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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 June 30, 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.
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(Exact name of registrant as specified in its charter)
Delaware 77-0262908
- --------------------------------- --------------------
(State or other jurisdiction IRS Employer
of incorporation or organization) (Identification No.)
3590 East Columbia 85714
Tucson, AZ
------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(520) 628 7415
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(Registrant's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(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 August 10, 2004 there
were 69,579,190 shares of the issuer's common stock, par value $.001 per share,
outstanding.
IONATRON, INC.
June 30, 2004
PART I - FINANCIAL INFORMATION
Item 1- Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 3
Consolidated Statements of Operations for the three months ended June 30, 2004 and 2003 4
Consolidated Statements of Operations for the six months ended June 30, 2004 and 2003 5
Consolidated Statement of Cash Flows for the six months ended June 30, 2004 and 2003 6
Consolidated Statement of Stockholder's Equity (Deficit) for the six months ended
June 30, 2004 7
Notes to Consolidated Financial Statements 8
Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3- Quantitative and Qualitative Disclosures About Market Risk 25
Item 4- Controls and Procedures 25
PART I I - OTHER INFORMATION
Item 2- Changes in Securities and Use of Proceeds 26
Item 4- Submission of Matters to a Vote of Security Holders 26
Item 6- Exhibits and Reports on Form 8-K 26
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURES 27
-2-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IONATRON, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,639,403 $ 103,392
Accounts receivable 686,930 73,027
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,091,324 31,427
Inventory 22,861 21,000
Receivables from stockholder 2,713 107,482
Prepaid expenses 90,544 47,905
----------- -----------
TOTAL CURRENT ASSETS 8,533,775 384,233
PROPERTY AND EQUIPMENT, NET 1,079,760 1,141,887
----------- -----------
TOTAL ASSETS $ 9,613,535 $ 1,526,120
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of capital lease obligation $ 2,363 $ --
Note payable to stockholder 2,800,000 4,300,000
Accounts payable 599,506 330,696
Accrued expenses 342,042 365,208
----------- -----------
TOTAL CURRENT LIABILITIES 3,743,911 4,995,904
CAPITAL LEASE OBLIGATION 4,718 --
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock, $.001 par value, 100,000,000 shares authorized; 69,561,690
shares issued and outstanding at June 30, 2004 and 48,452,249 shares
issued and outstanding at December 31, 2003 69,561 48,452
Additional paid-in capital 8,065,472 471,548
Accumulated deficit (2,270,127) (3,989,784)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 5,864,906 (3,469,784)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 9,613,535 $ 1,526,120
=========== ===========
See accompanying notes to unaudited consolidated financial statements
-3-
IONATRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30,
-----------------------------------
2004 2003
------------ ------------
REVENUE $ 1,833,572 $ --
COST OF REVENUE 1,726,753 --
------------ ------------
GROSS PROFIT 106,819 --
OPERATING EXPENSES:
General and administrative 1,199,390 743,365
Selling and marketing 119,566 98,538
Research and development 120,133 162,116
------------ ------------
TOTAL OPERATING EXPENSES 1,439,089 1,004,019
------------ ------------
OPERATING LOSS (1,332,270) (1,004,019)
OTHER (EXPENSE) INCOME
Interest expense (43,184) (47,546)
Interest income 21,221 --
------------ ------------
TOTAL OTHER (21,963) (47,546)
------------ ------------
NET LOSS $ (1,354,233) $ (1,051,565)
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.02) $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED 69,060,586 48,452,249
============ ============
See accompanying notes to unaudited consolidated financial statements
-4-
IONATRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2004 2003
------------ ------------
REVENUE $ 2,106,014 $ --
COST OF REVENUE 1,981,753 --
------------ ------------
GROSS PROFIT 124,261 --
OPERATING EXPENSES:
General and administrative 1,764,939 1,213,217
Selling and marketing 232,072 166,261
Research and development 300,898 583,591
------------ ------------
TOTAL OPERATING EXPENSES 2,297,909 1,963,069
------------ ------------
OPERATING LOSS (2,173,648) (1,963,069)
OTHER (EXPENSE) INCOME
Interest expense (117,700) (81,357)
Interest income 21,221 --
------------ ------------
TOTAL OTHER (96,479) (81,357)
------------ ------------
NET LOSS $ (2,270,127) $ (2,044,426)
============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.04) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED 60,138,283 48,452,249
============ ============
See accompanying notes to unaudited consolidated financial statements
-5-
IONATRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30,
---------------------------------
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,270,127) $(2,044,426)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 368,137 550,359
Loss on equipment disposal 2,188 --
Changes in working capital components:
Accounts receivable (613,903) (100,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts (1,059,897) --
Inventory (1,861) --
Prepaid expenses (42,639) (3,459)
Accounts payable 422,260 (244,926)
Accrued expenses (23,166) 271,962
----------- -----------
Net cash (used in) operating activities (3,219,008) (1,570,490)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (303,944) (587,991)
Proceeds from disposal of equipment 3,208 --
Receivables from stockholder 104,769 100,000
