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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 September 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
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(State or other jurisdiction IRS Employer
of incorporation or organization) (Identification No.)
3590 East Columbia
Tucson, AZ 85714
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(Address of Principal Executive Offices) (Zip Code)
(520) 628 7415
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(Registrant's Telephone Number, Including Area Code)
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(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 November 8, 2004
there were 70,397,384 shares of the issuer's common stock, par value $.001 per
share, outstanding.
IONATRON, INC.
September 30, 2004
PART I - FINANCIAL INFORMATION
Item 1- Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003 3
Consolidated Statements of Operations for the three
months ended September 30, 2004 and 2003 4
Consolidated Statements of Operations for the nine
months ended September 30, 2004 and 2003 5
Consolidated Statement of Cash Flows for the nine
months ended September 30, 2004 and 2003 6
Consolidated Statement of Stockholder's Equity (Deficit)
for the nine months ended September 30, 2004 7
Notes to Consolidated Financial Statements 8
Item 2- Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3- Quantitative and Qualitative Disclosures About Market Risk 30
Item 4- Controls and Procedures 30
PART II - OTHER INFORMATION
Item 2- Changes in Securities and Use of Proceeds 30
Item 6- Exhibits 30
SIGNATURES 31
-2-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IONATRON, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ ------------------
(Unaudited) (Audited)
ASSETS
Current assets
Cash and cash equivalents $ 5,193,188 $ 103,392
Accounts receivable 661,189 73,027
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,633,381 31,427
Inventory 302,689 21,000
Receivables from stockholder -- 107,482
Other receivables 76,935 --
Prepaid expenses 119,657 47,905
------------ ------------
Total current assets 7,987,039 384,233
Property and equipment, net 1,310,458 1,141,887
Intangible assets subject to amortization 283,000 --
Intangible assets not subject to amortization 603,000 --
Goodwill 1,328,809 --
------------ ------------
TOTAL ASSETS $ 11,512,306 $ 1,526,120
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of capital lease obligation $ 2,399 $ --
Note payable to stockholder 2,800,000 4,300,000
Accounts payable 1,036,577 330,696
Accrued expenses 392,481 365,208
------------ ------------
Total current liabilities 4,231,457 4,995,904
Capital lease obligation 4,105 --
Commitments and contingencies
Stockholders' equity
Preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock, $.001 par value, 100,000,000 shares
authorized; 70,539,175 shares issued and outstanding at
September 30, 2004 and 48,452,249 shares issued and
outstanding at December 31, 2003 70,539 48,452
Additional paid-in capital 10,372,358 471,548
Accumulated deficit (3,166,153) (3,989,784)
------------ ------------
Total stockholders' equity (deficit) 7,276,744 (3,469,784)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 11,512,306 $ 1,526,120
============ ============
See accompanying notes to unaudited consolidated financial statements
-3-
IONATRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
------------ ------------
2004 2003
------------ ------------
Revenue $ 2,628,982 $ 148,586
Cost of revenue 2,441,243 137,874
------------ ------------
Gross profit 187,739 10,712
Operating expenses:
General and administrative 726,158 420,844
Selling and marketing 112,825 23,134
Research and development 211,895 329,550
------------ ------------
Total operating expenses 1, 050,878 773,528
------------ ------------
Operating loss (863,139) (762,816)
Other (expense) income
Interest expense (46,539) (52,832)
Interest income 13,652 --
------------ ------------
Total other (32,887) (52,832)
------------ ------------
Net loss $ (896,026) $ 815,648)
============ ============
Net loss per share - basic and diluted $ (0.01) $ (0.02)
============ ============
Weighted average number of shares
outstanding, basic and diluted 69,804,232 48,452,249
============ ============
See accompanying notes to unaudited consolidated financial statements
-4-
IONATRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
------------ ------------
Revenue $ 4,734,996 $ 148,586
Cost of revenue 4,422,996 137,874
------------ ------------
Gross profit 312,000 10,712
Operating expenses:
General and administrative 2,491,097 1,634,061
Selling and marketing 344,897 189,395
Research and development 512,793 913,141
------------ ------------
Total operating expenses 3,348,787 2,736,597
------------ ------------
Operating loss (3,036,787) (2,725,885)
Other (expense) income
Interest expense (164,239) (134,189)
