UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2005
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For 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 Identification Number)
of Incorporation or Organization)
3590 East Columbia Street
Tucson, Arizona 85714
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (520) 628-7415
Indicate by check mark 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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. As of August 1, 2005 there
were 71,240,863 shares of the issuer's common stock, par value $.001 per share,
outstanding.
IONATRON, INC.
June 30, 2005
PART I - FINANCIAL INFORMATION
Item 1- Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (Unaudited)
and December 31, 2004 3
Consolidated Statements of Operations for the three months
ended June 30, 2005 and 2004 (Unaudited) 4
Consolidated Statements of Operations for the six months
ended June 30, 2005 and 2004 (Unaudited) 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 2005 and 2004 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2- Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 3- Quantitative and Qualitative Disclosures About Market Risk 23
Item 4- Controls and Procedures 23
PART II - OTHER INFORMATION
Item 1- Legal Proceedings 24
Item 2- Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 4- Submission of Matters to a Vote of Security Holders 24
Item 6- Exhibits 24
SIGNATURES 25
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IONATRON, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2005 2004
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(Unaudited) (Audited)
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ASSETS
Current assets
Cash and cash equivalents $ 1,116,027 $ 2,495,779
Accounts receivable - net 2,670,196 4,497,350
Inventory 1,028,212 341,334
Municipal bonds available for sale 500,000 1,000,000
Other receivables 38,872 30,403
Prepaid expenses 430,667 404,619
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Total current assets 5,783,974 8,769,485
Property and equipment, net 1,500,702 1,416,072
Goodwill 1,487,884 1,487,884
Unamortized intangible assets 603,000 603,000
Amortized intangible assets - net 218,350 261,450
------------ ------------
TOTAL ASSETS $ 9,593,910 $ 12,537,891
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,757,072 $ 1,639,018
Accrued expenses 500,455 841,067
Note payable to stockholder 2,800,000 2,800,000
Billings in excess of costs 45,042 25,695
Current portion of capital lease obligation 15,284 2,435
------------ ------------
Total current liabilities 5,117,853 5,308,215
Capital lease obligation 31,969 3,482
Deferred tax liabilities 28,731 9,577
Stockholders' equity
Preferred stock, 1,000,000 shares
authorized and unissued -- --
Common stock, $.001 par value, 100,000,000
shares authorized; 71,234,613 shares
issued and outstanding at
June 30, 2005 and 70,846,204 shares
issued and outstanding at December 31, 2004 71,235 70,846
Additional paid-in capital 10,963,421 10,406,776
Accumulated deficit (6,619,299) (3,261,005)
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Total stockholders' equity 4,415,357 7,216,617
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,593,910 $ 12,537,891
============ ============
See accompanying notes to consolidated financial statements (unaudited)
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IONATRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS
ENDED JUNE 30,
----------------------------
2005 2004
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Revenue $ 3,956,522 $ 1,833,572
Cost of revenue 3,775,826 1,726,753
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Gross profit 180,696 106,819
Operating expenses:
General and administrative 1,345,807 1,199,390
Selling and marketing 95,133 119,566
Research and development 385,656 120,133
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Total operating expenses 1,826,596 1,439,089
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Operating loss (1,645,900) (1,332,270)
Other (expense) income
Interest expense (58,102) (43,184)
Interest income 10,099 21,221
Other (7,500) --
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Total other (55,503) (21,963)
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Loss before provision for income taxes (1,701,403) (1,354,233)
Income taxes 9,293 --
------------ ------------
Net loss $ (1,710,696) $ (1,354,233)
------------ ------------
Net loss per share - basic and diluted $ (0.02) $ (0.02)
============ ============
Weighted average number of shares
outstanding, basic and diluted 71,212,062 69,060,586
============ ============
See accompanying notes to consolidated financial statements (unaudited)
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IONATRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------
2005 2004
------------ ------------
Revenue $ 6,526,793 $ 2,106,014
Cost of revenue 6,180,312 1,981,753
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Gross profit 346,481 124,261
Operating expenses:
General and administrative 2,869,011 1,764,939
Selling and marketing 230,662 232,072
Research and development 491,646 300,898
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Total operating expenses 3,591,319 2,297,909
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Operating loss (3,244,838) (2,173,648)
Other (expense) income
Interest expense (116,179) (117,700)
Interest income 21,001 21,221
Other 592 --
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Total other (94,586) (96,479)
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Loss before provision for income taxes (3,339,424) (2,270,127)
Income taxes 18,870 --
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Net loss $ (3,358,294) $ (2,270,127)
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Net loss per share - basic and diluted $ (0.05) $ (0.04)
============ ============
Weighted average number of shares
outstanding, basic and diluted 71,091,456 60,138,283
============ ============
See accompanying notes to consolidated financial statements (unaudited)
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IONATRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months ended
-----------------------------
June 30, 2005 June 30, 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,358,294) $(2,270,127)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 595,713 368,137
Loss on equipment disposal 58,825 2,188
Stock option compensation 145,981 --
Deferred income tax provision 19,154 --
Changes in working capital components:
(Increase) decrease in accounts receivable 1,827,154 (613,903)
(Increase) in costs and estimated earnings in
