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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB (Mark One) [X]
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004[   ]
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________.
 Commission File Number 0-27106 Viseon, Inc. (Exact name of small business issuer as specified in its charter) Nevada
    
    41-1767211(State or other jurisdiction
    
    (IRS EmployerOf incorporation or organization)
    
    Identification No.)8445 Freeport Parkway, Suite 245, Irving, Texas
    
    75063(Address of principal executive offices)
    
    (Zip Code)
 (972) 906-6300
(Issuers Telephone Number) Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was Required to file such report), and (2) has been
subject to such filing requirements for the past 90 days. YES þ  NO o The Company had 28,290,067 shares of Common Stock, $0.01 par value per share,
outstanding as of November 12, 2004. Transitional Small Business Disclosure Format (Check one): Yes o  No þ 1




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Viseon, Inc. INDEX PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets 
September 30, 2004 (unaudited) and June 30, 2004 (audited)
    
    
    3Consolidated Statements of Operations (unaudited) 
Three months ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows (unaudited) 
Three months ended September 30, 2004 and 2003
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    11Item 3. Controls and Procedures
    
    
    14PART II OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3. Defaults Upon Senior Securities
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 5. Other Information
    
    
    15Item 6. Exhibits and Reports on Form 8-K
    
    
    15Signatures
    
    
    17Certification Pursuant to Rule 13a-14(a)Certification Pursuant to 18 U.S.C. Section 1350
 2




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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements VISEON, INC. AND SUBSIDIARIES 
 Consolidated Balance Sheets September 30,
    
    June 30,2004
    
    2004(Unaudited)
    
    (Audited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    4,053,784
    
    
    $
    5,339,393Accounts receivable, net of allowance for doubtful accounts of
$3,739 at September 30, 2004 and June 30, 2004
    
    
    35,077
    
    
    
    43,389Inventories
    
    
    25,550
    
    
    
    14,600Prepaid expenses
    
    
    410,442
    
    
    
    469,789Total Current Assets
    
    
    4,524,853
    
    
    
    5,867,171PROPERTY AND EQUIPMENT, NET
    
    
    32,049
    
    
    
    35,659INTANGIBLE ASSETS, NET
    
    
    265,795
    
    
    
    210,157TOTAL ASSETS
    
    $
    4,822,697
    
    
    $
    6,112,987LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    432,694
    
    
    $
    413,674Accrued expenses
    
    
    352,771
    
    
    
    226,269Net liabilities of discontinued operations
    
    
    727,603
    
    
    
    743,582Total Current Liabilities
    
    
    1,513,068
    
    
    
    1,383,525COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYSeries A convertible preferred stock, $.01 par value per share,
5,000,000 shares authorized, 271 and 338
shares issued and outstanding
(liquidation preference of $6,775,000 and $8,450,000)
    
    
    3
    
    
    
    3Common stock, $.01 par value per share,
100,000,000 shares authorized,
26,848,519 and 24,682,907 shares issued and outstanding
    
    
    268,485
    
    
    
    246,829Additional paid-in capital
    
    
    37,940,386
    
    
    
    37,732,562Accumulated deficit
    
    
    (34,899,245
    )
    
    
    (33,249,932
    )Total Stockholders Equity
    
    
    3,309,629
    
    
    
    4,729,462TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    4,822,697
    
    
    $
    6,112,987
 See accompanying notes to consolidated financial statements. 3




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VISEON, INC. AND SUBSIDIARIES Consolidated Statements of Operations Three Months
    
    Three MonthsEnded
    
    EndedSeptember 30,
    
    September 30,2004
    
    2003(Unaudited)
    
    (Unaudited)NET SALES
    
    $
    168,169
    
    
    $
    30,699COST OF GOODS SOLD
    
    
    157,637
    
    
    
    35,993Gross Profit (Loss)
    
    
    10,532
    
    
    
    (5,294
    )RESEARCH AND DEVELOPMENT
    
    
    783,767
    
    
    
    1,546SELLING, GENERAL AND ADMINISTRATIVE
    
    
    694,673
    
    
    
    460,867Operating Loss
    
    
    (1,467,908
    )
    
    
    (467,707
    )OTHER INCOME (EXPENSE)Interest income
    
    
    17,642
    
    
    
    Interest expense
    
    
    
    
    
    
    (203,534
    )Other Income (Expense), net
    
    
    17,642
    
    
    
    (203,534
    )LOSS FROM CONTINUING OPERATIONS
    
    
    (1,450,266
    )
    
    
    (671,241
    )GAIN FROM DISCONTINUED OPERATIONS
    
    
    4,979
    
    
    
    NET LOSS
    
    
    (1,445,287
    )
    
    
    (671,241
    )PREFERRED STOCK DIVIDENDS
    
    
    (204,026
    )
    
    
    NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
    
    $
    (1,649,313
    )
    
    $
    (671,241
    )Basic and diluted loss per share:Loss from continuing operations
    
