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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 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.
------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 77-0262908
------------------------------- ------------------------------------
(State or Other Jurisdiction of (IRS Employer Identification Number)
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 May 5, 2005 there were
71,202,113 shares of the issuer's common stock, par value $.001 per share,
outstanding.
IONATRON, INC.
March 31, 2005
PART I - FINANCIAL INFORMATION
Item 1- Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December
31, 2004 3
Consolidated Statements of Operations for the three months ended March
31, 2005 and 2004 (Unaudited) 4
Consolidated Statements of Cash Flows for the three months ended March
31, 2005 and 2004 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2- Management's Discussion and Analysis of Financial Condition and Results of
Operations 14
Item 3- Quantitative and Qualitative Disclosures About Market Risk 18
Item 4- Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1- Legal Proceedings 20
Item 2- Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 6- Exhibits 20
SIGNATURES 21
2
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IONATRON, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 2005 December 31, 2004
---------------- ----------------
(Unaudited) (Audited)
---------------- ----------------
ASSETS
Current assets
Cash and cash equivalents $ 1,910,258 $ 2,495,779
Accounts receivable - net 2,119,456 4,497,350
Inventory 1,420,445 341,334
Municipal bonds available for sale 1,000,000 1,000,000
Other receivables 39,393 30,403
Prepaid expenses 365,955 404,619
---------------- ----------------
Total current assets 6,855,507 8,769,485
Property and equipment, net 1,389,295 1,416,072
Goodwill 1,487,884 1,487,884
Unamortized intangible assets 603,000 603,000
Amortized intangible assets - net 239,900 261,450
---------------- ----------------
TOTAL ASSETS $ 10,575,586 $ 12,537,891
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,059,548 $ 1,639,018
Accrued expenses 741,739 841,067
Note payable to stockholder 2,800,000 2,800,000
Billings in excess of costs 16,032 25,695
Current portion of capital lease obligation 9,526 2,435
---------------- ----------------
Total current liabilities 4,626,845 5,308,215
Capital lease obligation 21,496 3,482
Deferred tax liabilities 19,154 9,577
Stockholders' equity
Preferred stock, 1,000,000 shares authorized and unissued -- --
Common stock, $.001 par value, 100,000,000 shares authorized; 71,183,363
shares issued and outstanding at March 31, 2005 and 70,846,204 shares
issued and outstanding at December 31, 2004 71,183 70,846
Additional paid-in capital 10,745,511 10,406,776
Accumulated deficit (4,908,603) (3,261,005)
---------------- ----------------
Total stockholders' equity 5,908,091 7,216,617
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,575,586 $ 12,537,891
================ ================
See accompanying notes to consolidated financial statements (unaudited)
3
IONATRON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31,
----------------------------
2005 2004
------------ ------------
Revenue $ 2,570,271 $ 272,442
Cost of revenue 2,404,486 255,000
------------ ------------
Gross profit 165,785 17,442
Operating expenses:
General and administrative 1,523,204 565,549
Selling and marketing 135,529 112,506
Research and development 105,990 180,765
------------ ------------
Total operating expenses 1,764,723 858,820
------------ ------------
Operating loss (1,598,938) (841,378)
Other (expense) income
Interest expense (58,077) (74,516)
Interest income 10,902 --
Other 8,092 --
------------ ------------
Total other (39,083) (74,516)
------------ ------------
Loss before provision for income taxes (1,638,021) (915,894)
Income taxes 9,577 --
------------ ------------
Net loss $ (1,647,598) $ (915,894)
------------ ------------
Net loss per share - basic and diluted $ (0.02) $ (0.02)
============ ============
Weighted average number of shares outstanding, basic and diluted 70,969,510 51,215,979
============ ============
See accompanying notes to consolidated financial statements (unaudited)
4
IONATRON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended
------------------------------------
March 31, 2005 March 31, 2004
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,647,598) $ (915,894)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 275,575 157,478
Loss on equipment disposal 58,418 --
Stock option compensation 95,206 --
Deferred income tax provision 9,577 --
Changes in working capital components:
(Increase) decrease in accounts receivable 2,377,894 (63,889)
(Increase) in other receivable (8,990) --
(Increase) in inventory (1,079,111) (331,633)
(Increase) decrease in prepaid expenses 38,664 (35,650)
Increase (decrease) in accounts payable (579,470) 344,377
(Decrease) in billings in excess of costs (9,663) --
(Decrease) in accrued expenses (99,328) (206,028)
---------------- ----------------
Net cash used in operating activities (568,826) (1,051,239)
---------------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of equipment (259,176) (74,120)
Receivables from stockholder -- 104,769
---------------- ----------------
Net cash (used in) provided by investing
activities (259,176) 30,649
---------------- ----------------
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 (1,385) --
Cash acquired from reverse merger -- 8,905,937
Exercise of stock options and warrants 243,866 --
---------------- ----------------
Net cash provided by financing activities 242,481 9,405,937
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (585,521) 8,385,347
Cash and cash equivalents, beginning of period 2,495,779 103,392
---------------- ----------------
Cash and cash equivalents, end of period $ 1,910,258 $ 8,488,739
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR:
Interest 58,077 633
Income taxes -- --
See non-cash investing and financing activities at Note 14
See accompanying notes to consolidated financial statements (unaudited)
5
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.