excess of billings on uncompleted contracts -- (1,059,897)
(Increase) in other receivable (8,469) --
(Increase) in inventory (686,878) (1,861)
(Increase) in prepaid expenses (26,048) (42,639)
Increase in accounts payable 118,054 422,260
Increase in billings in excess of costs 19,347 --
(Decrease) in accrued expenses (340,612) (23,166)
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Net cash used in operating activities (1,636,073) (3,219,008)
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment (645,291) (303,944)
Proceeds from sale of available for sale investments 500,000
Proceeds from disposal of equipment -- 3,208
Receivables from stockholder -- 104,769
----------- -----------
Net cash used in investing activities (145,291) (195,967)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to stockholder -- 1,000,000
Repayment on note payable to stockholder -- (500,000)
Principal payments on capital lease obligation (9,441) (381)
Cash acquired from reverse merger -- 8,905,937
Exercise of stock options and warrants 411,053 545,430
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Net cash provided by financing activities 401,612 9,950,986
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Net increase (decrease) in cash and cash equivalents (1,379,752) 6,536,011
Cash and cash equivalents, beginning of period 2,495,779 103,392
----------- -----------
Cash and cash equivalents, end of period $ 1,116,027 $ 6,639,403
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest 116,179 --
Income taxes -- --
See non-cash investing and financing activities at Note 14
See accompanying notes to consolidated financial statements (unaudited)
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IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
NATURE OF BUSINESS AND SUMMARY OF OPERATIONS:
Ionatron, Inc. ("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 culminating in our first U.S. Government contract in September of
2003. During 2004 we demonstrated the laser guided man-made lightning directed
energy technology in the laboratory; demonstrated the technology effects on a
variety of targets both under U.S. Government contract and using internal
research and development funding; delivered a compact laser source specifically
designed to enable the technology under a U.S. Government contract; and
commenced a U.S. Government contract for the development of a system on a mobile
platform for field demonstration and testing. In 2005, we developed a counter
IED ("Improvised Explosive Device") vehicle for use in Iraq called the Joint IED
Neutralizer ("JIN").
Through North Star Power Engineering Inc. ("North Star"), we are involved
in the design and manufacture of 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 and
its wholly owned subsidiaries, Ionatron Technologies, Inc. and North Star as of
June 30, 2005 (collectively, "Company," "Ionatron," "we," "our" and "us"). All
intercompany balances and transactions have been eliminated. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary for a fair presentation of the results for the interim periods
presented have been made. The results for the six month period ended June 30,
2005, may not be indicative of the results for the entire year. The interim
unaudited condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements
contained in its Annual Report on Form 10-K.
Certain amounts in the 2004 consolidated financial statements have been
reclassified to conform to the 2005 presentation.
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.
ACQUISITION
In September 2004, we completed the acquisition of substantially all the
assets of North Star Research Acquisition Corporation (formerly North Star
Research Corporation), 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. Subsequent to the
acquisition we changed the corporation's name to North Star Power Engineering
Inc. ("North Star").
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IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
USE OF ESTIMATES:
Our consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (GAAP), which require management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. We have identified
significant accounting policies that require a higher degree of judgment and
complexity. See Note 1 to the Company's audited consolidated financial
statements contained in its Annual Report on Form 10-K, which is incorporated
herein by reference for information with respect to our significant accounting
policies.
2. STOCK-BASED COMPENSATION, OPTIONS AND WARRANTS
The Company has a number of stock-based employee compensation plans. The
Company generally grants stock options for a fixed number of shares to employees
and directors with an exercise price equal to the fair market value of the
shares at the date of grant. The Company accounts for stock option grants to
employees and directors under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, as amended by Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. Accordingly, no compensation cost has
been recognized for these stock option grants. Awards under the plans vest over
periods ranging from immediate vesting to five years, depending upon the type of
award. The following table illustrates the effect on net loss and loss per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period presented, using the Black-Scholes valuation model.
Pro-forma compensation and non-employee compensation are 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:
o Fair market value of the underlying common stock based on our closing
common stock price on the date the option is granted;
o Risk-free interest rate based on the weighted averaged 5-year U.S.
Treasury note strip rates;
o Volatility is based on comparable companies considered as we do not have
sufficient trading history for our common stock;
o No expected dividend yield based on future dividend payment plans; and
o Expected life of the options is five years.
For the three months ended June 30,
- --------------------------------------------------------------------
2005 2004
----------- -----------
Net loss:
As reported $(1,710,696) $(1,354,233)
Pro forma stock compensation expense (722,959) (195,531)
----------- -----------
Pro forma $(2,433,655) $(1,549,764)
=========== ===========
Net loss per share - basic and diluted:
As reported $ (0.02) $ (0.02)
=========== ===========
Pro forma $ (0.03) $ (0.02)
=========== ===========
Compensation expense recorded for shares and options delivered to
non-employees for the three months ended June 30, 2005 and 2004, was
approximately $51,000 and $153,000 respectively, which was charged to operating
expenses with an offsetting entry to additional paid in capital.
