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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March, 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FROM THE TRANSITION PERIOD FROM ___________________ TO ___________________
Commission File Number 001-14015
Ionatron, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0262908
- --------------------------------- --------------------
(State or other jurisdiction IRS Employer
of incorporation or organization) (Identification No.)
3950 East Columbia 85714
Tucson, AZ ----------
- ------------------------------- (Zip Code)
(Address of Principal Executive Offices)
(520) 628 7415
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
U.S. Home & Garden Inc., fiscal year changed to December 31
- --------------------------------------------------------------------------------
(former name, former address and former fiscal year, if changed since last
report)
Indicate by check 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 _X_ No ____
Indicate by check whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act
Yes ____ No _X_
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date. As of May 15, 2004
there were 69,390,208 shares of the issuer's common stock, par value $.001 per
share, outstanding.
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements (unaudited)
Consolidated balance sheets as of March 31, 2004 and
December 31, 2003 3
Consolidated statements of operations for the three months
ended March 31, 2004 and 2003 4
Consolidated statements of cash flows for the three months
ended March 31, 2004 and 2003 5
Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2004 6
Notes to consolidated financial statements 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk 20
Item 4 Controls and Procedures 21
PART II - OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds 22
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits 22
(b) Reports on Form 8-K 22
23
SIGNATURES
-2-
IONATRON, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
------------ ------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,488,739 $ 103,392
Accounts receivable 85,340 73,027
Receivables from shareholder 2,713 107,482
Inventory 352,633 21,000
Costs in excess of billings 83,003 31,427
Prepaid expenses 83,555 47,905
------------ ------------
Total current assets 9,095,983 384,233
------------ ------------
Property and equipment, net 1,058,529 1,141,887
------------ ------------
Total assets $ 10,154,512 $ 1,526,120
------------ ------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Note payable to shareholder $ 2,800,000 $ 4,300,000
Accounts payable 675,073 330,696
Accrued expenses 159,180 365,208
------------ ------------
Total liabilities 3,634,253 4,995,904
------------ ------------
Commitments and contingencies -- --
Stockholders' equity (deficit):
Preferred stock, 1,000,000 shares authorized and unissued
Common stock, $.001 par value, 100,000,000 shares
authorized; 67,798,339 shares issued and outstanding
at March 31, 2004 and 48,452,249 shares issued and
outstanding at December 31, 2003 67,798 48,452
Additional paid-in capital 7,368,355 471,548
Accumulated deficit (915,894) (3,989,784)
------------ ------------
Total stockholders' equity (deficit) 6,520,259 (3,469,784)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 10,154,512 $ 1,526,120
============ ============
See accompanying notes to the consolidated financial statements
-3-
IONATRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
March 31, 2004 March 31, 2003
-------------- --------------
Revenue $ 272,442 $ --
Costs of revenue 255,000 --
--------- ---------
Gross profit 17,442 --
Operating expenses:
General and administrative 565,549 469,852
Selling and marketing 112,506 67,723
Research and development 180,765 421,475
--------- ---------
Total operating expenses 858,820 959,050
--------- ---------
Operating loss (841,378) (959,050)
Interest expense 74,516 33,811
--------- ---------
Net loss $(915,894) $(992,861)
========= =========
Per Share Amounts:
Weighted average common shares outstanding-basic and
diluted 51,215,979 48,452,249
Net loss per common share - basic and diluted $(.02) $(.02)
See accompanying notes to the consolidated financial statements
-4-
IONATRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Three Months
Ended Ended
March 31, 2004 March 31, 2003
-------------- --------------
Cash flows from operating activities
Net loss $ (915,894) $ (992,861)
Adjustments to reconcile net loss to net cash and cash
equivalents (used in) provided by operating activities:
Depreciation and amortization 157,478 158,609
Changes in assets and liabilities:
Accounts receivable (12,313) --
Inventory (331,633) --
Costs in excess of billings (51,576) --
Prepaid expenses (35,650) (3,459)
Accounts payable 344,377 55,455
Accrued expenses (206,028) 139,210
----------- -----------
Total adjustments (135,345) 349,815
----------- -----------
Net cash used in operating activities (1,051,239) (643,046)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (74,120) (522,185)
Receivables from shareholder 104,769 --
----------- -----------
Net cash used in investing activities 30,649 (522,185)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable to shareholder 1,000,000 1,100,000
Repayment of note payable (500,000) --
Cash acquired from reverse merger 8,905,937 --
----------- -----------
Net cash provided by financing activities 9,405,937 1,100,000
----------- -----------
Net increase in cash and cash equivalents 8,385,347 (65,231)
Cash, beginning of period 103,392 97,206
----------- -----------
Cash and cash equivalents, end of period $ 8,488,739 $ 31,975
=========== ===========
Supplemental statement of cash flow information:
Cash paid during the year for interest $ 633 $ --
=========== ===========
Noncash investing and financing activities ( Note 11)
See accompanying notes to the consolidated financial statements
-5-
IONATRON, INC
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 2004
(Unaudited)
COMMON STOCK
------------------------- PAID-IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- ------- ---------- ----------- ----------
Amounts at January 1, 2004 48,452,249 $ 48452 $471,548 $(3,989,784) $(3,469,784)
Transfer of deficit on termination of (3,989,784) 3,989,784
Subchapter S election
Contribution of note payable to 2,000,000 2,000,000
stockholders' equity
Issuance of common stock in merger 19,346,090 19,346 8,886,591 8,905,937
Net loss for the period (915,894) (915,894)
---------- ------- ---------- ----------- -----------
Amounts at March 31, 2004 67,798,339 $67,798 $7,368,355 $ (915,894) $ 6,520,259
========== ======= ========== =========== ===========
See accompanying notes to the consolidated financial statements
-6-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF FINANCIAL PRESENTATION
The consolidated financial statements include the accounts of Ionatron,
Inc. and its wholly-owned subsidiary, Ionatron Technologies, Inc. (collectively,
"Company," "Ionatron," "we," "our" and "us"). All intercompany balances and
transactions have been eliminated.
