Exhibit 99.1
RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE ABLE TO ACHIEVE AND MAINTAIN
PROFITABLE OPERATIONS.
We have incurred net losses since our formation in June 2002, including
net losses of $747,675, $3,242,109 and $3,515,954 for the period of inception
through December 31, 2002 and the years ended December 31, 2003 and 2004,
respectively. Additionally, losses are continuing to date. Our ability to
achieve profitable operations is dependent upon, among other things, our ability
to obtain sufficient government contracts and to complete the development of
products based on our technologies. We cannot assure you that we will be able to
significantly increase our revenues or achieve and maintain profitability.
OUR FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO DEVELOP NEW TECHNOLOGIES AND
APPLICATIONS THAT ADDRESS THE NEEDS OF OUR MARKETS.
Both our defense and commercial markets are characterized by rapidly
changing technologies and evolving industry standards. Accordingly, our future
performance depends on a number of factors, including our ability to:
o identify emerging technological trends in our target markets;
o develop and maintain competitive products;
o enhance our products by improving performance and adding innovative
features that differentiate our products from those of our
competitors;
o develop and manufacture and bring products to market quickly at
cost-effective prices; and
o meet scheduled timetables for the development, certification and
delivery of new products.
We believe that, in order to remain competitive in the future, we will need
to continue to develop new products, which will require the investment of
significant financial and engineering resources. The need to make these
expenditures could divert our attention and resources from other projects, and
we cannot be sure that these expenditures will ultimately lead to the timely
development of new technology. Due to the design complexity of our products, we
may in the future experience delays in completing development and introduction
of new products. Any delays could result in increased costs of development,
deflect resources from other projects or loss of contracts. In addition, there
can be no assurance that the market for our products will develop or continue to
expand as we currently anticipate. The failure of our technology to gain market
acceptance could significantly reduce our revenues and harm our business.
Furthermore, we cannot be sure that our competitors will not develop competing
technologies which gain market acceptance in advance of our products. The
possibility that our competitors might develop new technology or products might
cause our existing technology and products to become obsolete or create
significant price competition. If we fail in our new product development efforts
or our products fail to achieve market acceptance more rapidly than our
competitors, our revenues will decline and our business, financial condition and
results of operations will be negatively affected.
WE DEPEND ON THE U.S. GOVERNMENT FOR SUBSTANTIALLY ALL OF OUR SALES, AND THE
LOSS OF THIS RELATIONSHIP OR A SHIFT IN GOVERNMENT FUNDING COULD HAVE SEVERE
CONSEQUENCES ON OUR PROSPECTS AND FINANCIAL CONDITION.
Approximately 100% and 99% of our net sales in 2003 and 2004, respectively,
and were to the U.S. Government and U.S. Government contractors. Therefore, any
significant disruption or deterioration of our relationship with the U.S.
Government would significantly reduce our revenues. Our U.S. Government programs
must compete with programs managed by other defense contractors for a limited
number of programs and for uncertain levels of funding. The development of our
business will depend upon the continued willingness of the U.S. government
agencies to fund existing and new defense programs and, in particular, to
continue to purchase our products and services. Although defense spending in the
United States has recently increased, further increases may not continue and any
proposed budget or supplemental budget request may not be approved. In addition,
the U.S. Department of Defense may not continue to focus its spending on
technologies that we incorporate in our products.
Our competitors continuously engage in efforts to expand their business
relationships with the U.S. Government which may be at our expense and are
likely to continue these efforts in the future. The U.S. Government may choose
to use other defense contractors for its limited number of defense programs. In
addition, the funding of defense programs also competes with non-defense
spending of the U.S. Government. Budget decisions made by the U.S. Government
are outside of our control and have long-term consequences for the size and
structure of Ionatron. A shift in Government defense spending to other programs
in which we are not involved or a reduction in U.S. Government defense spending
generally could have severe consequences for our results of operations.
THE U.S. GOVERNMENT MAY TERMINATE OR MODIFY OUR EXISTING CONTRACTS, WHICH WOULD
ADVERSELY AFFECT OUR REVENUE.
There are inherent risks in contracting with the U.S. Government, including
risks peculiar to the defense industry, which could have a material adverse
effect on our business, financial condition or results of operations. Laws and
regulations permit the U.S. Government to:
o terminate contracts for its convenience;
o reduce or modify contracts if its requirements or budgetary
constraints change;
o cancel multi-year contracts and related orders if funds for contract
performance for any subsequent year become unavailable;
o shift its spending practices; and
o adjust contract costs and fees on the basis of audits done by its
agencies.