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IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the six months ended June 30,
- -------------------------------------------------------------------
2005 2004
----------- -----------
Net loss:
As reported $(3,358,294) $(2,270,127)
Pro forma stock compensation expense (2,810,427) (195,531)
----------- -----------
Pro forma $(6,168,721) $(2,465,658)
=========== ===========
Net loss per share - basic and diluted:
As reported $ (0.05) $ (0.04)
=========== ===========
Pro forma $ (0.09) $ (0.04)
=========== ===========
Compensation expense recorded for shares and options delivered to
non-employees for the six months ended June 30, 2005 and 2004, was approximately
$146,000 and $153,000 respectively, which was charged to operating expenses with
an offsetting entry to additional paid in capital.
The fair value for these options was estimated at the date of grant using
a Black-Scholes option pricing model with the following assumptions for the
three month periods ended June 30, 2005 and 2004, respectively: risk-free
interest rates of 3.3% and 3.0% per annum; and expected volatility of 75% for
both periods. We used the following assumptions for the six month periods ended
June 30, 2005 and 2004, respectively: risk-free interest rates of 3.3% and 3.0%
per annum; and expected volatility of 62% and 75%.
A summary of the activity of options under the plans for the six months
ended June 30, 2005 follows:
Number of Weighted Average
Options Exercise Price
----------- -----------
Outstanding at December 31, 2004 3,647,925 $ 2.34
Granted 830,850 7.68
Exercised (359,083) 1.42
Forfeited (100,475) 5.75
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Outstanding at June 30, 2005 4,019,217 $ 3.44
=========== ===========
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IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Additional information about outstanding options to purchase the Company's
common stock as of June 30, 2005 is as follows:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted Avg.
Remaining Weighted Avg. Weighted Avg.
Number of Contractual Life Exercise Number of Exercise
Exercise Price Shares (In Years) Price Shares Price
- ------------------- --------- ------------------ -------- ------------ ---------
$0.48 - $0.75 1,701,750 3.72 $ 0.63 1,701,750 $ 0.63
$2.85 - $5.77 1,314,967 3.83 $ 3.85 905,334 $ 3.96
$6.00 - $8.79 1,002,500 4.59 $ 7.66 350,000 $ 7.96
--------- ------
Total 2,957,084 $ 2.52
--------- ------
A summary of the activity of warrants follows:
Number of
Underlying Weighted Average
Shares Exercise Price
-------- --------
Outstanding at December 31, 2004 607,460 $ 0.63
Exercised (43,860) $ 0.63
-------- --------
Outstanding at June 30, 2005 563,600 $ 0.63
-------- --------
Additional information about outstanding warrants to purchase the
Company's common stock as of June 30, 2005 is as follows:
Warrants Outstanding Warrants Exercisable
------------------------------------------ -------------------------
Weighted Avg.
Remaining Weighted Avg. Weighted Avg.
Number of Contractual Life Exercise Number of Exercise
Exercise Price Shares (In Years) Price Shares Price
- ------------------- --------- ------------------ -------- ------------ --------
$0.63 563,600 3.72 $ 0.63 563,600 $ 0.63
------- ------
Total 563,600 $ 0.63
------- ------
3. PENDING ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission (SEC) has changed the effective
date of the Statement of Financial Accounting Standards No. 123 (revised 2004)
(SFAS 123(R)), "Share-Based Payment," to the beginning of the first annual
period beginning after June 15, 2005. In addition, the SEC has issued
interpretation of SFAS No. 123(R) in its Staff Accounting Bulletin (SAB) 107.
Thus, Ionatron must adopt SFAS 123(R), while taking into consideration the
guidance in SAB 107 no later than January 1, 2006. SFAS No. 123(R) and SAB 107
may negatively impact our earnings; however, we have not completed an analysis
of all of the differences between Statement No. 123(R), SFAS No. 123 and SAB
107, including the specific transition method to be utilized upon adoption.
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IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at:
June 30, December 31,
2005 2004
----------- -----------
Billed:
Completed contracts $ 361,254 $ 17,432
Contracts in progress 1,207,829 2,264,509
Retained 100,000 100,000
Unbilled cost and estimated earnings
on uncompleted contracts 1,001,113 2,132,841
----------- -----------
2,670,196 4,514,782
Less: Allowance for doubtful accounts -- 17,432
----------- -----------
Total $ 2,670,196 $ 4,497,350
=========== ===========
The components of unbilled cost and estimated earnings on uncompleted
contracts consist of the following at:
June 30, December 31,
2005 2004
----------- -----------
Cost incurred on uncompleted contracts $16,433,003 $10,054,620
Estimated earnings 1,048,880 739,332
----------- -----------
Total billable costs and estimated earnings 17,481,883 10,793,952
Less: Billings to date 16,525,812 8,686,806
----------- -----------
Total $ 956,071 $ 2,107,146
=========== ===========
Included in accompanying balance sheet under the following captions:
Unbilled costs and estimated earnings on
uncompleted contracts included in accounts
receivable $ 1,001,113 $ 2,132,841
Billings in excess of costs (45,042) (25,695)
----------- -----------
Total $ 956,071 $ 2,107,146
=========== ===========
5. INVENTORY
Inventories, primarily consisting of labor, overhead and materials
pertaining to long-term contracts, are carried at cost. At December 31, 2004,
inventory was comprised only of materials. The reserve for obsolescence was zero
at June 30, 2005 and December 31, 2004.