The consolidated financial statements and related notes thereto as of
March 31, 2004 and for the three months ended March 31, 2004 and 2003 are
presented as unaudited, but in the opinion of management include all adjustments
necessary to present fairly the information set forth therein. The consolidated
balance sheet information for December 31, 2003 was derived from the audited
financial statements. The interim results are not necessarily indicative of the
results for any future periods.
MERGER AND RECAPITALIZATION
On March 18, 2004, a subsidiary of U. S. Home & Garden Inc. (USHG), a
non-operating, publicly traded company merged into Ionatron, Inc. (the
"Merger"). Following the Merger, USHG shareholders held 33.89 % and Ionatron
shareholders held 66.11% of USHG common stock on a fully diluted basis. The
combination has been accounted for as a recapitalization of Ionatron, Inc.,
effective from our inception on June 3, 2002 and the issuance of 19,346,090
common shares and 5,429,009 options and warrants to the USHG shareholders on the
date of merger in exchange for the cash. We also acquired in the Merger a $1.6
million principal amount subordinated promissory note from a highly leveraged
entity. This note matures in 2009 and accrues interest on a compound basis at
the rate of 9% per annum until maturity. We recorded a 100% valuation allowance
for this note due to the uncertainty of collectibility.
The consolidated financial statements reflect the historical results
of Ionatron, Inc., prior to March 18, 2004 and the consolidated results of
operations of the Company since March 18, 2004. All outstanding shares of
Ionatron common stock were converted to 48,452,249 shares of USHG common stock.
On April 29, 2004, our shareholders approved the change of our corporate name to
Ionatron, Inc., an increase of our authorized common stock to 100,000,000
shares, and the classification of the Board of Directors into three classes. We
also changed of our fiscal year end from June 30 to December 31. The common
stock and per share information in the consolidated financial statements and
related notes have been retroactively adjusted to give effect to the
recapitalization.
NATURE OF BUSINESS AND SUMMARY OF OPERATIONS
Ionatron was formed on June 3, 2002 to develop and market Directed
Energy Weapon technology products initially for sale to the U.S. Government. The
goal of the Company is to produce products that incorporate our technology
initially for specific U.S. Government customer applications and platforms.
Ionatron and the U.S. Government have entered into several contracts for
products and services as well as Cooperative Research and Development Agreements
for joint research on Laser Induced Plasma Channel ("LIPC") based directed
energy weapons. We expect to offer U.S. Government approved versions of our
products for commercial security applications in the future. During 2003 and
2002, the Company engaged in research and development and business development
activities. Ionatron has demonstrated its laser guided man-made lightning
directed energy technology in the laboratory and now has government contracts
for effects testing, compact laser source development and the delivery of a
system on a mobile platform for field demonstration and testing.
-7-
RISKS AND UNCERTAINTIES
Future results of operations of Ionatron involve a number of known and
unknown risks and uncertainties. Factors that could affect future operating
results and cash flows and cause actual results to vary materially from
historical results include, but are not limited to:
- Failure or difficulties in managing our operations, including
attracting and retaining qualified personnel;
- Failure or inability to attain profit levels necessary to
sustain our business
- Interruption or failure of, or failure to manage, our
technology and information systems;
- Changes in government policy, regulation and enforcement or
adverse judicial or administrative interpretations and rulings
or legislative action relating to procurement regulations,
enforcement and pricing;
- Availability of budgetary allocations for governmental
agencies to purchase our products;
- Inability to adapt to technological change;
- Inability to successfully manufacture and assemble our
products;
- Competition from defense contractors with greater financial
and manufacturing resources;
- Dependence upon sales to the U.S. government;
- Sales agreements with the U.S. government typically provide
for termination at any time and may contain unfavorable terms;
- Dependence on qualified subcontractors for parts of our
research and development activities;
- Inability to raise sufficient financing for expanded
manufacturing and assembly activity;
- Failure to successfully field test our weapon products;
- Inability to collect amounts due to us from our customers; and
- Our failure to provide adequate customer service.
Negative developments in these areas could have a material effect on
our business, financial condition and results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires our
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
-8-
REVENUE RECOGNITION
Revenues under long-term U.S. Government contracts are recorded under
the percentage of completion method. Revenues under cost plus fixed fee
contracts are recorded as costs are incurred and include estimated earned fees
in the proportion that costs incurred to date bear to total estimated costs.