Interest income 34,873 --
------------ ------------
Total other (129,366) (134,189)
------------ ------------
Net loss $ (3,166,153) $ (2,860,074)
------------ ------------
Net loss per share - basic and diluted $ (0.05) $ (0.06)
Weighted average number of shares
outstanding, basic and diluted 63,383,784 48,452,249
See accompanying notes to unaudited consolidated financial statements
-5-
IONATRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended September 30,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,166,153) $ (2,840,075)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 601,295 1,008,345
Loss on equipment disposal 2,188 --
Changes in working capital components:
Accounts receivable (343,807) --
Other receivable (76,935) 100,000
Costs and estimated earnings in excess of
billings on uncompleted contracts (1,506,155) (61,794)
Inventory (281,689) --
Prepaid expenses (71,752) (3,459)
Accounts payable 828,438 (614,350)
Accrued expenses (268,897) 338,859
------------ ------------
Net cash (used in) operating activities (4,283,467) (2,072,474)
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment (722,467) (665,798)
Proceeds from disposal of equipment 3,208 --
Receivables from stockholder 107,482 --
Acquisition of business, net of cash acquired (573,233) --
------------ ------------
Net cash (used in) investing activities (1,185,010) (665,798)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to stockholder 1,000,000 2,799,945
Repayment on note payable to stockholder (500,000) (120,000)
Principal payments on capital lease obligation (958) --
Cash acquired from reverse merger 8,916,628 --
Exercise of stock options and warrants 1,142,603 --
------------ ------------
Net cash provided by financing activities 10,558,273 2,679,945
------------ ------------
Net increase (decrease) in cash and cash equivalents 5,089,796 (58,327)
Cash and cash equivalents, beginning of period 103,392 97,206
------------ ------------
Cash and cash equivalents, end of period $ 5,193,188 $ 38,879
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest 164,036 134,188
Income taxes 66,232 --
See non cash investing and financing activities at Note 13
See accompanying notes to unaudited consolidated financial statements
-6-
IONATRON, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED SEPTEMBER 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 8,897,282 -- 8,916,628
Issuance of common stock in acquisition 199,063 199 1,699,801 -- 1,700,000
Exercise of stock options and warrants 2,541,773 2,542 1,140,061 -- 1,142,603
Shares delivered for services performed -- -- 153,450 -- 153,450
Net loss for the nine months ended
September 31, 2004 -- -- -- (3,166,153) (3,166,153)
------------ ------------ ------------ ------------ ------------
Balance as of September 30, 2004 70,539,175 $ 70,539 $ 10,372,358 $ (3,166,153) $ 7,276,744
============ ============ ============ ============ ============
See Accompanying Notes to the Consolidated Financial Statements.
-7-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF OPERATIONS, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
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.
Through North Star, we are involved in the designing and manufacturing a
broad range of high voltage equipment for the defense, aerospace,
semi-conductor, and medical industries.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Ionatron,
Inc. and its wholly owned subsidiaries, Ionatron Technologies, Inc. and North
Star Research Acquisition Corp. as of September 30, 2004 (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
September 30, 2004 and 2003 and for the three and nine months ended September
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 consolidated balance sheet as
of September 30, 2004 includes the accounts of North Star Research Company. 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.
-8-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
ACQUISITION
In September 2004 Ionatron completed the acquisition of substantially all
the assets of North Star Research Corporation ("North Star"), a New Mexico
corporation engaged in the business of designing and manufacturing a broad range
of high voltage equipment for the defense, aerospace, semi-conductor, and
medical industries.
As consideration for North Star's assets, the Company paid $700,000,
issued 199,063 shares of the Company's common stock and assumed liabilities for
warranty claims and other accrued expenses. The Company recognized goodwill of
$1,328,809 and intangible assets of $886,000 in the acquisition. The transaction
was effected through a newly-formed subsidiary, North Star Research Acquisition
Corp., a Delaware corporation, and was funded through cash on hand. Prior to the
acquisition, the Company entered into a time and materials purchase order with
North Star relating to power supply activities in an amount of $25,000.