----------- -----------
Net cash (used in) investing activities (195,967) (487,991)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable to stockholder 1,000,000 2,020,000
Repayment on note payable to stockholder (500,000) (20,000)
Principal payments on capital lease obligation (381) --
Cash acquired from reverse merger 8,905,937 --
Exercise of stock options and warrants 545,430 --
----------- -----------
Net cash provided by financing activities 9,950,986 2,000,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 6,536,011 (58,481)
Cash and cash equivalents, beginning of period 103,392 97,206
----------- -----------
Cash and cash equivalents, end of period $ 6,639,403 $ 38,725
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest -- --
Income taxes -- --
See non cash investing and financing activities at Note 11
See accompanying notes to unaudited consolidated financial statements
-6-
IONATRON, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
SIX MONTHS ENDED JUNE 30, 2004
(Unaudited)
-------------------------
COMMON STOCK
------------------------- PAID-IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
Balance as of January 1, 2004 48,452,249 $ 48,452 $ 471,548 $(3,989,784) $(3,469,784)
Transfer of deficit on termination of
Subchapter S election -- -- (3,989,784) 3,989,784 --
Contribution of note payable to
stockholders' equity -- -- 2,000,000 -- 2,000,000
Issuance of common stock in merger 19,346,090 19,346 8,886,591 -- 8,905,937
Exercise of stock options and warrants 1,763,351 1,763 543,667 -- 545,430
Shares delivered for services performed -- -- 153,450 -- 153,450
Net loss for the six months ended
June 31, 2004 -- -- -- (2,270,127) (2,270,127)
----------- ----------- ----------- ----------- -----------
Balance as of June 30, 2004 69,561,690 $ 69,561 $ 8,065,472 $(2,270,127) $ 5,864,906
=========== =========== =========== =========== ===========
See Accompanying Notes to the Consolidated Financial Statements.
-7-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION, NATURE OF OPERATIONS, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF 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 June
30, 2004 and for the three and six months ended June 30, 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 stockholders held 33.89 % and Ionatron
stockholders 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 5,492,009 options and warrants to the USHG stockholders 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 stockholders 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 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 has 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.
-8-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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
manufacturing and administrative 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.
The asset "costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. Such revenues are expected to be billed and collected within one year on
contracts in progress. The liability "billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
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 and
municipal bonds with a variable interest rate that is adjusted to the current
market rate of interest every seven days and are readily convertible into cash.
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.
-9-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
PROPERTY AND EQUIPMENT
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
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.
-10-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 USHG 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.
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. No adjustment has been made to net loss attributable
to common stockholders. 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. As such, no diluted weighted average number of shares
outstanding nor diluted loss per share has been reflected as the effect is
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. 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. Nonemployee stock-based
transactions are accounted for under SFAS 123.
-11-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pro-forma compensation and nonemployee 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.
No compensation cost has been recognized for options granted to employees
for the three and six months ended June 30, 2004 and 2003. The following pro
forma information presents pro forma net loss information as if compensation
expense had been recognized for stock options as determined under the
fair-value-based method prescribed by SFAS No. 123 using the Black-Scholes
options pricing model:
FOR THE SIX MONTHS ENDED JUNE 30,
- ------------------------------------------------------------------------------
2004 2003
-------------- ---------------
Net loss:
As reported $ (2,270,127) $ (2,044,426)
============= ===============
Pro forma stock compensation expense $ (195,531) $ --
------------- ---------------
Pro forma $ (2,465,658) $ (2,044,426)
============= ===============
Net loss per share - basic and diluted:
As reported $ (0.04) $ (0.04)
============= ===============
Pro forma $ (0.04) $ (0.04)
============= ===============
Compensation expense recorded for shares delivered to employees and
non-employees for the six months ended June 30, 2004 was approximately $153,000.
No compensation expense was recorded for options to purchase shares or shares
delivered for the six months ended June 30, 2003.
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.
-12-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted
contracts included $1,091,000 at June 30, 2004 and $31,000 at December 31, 2003
of recoverable costs for progress completed, but not yet billed at the end of
the period. These were billed in the month following the relevant period.