Costs include direct labor, direct materials, and subcontractor costs and
overhead. As contracts can extend over one or more accounting periods, revisions
in costs and earnings estimated during the course of work are reflected during
the accounting period in which the facts become known. When the current contract
estimate indicates a loss, provision is made for the total anticipated loss in
the current period.
Revenues for other products and services are recognized when such
products and services are delivered and, in connection with certain sales
to government agencies, when the products and services are accepted, which is
normally negotiated as part of the initial contract.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are considered to be all highly liquid
investments purchased with an initial maturity of three (3) months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of accounts receivable, accounts payable, accrued
expenses and related party debt approximate fair value due to the short maturity
of these instruments.
CONCENTRATIONS OF CREDIT RISK
We maintain cash balances at a major bank and at times, balances exceed
FDIC limits. We generally do not have a significant concentration of credit risk
on accounts receivable from the U.S. Government.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We do not generally provide an allowance for receivables from the U.S.
Government. Allowances for doubtful accounts will be maintained for estimated
losses resulting from the failure of other customers to make required payments
on their accounts.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at historical cost. Depreciation
and amortization are calculated using the straight-line method over the
estimated useful lives of the assets from 3 to 10 years. Leasehold improvements
are depreciated over the life of the related lease or asset, if shorter.
Amortization of assets acquired under capital leases is included in depreciation
and amortization expense.
Significant improvements extending the useful life of property are
capitalized. When property is retired or otherwise disposed of, the cost of the
property and the related accumulated depreciation are removed from the accounts,
and any resulting gains or losses are reflected in the consolidated statement of
operations. Repair and maintenance costs are expensed as incurred.
COMPUTER SOFTWARE DEVELOPMENT COSTS
Direct development costs associated with internal-use computer software
are accounted for under Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" and are capitalized,
including external direct costs of material and services and payroll costs for
employees devoting time to the software projects. Costs incurred during the
preliminary project stage, as well as for maintenance and training are expensed
-9-
as incurred. Amortization is provided on a straight-line basis over the shorter
of 3 years or the estimated useful life of the software.
VALUATION OF LONG-LIVED ASSETS
We review long-lived assets and certain identifiable intangibles for
possible impairment whenever events or changes in circumstances (rapid pace of
technology) indicate that the carrying amount of any asset may not be
recoverable. We assess the recoverability of long-lived assets and certain
identifiable intangibles by determining whether the amortization of the balances
over their remaining lives can be recovered through undiscounted future
operating cash flows. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of long-lived assets will be impacted if estimated future
operating cash flows are not achieved. Factors we consider important that could
trigger an impairment review include the following:
o Significant underperformance relative to historical or
projected future operating results,
o Significant changes in the manner of our use of the acquired
assets or the strategy for our overall business;
o Significant negative industry or economic trends; and
o Significant decline in our stock price for a sustained period
and market capitalization relative to net book value.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Accordingly, deferred tax assets and liabilities are recognized currently for
the future tax consequences attributable to the temporary differences between
the financial statement carrying amounts of assets and liabilities and their
respective tax basis. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A valuation allowance is recorded to
reduce the carrying amounts of deferred tax assets if it is more likely than not
that such assets will not be realized.
We consider all available evidence, both positive and negative, to
determine whether, based on the weight of that evidence, a valuation allowance
is needed for some portion or all of a net deferred tax asset. Judgment is used
in considering the relative impact of negative and positive evidence. In
arriving at these judgments, the weight given to the potential effect of
negative and positive evidence is commensurate with the extent to which it can
be objectively verified. We record a valuation allowance to reduce our deferred
tax assets and review the amount of such allowance annually. When we determine
certain deferred tax assets are more likely than not to be utilized, we will
reduce our valuation allowance accordingly.
Prior to January 1, 2004, we elected to be taxed as a Subchapter
S-corporation with the individual shareholders reporting their respective share
of our losses on their income tax return. Accordingly, we have no deferred tax
assets or liabilities arising in prior periods.
We have provided a valuation allowance for the deferred tax assets
related to the $6.7 million operating and $7.8 million capital loss carryovers
of USHG. The operating losses are available for deduction from our taxable
income at a rate of $2.8 million per year. The tax benefits related to deduction
of the USHG losses will be added to paid-in capital.
RESEARCH AND DEVELOPMENT EXPENSES
We expense our research and development costs as incurred.
-10-
NET LOSS PER SHARE
Basic earnings per share is computed by dividing income (loss)
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflect the effect of
common shares issuable upon exercise of stock options and warrants when such
effect is not anti-dilutive.
STOCK-BASED COMPENSATION
We account for our stock option awards under the intrinsic value based
method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, including FASB Interpretation
No. 44 "Accounting for Certain Transactions Including Stock Compensation," an
interpretation of APB Opinion No. 25. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at grant date or other measurement date over the amount an employee must pay to
acquire the stock. We make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied as
required by SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of SFAS 123." For purposes of pro forma disclosures under SFAS 123,
pro-forma compensation expense measured at date of grant for options granted
near the end of the first quarter is assumed to be amortized for pro-forma
disclosure purposes over the two - four year vesting periods of the options. As
a result of the grant date at the end of the first quarter, there was no
pro-forma compensation expense for the first quarter.