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IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. MUNICIPAL BONDS AVAILABLE FOR SALE
Municipal bonds available for sale are those investments that the Company
intends to hold for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as available for sale would
be based on various factors, including significant movements in interest rates,
changes in the mix of the Company's assets and liabilities, liquidity needs, or
other similar factors. These investments are carried at fair value and are based
upon quoted prices. There can be no assurance that prices estimated for such
securities can be realized upon ultimate sale. Unrealized gains or losses are
reported as increases or decreases in accumulated other comprehensive income
(loss) in the consolidated statements of stockholders' equity. Realized gains or
losses are determined on the basis of the cost of specific investments sold and
are included in earnings.
The following is a summary of the Company's investment in marketable debt
securities as of June 30, 2005 and December 31, 2004:
Gross Gross Gross
amortized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------------------
June 30, 2005
-----------------------------------------------------------------------
Municipal bonds $ 500,000 $ -- $ -- $ 500,000
-----------------------------------------------------------------------
December 31, 2004
-----------------------------------------------------------------------
Municipal bonds $1,000,000 $ -- $ -- $ 1,000,000
At June 30, 2005 and December 31, 2004, municipal bonds available for sale
are classified as current assets on the consolidated balance sheets with a
variable interest rate that is adjusted to the current market rate of interest
every seven days. These municipal bonds are readily convertible into cash.
7. PROPERTY AND EQUIPMENT
Property and Equipment consists of the following at:
June 30, December 31,
2005 2004
----------- -----------
Furniture and leasehold improvements $ 333,410 $ 201,249
Equipment and software 3,362,902 2,957,035
----------- -----------
Total 3,696,312 3,158,284
Less accumulated depreciation and amortization (2,195,610) (1,742,212)
----------- -----------
Net property and equipment $ 1,500,702 $ 1,416,072
=========== ===========
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IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. ACCRUED EXPENSES
Accrued expenses consisted of the following at:
June 30, 2005 December 31, 2004
---------------------------------
Payroll liability $290,349 $309,818
Deferred rent 66,915 52,874
Warranty reserve -- 40,000
Loss reserve 29,469 --
Insurance premium financing 28,816 199,171
Other 84,906 239,204
-------- --------
Total accrued expenses $500,455 $841,067
======== ========
9. 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 the same terms as 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 was outstanding under the revolving
credit arrangements at June 30, 2005 and December 31, 2004. Interest on this
note was approximately $108,000 and $116,000 for the six months ended June 30,
2005 and June 30, 2004, respectively.
10. INCOME TAXES
We account for income taxes under an asset and liability approach that
requires the expected future tax consequences of temporary differences between
book and tax bases of assets and liabilities to be recognized as deferred tax
assets and liabilities. During the first quarter of 2004, we established a full
valuation allowance against our deferred tax assets because we determined it is
more likely than not that these deferred tax assets will not be realized in the
foreseeable future. Included in the deferred tax asset is a portion that is
attributable to losses that were incurred prior to a "change in ownership" as
defined by Internal Revenue Code rules. The amount that can be utilized each
year is fixed; however, annual limitation amounts not previously utilized carry
over to subsequent years and can be utilized to the extent of the total
unexpired NOL carryforward amount. The pre-change of control NOL carryforwards
will begin to expire in 2020.
For the three and six months ended June 30, 2005 we recorded a provision
for income taxes of $9,577 and $19,154, respectively, due to an increase in
deferred tax liabilities as a result of the tax amortization of goodwill related
to the North Star Acquisition.
11. SIGNIFICANT CUSTOMERS
The majority of our customers are either the U.S. Government or
contractors to the U.S. Government and represented 98% and 100% of revenues for
the six months ended June 30, 2005 and 2004, respectively.
12. NET LOSS PER SHARE
Basic loss per share is computed as net income (loss) divided by the
weighted average number of common shares outstanding for the period. Diluted
loss per share reflects the potential dilution that could occur from common
shares issuable through exercise of stock options and warrants. The dilutive
effect of options and warrants, which were not included in the total of diluted
shares because the effect was antidilutive, was 2,839,000 and 4,035,000 shares
for the quarters ended June 30, 2005 and 2004, respectively.
- 13 -
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. COMMITMENTS AND CONTINGENCIES
OPERATING 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 partially 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 was
approximately $88,000 for the six months ended June 30, 2005 and 2004.
We also lease office, manufacturing and storage space at our Albuquerque
facility with an annual rental of approximately $99,000. 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 $2,900. The lease also contains an early
termination provision effective after July 1, 2006 which is permissible with a
120 day advance notice and a payment of approximately $15,000. We are also
responsible for certain property related costs, including insurance and
utilities.
In addition, on April 1, 2005 we took possession of the 50,148 square feet
of office, manufacturing and warehouse facilities at the Stennis Space Center in
Mississippi for which we had entered into a lease in July 2004. Prior to taking
possession on April 1, 2005, the facility was being improved by the landlord to
make the space ready for lease and these improvements needed to be completed
before we could take possession. We did not have access to or control over the
facility prior to taking possession and had no financial obligations until the
improvements were completed to our satisfaction and the property was turned over
to us on April 1, 2005. We are also not subject to any incentives or allowances
for leasehold improvements from the landlord. The lease is for a five-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. Through June 2005 we have paid a
total of $44,000 in deposits on the facility. Rent expense was approximately
$68,000 for the three months ended June 30, 2005.