    $
    (0.06
    )
    
    $
    (0.04
    )Gain from discontinued operations
    
    $
    0.00
    
    
    $
    0.00Net loss
    
    $
    (0.06
    )
    
    $
    (0.04
    )Net loss attributable to common stockholders
    
    $
    (0.07
    )
    
    $
    (0.04
    )Weighted average common shares outstanding:Basic and diluted
    
    
    25,177,131
    
    
    
    17,971,406
 See accompanying notes to consolidated financial statements. 4




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VISEON, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Three Months
    
    Three MonthsEnded
    
    EndedSeptember 30, 2004
    
    September 30, 2003(Unaudited)
    
    (Unaudited)Cash flows from operating activities:Net loss
    
    $
    (1,445,287
    )
    
    $
    (671,241
    )Adjustments to reconcile net loss to net
cash flows from operating activities:Depreciation and amortization
    
    
    11,239
    
    
    
    7,831Amortization of original issue discount
    
    
    
    
    
    
    170,303Compensation related to stock options
    
    
    
    
    
    
    46,446Compensation related to issuance of stock
    
    
    46,250
    
    
    
    127,963Loss on retirement of equipment
    
    
    
    
    
    
    152Gain from discontinued operations
    
    
    (4,979
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    8,312
    
    
    
    (14,818
    )Inventories
    
    
    (10,950
    )
    
    
    6,280Prepaid expenses
    
    
    59,347
    
    
    
    (63,303
    )Accounts payable
    
    
    19,020
    
    
    
    69,237Accrued expenses
    
    
    136,060
    
    
    
    281,819Net cash flows used in operating activities
    
    
    (1,180,988
    )
    
    
    (39,331
    )Cash flows from investing activities:Proceeds from sale of equipment
    
    
    
    
    
    
    1,000Payments for intangible assets
    
    
    (63,267
    )
    
    
    (5,074
    )Net cash used in investing activities
    
    
    (63,267
    )
    
    
    (4,074
    )Cash flows from financing activities:Payments on short-term notes payable
    
    
    
    
    
    
    (110,000
    )Proceeds from subordinated note payable and warrants issued with note payable
    
    
    
    
    
    
    175,000Proceeds from exercise of common stock options
    
    
    
    
    
    
    45,000Expenses related to preferred stock offering
    
    
    (26,863
    )
    
    
    Dividends on convertible preferred stock
    
    
    (3,491
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (30,354
    )
    
    
    110,000Change in cash and cash equivalents from discontinued operations
    
    
    (11,000
    )
    
    
    (20,000
    )Increase (decrease) in cash and cash equivalents
    
    
    (1,285,609
    )
    
    
    46,595Cash and cash equivalents, beginning of period
    
    
    5,339,393
    
    
    
    7,784Cash and cash equivalents, end of period
    
    $
    4,053,784
    
    
    $
    54,379Supplemental cash flow information:Noncash investing and financing activities
Accrued preferred stock dividends converted to common stock
    
    $
    140,833
    
    
    $
    Common stock issued for preferred stock dividends
    
    $
    70,416
    
    
    $
    
 See accompanying notes to consolidated financial statements. 5




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VISEON, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003 1. DESCRIPTION OF THE BUSINESS: Viseon, Inc. (the Company), a Nevada corporation, was incorporated on
December 21, 1993 and historically had been a developer of its own group
videoconferencing systems sold primarily to corporate end users and OEM
customers. On July 25, 1995, it completed its initial public offering of its
common stock, par value $0.01 per share (the Common Stock). In January 2003, the Company changed its focus from being a group
videoconferencing systems manufacturer and reseller to a desktop and consumer
video communications systems developer, manufacturer and reseller. The only
measurable revenues that the Company is currently realizing are a result of
sales of the VisiFone, the Companys personal videophone which operates on
broadband networks. Therefore, the net assets and operations related to the
group videoconferencing business have been classified as discontinued
operations in the accompanying consolidated financial statements. The VisiFone products are low-cost broadband videophone communication devices,
which can be used by both consumers and businesses. The VisiFone is a
self-contained system that does not require a PC or any external equipment for
its operation and the VisiFoneTV model utilizes a standard television monitor
for display. Both VisiFone models operate on any broadband connection and home
or office network including high-speed Internet connections via DSL or cable
modem. The VisiFone is available as either an ITU Standard, H.323 compliant
system which is compatible with most corporate video conferencing systems or as
a Session-Initiation-Protocol (SIP) compliant device, which is compatible with
many of the emerging Voice Over Internet Protocol (VOIP) telephony networks.
The VisiFone can be used in corporate, government and educational applications
and is priced such that it also has significant potential to be sold to
residential consumers who have subscribed to broadband Internet access via
cable modem or DSL. The Company has incurred losses from operations and negative cash flows from
operations for the quarters ended September 30, 2004 and 2003. Management
plans to try to increase sales and improve operations through 1) increased
marketing and direct sales activities to corporate customers, 2) continued
initiatives to gain acceptance of our product by broadband carriers for sale to
their subscribers, 3) continued measures to minimize overhead and 4)
initiatives to monetize our intellectual property rights. Management believes
that current cash funds and funds generated from operations will be sufficient
to cover cash needs for the 2004-2005 fiscal year, although there can be no
assurance in this regard. In the event sales do not materialize at the
expected rates or the Company does not achieve planned gross margins,
management would seek additional financing or would conserve cash by further
reducing expenses. There can be no assurance that the Company will be
successful in achieving these objectives or becoming profitable. 2. BASIS OF PRESENTATION: The unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America, pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosures
normally included in the consolidated financial statements have been omitted or
condensed pursuant to such rules and regulations. The accompanying unaudited
consolidated financial statements should be read in conjunction with the
Companys June 30, 2004 consolidated financial statements and related footnotes
included in the Companys Annual Report on Form 10-KSB. The consolidated financial statements include the accounts of Viseon, Inc. and
its wholly-owned subsidiaries, RSI Systems, Ltd. a subsidiary in the United
Kingdom and Viseon PVT, Inc., a Nevada Corporation. The consolidated financial statements reflect all adjustments, of a normal
recurring nature, necessary to fairly present the results of operations and
financial position of the Company for the interim periods. Operating results
for the three months ended September 30, 2004 are not necessarily indicative of
the results that may be expected for the full year. 6