Pro-forma compensation is based on the fair value of the options
granted which has been estimated at the various dates of the grants using the
Black-Scholes option-pricing model with the following assumptions:
- Fair market value of the underlying common stock based on our
closing common stock price on the date the option is granted;
- Risk-free interest rate based on the weighted averaged 5-year
U.S. Treasury note strip rates;
- Volatility has been based on comparable companies considered
as we do not have sufficient trading history for our common
stock; and
- No expected dividend yield based on future dividend payment
plans.
COMPREHENSIVE INCOME
We have no items of comprehensive income or expense. Accordingly, our
comprehensive income (loss) and net income (loss) are equal for all periods
presented.
NEW ACCOUNTING PRONOUNCEMENTS
There are no new accounting pronouncements that affect our consolidated
financial statements. However recent proposals by the Financial Accounting
Standards Board relating to stock based compensation would, if adopted, require
us to use the fair value method of accounting (as described above) for our stock
options issued in the future.
2. ACCOUNTS RECEIVABLE
Accounts receivable included $23,292 at March 31, 2004 and $30,948 at
December 31, 2003 of recoverable costs for progress completed but not yet
billed.
-11-
3. INVENTORIES
Inventories, primarily consisting of labor, overhead and materials
pertaining to long-term contracts, are carried at cost. At March 31, 2004,
inventory was comprised only of materials.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31, 2004 December 31, 2003
-------------- -----------------
Furniture and leasehold improvements $ 31,539 $ 16,559
Equipment and software 2,059,757 2,000,617
----------- -----------
2,091,296 2,017,176
Less accumulated depreciation (1,032,767) (875,289)
----------- -----------
Net property and equipment $ 1,058,529 $ 1,141,887
=========== ===========
5. NOTE PAYABLE TO SHAREHOLDER
Our Chairman, a significant shareholder, has provided funds from the
inception of the Company under a revolving credit arrangement. The maximum
amount borrowed was $5.3 million. After pay down of $500,000 and contribution of
$2 million of the revolving credit into equity in the first quarter of 2004, the
remainder of $2.8 million was incorporated into a new $3 million revolving
credit arrangement with same terms of the original revolving credit agreement.
The note payable to shareholder bears interest at a variable annual rate equal
to the prime rate plus two percent (2%), is due upon demand subject to Board
approval, and is collateralized by the assets of our subsidiary, Ionatron
Technologies, Inc. $2.8 million and $4.3 million were outstanding under the
revolving credit arrangements at March 31, 2004 and December 31, 2003,
respectively.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock
with such designations, rights and preference as may be determined from time to
time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights, which could adversely affect
the voting power or other rights of the holders of the Company's common stock.
No shares of the preferred stock are outstanding.
COMMON STOCK
On April 29, 2004, our shareholders approved the increase in our
authorized common stock to 100,000,000 shares. We have given retroactive effect
to this increase in the accompanying balance sheet.
We have a Rights Agreement commonly known as a "poison pill", which
provides that in the event an individual or entity becomes a beneficial holder
of 12% or more of the shares of our capital stock, without the approval of the
Board of Directors, other stockholders of the Company shall have the right to
purchase shares of our (or in some cases, the acquiror's) common stock from the
Company at 50% of its then market value. In connection with the Merger, the
acquisition of greater than 12% of our capital stock by each of our Chairman and
Chief Executive Officer was approved by the Board of Directors.
-12-
STOCK WARRANT AND DEVELOPMENT AGREEMENT
In October 2003, we entered a Development Agreement with a third party
whereby the Company issued a warrant, which expires October 2008, to purchase
1,028,076 common shares at $0. Substantially all of the non-financial terms of
the development agreement including the identity of the third party are
classified by the U.S. Government. The Development Agreement provides the third
party with ownership rights to intellectual property developed on behalf of the
third party and certain license rights in exchange for the payment of
$2,400,000. In addition, the Development Agreement provides for reimbursement of
up to one third of our actual labor, material and external consulting costs
expended under the Development Agreement. The initial $500,000 payment under the
agreement was considered as payment for the warrant and was recorded as
additional paid-in-capital. 1,028,076 shares of common stock issued in the
Merger are being held in escrow pending issuance under the warrant. The third
party and our management met on April 29, 2004 and both parties intend to enter
a modified joint development agreement for the remaining $1.9 million payment
due under the original agreement.
STOCK OPTIONS AND WARRANTS
At March 31, 2004 there were options to purchase 6.6 million shares of
common stock outstanding. Options and warrants issued by USHG covering
approximately 5.5 million shares of common stock exercisable, at exercise prices
ranging from $.25 to $.63, until 2013 were outstanding at the date of the
merger. Subsequent to the Merger we issued options covering 1.1 million shares
of common stock at exercise prices ranging from $2.85 to $3.35 and expiration
dates extending into 2009. Of the total, options to purchase 300,000 shares were
granted to consultants for services provided in connection with the Merger. The
remainder, which vest over two year to four year periods, were granted to
directors and employees We may issue up to 3,000,000 shares of common stock at
terms and conditions approved by the Board at dates of issuances under the
qualified stock option plan approved by our stockholders on April 29, 2004.