3. INVENTORIES
Inventories, primarily consisting of labor, overhead and materials
pertaining to long-term contracts, are carried at cost. At June 30, 2004,
inventory was comprised only of materials.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
June 30, 2004 December 31, 2003
------------- -----------------
Furniture and leasehold improvements $ 35,036 $ 16,559
Equipment and software 2,257,148 2,000,617
----------- -----------
2,292,184 2,017,176
Less accumulated depreciation (1,212,424) (875,289)
----------- -----------
Net property and equipment $ 1,079,760 $ 1,141,887
=========== ===========
5. NOTE PAYABLE TO STOCKHOLDER
The Company's Chairman, a significant stockholder, 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 stockholder 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 June 30, 2004 and December 31, 2003,
respectively. Interest paid to stockholder was approximately $116,000 and
$78,000 for the six months ended June 30, 2004 and 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.
-13-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
COMMON STOCK
On April 29, 2004, our stockholders 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.
A Rights Agreement commonly known as a "poison pill", currently exists
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.
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 a 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 June 30, 2004 there were options and warrants to purchase approximately
4.8 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 and through June 30, 2004, options
to purchase 1,107,500 shares of common stock were granted and options to
purchase 1,763,351 shares of common stock were exercised. Of the total options
granted, options to purchase 300,000 shares with an exercise price of $3.00 were
granted to consultants for services provided in connection with the Merger. The
remainder, which vest over one year to four year periods, were granted to
directors and employees and have exercise prices ranging from $2.85 to $3.35. 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 stock incentive plan
approved by our stockholders on April 29, 2004.
Subsequent of June 30, 2004, options to purchase 324,400 shares of common stock
were granted under the 2004 incentive plan.
7. SIGNIFICANT CUSTOMERS
Currently our sole customer is the U. S. Government.
-14-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 two quarters 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 that is
majority owned by our Chairman and other principal stockholders. 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 $ 165,000
2005 330,000
2006 330,000
2007 352,000
2008 379,500
Thereafter 1,454,750
--------------
Total $ 3,011,250
==============
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 June 30, 2004.
10. INCOME TAXES
Income tax benefits of approximately $890,000 resulting from the loss in
the six months ended June 30, 2004 are available for deduction from future
taxable income. We have provided a valuation allowance for all of these income
tax benefits
-15-
11. SUPPLEMENTAL CASH FLOW INFORMATION
Non-Cash Investing and Financing Activities:
Six months ended June 30,
-------------------------
2004 2003
---------- ----------
Conversion of note payable to common stock $2,000,000 $ --
Equipment purchased under capital lease 7,462 --
Shares delivered to consultants for services
performed 153,450 --
-16-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read 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 merged into Ionatron Technologies, Inc.,
formerly Ionatron, Inc. (the "Merger"). Following the Merger, USHG stockholders
held 33.89 % and Ionatron stockholders 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 5,492,009 options and warrants to the USHG
stockholders 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 stockholders 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 has entered into government contracts for
effects testing, compact laser source development and the delivery of a system
on a mobile platform for field demonstration and testing.
-17-
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 develop applications in other commercial sectors.
Short-term military applications have been 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 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 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 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 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 ranged 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.
-18-
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 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. Our
government customers fund some of this development work. 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.
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.
-19-
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 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.
Employees
We currently have thirty-three employees, compared to twenty-six on March
31, 2004, ten of which are in management and general administrative, two are in
human resources, fourteen are in technical 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 recognized 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.
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.
-20-
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
The following table sets forth certain financial data for each three
months ended:
June 30, June 30,
2004 2003
----------- -----------
Revenue $ 1,833,572 $ --
Cost of revenue 1,726,753 --
Expenses:
General and administrative 1,199,390 743,365
Selling and marketing 119,566 98,538
Research and development 120,133 162,116
Interest 43,184 47,546
Interest income 21,221 --
Net loss $(1,354,233) $(1,051,565)
REVENUE
Revenue for the three months ended June 30, 2004 was derived from
continued work on four existing contracts. There was no revenue for the June 30,
2003. We are presently working on three contracts with a backlog of
approximately $10,560,000. The contracts are expected to be completed in 2004.
Additionally, the Department of Defense budget contains a funding line item in
the amount of $12.6 million for the development of Laser Induced Plasma Channel
Technology in which the Company anticipates participating. This line item is a
Navy program, which is a follow on to our 2004 Navy Congressional defined
program. We anticipate getting a contract and, upon completion of the
contractual agreements with the Navy and the approval of the 2005 Defense
budget, we anticipate that the majority of this amount will be added to our
backlog.
COST OF REVENUE
Our cost of revenue for the three months ended June 30, 2004 was
$1,720,000 and was comprised of direct costs and administrative and
manufacturing overhead. Our costs of revenue are expected to increase in
connection with our completion of our projects in process as well as anticipated
future projects.
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
The increase in general, administrative and selling expenses during the
three months ended June 30, 2004 as compared with the three months ended June
30, 2003 was primarily payroll related due to building infrastructure to support
current and planned operations. We expect a continued trend toward increased
general and administrative to support our planned activities.