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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Intangible Assets. The Company amortizes patents over their estimated useful
lives of ten years using the straight-line method. Accumulated amortization of
intangible assets was $57,071and $49,442 at September 30, 2004 and June 30,
2004, respectively. Amortization expense of intangible assets was $7,628 and
$2,453 for the three months ended September 30, 2004 and 2003. Amortization
expense is estimated to approximate $27,000 for each of the years ending June
30, 2005, 2006, 2007, 2008 and 2009. Revenue Recognition. The Company records sales revenue at the time merchandise
is shipped and records a reserve for potential returns based upon historical
experience rates. In November 1999, the SEC issued Staff Accounting Bulletin
(SAB) No. 101,Revenue Recognition. SAB No. 101, as amended, sets forth the
SEC staffs position regarding the point at which it is appropriate for a
registrant to recognize revenue. The staff believes that revenue is realizable
and earned when all of the following criteria are met: persuasive evidence of
an arrangement exists, delivery has occurred or service has been rendered, the
sellers price to the buyer is fixed or determinable and collectibility is
reasonably assured. The Company believes it meets all of the requirements for
revenue recognition under SFAS 48 and SAB 101. The Company offers an unconditional 30-day right of return on the sale of its
VisiFone products. The Company recognizes revenue on shipment and records a
reserve for potential returns. The Companys warranty policy during the first
year after the sale includes an obligation to replace during the first 30 days
and to repair during the next 11 months. The Company has a one-year warranty
with the manufacturer, so there is little, if any, cost to the Company for
warranty claims. No warranty reserve has been recorded to date, although the
Company will record a reserve if warranty activity increases and there are
unrecoverable costs to the Company. In May 2003, the Company entered into an agreement with a supplier pursuant to
which the supplier manufactures and private labels the VisiFone for the
Company. The Company typically assumes the risks and rewards of ownership of
the inventory purchased from the supplier and, accordingly, records revenue on
a gross basis. Substantially all revenues in the quarters ended September 30,
2004 and 2003 were from sales of the VisiFone purchased from this supplier. In
certain limited circumstances, the Company sells goods to customers and does
not assume the risks and rewards of ownership and, accordingly, records revenue
on a net basis. Accounts Receivable Reserves. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability or unwillingness of
its customers to make required payments. If the financial condition of the
Companys customers declines resulting in an impairment of their ability to
make payments, additional allowances may be required. Inventory Valuation. The Company writes down excess and obsolete inventory
equal to the difference between the cost of inventory and the estimated market
value based upon assumptions about product life cycles, demand for the
Companys products, market conditions and other pertinent factors. If actual
product life cycles, product demand and market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required in future periods. Loss Per Common Share. Basic loss attributable to common stockholders per
common share is computed by dividing the loss by the weighted average number of
common shares outstanding for the reporting period. Diluted loss attributable
to common stockholders per common share is computed by dividing the loss by the
sum of the weighted average number of common shares outstanding plus the number
of common share equivalents that represent all additional shares of Common
Stock that would have been outstanding if all potentially dilutive securities
(primarily stock options, stock warrants and convertible debt) had been
exercised. All common stock equivalents outstanding during the three months
ended September 30, 2004 and 2003 were anti-dilutive. Stock Based Compensation. In accordance with Accounting Principles Board (APB)
Opinion No. 25 and related interpretations, the Company uses the intrinsic
value-based method for measuring stock-based compensation cost which measures
compensation cost as the excess, if any, of quoted market price of the
Companys Common Stock at the grant date over the amount the employee must pay
for the stock. The Companys general policy is to grant stock options at fair
value at the date of grant. The Company has adopted the disclosure only
provision of SFAS No. 148, Accounting for Stock-Based Compensation. 7