7. SIGNIFICANT CUSTOMERS
Our principal customer is the U. S. Government.
8. RETIREMENT PLANS
We established a 401(k) plan for the benefit of our employees. We may
make discretionary contributions to the plan. In the first quarter of 2004 and
fiscal years 2003 and 2002, the Company did not contribute to the 401(k) plan.
9. COMMITMENTS AND CONTINGENCIES
LEASES
We lease office, manufacturing and storage space at an annual rental of
$330,000 under a non-cancelable operating lease agreement from a company owned
by our Chairman. The lease expires in November 2012, contains renewal options
and an escalation provision at the end of five years that increases our annual
rent by $49,500. We are also responsible for certain property related costs,
including insurance, utilities and property taxes. Rent expense for 2003 and
2002 was approximately $90,000 for each quarter. Future annual minimum lease
payments under these leases are:
Years ending December 31, Amount
- ------------------------- ----------
2004 $ 247,500
2005 330,000
2006 330,000
2007 352,000
2008 379,500
Thereafter 1,454,750
----------
Total $3,093,750
==========
-13-
GUARANTEES
We agree to indemnify our officers and directors for certain events or
occurrences arising as a result of the officer or director's serving in such
capacity. The term of the indemnification period is for the officer's or
director's lifetime. The maximum amount of future payments that we could be
required to make under these indemnification agreements is unlimited. However,
we maintain a directors and officer liability insurance policy that limits our
exposure and enables us to recover a portion of any future amounts paid. As a
result, we believe the estimated fair value of these indemnification agreements
is minimal because of our insurance coverage and we have not recognized any
liabilities for these agreements as of March 31, 2004.
10. INCOME TAXES
Income tax benefits of approximately $360,000 resulting from the loss
in the first quarter are available for deduction from future taxable income. We
have provided a valuation allowance for all of these income tax benefits.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Non-Cash Investing and Financing Activities:
Three Months Ended March 31,
----------------------------
2004 2003
---- ----
Conversion of note payable to common 2,000,000 --
stock
12. SUBSEQUENT EVENT
We announced on April 21, 2004 receipt of a U.S. Government contract to
build and deliver a transportable demonstrator unit that will be utilized to
conduct field trials of our next generation controlled energy technology. The
initial contract award is for $9,000,000 and is expected to be completed in less
than 10 months and is a cost plus fixed fee type contract.
-14-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with our
Consolidated Financial Statements included elsewhere in this Form 10-Q and any
subsequent filings. Certain of the statements contained herein may be considered
forward-looking statements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements for purposes of the securities laws. Forward-looking
statements include all statements that do not relate solely to the historical or
current facts, and can be identified by the use of forward looking words such as
"may", "believe", "will", "expect", "expected", "project", "anticipate",
"anticipated" estimates", "plans", "strategy", "target", "prospects" or
"continue" These forward looking statements are based on the current plans and
expectations of our management and are subject to a number of uncertainties and
risks that could significantly affect our current plans and expectations, as
well as future results of operations and financial condition and may cause our
actual results, performances or achievements to be materially difficult from any
future results, performances or achievements expressed or implied by such
forward-looking statements. This Form 10-Q contains important information as to
risk factors in the notes to financial statements and below. In making these
forward-looking statements, we claim the protection of the safe-harbor for
forward-looking statements contained in the Private Securities Reform Act of
1995. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to have been correct. We do not assume any obligation to
update these forward-looking statements to reflect actual results, changes in
assumptions, or changes in other factors affecting such forward-looking
statements.
OVERVIEW
On March 18, 2004, a subsidiary of U. S. Home & Garden Inc. (USHG), a
non-operating, publicly traded company trading merged into Ionatron
Technologies, Inc., formerly Ionatron, Inc. (the "Merger"). Following the
Merger, USHG shareholders held 33.89 % and Ionatron shareholders held 66.11% of
the outstanding USHG common stock. The combination has been accounted for as a
recapitalization of Ionatron, Inc., from our inception on June 3, 2002, and the
issuance of 19,346,090 common shares and 5,429,006 options and warrants to the
USHG shareholders on the date of merger in exchange for cash. The consolidated
financial statements reflect the historical results of Ionatron, Inc., prior to
March 18, 2004 and the consolidated results of operations of the Company since
March 18, 2004. On April 29, 2004, our shareholders approved the change of our
corporate name to Ionatron, Inc., an increase of our authorized common stock to
100,000,000 shares and the classification of our Board of Directors into three
classes. We also changed our fiscal year end from June 30 to December 31. The
common stock and per share information in the consolidated financial statements
and related notes have been retroactively adjusted to give effect to the
re-capitalization.
Ionatron was formed on June 3, 2002 to develop and market Directed
Energy Weapon technology products initially for sale to the U.S. Government. The
goal of the Company is to initially produce products that incorporate our
technology for specific U.S. Government customer applications and platforms.