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 March 31, 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 three month period ended March 31,
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 with 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").
6
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 March 31,
- ----------------------------------------------------------------------
2005 2004
------------ ------------
Net loss:
As reported $ (1,647,598) $ (915,894)
Pro forma stock compensation expense (2,087,468) --
------------ ------------
Pro forma $ (3,735,066) $ (915,894)
============ ============
Net loss per share - basic and diluted:
As reported $ (0.02) $ (0.02)
============ ============
Pro forma $ (0.05) $ (0.02)
============ ============
Compensation expense recorded for shares and options delivered to
non-employees for the three months ended March 31, 2005 was approximately
$95,000 which was charged to operating expenses with an offsetting entry to
additional paid in capital.
7
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A summary of the activity of options under the plans for the three
months ended March 31, 2005 follows:
Number of Weighted Average
Options Exercise Price
---------- ----------
Outstanding at December 31, 2004 3,647,925 $ 2.34
Granted 722,850 7.64
Exercised (307,833) 0.90
Forfeited (29,100) 4.78
---------- ----------
Outstanding at March 31, 2005 4,033,842 $ 3.36
========== ==========
Additional information about outstanding options to purchase the
Company's common stock as of March 31, 2005 is as follows:
Options Outstanding Options Exercisable
---------------------------------------------------- ------------------------------
Weighted Avg. Weighted Weighted
Remaining Avg. Avg.
Number of Contractual Life Exercise Number of Exercise
Exercise Price Shares (In Years) Price Shares Price
- ------------------- ------------- ------------------ ------------- ------------- -------------
$0.48 - $0.75 1,701,750 3.85 $ 0.63 1,701,750 $ 0.63
$2.85 - $5.77 1,400,467 3.95 $ 3.83 962,083 $ 3.94
$6.00 - $8.79 931,625 4.79 $ 7.65 350,000 $ 7.96
------------ ----------
Total 3,013,833 $ 2.54
------------ ----------
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 March 31, 2005 563,600 $ 0.63
---------------- ----------------
Additional information about outstanding warrants to purchase the
Company's common stock as of March 31, 2005 is as follows:
Warrants Outstanding Warrants Exercisable
-------------------------------------------------------- --------------------------------
Weighted Avg.
Remaining
Number of Contractual Weighted Avg. Number of Weighted Avg.
Exercise Price Shares Life(In Years) Exercise Price Shares Exercise Price
- --------------------- ---------------- ---------------- ---------------- ------------ ----------------
$0.63 563,600 3.96 $ 0.63 563,600 $ 0.63
------------ ----------------
Total 563,600 $ 0.63
------------ ----------------
8
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. PENDING ACCOUNTING PRONOUNCEMENTS
The Securities and Exchange Commission 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. Thus, Ionatron must adopt SFAS 123(R) no later
than January 1, 2006. SFAS No. 123R may negatively impact our earnings; however,
we have not completed an analysis of all of the differences between Statement
No. 123R and SFAS No. 123, including the specific transition method to be
utilized upon adoption.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at:
March 31, 2005 December 31, 2004
-----------------------------------
Billed:
Completed contracts $ 17,432 $ 17,432
Contracts in progress 1,223,181 2,264,509
Retained 100,000 100,000
Unbilled cost and estimated earnings on uncompleted contracts 796,275 2,132,841
---------------- ----------------
2,136,888 4,514,782
Less: Allowance for doubtful accounts 17,432 17,432
---------------- ----------------
Total $ 2,119,456 $ 4,497,350
================ ================
The components of unbilled cost and estimated earnings on uncompleted
contracts consist of the following at:
March 31, 2005 December 31, 2004
------------------------------------
Cost incurred on uncompleted contracts $ 12,722,528 $ 10,054,620
Estimated earnings 912,911 739,332
---------------- ----------------
Total billable costs and estimated earnings 13,635,439 10,793,952
Less: Billings to date 12,855,196 8,686,806
---------------- ----------------
Total $ 780,243 $ 2,107,146
================ ================
Included in accompanying balance sheet under the following captions:
Unbilled costs and estimated earnings on uncompleted contracts included in
accounts receivable $ 796,275 $ 2,132,841
Billings in excess of costs (16,032) (25,695)
---------------- ----------------
Total $ 780,243 $ 2,107,146
================ ================
9
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 March 31, 2005 and December 31, 2004.