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Had compensation cost been recognized based on the fair values of options at
the grant dates consistent with the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
the Companys net loss and basic and diluted net loss per common share would
have been changed to the following pro forma amounts: For the three months endedSeptember 30,2004
    
    2003Loss attributable to common stockholdersAs reported
    
    $
    (1,649,313
    )
    
    $
    (671,241
    )Pro forma
    
    
    (1,767,919
    )
    
    
    (687,466
    )Basic and diluted loss per common share:As reported
    
    
    (0.07
    )
    
    
    (0.04
    )Pro forma
    
    
    (0.07
    )
    
    
    (0.04
    )Stock based compensation:As reported
    
    
    
    
    
    
    46,446Pro forma
    
    
    118,606
    
    
    
    16,225
 In determining the compensation cost of options granted during the three months
ended September 30, 2004 and 2003, as specified by SFAS No. 123, the fair value
of each option grant has been estimated on the date of grant using the
Black-Scholes option pricing model and the weighted average assumptions used in
these calculations are summarized as follows: For the Three Months EndedSeptember 30,2004
    
    2003Risk-free interest rate
    
    
    4.25
    %
    
    
    N/AExpected life of options granted
    
    10 Years
    
    
    N/AExpected volatility
    
    
    33.31
    %
    
    
    N/AExpected dividend yield
    
    
    0
    %
    
    
    N/A
 4. CONVERTIBLE PREFERRED STOCK AND WARRANTS: In the months of March and April 2004, the Company sold, in private placement
transactions, a total of 338 shares of Series A Convertible Preferred Stock in
prepackaged units which included one Series A-1 Warrant and one Series A-2
Warrant for each share of Series A Convertible Preferred Stock (collectively
referred to as the Securities). The private placement of the Securities
resulted in gross proceeds to the Company of $8,450,000, prior to offering
expenses. In total, holders of the 338 shares of Series A Convertible Preferred
Stock may acquire 16,900,000 shares of our Common Stock (8,450,000 shares of
Common Stock upon conversion and 8,450,000 shares upon exercise of warrants).
The Companys placement agent received an aggregate placement fee of $845,000
and warrants to purchase 1,267,500 shares of Common Stock. Each share of Series A Convertible Preferred Stock is convertible, at the
initial conversion price of $1.00, into 25,000 shares of Common Stock, subject
to adjustment under certain conditions. Holders of the Series A Convertible
Preferred Stock are entitled to dividends at the rate of 10% per annum payable
quarterly in either cash or, at the option of the Company, registered shares of
Common Stock valued at fair market value. Shares of Series A Convertible
Preferred Stock are convertible into shares of Common Stock at the holders
option at any time and will automatically convert to shares of Common Stock if
certain trading volume and closing price targets (cumulative average trading
volume of at least 125,000 shares per day for 20 consecutive trading days with
a cumulative average closing price of no less than $2 per share through March
15, 2006 or $3 per share thereafter, subject to adjustment under certain
conditions) on the Companys Common Stock are met. In addition, shares of the
Series A Convertible Preferred Stock participate on an as-if 8