The following is a summary of the preliminary purchase price allocation
for the acquisition
Current and other assets, net of cash acquired $ 340,154
Property and equipment 45,333
Goodwill 1,328,809
Intangible assets 886,000
Accounts payable and accrued expenses (287,063)
Acquisition costs accrued (40,000)
Issuance of common stock (1,700,000)
Net cash paid $ 573,233
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.
-9-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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.
-10-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 INCLUDING INTANGIBLES SUBJECT TO AMORTIZATION
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.
GOODWILL AND INDEFINITE LIFE INTANGIBLE ASSETS
We account for Goodwill and Indefinite Life Intangible Assets based on the
method of accounting prescribed by the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets," and we have determined that the consolidated company
is a reporting unit. We believe that the North Star Research trade name is an
indefinite life intangible asset.
Goodwill and indefinite life intangible assets will be tested annually for
impairment or more frequently if events or changes in circumstances indicate
that the assets might be impaired. In assessing the recoverability of goodwill
and indefinite life intangible assets, we must make assumptions about the
estimated future cash flows and other factors to determine the fair value of
these assets.
Assumptions about future revenue and cash flows require significant judgment
because of the current state of the economy and the fluctuation of actual
revenue and the timing of expenses. We develop future cash flows based on
projected sales with the assumption that expenses will grow at rates consistent
with historical rates. If the expected cash flows are not realized, impairment
losses may be recorded in the future.
-11-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For goodwill, the impairment evaluation includes a comparison of the carrying
value of the reporting unit (including goodwill) to that reporting unit's fair
value. If the reporting unit's estimated fair value exceeds the reporting unit's
carrying value, no impairment of goodwill exists. If the fair value of the
reporting unit does not exceed the unit's carrying value, then an additional
analysis is performed to allocate the fair value of the reporting unit to all of
the assets and liabilities of that unit. If the excess of the fair value of the
reporting unit over the fair value of the identifiable assets and liabilities is
less than the carrying value of the unit's goodwill, an impairment charge is
recorded for the difference.
The impairment evaluation for indefinite life intangible assets is performed by
a comparison of the asset's carrying value to the asset's fair value. When the
carrying value exceeds fair value an impairment charge is recorded for the
amount of the difference. An intangible asset is determined to have an
indefinite useful life when there are no legal, regulatory, contractual,
competitive, economic, or any other factors that may limit the period over which
the asset is expected to contribute directly or indirectly to the future cash
flows of the Company. In addition, each reporting period, we evaluate the
remaining useful life of an intangible asset that is not being amortized to
determine whether events and circumstances continue to support an indefinite
useful life. If an intangible asset that is not being amortized is determined to
have a finite useful life, the asset will be amortized prospectively over the
estimated remaining useful life and accounted for in the same manner as
intangible assets subject to amortization.
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 $27.1 million operating and $0.5 million capital loss carryovers of USHG.
The USHG operating losses are available for deduction from our taxable income at
a rate of approximately $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.
-12-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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." Nonemployee stock-based transactions are accounted for
under SFAS 123.
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.
-13-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
No compensation cost has been recognized for options granted to employees
for the three and nine months ended September 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 and amortized over the vesting periods of the related
options:
For the nine months ended September 30,
- --------------------------------------------------------------------------------
2004 2003
---------------- ----------------
Net loss:
As reported $ (3,166,153) $ (2,860,074)
================ ================
Pro forma stock compensation expense (722,142) -
Actual non-cash consulting compensation 153,450 -
---------------- ----------------
Pro forma $ (3,734,845) $ (2,860,074)
================ ================
Net loss per share - basic and diluted:
As reported $ (0.05) $ (0.06)
================ ================
Pro forma $ (0.06) $ (0.06)
================ ================
Compensation expense recorded for shares delivered to employees and
non-employees for the nine months ended September 30, 2004 was approximately
$153,000. No compensation expense was recorded for options to purchase shares or
shares delivered for the nine months ended September 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.
2. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted
contracts included $1,633,000 at September 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 September 30, 2004,
inventory was comprised only of materials.
-14-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September 30, 2004
(Unaudited) December 31, 2003
------------------ ------------------
Furniture and leasehold improvements $ 99,894 $ 16,559
Equipment and software 2,656,154 2,000,617
------------------ ------------------
2,756,048 2,017,176
Less accumulated depreciation (1,445,590) (875,289)
------------------ ------------------
Net property and equipment $ 1,310,458 $ 1,141,887
================== ==================
5. INTANGIBLE ASSETS
The intangible assets recognized from the North Star acquisition is
comprised of the following as of September 30, 2004:
Intangible assets subject to amortization
Patent $ 34,000
Contractual backlog 37,000
In process research and development 283,000
--------
Total $212,000
========
Intangible assets not subject to
amortization
Tradename $603,000
========
The estimated future amortization expense related to the purchased
intangible assets at September 30, 2004 is as follows:
Fiscal year:
2004 (3 months) $ 223,000
2005 $ 34,000
2006 $ 7,000
2007 $ 7,000
2008 $ 7,000
2009 $ 5,000
-15-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. ACCRUED EXPENSES
Accrued expenses consists of accruals for rent, professional fees,
deferred rent, interest on note payable to stockholder, payroll liabilities and
warranty claims. Included in the acquisition of North Star's assets, the Company
assumed liabilities for warranty claims against the purchased assets for
$40,000. The warranty is for products sold within the past year and will be
re-evaluated throughout the year.
7. 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 September 30, 2004 and December 31, 2003,
respectively. Interest paid to stockholder was approximately $164,000 and
$134,000 for the nine months ended September 30, 2004 and 2003, respectively.
8. 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 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 are in communication regarding the modification of the Development
Agreement and terms of the Warrant.
-16-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
STOCK OPTIONS AND WARRANTS
At September 30, 2004 there were options and warrants to purchase
approximately 4.6 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 and through
September 30, 2004, options to purchase 1,743,675 shares of common stock were
granted and options to purchase 2,584,633 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 , some of which vest at date of grant
and others which vest over one year to four year periods, were granted to
directors and employees and have exercise prices ranging from $2.85 to $8.79. 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. As of November 11, 2004, options
to purchase 636,175 shares have been granted under this plan.
9. SIGNIFICANT CUSTOMERS
Currently our sole customer is the U. S. Government.
10. 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 three quarters of 2004 and
fiscal years 2003 and 2002, the Company did not contribute to the 401(k) plan.
11. COMMITMENTS AND CONTINGENCIES
LEASES
We lease office, manufacturing and storage space at our Tucson facility 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.
We also lease office, manufacturing and storage space at our Albuquerque
facility at an annual rental of approximately $58,300 under an operating lease
agreement. The lease expires in August 2007 and contains an escalation provision
for the last 12 months of the lease that increases our annual rent by $1,700.
The lease also contains an early termination provision effective after February
28, 2005 which is permissible with a 120 advance notice and a payment of
$10,000. We are also responsible for certain property related costs, including
insurance and utilities.
-17-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Future annual minimum lease payments under these leases are:
Years ending December 31, Amount
- ---------------------------------- -----------------
2004 $ 97,089
2005 388,356
2006 388,939
2007 336,188
2008 379,500
Thereafter 1,470,562
----------
Total $3,060,634
==========
In addition to the lease payments set forth above, we have entered into a
lease for 50,148 square feet of office, manufacturing and warehouse facilities
at the Stennis Space Center in Mississippi that is expected to commence on or
after March 30, 2005. The lease is for a 5-year term with the annual rent
increasing from $266,000 in the first year to $280,000 in the final year for an
aggregate commitment of $1,367,000. The lease may be renewed three times in
five-year increments. The facility requires a number of improvements before we
will take possession. We have no financial obligations until the improvements
are completed to our satisfaction and the property is turned over to us. We have
paid a $22,000 deposit on the building and will be required to pay another
$22,000 deposit upon acceptance.