If the U.S. Government terminates our contracts for convenience, we may
only recover our costs incurred or committed for settlement expenses and profit
on work completed before the termination. Additionally, most of our backlog
could be adversely affected by any modification or termination of contracts with
the U.S. Government or contracts the prime contractors have with the U.S.
Government. The U.S. Government regularly reviews our costs and performance on
its contracts, as well as our accounting and general business practices. The
U.S. Government may reduce the reimbursement for our fees and contract-related
costs as a result of an audit. We can give no assurance that one or more of our
Government contracts will not be terminated under these circumstances. Also, we
can give no assurance that we would be able to procure new Government contracts
to offset the revenues lost as a result of any termination of our contracts. As
our revenues are dependent on our procurement, performance and payment under our
contracts, the loss of one or more critical contracts could have a negative
impact on our financial condition.
OUR BUSINESS IS SUBJECT TO VARIOUS RESTRICTIVE LAWS AND REGULATIONS BECAUSE WE
ARE A CONTRACTOR AND SUBCONTRACTOR TO THE U.S. GOVERNMENT.
As a contractor and subcontractor to the U.S. Government, we are subject to
various laws and regulations that are more restrictive than those applicable to
non-government contractors. We are required to obtain and maintain material
governmental authorizations and approvals to run our business as it is currently
conducted. New or more stringent laws or government regulations concerning
government contracts, if adopted and enacted, could have a material adverse
effect on our business.
Generally, government contracts are subject to oversight audits by
government representatives. Responding to governmental audits, inquiries or
investigations may involve significant expense and divert management attention
from regular operations. Our government business is also subject to specific
procurement regulations and a variety of socio-economic and other requirements.
These requirements, although customary in government contracts, increase our
performance and compliance costs. These costs might increase in the future,
reducing our margins, which could have a negative effect on our financial
condition. Failure to comply with these regulations and requirements could lead
to suspension or debarment, for cause, from government contracting or
subcontracting for a period of time. Among the causes for debarment are
violations of various statutes, including those related to:
o procurement integrity;
o export control;
o government security regulations;
o employment practices;
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o protection of the environment;
o accuracy of records and the recording of costs; and
o foreign corruption.
Any of these factors, which are largely beyond our control, could also
negatively impact our financial condition. We also may experience problems
associated with advanced designs required by the government, which may result in
unforeseen technological difficulties and cost overruns. Failure to overcome
these technological difficulties and the occurrence of cost overruns would have
a negative impact on our results.
IF WE FAIL TO WIN COMPETITIVELY AWARDED CONTRACTS IN THE FUTURE, WE MAY
EXPERIENCE A REDUCTION IN OUR SALES, WHICH COULD NEGATIVELY AFFECT OUR
PROFITABILITY.
Our North Star subsidiary obtains many of its U.S. Government, U.S.
Government subcontractor and commercial contracts through a competitive bidding
process. We cannot assure you that we will continue to win competitively awarded
contracts or that awarded contracts will generate sales sufficient to result in
our profitability. We are also subject to risks associated with the following:
o the frequent need to bid on programs in advance of the completion of
their design (which may result in unforeseen technological
difficulties and cost overruns);
o the substantial time and effort, including the relatively unproductive
design and development required to prepare bids and proposals, spent
for competitively awarded contracts that may not be awarded to us;
o design complexity and rapid technological obsolescence; and
o the constant need for design improvement.
Our government contracts may be subject to protest or challenge by
unsuccessful bidders or to termination, reduction or modification in the event
of changes in government requirements, reductions in federal spending or other
factors.
COMPETITION WITHIN OUR MARKETS MAY REDUCE OUR PROCUREMENT OF FUTURE CONTRACTS
AND OUR SALES.
The defense and commercial industries in which we operate are highly
competitive. Our future competitors may range from highly resourceful small
concerns, which engineer and produce specialized items, to large, diversified
firms and defense contractors.. Many of our potential competitors have more
extensive or more specialized engineering, manufacturing and marketing
capabilities and greater financial resources than we do. Consequently, these
competitors may be better suited to take advantage of economics of scale and
devote greater resources to develop new technologies. There can be no assurance
that we can continue to compete effectively with these firms. In addition, some
of our suppliers [and customers] could develop the capability to manufacture
products similar to products that we are developing. This would result in them
competing directly which could significantly reduce our revenues and seriously
harm our business.