Ionatron and the U.S. Government have entered into several contracts for
products and services as well as Cooperative Research and Development Agreements
for joint research on Laser Induced Plasma Channel ("LIPC") based directed
energy weapons. We expect to offer U.S. Government approved versions of our
products for commercial security applications in the future. During 2003 and
2002, the Company engaged in research and development and business development
activities. Ionatron has demonstrated its laser guided man-made lightning
directed energy technology in the laboratory and now has government contracts
for effects testing, compact laser source development and the delivery of a
system on a mobile platform for field demonstration and testing.
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We are a new technology company working under contracts with agencies
of the U.S. Government concerned with national security that has developed and
demonstrated in our laboratory a novel internally developed directed energy
weapon technology called LIPC, our technology controls and directs electrical
energy between two points. Our business strategy is to continue long-term
development of the technology for multiple national security and defense
applications, as well as to in parallel develop, applications in other
commercial sectors. Many short-term military applications have been already
demonstrated to our customers. Our immediate plan is to manufacture
transportable demonstrators for those applications for various U.S. Government
organizations, in order to demonstrate the field utility of the technology. In
April 2004, we received a $9 million contract for one such unit. Upon completion
of this contract our intent is to transition to building prototypes and a
limited number of production units as soon as it is practicable. We cannot
assure you that the demonstrator will perform to the specifications required or
that additional prototypes or units will be ordered.
Currently the LIPC technology lends itself to many non-lethal and
lethal military applications. We have demonstrated the technology and
effectiveness for many application areas in our laboratory. We cannot assure you
that the technology will perform its intended applications outside of the
laboratory. Recently, we were requested by one branch of the military to put
forth a proposal, which we have done, that details the requirements and funding
needed to start low rate initial production and deliver units of a specific
Ionatron LIPC system during 2005. The funding for this proposal is currently
being identified with attempts to include it into the 2005 U.S. Defense Budget,
that begins with the government fiscal year on October 1, 2004. We cannot assure
you that this proposal will result in contract awards.
We have had meetings and performed demonstrations of the technology for
all branches of the U.S. Military, as well as many other U.S. Government
organizations involved in various defensive, anti-terrorism, or offensive
military type operations. We currently have many potential contracts in the
negotiation stage and have U.S. Government customers actively seeking short-term
and long-term funding for Ionatron projects. We cannot assure you that any such
contracts will become finalized in a timely manner or at all.
In order to help manage the Ionatron interface with our government
customers and their congressional funding counterparts, we maintain an ongoing
relationship with a well known and qualified Washington, DC based government
relations firm. We also have an established Vice President of Business
Development, whose group will be expanding this year as we aggressively market
our U.S. Government products.
We also have various U.S. Government contracts in the following areas:
- Transportable demonstrator for field trials;
- Portal ingress/egress denial demonstration;
- Effects of LIPC technology on various targets; and
- Compact architecture development of the equipment to allow
placement on smaller platforms.
The LIPC technology is designed as a line of sight weapon, which allows
the propagation of various forms and quantities of electrical energy to be aimed
and directs electrical energy between two points. The laboratory demonstrations
of the technology have gone from low voltage disruptive type energies to the
target to very high voltages and currents which have demonstrated energy
densities that physically damage different types of materials, such as ablating
concrete.
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We intend to take advantage of, and utilize, existing and mature laser
targeting and tracking technology for our systems with slight modifications. We
are in negotiations with three vendors to supply, to our specifications, the
electrical system requirements and have received a working prototype from one
vendor. Outsourcing such supply requirements is intended to free up our
technical personnel and other resources to work on development of next
generation electrical sources, now that we have developed at least one
electrical source that can be manufactured for us by outside sources. We also
have optical components and sections of our laser sources manufactured by
outside vendors which are then assembled and integrated at Ionatron to produce
the final laser source for our LIPC systems.
These LIPC systems will be self contained units that operate off of
existing power supplies found on typical mobile military platforms, such as
HMMWV's. Due to the low average power requirements of our systems, no additional
or exotic power systems will be required to support these systems. Future
systems will utilize the advanced electrical technologies developed for other
military programs to support more compact sources, and smaller, lighter LIPC
systems that can be mounted on smaller, autonomous platforms now under
development in other government programs.
The targets, effects, ranges, voltages and currents delivered, along
with many other aspects of the technology are classified under specific
Department of Defense guidelines and, consequently, cannot be disclosed to the
public.
Patents/Proprietary Information
Ionatron has numerous patent applications in various stages of
preparation and prosecution, which Ionatron believes it has novel intellectual
property and that it might be able to secure patents that operate to protect our
proprietary technical information and capabilities that will give us the
competitive advantage to continue to be the leader in the technology. Some of
these patents will be evaluated by the government to determine if they will be
classified in nature, and thus may not be seen by the general public. Ionatron
also has proprietary information in the form of trade secrets and technology
specific know how that should give us additional competitive advantages.
Research and development
Ionatron has funded its original research and development through
capital investment by its founders and we retain the ownership of all the
original intellectual property, which we believe is necessary to the ability to
use and control the technology. Ionatron also out sources certain research tasks
to experienced individuals or companies for some activities that require
sophisticated laboratory equipment or optical modeling programs we do not have
at our disposal. We have over ten relationships of this kind, which provide that
any intellectual property developed under the agreement is the sole property of
Ionatron.
