiliates and non-controlling interest		293,605			12.7	%		206,271			11.3	%		87,334			42.3	%

Income (Loss) on equity investments		-			0	%		7,062			0.4	%		(7,062	)		-100.0	%

Net income before non-controlling interest		293,605			12.7	%		213,333			11.7	%		80,272			37.6	%

Non-controlling interest income (loss)		25			0.0	%		(90	)		0.0	%		115			-127.8	%

Net income	$293,580				12.7	%	$ 213,243				11.7	%	$80,337				37.7	%

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Net Sales

Net sales increased by $488,321, or 26.9%, to $2,306,668 for the three months ended September 30, 2020 from $1,818,347 for the three months ended September 30, 2019. The change in net sales reflected the following:

- License customization revenue increased by approximately $192,231 from approximately $1,405,559 for the three months ended September 30, 2019 to $1,213,328 for the three months ended September 30, 2020 due to increase in new large projects with Samsung, SK, LG, etc.

- Maintenance revenue increased by approximately $297,293 from approximately $653,488 for the three months ended September 30, 2019 to $356,196 for the three months ended September 30, 2020. Maintenance service was sustained due to the strong relationship with the current customers. The Company plans to exit this project going forward.

Cost of Goods Sold

Cost of goods sold increased by $426,136 or 39.8%, to $1,497,499 for the three months ended September 30, 2020 from $1,071,363 for the three months ended September 30, 2019. The increase was primarily due to using outsourcing services and increase in employees.

Gross Profit (Loss)

Gross profit increased by $62,185, or 8.3%, from gross profit of $746,984, or 41.1& of net sales, for the three months ended September 30, 2019, to gross profit of $809,169 or 35.1% of net sales, for the three months ended September 30, 2020. The increase was mainly due to increase in new projects of customization maintenance.

Research and Development

Research and development expenses increased by $33,620 or 53.1%, to $96,932 for the three months ended September 30, 2020 from $63,312 for the three months ended September 30, 2019. The increase was due to increase in outsource development fees.

General and Administrative

General and administrative expenses decreased by $145,457 or 27.2%, from $534,672 for the three months ended September 30, 2019, to $389,215 for the three months ended September 30, 2020. The Change was primarily due to decrease in training expense and service fee.

Other Income (Expense)

Other income (expense) change was primarily due to decrease in miscellaneous income from Japan.

Provision for Income Tax

Change in tax provision was not material.

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Comparison of results of operations for the nine months ended September 30, 2020 as Compared to the nine months ended September 30, 2019

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

	Nine Months Ended
	September 30, 2020						September 30, 2019						Change
	Amount			% of Revenue			Amount			% of Revenue			Amount			%

Net sales	$	6,263,131			100.0	%	$	5,283,268			100.0	%	$	979,863			18.5	%
Cost of goods sold		4,235,923			67.6	%		4,240,030			80.3	%		(4,107	)		-0.1	%
Gross profit		2,027,208			32.4	%		1,043,238			19.7	%		983,970			94.3	%

Operating expense:
Research and development		501,093			8.0	%		441,906			8.4	%		59,187			13.4	%
General and administrative		1,310,845			20.9	%		1,540,467			29.2	%		(229,622	)		-14.9	%
Total operating expense		1,811,938			28.9	%		1,982,373			37.5	%		(170,435	)		-8.6	%

Income (loss) from operations		215,270			3.4	%		(939,135	)		-17.8	%		1,154,405			-122.9	%

Other income (expense):
Loss on extinguishment of debt		-			0.0	%		(160,419	)		-3.0	%		(160,419	)		-100.0	%
Interest income		33,007			0.5	%		-			0.0	%		33,007			n/a
Foreign currency transaction gain(loss)		10,443			0.2	%		-			0.0	%		10,443			n/a
Miscellaneous income, net		50,229			0.8	%		43,477			0.8	%		6,752			15.5	%
Interest expense		(18,470	)		-0.3	%		(45,147	)		-0.9	%		26,677			-59.1	%
Total other income (expense), net		75,209			1.2	%		(162,089	)		-3.1	%		237,298			-146.4	%

Income (loss) before provision for income taxes, loss on equity investments in affiliates, and non-controlling interest		290,479			4.6	%		(1,101,224	)		-20.8	%		1,391,703			-126.4	%
Provision for income tax		132,933			2.1	%		10,801			0.2	%		122,132			1,130.7	%

Net income (loss) before income or loss on equity investments in affiliates and non-controlling interest		157,546			2.5	%		(1,112,025	)		-21.0	%		1,269,571			-114.2	%

Income (Loss) on equity investments		-			0.0	%		-			0.0	%		-			n/a

Net income (loss) before non-controlling interest		157,546			2.5	%		(1,112,025	)		-21.0	%		1,269,571			-114.2	%

Non-controlling interest income (loss)		422			0.0	%		574			0.0	%		(152	)		-26.5	%

Net income (loss)	$ 157,124				2.5	%	$ (1,111,451)				-21.0	%	$1,268,575				-114.1	%

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Net Sales

Net sales increased by $979,863, or 18.5%, to $6,263,131 for the nine months ended September 30, 2020 from $5,283,268 for the nine months ended September 30, 2019. The change in net sales reflected the following:

- Solution installation revenue increased by approximately $437,089 from approximately $114,148 for the nine months ended September 30, 2019 to $551,238 for the nine months ended September 30, 2020 due to the Company focusing in sales effort in this area and signing up new projects with various customers since September 30, 2019 to September 30, 2020.