There can be no assurance that we will be able to compete successfully
against our current or future competitors or that the competitive pressures we
face will not result in reduced revenues and market share or seriously harm our
business.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUES FROM A LIMITED NUMBER OF
CONTRACTS. THEREFORE, OUR REVENUES WILL BE ADVERSELY AFFECTED IF WE FAIL TO
RECEIVE RENEWAL OR FOLLOW-ON CONTRACTS.
Renewal and follow-on contracts are important because our contracts are
typically for fixed terms. These terms vary from shorter than one year to
multi-year, particularly for contracts with options. The typical term of our
contracts with the U.S. government is between one and two years. The loss of
revenues from our possible failure to obtain renewal or follow-on contracts may
be significant because our U.S. government contracts account for a substantial
portion of our revenues.
OUR PRODUCTS MAY FAIL TO PERFORM SATISFACTORILY IN FIELD TESTS AT VARIOUS STAGES
OF DEVELOPMENT.
Our government customers typically field test our products at various
stages of development. Although we believe our technologies will perform their
ultimately intended applications, many of our products have not been completed
to date. Our success will ultimately depend upon our products meeting
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performance criteria established by our customers. Failure of a product to
perform satisfactorily in a field test could result in delay of product
development, cost overruns or even termination of the contract, any of which
could materially effect the development of such product and our prospects,
revenues and final condition.
WE DEPEND ON COMPONENT AVAILABILITY, SUBCONTRACTOR PERFORMANCE AND OUR KEY
SUPPLIERS TO MANUFACTURE AND DELIVER OUR PRODUCTS AND SERVICES.
Our manufacturing operations are highly dependent upon the delivery of
materials by outside suppliers in a timely manner. In addition, we depend in
part upon subcontractors to assemble major components and subsystems used in our
products in a timely and satisfactory manner. If these contract manufacturers
are not willing to contract with us on competitive terms or devote adequate
resources to fulfill their obligations to us, or we do not properly manage these
relationships, our existing customer relationships may suffer. In addition, by
undertaking these activities, we run the risks that
o the reputation and competitiveness of our products and services may
deteriorate as a result of the reduction of our control and quality
and delivery schedules and the consequent risk that we will experience
supply interruptions and be subject to escalating costs; and
o our competitiveness may be harmed by the failure of our contract
manufacturers to develop, implement or maintain manufacturing methods
appropriate for our products and customers.
Moreover, because most of our contracts are with Governmental agencies, we
may be limited in the third parties, we can engage as component manufacturers.
We are dependent for some purposes on sole-source suppliers. If any of
these sole-source suppliers fails to meet our needs, we may not have readily
available alternatives. Our inability to fill our supply needs would jeopardize
our ability to satisfactorily and timely complete our obligations under
government and other contracts. This might result in reduced sales, termination
of one or more of these contracts and damage to our reputation and relationships
with our customers. We cannot be sure that materials, components, and subsystems
will be available in the quantities we require, if at all.
BECAUSE THE MANUFACTURING PROCESS OF OUR PRODUCTS IS HIGHLY COMPLEX, ERRORS,
CHANGES OR UNCERTAINTIES COULD DISRUPT PRODUCTION.
The manufacture of our products involve highly complex and precise
processes, requiring production in a highly controlled and clean environment.
Inadvertent or slight changes or uncertainties in our manufacturing processes,
errors or use of defective or contaminated materials, our ability to achieve,
disrupt and delay production and affect product reliability.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY A NEGATIVE AUDIT BY THE U.S.
GOVERNMENT.
U.S. Government agencies such as the Defense Contract Audit Agency, or the
DCAA, routinely audit and investigate government contractors. These agencies
review a contractor's performance under its contracts, cost structure and
compliance with applicable laws, regulations and standards. The DCAA also
reviews the adequacy of, and a contractor's compliance with, its internal
control systems and policies, including the contractor's purchasing, property,
estimating, compensation and management information systems. Any costs found to
be improperly allocated to a specific contract will not be reimbursed, while
such costs already reimbursed must be refunded. If an audit uncovers improper or
illegal activities, we may be subject to civil and criminal penalties and
administrative sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines and suspension or prohibition from doing
business with the U.S. Government. In addition, we could suffer serious
reputational harm if allegations of impropriety were made against us.