-21-
RESEARCH AND DEVELOPMENT EXPENSES
The decrease in research and development expenses during the three months
ended June 30, 2004 as compared with the three months ended June 30, 2003 was
primarily due to the transfer of certain material, personnel and consulting
expenses to cost of sales in 2004 as certain research and development, in which
we retain rights to the results of the research, begins to be funded under our
contracts.
COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
The following table sets forth certain financial data for the six months
ended:
June 30, June 30,
2004 2003
----------- -----------
Revenue $ 2,106,014 $ --
Cost of revenue 1,981,753 --
Expenses:
General and administrative 1,764,939 1,213,217
Selling and marketing 232,072 166,261
Research and development 300,898 583,591
Interest 117,700 81,357
Interest income 21,221 --
Net loss $(2,270,127) $(2,044,426)
REVENUE
Revenue for the six months ended June 30, 2004 was derived from continued
work on four existing contracts. There was no revenue for the six months ended
June 30, 2003.
COST OF REVENUES
Our cost of revenues consisting of materials purchased, direct labor and
manufacturing and administrative overhead for the six months ended June 30, 2004
was $1,982,000.
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
The increase in general, administrative and selling expenses during the
six months ended June 30, 2004 as compared with the six months ended June 30,
2003 was primarily payroll related due to building infrastructure to support
current and planned operations. We expect a continued trend toward increased
general, administrative to support our planned activities.
RESEARCH AND DEVELOPMENT EXPENSES
The decrease in research and development expenses during the six months
ended June 30, 2004 as compared with the six months ended June 30, 2003 was
primarily due to the transfer of certain material, personnel and consulting
expenses to cost of sales in 2004 as certain research and development, in which
we retain rights to the results of the research, is funded under our contracts.
-22-
LIQUIDITY AND CAPITAL RESOURCES
Our cash position increased during six months ended June 30, 2004 by $6.5
million. At June 30, 2004 we had approximately $6.6 million of cash and cash
equivalents. During the six months ended June 30, 2004, we used $3.2 million in
operations primarily as a result of a net loss of $2.3 million, and an increase
in accounts receivable and cost and estimated earnings in excess of billings on
uncompleted contracts of $1.7 million, which were partially offset by a net
increase in accounts payable and accrued expenses of $400,000 and non-cash
charges for depreciation and amortization of $368,000. We also purchased $0.3
million of equipment during the six months ended June 30, 2004, which was
financed in part, by borrowings from our Chairman. Our borrowing arrangement
with our Chairman was restructured following a $500,000 payment and $2,000,000
conversion to equity, resulting in 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 fee basis.
This means all work is performed at Ionatron government-approved rates, 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.
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. It is expected that the cost of upgrading the facility will be paid for by
through the U.S. Army's Armament Retooling and Manufacturing Support initiative.
The actual facility moving expenses to relocate from Tucson, AZ to Mississippi
is estimated at approximately $1,000,000 to be incurred in 2005.
CONTRACTUAL COMMITMENTS
As of June 30, 2004, the Company had contractual obligations in the form of
non-cancelable operating leases and note payable to stockholder as follows:
PAYMENTS DUE BY PERIOD
----------------------------------------
TOTAL CURRENT 1-3 YEARS 4-5 YEARS
---------- ---------- ---------- ----------
Operating leases $2,928,750 $ 330,000 $1,012,000 $1,586,750
Capital leases 7,081 2,363 4,718 --
Note payable to stockholder 2,800,000 2,800,000 -- --
---------- ---------- ---------- ----------
Total $5,735,831 $3,132,363 $1,016,718 $1,586,750
========== ========== ========== ==========
-23-
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 ruling 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.
-24-
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
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 interest rate
on the revolving credit agreement.
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 June 30, 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.
-25-
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the three months June 30, 2004, the Company issued 1,763,351 shares
of common stock upon exercise of outstanding options to employees, directors and
consultants. The securities were issued pursuant to an exemption from
registration pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of Stockholders was held on April 29, 2004. At the
special meeting, the following matters were voted on and approved by our
stockholders:
Matter Votes For Votes Against Votes Abstaining
- ------ --------- ------------- ----------------
Amendment of Certificate of Incorporation to change
our name to Ionatron, Inc. 52,754,515 17,152 13,000
Amendment of Certificate of Incorporation to
increase our authorized shares of common stock from
75,000,000 to 100,000,000 52,402,852 371,615 10,200
Amendment of Certificate of Incorporation to
classify our Board of Directors into three classes 52,436,045 338,092 10,530
Approve our 2004 Stock Incentive Plan 52,248,917 509,500 26,500
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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,
(i) Report on form 8-K filed with the SEC on April 29, 2004
(ii) Report on form 8-K filed with the SEC on June 1, 2004
-26-
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: August 13, 2004
-27-