Our short-term research and development goals are to complement our
existing system design by developing more efficient and compact laser sources,
electrical sources, and lower cost more efficient optical beam trains. Some of
this development work is funded by our government customers. Most of our
research related work is funded internally in order to capture any intellectual
property rights from novel processes and inventions that may arise.
Our long-term research is to identify the long-range physical limits of
the technology. This work relates to understanding the long-range capabilities
of our LIPC's from alternative and potentially technically superior optical
sources and new potential wavelengths that it may be advantageous to exploit.
This work includes efforts to achieve a more complete understanding of the
entire physical laws we work within regarding atmospheric physics, plasma
physics, and the future capabilities of new solid-state laser materials and
laser processes that may enable the technology to be more fully exploited.
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We also intend to explore other uses of the technology in the existing
application area as well as completely novel applications in commercial sectors
outside the defense and national security application areas.
Properties
Ionatron currently is located in a 25,000 square foot Research and
Development and prototyping facility. We have numerous LIPC system test beds,
laser source design and assembly, optical design and assembly, machine shop,
engineering, research and development, electrical source design and fabrication,
indoor test and effects range, as well as the general and administrative
functions. The facility is limited in production capabilities but is capable of
performing on our existing contracts and the LIPC transportable demonstrator
contract.
As additional contracts are expected, we are preparing to move
operations to the NASA Stennis Space facility located on the Gulf Coast of
Mississippi in 2005. This facility is a 150,000 acre federally owned secure
facility which currently has a decommissioned Army Ammunition Manufacturing
facility, with approximately 600,000 square feet available to meet our long-term
secure research, development, manufacturing, and test range requirements. We are
currently negotiating to have just over 100,000 square feet upgraded, to our
specifications, as soon as possible in order to relocate operations to the
Stennis facility.
It is expected that the cost of upgrading the facility will be paid for
by through the U.S. Army's ARMS program. The actual facility moving expenses to
relocate from Tucson, AZ to Mississippi is estimated at approximately $1,000,000
to be incurred in 2005.
Employees
We currently have twenty-six employees, of whom six are in management
and general administrative, one is in human resources, twelve are in research
and engineering and seven are in manufacturing. We expect to significantly
increase the number of our personnel by the end of the year, primarily in
research, engineering and manufacturing.
CRITICAL ACCOUNTING POLICIES
The Company has identified the following accounting policy that
requires significant judgment. The Company believes its judgments relating to
revenue are appropriate.
Revenues
Revenues have been derived from ongoing contract work for effects
testing and the design and development of an in house demonstration system for a
government customer. It is expected that continued work on effects testing,
design and development of use specific Ionatron systems, advanced design and
proof of principle on an existing contract, compact laser source development and
the manufacture of a transportable demonstrator will contribute to revenues
going forward in 2004. This work is expected to be generally performed under
cost-plus contracts with U.S. Government customers.
Revenues under long-term U.S. Government contracts are recorded under
the percentage of completion method. Revenues under cost plus fixed fee
contracts are recorded as costs are incurred and include estimated earned fees
in the proportion that costs incurred to date bear to total estimated costs.
Costs include direct labor, direct materials, and subcontractor costs and
overhead. As contracts can extend over one or more accounting periods, revisions
in costs and earnings estimated during the course of work are reflected during
the accounting period in which the facts become known. When the current contract
estimate indicates a loss, provision is made for the total anticipated loss in
the current period.
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Revenues for other products and services are recognized when such
products are delivered and, in connection with certain sales to government
agencies, when the products and services are accepted, which is normally
negotiated as part of the initial contract.
COMPARISON OF OPERATIONS FOR THE FIRST QUARTERS OF 2004 AND 2003
The following table sets forth certain financial data for each quarter
ending:
March 31, March 31,
2004 2003
--------- ---------
Revenue $ 272,442 $ --
Cost of Revenue 255,000 --
Expenses:
General and Administrative 565,549 469,852
Selling and Marketing 112,506 67,723
Research and Development 180,765 421,475
Interest 74,516 33,811
Net loss (915,894) (992,861)
REVENUE
Revenue for the first quarter of 2004 was derived from continued work on
existing contracts. There was no revenue for the first quarter of 2003.
COST OF SALES
Our cost of sales in first quarter 2004 was $255,000. There were no
sales in the first quarter of 2003 for Ionatron.
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
The increase in General, Administrative and Selling expenses during the
first quarter of 2004 as compared with first quarter 2003 was primarily payroll
related.
RESEARCH AND DEVELOPMENT EXPENSES
The decrease in Research and Development expenses during the first
quarter of 2004 as compared with first quarter of 2003 was primarily due to the
transfer of certain material, personal and consulting expenses to cost of sales
in 2004 as certain research and development is funded under our contracts.