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 September 30, 2004.
12. INCOME TAXES
Income tax benefits of approximately $1,266,000 resulting from the loss in
the nine months ended September 30, 2004 are available for deduction from future
taxable income. We have provided a valuation allowance for all of these income
tax benefits.
-18-
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. SUPPLEMENTAL CASH FLOW INFORMATION
Non-Cash Investing and Financing Activities:
Nine months ended September 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 --
Shares issued in acquisition 1,700,000 --
Acquisition costs accrued 40,000 --
Assets and liabilities in North Star
acquisition
Current and other assets, net of cash
acquired (340,154)
Property and equipment (45,333)
Goodwill (1,328,809)
Intangible assets (886,000)
Accounts payable and accrued expenses 287,063
14. SUPPLEMENTAL PRO FORMA
The following unaudited condensed consolidated pro forma statement of
operations data shows the results of our operations for the nine months ended
September 30, 2004 and for the year ended December 31, 2003 as if the recently
completed acquisition of North Star had occurred at the beginning of each
period:
Nine months ended Year ended
September 30, December 31,
2004 2003
------------- -------------
Revenue $ 6,656,293 $ 3,645,876
Net Loss $ (3,206,601) $ (3,184,651)
Net loss per share - basic and diluted $ (0.05) $ (0.07)
Basic and diluted pro forma weighted average
number of common shares outstanding 63,582,847 48,651,312
Due to the pending audit of the North Star financial statements for the nine
months ended September 30, 2004 and for the year ended December 31, 2003, we
have cast these proforma disclosures using our best estimate of the actual
historical results of North Star. These estimates are subject to change pending
the completion of the audit.
-19-
IONATRON, INC.
September 30, 2004
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 September 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.
-20-
IONATRON, INC.
September 30, 2004
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.
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 Executive Vice President of Business
Operations, 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.
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.
-21-
IONATRON, INC.
September 30, 2004
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.
North Star Operations
North Star is engaged in the business of designing and manufacturing a
broad range of high voltage equipment for the defense, aerospace, semi-conductor
and medical industries. The business has ongoing contracts for research and
development with customers such as the United States Air Force, Sandia National
Laboratory and Los Alamos National Laboratory. Prior to the acquisition,
Ionatron had been working with North Star to develop and manufacture the
electrical sources for the Laser Induced Plasma Channel directed energy guided
electrical products.
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.
-22-
IONATRON, INC.
September 30, 2004
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. We also lease 7,500 square feet office, manufacturing and storage
space at our Albuquerque facility with assembly areas to build custom ordered
high voltage power supplies as well as offices for general and administrative.
Employees
We currently have fifty-six employees, compared to thirty-three on June
30, 2004, twenty-two of which are in management and general administrative, two
are in human resources, fifteen are in technical and engineering and seventeen
are in manufacturing. The majority of the increase in employees during the
quarter is the result of the North Star purchase with twenty employees. We
expect to significantly increase the number of our personnel by the over the
next several months, primarily in research, engineering and manufacturing.
CODE OF ETHICS AND BUSINESS CONDUCT
Upon request made to us in writing at the following address, our Code of
Ethics and Business Conduct will be provided without charge:
Ionatron, Inc.
Attn: Human Resources
3590 E Columbia
Tucson, AZ 85714
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.
-23-
IONATRON, INC.
September 30, 2004
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.
Long-lived Assets Including Intangibles Subject to Amortization
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.
Goodwill and Indefinite Life Intangible Assets
We account for Goodwill and Indefinite Life Intangible Assets based on the
method of accounting proscribed by the provisions of SFAS No. 142, "Goodwill and
Other Intangible Assets," and we have determined that the consolidated company
is a reporting unit. We believe that the North Star Research trade name is an
indefinite life intangible asset.
Goodwill and indefinite life intangible assets will be tested annually for
impairment or more frequently if events or changes in circumstances indicate
that the assets might be impaired. In assessing the recoverability of goodwill
and indefinite life intangible assets, we must make assumptions about the
estimated future cash flows and other factors to determine the fair value of
these assets.