The Company also leases vehicles in both the Tucson and Albuquerque
facilities to facilitate our material purchasing activities. These lease
commitments total approximately $1,062 per month. We are responsible for
registration, licensing and insurance costs.
Approximate future minimum lease payments due under these leases are:
Years ending December 31, Amount
-------------------------------------- ----------------
For the remaining six months of 2005 $ 356,000
2006 710,000
2007 687,000
2008 660,000
2009 661,000
Thereafter 1,162,000
---------------
Total $ 4,236,000
===============
GUARANTEES
We agree to indemnify our officers and directors for certain events or
occurrences arising as a result of the officers or directors 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 director's and officer's liability insurance policy that limits
our exposure and enables us to recover a portion of any future amounts paid. As
a result, we believe the estimated fair value of these indemnification
agreements is minimal because of our insurance coverage and we have not
recognized any liabilities for these agreements as of June 30, 2005.
- 14 -
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
LITIGATION
We may from time to time be involved in legal proceedings arising from
the normal course of business. As of the date of this report, we were not
involved in any legal proceedings.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash Investing and Financing Activities:
Six Months Ended June 30,
2005 2004
---------- -----------
Conversion of note payable to common stock $ -- $ 2,000,000
Capital lease obligations
incurred for use of equipment 50,777 --
15. AGGREGATE PRODUCT WARRANTY LIABILITY:
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 by North Star prior to the merger and will be
re-evaluated throughout the year.
Aggregate Product Warranty Liability:
------------------------------------------------------------------
Beginning Balance at December 31, 2004 $ 40,000
Payments made under warranties (16,500)
Change for accruals related to product warranties --
Change for accruals related to preexisting warranties (23,500)
--------
Ending Balance at June 30, 2005 $ --
========
16. INDUSTRY SEGMENTS
The Company is currently engaged in developing and marketing through two
distinct segments: (1) Ionatron, where the focus is on Directed Energy Weapon
technology products for sale to the U.S. Government and (2) North Star which was
acquired September 30, 2004, where the focus is on the manufacture of custom
high voltage equipment for sale in a more broad-based market. Prior to the
acquisition of North Star there was only one segment.
Selected Financial Data for the Three Months Ended June 30, 2005
Depreciation
Business and Interest Interest Net Capital Identifiable
Segment Revenues Amortization Income Expense Income/(Loss) Expenditures Assets
- --------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Ionatron $ 3,518,772 $ 290,364 $ 9,737 $ 57,618 $ (1,756,228) $ 386,116 $ 9,532,085
North Star 614,117 29,774 362 484 45,532 -- 3,037,940
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Company 4,132,889 320,138 10,099 58,102 (1,710,696) 386,116 12,570,025
Intersegment (176,367) -- -- -- -- -- (561,115)
Investment in Sub -- -- -- -- -- -- (2,415,000)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Consolidated Company $ 3,956,522 $ 320,138 $ 10,099 $ 58,102 $ (1,710,696) $ 386,116 $ 9,593,910
============ ============ ============ ============ ============ ============ ============
- 15 -
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Selected Financial Data for the Six Months Ended June 30, 2005
Depreciation
Business and Interest Interest Capital
Segment Revenues Amortization Income Expense Net Loss Expenditures
- -------------------- ----------- ----------- ----------- ----------- ----------- -----------
Ionatron $ 5,881,919 $ 536,334 $ 20,219 $ 115,596 $(3,257,299) $ 614,096
North Star 960,325 59,379 782 583 (100,995) 31,195
----------- ----------- ----------- ----------- ----------- -----------
Total Company 6,842,244 595,713 21,001 116,179 (3,358,294) 645,291
Intersegment (315,451) -- -- -- -- --
Investment in Sub -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Consolidated Company $ 6,526,793 $ 595,713 $ 21,001 $ 116,179 $(3,358,294) $ 645,291
=========== =========== =========== =========== =========== ===========
- 16 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our discussion and analysis of the financial condition and results of
operations should be read in conjunction with the unaudited consolidated
financial statements and the related disclosures included elsewhere herein and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations included as part of our Annual Report on Form 10-K for the year ended
December 31, 2004.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning 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
different from any future results, performances or achievements expressed or
implied by such forward-looking statements. Important factors that could cause
our actual results to differ materially from our expectations are described in
Exhibit 99.1 (Risk Factors) to our Annual Report on From 10-K for the year ended
December 31, 2004. 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
Ionatron was formed on June 3, 2002 to develop and market Directed Energy
Weapon technology products initially for sale to the U.S. Government. 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
culminating in our first U.S. Government contract in September of 2003. During
2004, we demonstrated the laser guided man-made lightning directed energy
technology in the laboratory; demonstrated the technology effects on a variety
of targets both under U.S. Government contract and using internal research and
development funding; delivered a compact laser source specifically designed to
enable the technology under a U.S. Government contract; and commenced a U.S.
Government contract for the development of a system on a mobile platform for
field demonstration and testing. In 2005, we developed a counter IED
("Improvised Explosive Device") vehicle for use in Iraq called the Joint IED
Neutralizer ("JIN").