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converted basis in any dividends paid on Common Stock. Holders of shares of
Series A Convertible Preferred Stock are entitled to voting rights together
with the Common Stock, on an as-if converted basis. The conversion price of the Series A Convertible Preferred Stock is subject to
appropriate adjustment in the event of stock splits, stock dividends, reverse
stock splits, capital reorganizations, recapitalizations, reclassifications,
and similar occurrences as well as the issuance of Common Stock in
consideration of an amount less than the then-effective conversion price. The holder of each Series A-1 Warrant is entitled to purchase 12,500 shares of
Common Stock at an exercise price of $1.08 per share for a term of five years
from the date of issuance. The holder of each Series A-2 Warrant is entitled to
purchase 12,500 shares of Common Stock at an exercise price of $1.26 per share
for a term of five years from the date of issuance. The exercise price of the
Series A-1 and Series A-2 Warrants is subject to adjustment for the issuance of
Common Stock in consideration of an amount less than the then effective
exercise price. The shares of Common Stock underlying the Securities are currently subject to
an effective registration statement on Form SB-2 under the Securities Act of
1933, as amended. The Company has agreed to cause this registration statement
to continuously remain effective until all such Common Stock may be sold
without regard to an effective registration statement. Failure to maintain a
continuously effective registration statement will subject the Company to
liability to certain holders of shares of Series A Convertible Preferred Stock
in the form of liquidated damages totaling as high as $253,500 per month. The
Company accrued $147,875 for the estimated liquidated damages due to certain
holders of shares of Series A Convertible Preferred Stock related to the
effective date of the Companys registration statement occurring twelve days
later than the date required in an agreement between the Company and its
preferred stockholders. In addition to a placement fee paid in cash, the Companys placement agent
received warrants to purchase a total of 1,267,500 shares of Common Stock at a
purchase price of $1.00 per share for a term of five years from the date of
issuance (the Series A-1-AGENT Warrants). The exercise price of the Series
A-1-AGENT Warrants is subject to adjustment for the issuance of Common Stock in
consideration of an amount less than the then effective exercise price. The Company has the right to redeem the Series A-1 Warrants, Series A-2
Warrants and Series A-1-AGENT Warrants at a price of ten cents ($.10) per
issuable share upon fifteen days notice if certain trading volume and closing
price targets (cumulative average trading volume of at least 125,000 shares per
day for 20 consecutive trading days with a cumulative average closing price of
no less than $2.50 per share through March 15, 2006 or $3.50 per share
thereafter, subject to adjustment under certain conditions) on the Companys
Common Stock are met. In August and September 2004, holders of 67 shares of the Series A Convertible
Preferred Stock elected to convert their shares to Common Stock resulting in
the issuance of 1,675,000 shares of Common Stock. 5. COMMITMENTS AND CONTINGENCIES: Manufacturing Agreement On August 28, 1996, the Company entered into a manufacturing agreement with a
third party custom manufacturer (the Manufacturer). Pursuant to this
agreement, the Manufacturer agreed to produce the Companys group
videoconferencing products. The agreement may be terminated by either party
upon failure of the other party to comply with any material term of the
agreement after a 30 day written notice and cure period. In the event of such
termination, the Company would be obligated to pay for any goods accepted under
the terms of the agreement. The Company may also terminate the agreement upon
30 days written notice. In such case, the Company would be obligated to pay for
material and work in progress for products ordered. The Company and the Manufacturer agreed that the Company would not order any
additional products from the Manufacturer, as of June 30, 2003. The Company and
the Manufacturer have discussed a potential liability of the Company related to
the termination of the manufacturing agreement for which the Company has
accrued, in net liabilities of discontinued operations, an estimated potential
liability of $518,500. 9




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Distributor and Dealer Agreements In May 2003, the Company entered into an agreement with a supplier pursuant to
which the supplier manufactures and private labels the VisiFone for the
Company. In most instances, the Company assumes the risks and rewards of
ownership of the inventory purchased from the supplier and, accordingly,
records revenue on a gross basis. Substantially all revenues for the three
month periods ended September 30, 2004 and 2003 were from sales of the VisiFone
purchased from this supplier. Investor and Recruitment Agreement In February 2001, in connection with an agreement for seeking potential
investors and recruiting and hiring of senior management, the Company issued
rights to purchase warrants for 500,000 shares of its Common Stock at an
exercise price of $0.45. The agreement also required the payment of consulting
fees. As of June 30, 2004, all warrants have vested and been expensed. This
agreement expired in February 2004. The warrants expire in February 2006. Legal Proceedings The Company is involved in legal actions in the ordinary course of its
business. During 2001, the Company initiated a suit for reasonable royalties and lost
profits associated with alleged infringement of two of the Companys patents.
The Company was unsuccessful in court and the Company and defendant have
entered briefs regarding the payment of attorneys fees and dismissal of this
litigation. On September 24, 2004, the United States District Court entered an
order denying defendants motion for reimbursement of legal fees and costs and
this litigation was dismissed. In February 2004, the Company was named as defendant in a lawsuit for
approximately $31,000 allegedly owed for past-due accounts payable. The
plaintiff was also seeking recovery of attorneys fees of approximately
$10,000. The Company has accrued $25,111 related to its estimated exposure with
this lawsuit. In October 2004, the Company paid $22,500 in full and final
settlement of the plaintiffs claims and this lawsuit was dismissed. The Company had been named as a defendant in several lawsuits during fiscal
year 2004 and 2003 related to amounts allegedly owed for goods and services.
During fiscal year 2004, the Company settled these lawsuits for approximately
$175,000, which amounts had been previously included in cost of goods sold or
selling, general and administrative expenses in the consolidated statement of
operations. 6. STOCKHOLDERS EQUITY: During the three month period ended September 30, 2004, the Company issued
253,402 shares of Common Stock valued at $227,198 for payment of dividends on
its Series A Convertible Preferred Stock. In addition, 55,061 shares of Common
Stock were issued pursuant to the 2003 Consultant Compensation Plan in payment
of approximately $46,250 in services rendered. During the quarter ended September 30, 2004, 67 shares of Series A Convertible
Preferred Stock were converted into 1,675,000 shares of Common Stock. In September 2004, the Company issued 182,149 shares of Common Stock upon
exercise of warrants. In accordance with the warrant agreement, the holder
exercised the warrant on a cashless basis by exchanging the right to purchase
107,851 shares valued at $130,500 for the payment otherwise due on exercise of
the warrant. 7. DISCONTINUED OPERATIONS: In January 2003, the Company decided to change its focus from being a group
videoconferencing manufacturer and reseller to a desktop and consumer video
communications manufacturer and reseller. This was accomplished by the transfer
to a third party of its group videoconferencing services contract portfolio and
the liquidation of its remaining group videoconferencing assets. The only
measurable revenues the Company is now receiving result from sales of the 10