OUR BACKLOG IS SUBJECT TO REDUCTION AND CANCELLATION.
Backlog represents products or services that our customers have committed
by contract to purchase from us, our total funded backlog as of December 31,
2004 was approximately $2.9 million. Backlog is subject to fluctuations and is
not necessarily indicative of future sales. Moreover, cancellations of purchase
orders or reductions of product quantities in existing contracts could
substantially and materially reduce backlog and, consequently, future revenues.
Our failure to replace canceled or reduced backlog could result in lower
revenues.
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WE DEPEND ON THE RECRUITMENT AND RETENTION OF QUALIFIED PERSONNEL, AND OUR
FAILURE TO ATTRACT AND RETAIN SUCH PERSONNEL COULD SERIOUSLY HARM OUR BUSINESS.
Due to the specialized nature of our businesses, our future performance is
highly dependent upon the continued services of our key engineering personnel
and executive officers. Our prospects depend upon our ability to attract and
retain qualified engineering, manufacturing, marketing, sales and management
personnel for our operations. Competition for personnel is intense, and we may
not be successful in attracting or retaining qualified personnel. Our failure to
compete for these personnel could seriously harm our business, results of
operations and financial condition.
BECAUSE MANY OF OUR CONTRACTS AND PROJECTS ARE CLASSIFIED FOR NATIONAL SECURITY
REASONS, WE MAY NOT BE ABLE TO PROVIDE IMPORTANT INFORMATION TO THE PUBLIC.
To date, substantially all of our revenues have been derived from contracts
which are classified by the U.S. Government for national security reasons.
Therefore, we are prohibited from filing these contracts as exhibits to our SEC
reports, registration statements and filings or provide more than the summary
information that we provide in our reports, registration statements and other
filings the SEC and in our press releases. Accordingly, investors may not have
important information concerning our businesses and operations with which to
make an informed investment decision.
THE U.S. GOVERNMENT'S RIGHT TO USE TECHNOLOGY DEVELOPED BY US LIMITS OUR
INTELLECTUAL PROPERTY RIGHTS.
We seek to protect the competitive benefits we derive from our patents,
proprietary information and other intellectual property. However, we do not have
the right to prohibit the U.S. government from using certain technologies
developed or acquired by us or to prohibit third party companies, including our
competitors, from using those technologies in providing products and services to
the U.S. government. The U.S. government has the right to royalty-free use of
technologies that we have developed under U.S. Government contracts. We are free
to commercially exploit those government-funded technologies and may assert our
intellectual property rights to seek to block other non-government users
thereof, but we cannot assure you we could successfully do so,
We are subject to government regulation which may require us to obtain
additional licenses and could limit our ability to sell our products outside the
United States.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH
COULD AFFECT OUR ABILITY TO COMPETE.
Protecting our intellectual property rights is critical to our ability to
compete and succeed as a company. We hold a number of United States and patent
applications, as well as trademark, and registrations which are necessary and
contribute significantly to the preservation of our competitive position in the
market. There can be no assurance that any of these patents or future patent
applications and other intellectual property will not be challenged, invalidated
or circumvented by third parties. In some instances, we have augmented our
technology base by licensing the proprietary intellectual property of others. In
the future, we may not be able to obtain necessary licenses on commercially
reasonable terms. We enter into confidentiality and invention assignment
agreements with our employees, and enter into nondisclosure agreements with our
suppliers and appropriate customers so as to limit access to and disclosure of
our proprietary information. These measures may not suffice to deter
misappropriation or independent third party development of similar technologies.
Moreover, the protection provided to our intellectual property by the laws and
courts of foreign nations may not be as advantageous to us as the remedies
available under United States law.
WE MAY FACE CLAIMS OF INFRINGEMENT OF PROPRIETARY RIGHTS.
There is a risk that a third party may claim our products infringe on their
proprietary rights. Whether or not our products infringe on proprietary rights
of third parties, infringement or invalidity claims may be asserted or
prosecuted against us and we could incur significant expense in defending them.
If any claims or actions are asserted against us, we may be required to modify
our products or obtain licenses on commercially reasonable terms, in a timely
manner or at all. Our failure to do so could adversely affect our business.
OUR OPERATIONS EXPOSE US TO THE RISK OF MATERIAL ENVIRONMENTAL LIABILITIES.