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 shareholders
held 33.89% and Ionatron shareholders held 66.11% of the outstanding USHG common
stock. The combination has been accounted for as a recapitalization of Ionatron,
Inc., from our inception on June 3, 2002, and the issuance of 19,346,090 common
shares and 5,429,009 options and warrants to the USHG shareholders on the date
of merger in exchange for cash. The consolidated financial statements reflect
the historical results of Ionatron, Inc., prior to March 18, 2004 and the
consolidated results of operations of the Company since March 18, 2004. On April
29, 2004, our shareholders approved the change of our corporate name to
Ionatron, Inc., an increase of authorized common stock to 100,000,000 shares and
the classification of the Board of Directors into three classes. Ionatron also
changed its fiscal year end from June 30 to December 31.
In September 2004, we completed the acquisition of substantially all the
assets of North Star Research Acquisition Corporation (formerly North Star
Research Corporation), 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. Subsequent to the
acquisition we changed the corporation's name to North Star Power Engineering
Inc. ("North Star").
OPERATING SEGMENTS:
We are currently engaged in developing and marketing through two distinct
segments: (1) Ionatron, where the focus is on Directed Energy Weapon technology
products for sale to the U.S. Government and (2) North Star, where the focus is
on the manufacture of custom high voltage equipment for sale to a more
broad-based market.
- 17 -
CRITICAL ACCOUNTING POLICIES
Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S.
generally accepted accounting principles (GAAP), which require management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. We have identified the
following significant accounting policies that require a higher degree of
judgment and complexity. See Note 1 to the Company's audited consolidated
financial statements contained in its Annual Report on Form 10-K, which is
incorporated herein by reference for information with respect to other
significant accounting policies.
Revenues
Revenue has been derived from ongoing contract work for effects testing
and the design and development of an in house demonstration system for a
government customer. It is expected that continued work on effects testing,
design and development of use specific Ionatron systems, advanced design and
proof of principle on an existing contract, compact laser source development and
the manufacture of a transportable demonstrator will contribute to revenues
going forward in 2005. This work is expected to be generally performed under
cost-plus contracts with U.S. Government customers.
Revenue under long-term U.S. Government contracts is recorded under the
percentage of completion method. Revenues, billable monthly, 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.
The asset accounts receivable includes costs and estimated earnings in
excess of billings on uncompleted contracts which represents revenues recognized
in excess of amounts billed. Such revenues are billable under the terms of the
contracts as of the balance sheet date, yet were not invoiced until the
following month, and are generally expected to be collected within 60 days. The
liability "billings in excess of costs" represents billings and estimated
earnings in excess of revenues recognized on uncompleted contracts
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. Revenues from commercial, non-governmental, customers are
based on fixed price contacts where the sale is recognized upon acceptance of
the product or performance of the service.
Cost Of Revenue
Cost of revenue under long-term U.S. Government contracts is recorded
using the cost plus fixed fee method. Cost of revenue is recorded as costs are
incurred. Costs include direct labor, direct materials, subcontractor costs and
manufacturing and administrative overhead. General and administrative expenses
allowable under the terms of the contracts are allocated per contract depending
on its direct labor and material proportion to total direct labor and material
of all contracts.
As contracts can extend over one or more accounting periods, revisions in
costs estimated during the course of work are reflected during the accounting
period in which the facts become known.
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 Ionatron and North Star
are separate reporting units. We believe that the North Star trade name is an
indefinite life intangible asset.
- 18 -
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.
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 our future cash
flows. 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 JUNE 30, 2005 and 2004
is as follows:
2005 2004
----------- -----------
Revenue $ 3,956,522 $ 1,833,572
Cost of revenue 3,775,826 1,726,753
General and administrative 1,345,807 1,199,390
Selling and marketing 95,133 119,566
Research and development 385,656 120,133
Other (expense) income:
Interest expense (58,102) (43,184)
Interest income 10,099 21,221
Other (7,500) --
----------- -----------
Loss before provision for income taxes (1,701,403) (1,354,233)
Provision for income taxes 9,293 --
----------- -----------
Net loss $(1,710,696) $(1,354,233)
=========== ===========
REVENUE
The increase in revenue for the three months ended June 30, 2005 compared
to 2004 was attributed to increased revenue from governmental contracts as well
as the inclusion of North Star's revenue of $437,750, net of intersegment
revenue. Our revenue, increased from approximately $2.6 million for the first
quarter of 2005 as we started billing on our new JIN project in the second
quarter.
COST OF REVENUE
Cost of revenue also increased when compared to the three months ended of
June 30, 2004 due to more work being done and more materials acquired under
existing government contracts and the inclusion of North Star's cost of revenue
of $374,422, net of intersegment cost of revenue. Cost of revenue includes an
allocation of general and administrative expenses and research and development
costs in accordance with the terms of our contracts.
- 19 -
GENERAL AND ADMINISTRATIVE
The increase in general and administrative costs for the three months
ended June 30, 2005 from the three months ended June 30, 2004 is primarily due
to an increase of approximately $783,000 in personnel costs. Also contributing
to the increase are higher insurance costs of approximately $66,000, recruiting
costs of approximately $107,000 and depreciation and amortization expense of
approximately $106,000. Offsetting these increases was a significant rise in the
amount of indirect costs allocated to cost of sales.