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VisiFone. Therefore, the net assets and operations related to the group
videoconferencing business have been classified as discontinued operations in
the accompanying consolidated financial statements. 8. SUBSEQUENT EVENTS: In October and November 2004 (through November 10, 2004), 51 shares of Series A
Convertible Preferred Stock were converted into 1,275,000 shares of Common
Stock. CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE THE
COMPANYS ACTUAL RESULTS TO DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING
STATEMENTS This Quarterly Report on Form 10-QSB contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Words such
as intend, anticipate, believe, estimate, plan and expect and
variations of these words and similar expressions are intended to identify
these forward-looking statements. All statements other than statements of
historical facts contained in this report, including statements regarding our
future financial position, business strategy, budgets, projected costs and
plans and objectives of management for future operations, are considered to be
forward-looking statements. We express our expectations, beliefs and
projections in good faith and believe our expectations reflected in these
forward-looking statements are based on reasonable assumptions; however, we
cannot assure you that these expectations, beliefs or projections will prove to
have been correct. Risks, uncertainties and assumptions that could cause
actual results to differ materially from the expectations reflected in the
forward-looking statements include, among other things: (i) projections of
revenues, income or loss, earnings or loss per share, capital expenditures,
dividends, capital structure and other financial items, (ii) statements of the
plans and objectives of the Company or its management or Board of Directors,
including the introduction of new products, or estimates or predictions of
actions by customers, suppliers, competitors or regulatory authorities, (iii)
statements of future economic performance, and (iv) statements of assumptions
underlying other statements and statements about the Company or its business. Readers are referred to the caption Risk Factors appearing at the end of Item
1 of the 2004 Annual Report on Form 10-KSB for additional factors that may
affect our forward-looking statements. In light of these risks, uncertainties
and assumptions, the forward-looking events discussed in this report might not
occur. We undertake no obligation to update or revise our forward-looking
statements, whether as a result of new information, future events or otherwise. 
 Item 2. Managements Discussion and Analysis or Plan of Operation INTRODUCTION The VisiFone products are low-cost broadband videophone communication devices,
which can be used by both consumers and businesses. The VisiFone is a
self-contained system that does not require a PC or any external equipment for
its operation and the VisiFoneTV model utilizes a standard television monitor
for display. Both VisiFone models operate on any broadband connection and home
or office network including high-speed Internet connections via DSL or cable
modem. The VisiFone is available as either an ITU Standard, H.323 compliant
system which is compatible with most corporate video conferencing systems or as
a Session-Initiation-Protocol (SIP) compliant device, which is compatible with
many of the emerging Voice Over Internet Protocol telephony networks. The
VisiFone can be used in corporate, government and educational applications and
is priced such that it also has significant potential to be sold to residential
consumers who have subscribed to broadband Internet access via cable modem or
DSL. The Company has licensed certain parts of its patents to other companies within
the visual communications industry. The Company intends to enter into
additional agreements whereby it may grant a license of its intellectual
property to third parties in furtherance of developing proprietary consumer
broadband videophone products and services, some of which may be based on its
existing intellectual property. The Company plans to undertake the development
of these products and services jointly with one or more suitable, established
manufacturers, which the Company is currently in the process of identifying and
selecting. To date the Company has retained independent business enterprises to
assist in the design of the general appearance and functionality of our next
generation broadband videophones as well as the design and development of the
software, electronics and acoustics that will be integrated therein which is
the genesis of the next generation VisiFone. The design and development
assistance provided by each of these companies is a cooperative effort with our
technical support personnel, under the supervision of our technical advisors
and senior management to 11