Assumptions about future revenue and cash flows require significant judgment
because of the current state of the economy and the fluctuation of actual
revenue and the timing of expenses. We develop future cash flows based on
projected sales with the assumption that expenses will grow at rates consistent
with historical rates. If the expected cash flows are not realized, impairment
losses may be recorded in the future.
For goodwill, the impairment evaluation includes a comparison of the carrying
value of the reporting unit (including goodwill) to that reporting unit's fair
value. If the reporting unit's estimated fair value exceeds the reporting unit's
carrying value, no impairment of goodwill exists. If the fair value of the
reporting unit does not exceed the unit's carrying value, then an additional
analysis is performed to allocate the fair value of the reporting unit to all of
the assets and liabilities of that unit. If the excess of the fair value of the
reporting unit over the fair value of the identifiable assets and liabilities is
less than the carrying value of the unit's goodwill, an impairment charge is
recorded for the difference.
-24-
IONATRON, INC.
September 30, 2004
The impairment evaluation for indefinite life intangible assets is performed by
a comparison of the asset's carrying value to the asset's fair value. When the
carrying value exceeds fair value an impairment charge is recorded for the
amount of the difference. An intangible asset is determined to have an
indefinite useful life when there are no legal, regulatory, contractual,
competitive, economic, or any other factors that may limit the period over which
the asset is expected to contribute directly or indirectly to the future cash
flows of the Company. In addition, each reporting period, we evaluate the
remaining useful life of an intangible asset that is not being amortized to
determine whether events and circumstances continue to support an indefinite
useful life. If an intangible asset that is not being amortized is determined to
have a finite useful life, the asset will be amortized prospectively over the
estimated remaining useful life and accounted for in the same manner as
intangible assets subject to amortization.
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND
2003
The following table sets forth certain financial data for each three
months ended:
September 30, September 30,
2004 2003
--------------- ---------------
Revenue $ 2,628,982 $ 148,586
Cost of revenue 2,441,243 137,874
Expenses:
General and administrative 726,158 420,844
Selling and marketing 112,825 23,134
Research and development 211,895 329,550
Interest expense 46,539 52,832
Interest income 13,652 --
Net loss $ (896,026) $ (815,648)
REVENUE
Revenue for the three months ended September 30, 2004 was derived from
continued work on four existing contracts. The contracts are expected to be
completed in 2005. Revenue for the three months ended September 30, 2003 was
based on our initial government contract. We are presently working on three
contracts with a backlog of approximately $8,505,000 as of September 30, 2004 ,
which does not include the previously announced $12.6 million Department of
Defense budget funding line item for the development of Laser Induced Plasma
Channel Technology. This 2005 line item is a Navy program, which is a follow on
to our 2004 Navy Congressional defined program. We have submitted a proposal
which is being negotiated with the Department of Navy and we anticipate getting
a continuing contract with the Department of the Navy upon completion of these
negotiations.
COST OF REVENUE
Our cost of revenue for the three months ended September 30, 2004 and 2003
was $2,441,000 and $138,000, respectively 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.
-25-
IONATRON, INC.
September 30, 2004
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
The increase in general, administrative and selling expenses during the
three months ended September 30, 2004 as compared with the three months ended
September 30, 2003 was primarily payroll related due to building infrastructure
to support current and planned operations as will as increased legal and
accounting costs. We expect a continued trend toward increased general and
administrative to support our planned activities.
RESEARCH AND DEVELOPMENT EXPENSES
The decrease in research and development expenses during the three months
ended September 30, 2004 as compared with the three months ended September 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 NINE MONTHS ENDED SEPTEMBER 30, 2004 AND
2003
The following table sets forth certain financial data for the nine months
ended:
September 30, September 30,
2004 2003
----------------- -----------------
Revenue $ 4,734,996 $ 148,586
Cost of revenue 4,422,996 137,874
Expenses:
General and administrative 2,491,097 1,634,061
Selling and marketing 344,897 189,395
Research and development 512,793 913,141
Interest expense 164,239 134,189
Interest income 34,873 --
Net loss $ (3,166,153) $ (2,860,074)
REVENUE
Revenue for the nine months ended September 30, 2004 was derived from
continued work on four existing contracts. The revenue for the nine months ended
September 30, 2003 was based on our initial government contract.