General and administrative costs for the three months ended June 30, 2005
decreased from the previous three months ended March 31, 2005, primarily as a
result of a decrease in professional fees of approximately $432,000 offset by
increases in recruiting costs of approximately $100,000.
SELLING AND MARKETING
Selling and marketing expenses decreased during the three months ended
June 30, 2005 primarily resulting from an increase in the allocation of salary
expenses to project oversight and administrative activities.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 220% during the three months
ended June 30, 2005 as compared to 2004 primarily due to our shift to internally
funded proof of concept and research and development from production and
research and development under contracts in 2005.
INTEREST EXPENSE
The interest expense on our credit line payable to our Chairman increased
$14,000 from the second quarter of 2004 to the same period in 2005 as a result
of the increase in prime rate. See "Liquidity and Capital Resources" for further
information concerning the restructuring of the credit line agreement.
INTEREST INCOME
Interest income in the second quarter of 2005 decreased $11,000 from the
second quarter of 2004 as a result of reduction of investment in the short-term
investment fund.
NET LOSS
The operations for the three months ended June 30, 2005 resulted in a net
loss of $1,711,000 an increase from the 2004 net loss of $356,000. General and
administrative expenses increased 12% primarily due to additional staff,
additional insurance costs and depreciation expense. Research and development
expenses increased over 220% from 2004 as expected due to the shift to internal
research and development from development under contracts. Offsetting the impact
of these increases, 2005 selling and marketing expenses decreased 62% resulting
from an allocation of costs to administrative and project oversight activities.
- 20 -
COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004 is
as follows:
2005 2004
----------- -----------
Revenue $ 6,526,793 $ 2,106,014
Cost of revenue 6,180,312 1,981,753
General and administrative 2,869,011 1,764,939
Selling and marketing 230,662 232,072
Research and development 491,646 300,898
Other (expense) income:
Interest expense (116,179) (117,700)
Interest income 21,001 21,221
Other 592 --
----------- -----------
Loss before provision for income taxes (3,339,424) (2,270,127)
Provision for income taxes 18,870 --
----------- -----------
Net loss $(3,358,294) $(2,270,127)
=========== ===========
REVENUE
The increase in revenue for the six months ended June 30, 2005 compared to
2004 was attributed to increased revenue from existing governmental contracts,
revenue from our new JIN contract as well as the inclusion of North Star's
revenue of $644,874, net of intersegment revenue.
COST OF REVENUE
Cost of revenue also increased when compared to the six months ended of
June 30, 2004 due to more work being done and more materials acquired under
existing government contracts as well as the new JIN contracts and the inclusion
of North Star's cost of revenue of $580,595, net of intersegment cost of
revenue. Cost of revenue includes an allocation of general and administrative
expenses and research and development costs in accordance with the terms of our
contracts.
GENERAL AND ADMINISTRATIVE
The increase in general and administrative costs for the six months ended
June 30, 2005 from the six months ended June 30, 2004 is primarily due to an
increase of approximately $1.3 million in personnel costs. Also contributing to
the increase is a rise in depreciation and amortization expense of approximately
$185,000 and increases in professional fees and insurance of approximately
$600,000 and $216,000, respectively. Included in the professional fees are costs
of approximately $386,000 related to compliance with Section 404 of the
Sarbanes-Oxley Act of 2002. Offsetting these increases was a significant rise in
the amount of indirect costs allocated to cost of sales.
SELLING AND MARKETING
Selling and marketing expenses remained consistent during the six months
ended June 30, 2005 when compared to the six months ended June 30, 2004.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 63% during the six months
ended June 30, 2005 as compared to 2004 primarily due to our shift to internally
funded proof of concept and research and development from production and
research and development under contracts in 2005.
- 21 -
NET LOSS
The operations for the six months ended June 30, 2005 resulted in a net
loss of $3,358,294 an increase from the 2004 net loss of $2,270,127. General and
administrative expenses increased 63% primarily due to additional staff,
additional costs associated with being a publicly held company and depreciation
expense. 2005 research and development expenses increased by 63% from 2004 as
expected due to the shift to internal research and development from development
under contracts. Offsetting the impact of these increases Selling and marketing
expenses decreased 22% resulting from an allocation of salary expenses to
project oversight and administrative activities.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005 we had approximately $1.1 million of cash and cash
equivalents, a decrease of $1.4 million from cash and cash equivalents at
December 31, 2004 of $2.5 million. Additionally at June 30, 2005 and December
31, 2004, we had $500,000 and $1.0 million, respectively, of investments held in
a bond fund which is re-priced weekly.
During the first half of 2005, we used $1.6 million of cash in operating
activities, consisting primarily of our net loss of $3.4 million and an increase
in inventory and a decrease in accrued expenses of $687,000 and $341,000,
respectively, partially offset by depreciation and amortization expense of
$596,000 and a decrease in accounts receivable of $1.8 million. The increase in
inventory is primarily the result of material acquisitions in the JIN project
with the U.S. government. We anticipate that short-term and long-term funding
needs will be provided from the cash flow from cash and investments on hand,
government contracts as well as our available line of credit.
Additionally, in the first half of 2005, we used $145,000 in cash in
investing activities, consisting of equipment purchases partially offset by the
partial liquidation of the investment in municipal bonds. During the six months,
financing activities provided $411,000 of cash, due to option exercises.