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insure strict adherence to the specifications outlined to them by the Company.
Additionally, the Company established a relationship with Leadtek, an Asian
partner, as a distributor in the U.S. of a broadband videophone manufactured by
Leadtek. The Company may also continue forming new relationships with other
companies to distribute their products alongside its own products. The Companys marketing strategy targets primarily residential consumers who
have historically not purchased video communication devices and, to a limited
degree, business and government entities with widespread operations across
regional, national and international boundaries. Management identified the
challenges associated with marketing the Companys products to such a diverse
market segment prior to its decision to modify the Companys business model and
has been evaluating various marketing strategies for more than two years.
Management recognized the advantages of developing a marketing strategy that
included a plan of sales and distribution of its products in tandem with one or
more major broadband providers and VOIP marketers. In this regard, the Company
has been actively discussing videotelephony and the merits of offering the
VisiFone to their subscribers, with cable television system operators,
telephone companies and independent VOIP marketers in search of potential
partners with which such a relationship can be developed. All of these
developments have affected and will continue to affect the Companys financial
model in terms of margins, cash flow requirements and other areas. The Company
has a limited operational history with respect to the current direction of its
business. There can be no assurance that the Company will be able to succeed in
implementing its strategy, or that the Company will be able to achieve positive
cash flows or profitable operations as a result of such changes in its
business. RESULTS OF OPERATIONS Three Months ended September 30, 2004 Compared to Three Months ended September
30, 2003. Net Sales. Net sales for the first quarter of fiscal year 2005 were $168,169,
an increase of 447.80% from $30,699 in the first quarter of fiscal year 2004.
The increase in sales in the first quarter of fiscal year 2005 was primarily
attributable to sales of the Companys set-top unit to a single customer in the
amount of $154,800. Gross Profit (Loss). Gross profit was $10,532 in the first quarter of fiscal
year 2005 compared to a gross loss of $5,294 during the first quarter of fiscal
year 2004. The gross profit (loss) in both periods was low as the Company sold
the VisiFone at low margins to corporate, government and educational customers
for demonstration and evaluation purposes and to promote adoption of the
technology in the marketplace. Research and Development Expenses. Research and development expenses were
$783,767 for the first quarter of fiscal year 2005 (466.1% of net sales)
compared to $1,546 or 5.0% of net sales for the first quarter of fiscal year
2004. The significant increase was attributable to increased expenditures
toward the development of the next generation unit in the VisiFone product
line. The Company anticipates that research and development expenses will
increase in amount and remain high as a percentage of sales over the next two
quarterly periods. Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $694,673 or 413.1% of net sales for the first
quarter of fiscal year 2005 compared to $460,867 or 1501.2% of net sales for
the first quarter of fiscal year 2004. The increase in selling, general and
administrative expenses was primarily due to an increase in number of employees
and related costs and an accrual for the estimated liquidated damages due to
certain of the Companys preferred stockholders related to the effective date
of the Companys registration statement occurring twelve days later than the
date required in an agreement between the Company and its preferred
stockholders. Other Income (Expense). Other income was $17,642 in the first quarter of fiscal
year 2005, compared to other expense of $203,534 in the first quarter of fiscal
year 2004. The net increase in other income was attributable to interest earned
on the Companys cash funds in fiscal 2005 and the reduction in interest
expense as the Company repaid or converted its interest-bearing debt to equity
in fiscal 2004. Gain from Discontinued Operations. During the first quarter of fiscal 2005,
the Company negotiated discounted repayments related to amounts owed to certain
creditors. Based on these discounts, the Company recorded a gain from
discontinued operations of $4,979. 12




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Preferred Stock Dividends. The results of operations for the first quarter of
fiscal 2005 reflect $204,026 for dividends on the Companys Series A
Convertible Preferred Stock which bears dividends at the rate of 10%.
Substantially all such dividends were paid by the issuance of Common Stock. LIQUIDITY AND CAPITAL RESOURCES The Company raised $8,450,000 million (prior to offering expenses) from the
sale of its Series A Convertible Preferred Stock with warrants in a series of
private placement transactions in March and April 2004. Management believes
that current cash funds and funds generated from operations will be sufficient
to cover cash needs for the 2004-2005 fiscal year, although there can be no
assurance in this regard. Historically, the Company has generated losses from operations and negative
cash flows. For the three months ended September 30, 2004, the Company incurred
a net loss attributable to common stockholders of $(1,649,313) and used
$1,180,988 of cash in operating activities. The Company used $63,267 of cash in
investing activities for payment of costs related to its intellectual property,
used $30,354 of cash in financing activities and repaid $11,000 of liabilities
related to discontinued operations. Management plans to try to increase sales
and improve operating results through (i) increased marketing and direct sales
activities to corporate customers, (ii) continued initiatives to gain
acceptance of our product by consumer broadband providers for sale to their
subscribers and (iii) initiatives to monetize our intellectual property rights.
There can be no assurance that we will be successful in achieving these
objectives and becoming profitable. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
net revenues and expenses during the reporting period. We regularly evaluate
our estimates and assumptions related to net revenues, allowance for doubtful
accounts, sales returns and allowances and accounting for income taxes. We base
our estimates and assumptions on historical experience and on various other
factors that we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. To the
extent there are material differences between our estimates and the actual
results, our future results of operations will be affected. We believe the following critical accounting policies require us to make
significant judgments and estimates in the preparation of our consolidated
financial statements: Revenue Recognition The Company records sales revenue at the time merchandise is delivered. In
November 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition, SAB No. 101, as amended, which sets forth the SEC staff s
position regarding the point at which it is appropriate for a registrant to
recognize revenue. The staff believes that revenue is realizable and earned
when all of the following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, the
sellers price to the buyer is fixed or determinable and collectibility is
reasonably assured. The Company uses the above criteria to determine whether
revenue can be recognized. When product sales revenue is recognized, we establish and estimated allowance
for future product returns based on historical returns experience; when price
reductions are approved, we establish an estimated liability for price
protection payable on inventories owned by product resellers. Should actual
product returns or pricing adjustments exceed our estimates, additional
reductions to revenue would result. Revenue from the licensing of patents is
recognized at the time a patent agreement is executed and the goods, services
and/or cash are received. Our product typically carries a ninety-day to
five-year warranty. Although we engage in extensive product quality programs
and processes, our warranty obligation is affected by product failure rates,
use of materials or service delivery cost that differs from our estimates. As a
result, additional warranty reserves could be required, which could reduce
gross margins. 13