COST OF REVENUES
Our cost of revenues consisting of materials purchased, direct labor and
manufacturing and administrative overhead for the nine months ended September
30, 2004 and 2003 was $4,423,000 and $138,000, respectively.
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IONATRON, INC.
September 30, 2004
GENERAL, ADMINISTRATIVE AND SELLING EXPENSES
The increase in general, administrative and selling expenses during the
nine months ended September 30, 2004 as compared with the nine months ended
September 30, 2003 was primarily payroll related due to building infrastructure
to support current and planned operations as well as increased legal and
accounting costs. 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 nine months
ended September 30, 2004 as compared with the nine months ended September 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.
LIQUIDITY AND CAPITAL RESOURCES
Our cash position increased during the nine months ended September 30,
2004 by $5.1 million. At September 30, 2004 we had approximately $5.2 million of
cash and cash equivalents. During the nine months ended September 30, 2004, we
used $4.3 million in operations primarily as a result of a net loss of $3.2
million, an increase in accounts receivable of $344,000 and an increase in costs
and estimated earnings in excess of billings on uncompleted contracts of $1.5
million, which were partially offset by a net increase in accounts payable and
accrued expenses of $560,000 and an increase in non-cash charges for
depreciation and amortization of $601,000. We also purchased $722,000 of
equipment during the nine months ended September 30, 2004 which was financed, by
borrowings from our Chairman and cash acquired in the merger. Our borrowing
arrangement with our Chairman, which is due on demand, was restructured
following a $500,000 payment and $2,000,000 conversion to equity, resulting in a
$3 million revolving credit arrangement. The $700,000 cash paid for the
acquisition of North Star was funded through cash on hand. During the nine
months ended September 30, 2004, we received approximately $1.2 million from the
exercise of stock options and warrants.
We believe that we will have sufficient working capital to fulfill this
and next 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.
Startup costs for the Mississippi facility are expected to be incurred in 2005.
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IONATRON, INC.
September 30, 2004
CONTRACTUAL COMMITMENTS
As of September 30, 2004, the Company had contractual obligations in the form of
non-cancelable and cancelable operating leases and note payable to stockholder
as follows:
Payments Due by Period
------------------------------------
Total Current 1-3 years 4-5 years
---------- ---------- ---------- ----------
Operating leases $2,294,267 $ 388,356 $1,146,911 $ 759,000
Capital leases 6,504 2,399 4,105 --
Note payable to stockholder 2,800,000 2,800,000 -- --
---------- ---------- ---------- ----------
Total $5,100,771 $3,190,775 $1,151,016 $ 759,000
========== ========== ========== ==========
In addition to the commitment schedule above, we have entered into a lease for
50,148 square feet of office, manufacturing and warehouse facilities at the
Stennis Space Center in Mississippi that is expected to commence on or after
March 30, 2005. The lease is for a 5-year term with the annual rent increasing
from $266,000 in the first year to $280,000 in the final year for an aggregate
commitment of $1,367,000. The lease may be renewed three times in five-year
increments. The facility requires a number of improvements before we will take
possession. We have no financial obligations until the improvements are
completed to our satisfaction and the property is turned over to us. We have
paid a $22,000 deposit on the building and will be required to pay another
$22,000 deposit upon acceptance.
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;
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IONATRON, INC.
September 30, 2004
- 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, among other things,
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.
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IONATRON, INC.
September 30, 2004
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 September 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.
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the three months September 30, 2004, the Company issued 778,422
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 3(a)(9) of the Securities Act of 1933.
ITEM 6. EXHIBITS
10.1 Tenant use contract between the Company and Mason Technology Inc. dated
July 14, 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).
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IONATRON, INC.
September 30, 2004
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: November 15, 2004
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