Our cash position increased during the first half of 2004 by $6.5 million
primarily as a result of the merger with USHG that provided $8.9 million of
cash. At June 30, 2004 we had approximately $6.6 million of cash and cash
equivalents. We used $3.2 million in operations and purchased $304,000 of
equipment during the period, which was financed in part, by borrowings from our
Chairman. Our borrowing arrangement with our Chairman was restructured in March
2004, after pay down of $500,000 and his contribution of $2 million to our
capital, into a $3 million revolving credit arrangement.
We believe that we will have sufficient cash, or access to sufficient cash
through potential banking or investing relationships to meet current and future
cash needs. The transportable demonstrator contract, the JIN contract and one
other contract, that presently represent a major portion of our current
activity, are on a cost plus fixed fee basis. This means the majority of work
performed is done at our 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. These government-approved
rates are adjusted periodically and will be adjusted in the future to
incorporate additional costs as the operations expand. Other contracts are at
fixed prices which have commercial type gross margins associated with them.
BACK-LOG OF ORDERS
At June 30, 2005, we had a backlog (that is, work load remaining on signed
contracts) of $303,000, to be completed within the next twelve months. In July
2005, we received a $6.4 million contract for the further development of our
LIPC technology. The funding for this contract is derived from the Fiscal Year
2005 Congressional Plus Up contained in the 2005 Department of Defense budget.
The contract allows work to begin on critical items desired by the customer
while further discussions continue as to the remainder of the Scope of Work for
that funding. In August 2005, we received a new letter contract for an
additional $8.2 million from the U.S. government for our JIN (Joint IED
Neutralizer) Project. The letter contract provides continued funding for the
ongoing JIN prototype development while the final contract details are
negotiated. With respect to the LIPC Transportable Demonstrator project, that
effort remains on hold as the Government is transferring responsibility for the
project to a different end user organization. Upon completion of the formal
transfer for project responsibility, we expect the funding will be restarted and
the Demonstrator will be completed and delivered to the new sponsoring
organization.
- 22 -
CONTRACTUAL OBLIGATIONS
As of June 30, 2005, the Company had contractual obligations in the form
of non-cancelable and cancelable leases, insurance premium financing and note
payable to stockholder as follows:
Payment by Period
------------------------------------------------------------
More
Less than 1 1 to 3 4 to 5 than 5
Total Year Years Years Years
------------------------------------------------------------
Capital lease $ 51,677 $ 17,704 $ 32,327 $ 1,646 $ --
Insurance premium financing 28,816 28,816 -- -- --
Note payable to stockholder 2,800,000 2,800,000 -- -- --
Operating lease 4,236,000 710,000 1,374,000 1,251,000 901,000
------------------------------------------------------------
Total $7,116,493 $3,556,520 $1,406,327 $1,252,646 $ 901,000
==============================================================
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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;
should that rate increase by 1%, the effect would be an increase in the net loss
for the six months ended June 30, 2005 by $14,000.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of our management,
including our chief executive officer/chief financial officer, of the
effectiveness of our disclosure controls and procedures. Based on that
evaluation, our chief executive officer/chief financial officer has concluded
that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. During the quarter ended June 30, 2005, 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.
- 23 -
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
We may from time to time be involved in legal proceedings arising from the
normal course of business. As of the date of this report, we were not involved
in any legal proceedings.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the six months ended June 30, 2005, the Company issued 388,409
shares of common stock upon exercise of outstanding options and warrants 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 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of Ionatron, Inc. held on June 28,
2005, 66,881,117 shares of Ionatron's Common Stock, or 93.93% of the total
Common Stock outstanding on the record date for such meeting, were represented.
The Stockholders of Ionatron elected Mr. Robert Howard and Rear Admiral
Thomas W. Steffens (Ret.) as Class I Directors with terms expiring at the Annual
Meeting of Stockholders to be held in 2008. Of the shares voted with respect to
the election of Mr. Howard, 66,542,352 were voted in favor and 338,765 were
withheld. Of the shares voted with respect to the election of Admiral Steffens,
66,729,528 were voted in favor and 151,589 were withheld.
Continuing as Class II Directors with terms expiring in 2006 are Mr.
Thomas C. Dearmin, and Mr. George P. Farley. Continuing as Class III Directors
with terms expiring in 2007 are Mr. James K. Harlan, and Mr. David C. Hurley.
The Stockholders of Ionatron also approved the amendment of the Company's
2004 Stock Incentive Plan to, among other things; increase the number of shares
of common stock available for issuance under the plan from 3,000,000 to
5,000,000. Of the shares voted with respect to the ratification of the amendment
of the 2004 Stock Incentive Plan, 51,382,315 were voted in favor, 658,775 were
voted against and 90,557 were withheld. In addition, there were 14,749,470
shares that were not voted on this proposal.
ITEM 6 EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------
10.1 Form of 2004 Stock Incentive Plan Non-Qualifying Stock Option
Agreement for Directors.
31.1 Certification of Chief Executive and Chief Financial Officer
pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Chief Executive Officer and Chief Financial Officer Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IONATRON, INC.
By /s/ Thomas C. Dearmin
----------------------------------
Thomas C. Dearmin
Chief Executive Officer, President
and Chief Financial Officer
Date: August 9, 2005
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