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Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. Our allowance
for doubtful accounts is based on our assessment of the collectibility of
specific customer accounts, the aging of accounts receivable, our history of
bad debts and the general condition of the industry. If a major customers
credit worthiness deteriorates, or our customers actual defaults exceed our
historical experience, our estimates could change and impact our reported
results. Accounting for Income Taxes The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized at the enacted rates for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing tax
assets and liabilities and their respective tax basis. The effect on deferred
tax assets and liabilities of a change in tax rate is recognized in income in
the period that includes the enactment date. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. 
 Item 3. Controls and Procedures Within 90 days prior to the date of filing this Quarterly Report on Form
10-QSB, the Company conducted an evaluation, under the supervision and with the
participation of the Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the Companys disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 as amended (the Exchange Act)). Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures as of the end of the fiscal quarter covered
by this Quarterly Report on Form 10-QSB are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. Management of the Company has also evaluated, with the participation
of the Chief Executive Officer and Chief Financial Officer of the Company, any
change in the Companys internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
the fiscal quarter covered by this Quarterly Report on Form 10-QSB. There was
no change in the Companys internal control over financial reporting during the
Companys most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Companys internal control
over financial reporting. However, due to the limited number of Company
employees engaged in the authorization, recording, processing and reporting of
transactions, there is inherently a lack of segregation of duties. The Company
periodically assesses the cost versus benefit of adding the resources that
would remedy or mitigate this situation and currently, does not consider the
benefits to outweigh the costs of adding additional staff in light of the
limited number of transactions related to the Companys operations. 14




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PART II
OTHER INFORMATION 
 Item 1. Legal Proceedings On June 22, 2001, the Company initiated a suit in the United States District
Court for the District of Minnesota, Hennepin County, Minnesota against Forgent
Networks, Inc. for reasonable royalties and lost profits associated with
alleged infringement of the Companys first two U.S. patents numbers 6,073,192
and 5,802,281. The United States District Court granted a partial summary
judgment in favor of Forgent, which resolved certain claims advanced. Forgent
and the Company thereafter submitted briefs on the remaining issues, which
included the payment of attorneys fees and the dismissal of the litigation. On
November 24, 2003, the Court dismissed the action finding that said Court
lacked subject matter jurisdiction over the action and ruled that each party
bear its own attorneys fees and costs. Subsequent to such ruling, on December
23, 2003, Forgent filed a brief in support of its motion for reimbursement of
legal fees and costs. The Company timely filed a reply brief in response
thereto in support of its position that the motion was moot as the issue raised
therein had been previously ruled on and resolved by November 24, 2003 order.
Forgents motion for reimbursement of legal fees and costs was denied by order
of the United States District Court for the District of Minnesota, Hennepin
County dated September 24, 2004, which resulted in the final resolution of this
matter. On or about February 25, 2004, Sprint North Supply Company instituted suit
against the Company in the County Court at Law No. 2 of Dallas County, Texas,
(Cause No. CC 03-15339 B), styled Sprint North Supply Company vs. Viseon, Inc.
d/b/a Viseon Video asserting a claim for $31,033 allegedly owed by the Company
on a past due account receivable for goods and services purportedly sold by the
Plaintiff as well as an additional $10,344 for attorneys fees associated with
such litigation. When requisite service of process was served on the Company,
it filed an Answer denying all of the material allegations advanced by the
Plaintiff. In October 2004, the Company paid $22,500 for a full release of all
further liability in final settlement of this litigation. The Company is subject to certain other litigation and claims arising in the
ordinary course of business. We do not expect costs related to these claims to
have a material adverse effect on our consolidated financial position or our
results of operations. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3. Defaults upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits ExhibitNumber
    
    Description31.01
    
    Certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.32.01
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 (b) Reports on Form 8-K 15




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On September 9, 2004, the Company filed a Current Report on Form 8-K, which was
filed in accordance with Item 5.02, Departure of Directors or Principal
Officers, Election of Directors, of such report in connection with the
resignation of W.R. Howell as a director and the appointment of John ODonnell
as a member of the Board of Directors. 16




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Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. VISEON, INC.Dated: November 12, 2004
    
    By: /s/ John C HarrisJohn C. HarrisIts President & Chief Executive OfficerDated: November 12, 2004
    
    By: /s/ Robert A. WolfRobert A. WolfIts Chief Financial Officer
 17