- Maintenance revenue increased by approximately $330,596 from approximately $1,370,136 for the nine months ended September 30, 2019 to $1,700,732 for the nine months ended September 30, 2020 due to increase in new contracts.

- License customization revenue increased by approximately $134,706 from approximately $3,144,990 for the nine months ended September 30, 2019 to $3,284,696 for the nine months ended September 30, 2020 due to resuming projects which were temporarily ceased by COVID-19.

Cost of Sales

Cost of sales decreased by $4,107 or 0.1%, to $4,235,923 for the nine months ended September 30, 2020 from $4,240,030 for the nine months ended September 30, 2019. Change in cost of sales was not material.

Gross Profit (Loss)

Gross profit increased by $983,970, or 94.3%, to gross profit of $2,027,208,or 32.4% of net sales, for the nine months ended September 30, 2020, from gross loss of $1,043,238, or 19.7% of net sales, for the nine months ended September 30, 2019.

The increase was due to an increase in sales.

Research and Development

Research and development expenses increased by $59,187 or 13.4%, to $501,093 for the nine months ended September 30, 2020 from $441,906 for the nine months ended September 30, 2019. The increase was due to increase in outsource development fees.

General and Administrative

General and administrative expenses decreased by $229,622 or 14.9%, to $1,310,845 for the nine months ended September 30, 2020 from $1,540,467 for the nine months ended September 30, 2019. The decrease was due to decrease in commission fees, service fees, and training expense.

Other Income (Expense)

Other income (expense) change was primarily due to loss on extinguishment of debt in the amount of $160,419 due to pay-off of convertible debt for the nine months ended September 30, 2019 and decrease in miscellaneous income for the nine months ended September 30, 2020.

Provision for Income Tax

Change in tax provision was not material.

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Liquidity and Capital Resources

At September 30, 2020, the Company had cash and cash equivalents of [$2,853,053]. We estimate that we will require up to $3,000,000 of capital for the next twelve months of operations. We estimate that our expenses will be comprised primarily of general expenses including particularly marketing, research and development costs, overhead, legal and accounting fees.

	Nine Months Ended September 30,						Changes
	2020			2019			Amount	%
Net cash provided by (used in) operating activities		1,790,454			(908,209	)	2,698,663		-297.1	%
Net cash provided by (used in) investing activities		(43,302	)		(491,522	)	448,220		-91.2	%
Net cash provided by (used in) financing activities		391,064			79,567		311,497		391.5	%
Effect of foreign currency translation on cash and cash equivalents		14,093			(8,606	)	22,699		-263.8	%
Net increase (decrease) in cash and cash equivalents		2,152,309			(1,328,770	)	3,481,079		-262.0	%

Operating Activities

Cash provided by operating activities for the nine months ended September 30, 2020 was $1,790,454 compared to ($908,209) for the nine months ended September 30, 2019, an increase of $2,698,663, or approximately 297.1%. The increase in cash provided by operating activities was due to primarily increase in net income of $157,124 for the nine months ended September 30, 2020 compared to net loss of $1,111,451 for nine months ended September 30, 2019 and increase in account receivable of 1,644,070, for the nine months ended September 30, 2020 compared to account receivable of $202,824 for the nine months ended September 30, 2019.

Investing Activities

Cash used in investing activities for the nine months ended September 30, 2020 was $43,302, compared to $491,522 for the nine months ended September 30, 2019. The cash used in investing activities was mainly due to net decrease in purchase of property and equipment of $9,336 for the nine months ended September 30, 2020 compared to $286,811 for the nine months ended September 30, 2019 and decrease in loans provided under short-term loans of $41,641 for the nine months ended September 30, 2020 compared to $201,300 for the nine months ended September 30, 2019.

Financing Activities

Cash provided in financing activities for the nine months ended September 30, 2020 was $391,064 compared to $79,567 for the nine months ended September 30, 2019, an increase of $311,497. The increase in cash provided by financing activities was due to primarily decrease of principal payments on convertible debt of $0 for the nine months ended September 30, 2020 compared to $200,000 for the nine months ended September 30, 2019 and increase of government grants of $505,552 for the nine months ended September 30, 2020 compared to $0 for the nine months ended September 30, 2019.

Critical Accounting Policies

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

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.

Controls and Procedures

Disclosure Controls

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

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

Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting. Under the supervision of our Chief Executive and Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2020 using the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of September 30, 2020, we determined that our disclosure controls and procedures are not effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time provided in the SEC rules and forms.

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

Changes in Internal Control

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the nine months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, as a result of the Company’s recent change of control, we have added several additional employees in accounting which we hope will improve the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 2.

Unregistered Sales of Equity Securities

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None

Item 6.

Exhibit

Exhibit Number		Exhibit Description

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 **

* Filed herewith.

** Furnished herewith.

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SIGNATURES

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

Date: November 12, 2020	I-ON DIGITAL CORP.

	By:	/s/ Jae Cheol Oh
		Name: Jae Cheol Oh
		Chief Executive Officer, Treasurer, Director (Principal Executive and, Financial Officer)