We are also subject to increasingly stringent laws and regulations that
impose strict requirements for the proper management, treatment, storage and
disposal of hazardous substances and wastes, restrict air and water emissions
from our testing and manufacturing operations, and require maintenance of a safe
workplace, These laws and regulations can impose substantial fines and criminal
sanctions for violations, and require the installation of costly pollution
control equipment or operational changes to limit pollution emissions and/or
decrease the likelihood of accidental hazardous substance releases. We incur,
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and expect to continue to incur, substantial capital and operating costs to
comply with these laws and regulations. In addition, new laws and regulations,
stricter enforcement of existing laws and regulations, the discovery of
previously unknown contamination or the imposition of new clean-up requirements
could require us to incur costs in the future that would have a negative effect
on our financial condition or results of operations.
THE UNPREDICTABILITY OF OUR RESULTS MAY HARM THE TRADING PRICE OF OUR
SECURITIES, OR CONTRIBUTE TO VOLATILITY.
Our operating results may vary significantly over time for a variety of
reasons, many of which are outside of our control, and any of which may harm our
business. The value of our securities may fluctuate as a result of
considerations that are difficult to forecast, such as:
o the size and timing of contract receipt and funding;
o changes in U.S. Government policies and government budgetary policies;
o termination or expiration of a key government contract;
o our ability and the ability of our key suppliers to respond to changes
in customer orders;
o timing of our new product introductions and the new product
introductions of our competitors;
o adoption of new technologies and industry standards;
o competitive factors, including pricing, availability and demand for
competing products fluctuations in foreign currency exchange rates;
o conditions in the capital markets and the availability of project
financing;
o regulatory developments;
o general economic conditions;
o changes in the mix of our products;
o cost and availability of components and subsystems; and
o price erosion.
OUR MANAGEMENT HOLDS A MAJORITY OF OUR OUTSTANDING VOTING STOCK AND HAS CONTROL
OVER SHAREHOLDER MATTERS.
Our management own approximately 65.3% of our outstanding common stock.
Accordingly, they can exert significant influence over matters, which require
stockholder vote, including the election of directors, amendments to our
Certificate of Incorporation or approval of the dissolution, merger, or sale of
Ionatron, our subsidiaries or substantially all of our assets. This
concentration of ownership and control by management could delay or prevent a
change in our control or other action, even when a change in control or other
action might be in the best interests of other stockholders.
A LARGE NUMBER OF SHARES OF OUR COMMON STOCK COULD BE SOLD IN THE MARKET IN THE
NEAR FUTURE, WHICH COULD DEPRESS OUR STOCK PRICE.
As of March 3, 2005, we had outstanding approximately 70.9 million shares
of common stock. A substantial portion of our shares are currently freely
trading without restriction under the Securities Act of 1933, having been held
by their holders for over two years and are eligible for sale under Rule 144(k).
There are currently outstanding options to purchase approximately 3.4 million
shares of our common stock, most of which have an average exercise price of
substantially below our current market price. To the extent any of our options
are exercised, your percentage ownership will be diluted and our stock price
could be further adversely affected. Moreover, as the underlying shares are
sold, the market price could drop significantly if the holders of these
restricted shares sell them or if the market perceives that the holders intend
to sell these shares..
PROVISIONS OF OUR CORPORATE CHARTER DOCUMENTS COULD DELAY OUR PREVENT CHANGE OF
CONTROL.
Our Certificate of Incorporation authorizes our board of directors to issue
up to 1,000,000 shares of "blank check" preferred stock without shareholder
approval, in one or more series and to fix the dividend rights, terms,
conversion rights, voting rights, redemption rights and terms, liquidation
preferences, and any other rights, preferences, privileges, and restrictions
applicable to each new series of preferred stock. In addition, our Certificate
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of Incorporation divides our board of directors into three classes, serving
staggered three-year terms. At least two annual meetings, instead of one, will
be required to effect a change in a majority of our board of directors We also
have a rights agreement, commonly known as a "poison pill" in place 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, our other stockholders shall have the right to purchase
shares of our (or in some cases the acquiror's) common stock from us at 50% of
its then market value. The designation of preferred stock in the future, the
classification of our board of directors, its three classes and the rights
agreement could make it difficult for third parties to gain control of our
company, prevent or substantially delay a change in control, discourage bids for
our common stock at a premium, or otherwise adversely affect the market price of
our common stock.
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