LIQUIDITY AND CAPITAL RESOURCES
Our cash position increased during the first quarter of 2004 by $8.4
million primarily as a result of the merger with USHG that provided $8.9 million
of cash. At March 31, 2004 we had approximately $8.5 million of cash and cash
equivalents. We used $1.0 million in operations and purchased $0.1 million of
equipment during the quarter, which was financed in part, by borrowings from our
Chairman. Our borrowing arrangement with our Chairman was restructured, after
pay down of $500,000 and his contribution of $2 million to our capital, into a
$3 million revolving credit arrangement.
We believe that we will have sufficient working capital to fulfill this
year's existing contracts and expected contracts. The transportable demonstrator
contract and at least two of the other Ionatron contracts, that presently
represent a major portion of our current activity, are on a cost plus fixed fee
basis. This means all work performed is done at Ionatron government-approved
rates,
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which include general and administrative costs, overhead, labor and materials,
fees and profit. These costs are accrued as incurred and billed monthly. Other
contracts are at fixed prices which have commercial type gross margins
associated with them.
RISKS AND UNCERTAINTIES
Future results of operations of Ionatron involve a number of known and
unknown risks and uncertainties. Factors that could affect future operating
results and cash flows and cause actual results to vary materially from
historical results include, but are not limited to:
- Failure or difficulties in managing our operations, including
attracting and retaining qualified personnel;
- Failure or inability to attain profit levels necessary to
sustain our business
- Interruption or failure of, or failure to manage, our
technology and information systems;
- Changes in government policy, regulation and enforcement or
adverse judicial or administrative interpretations and rulings
or legislative action relating to procurement regulations,
enforcement and pricing;
- Availability of budgetary allocations for governmental
agencies to purchase our products;
- Inability to adapt to technological change;
- Inability to successfully manufacture and assemble our
products;
- Competition from defense contractors with greater financial
and manufacturing resources;
- Dependence upon sales to the U.S. government;
- Sales agreements with the U.S. government typically provide
for termination at any time and may contain unfavorable terms;
- Dependence on qualified subcontractors for parts of our
research and development activities;
- Inability to raise sufficient financing for expanded
manufacturing and assembly activity;
- Failure to successfully field test our weapon products;
- Inability to collect amounts due to us from our customers; and
- Our failure to provide adequate customer service.
Negative developments in these areas could have a material effect on
our business, financial condition and results of operations.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, our financial position is subject to
a variety of risks, such as the collectibility of our accounts receivable and
the recoverability of the carrying values of our long-term assets. We do not
presently enter into any transactions involving derivative financial instruments
for risk management or other purposes.
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Our available cash balances are invested on a short-term basis and are
not subject to significant risks associated with changes in interest rates.
Substantially all of our cash flows are derived from our operations within the
United States and we are not subject to market risk associated with changes in
foreign exchange rates.
We are exposed to market risk for the impact of interest rate changes,
as the interest rate of our borrowings under our revolving credit agreement with
our Chairman is subject to changes based on changes in the prime rate Interest
rate on Howard revolver-based on prime.
ITEM 4 CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of our management,
including our chief executive officer/chief financial officer, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, our chief executive officer/chief financial officer has concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. During the quarter ended March 31, 2004, there were no
significant changes in our internal controls over financial reports that have
materially affected, or which are reasonably likely to materially affect our
internal controls over financial reporting.
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PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On March 18, 2004 Ionatron merged with US Home & Garden Inc. ("USHG"),
a non-operating company whose common stock was listed on the over-the-counter
bulletin board. The Ionatron shareholders received 48,452,249 shares of USHG
(67% of the outstanding shares) in the transaction. The transaction was
accounted for as a recapitalization of Ionatron. These shares were issued to a
limited number of accredited stockholders pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933 and/or Regulation
D of the Securities Act of 1933.
On March 18, 2004, prior to the Merger, USHG issued (i) 750,000 shares
of common stock to a former officer of USHG as partial severance compensation,
(ii) 135,000 shares of common stock to a former officer of USHG as severance
compensation, (iii) 10,000 shares of common stock to a former director as
consideration for his obligation to serve as USHG stockholder representative
for purposes of the indemnification obligations under the Merger agreement, (iv)
400,000 shares of common stock to an investment banking firm for services
rendered in connection with its October 2003 sale of its Easy Gardener business
and (v) 50,000 shares of common stock issued to an investment banking firm as
consideration for rendering a valuation opinion in connection with USHG's sale
of Golden West Agri-Products, Inc. immediately prior to the Merger. These
securities were issued pursuant to an exemption from registration under Section
4(2) and/or Regulation D of the Securities Act of 1933.
In March 2004, the Company issued options to purchase an aggregate of
1,107,500 shares to employees, directors and consultants. The securities were
issued pursuant to an exemption from reporting in Section 2(a)(3) or 4(2) of the
Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Amendment of Certificate of Incorporation of the Company
filed with the Secretary of State of the State of Delaware on April 29,
2004.
31.1 Certification of Chief Executive and Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Chief Executive and Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (furnished to the Commission herewith).
(b) Reports on Form 8-K
None
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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.
IONATRON, INC.
/s/ Thomas C. Dearmin
---------------------------------------
Thomas C. Dearmin
President, Chief Executive Officer, and
Chief Financial Officer
Date: May 17, 2004
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