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 and equity securities as of March 31, 2005 and December 31, 2004:
Gross Gross Gross
amortized unrealized unrealized Fair
cost gains losses value
-----------------------------------------------------------------------
March 31, 2005
-----------------------------------------------------------------------
Municipal bonds $ 1,000,000 $ -- $ -- $ 1,000,000
-----------------------------------------------------------------------
December 31, 2004
-----------------------------------------------------------------------
Municipal bonds $ 1,000,000 $ -- $ -- $ 1,000,000
At March 31, 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:
March 31, 2005 December 31, 2004
---------------- ----------------
Furniture and leasehold improvements $ 289,459 $ 201,249
Equipment and software 3,000,351 2,957,035
---------------- ----------------
Total 3,289,810 3,158,284
Less accumulated depreciation and amortization (1,900,515) (1,742,212)
---------------- ----------------
Net property and equipment $ 1,389,295 1,416,072
================ ================
10
IONATRON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. ACCRUED EXPENSES
Accrued expenses consisted of the following at:
March 31, 2005 December 31, 2004
---------------- ----------------
Payroll liability $ 240,007 $ 309,818
Deferred rent 59,062 52,874
Warranty reserve -- 40,000
Insurance premium financing 114,534 199,171
Other 328,136 239,204
---------------- ----------------
Total accrued expenses $ 741,739 $ 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 March 31, 2005 and December 31, 2004. Interest
on this note was approximately $52,000 and $74,000 for the three months ended
March 31, 2005 and March 31, 2004, respectively.
10. INCOME TAXES
At March 31, 2005 management believes that sufficient uncertainty
exists regarding the future realization of the Company's gross deferred tax
assets of approximately $17.0 million and thus a full valuation allowance is
required.
At March 31, 2005, the Company had approximately $44.2 million of Net
Operating Loss ("NOL") carryforwards for federal income tax reporting purposes.
Of this amount, approximately $27.1 million 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.
At March 31, 2005, the Company had approximately $17.1 million of NOL
carryforwards for state income tax reporting purposes. Utilization of these
NOL's may be subject to substantial annual limitation due to the ownership
change limitations provision of the respective states.
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 three months ended March 31, 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 4,323,142 and 6,599,509 shares
for the quarters ended March 31, 2005 and 2004, respectively
11
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 majority owned by our Chairman and other principal
stockholders. The lease expires in November 2012, contains renewal options and
an escalation provision at the end of five years that increases our annual rent
by $49,500. We are also responsible for certain property related costs,
including insurance, utilities and property taxes. Rent expense was
approximately $87,000 for the three months ended March 31, 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 April 2005 we
have paid a total of $44,000 in deposits on the facility.
The Company also leases vehicles in both the Tucson and Albuquerque
facilities to facilitate our material purchasing activities. These lease
commitments total approximately $854 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
- -------------------------------- -----------------
2005 $ 530,000
2006 703,000
2007 677,000
2008 655,000
2009 659,000
Thereafter 1,161,000
-----------------
Total $ 4,385,000
=================
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 March 31, 2005.
12
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:
Three Months Ended March 31,
2005 2004
------------------ -------------------
Conversion of note payable to common stock $ -- $ 2,000,000
Capital lease obligations incurred for use of
equipment 26,490 --
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 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 March 31, 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 March 31, 2005
Depreciation
and Interest Interest Identifiable Capital
Business Segment Revenues Amortization Income Expense Net Loss Assets Expenditures
- ------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Ionatron $ 2,363,147 $ 245,970 $ 10,482 $ 57,978 $ (1,501,071) $ 10,758,667 $ 227,981
North Star 346,208 29,605 420 99 (146,527) 2,761,603 31,195
------------ ------------ ------------ ------------ ------------ ------------ ------------
Total Company 2,709,355 275,575 10,902 58,077 (1,647,598) 13,520,270 259,176
Intersegment (139,084) -- -- -- -- (529,684) --
Investment in Sub -- -- -- -- -- (2,415,000) --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Consolidated
Company $ 2,570,271 $ 275,575 $ 10,902 $ 58,077 $ (1,647,598) $ 10,575,586 $ 259,176
============ ============ ============ ============ ============ ============ ============
13
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.
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 in a
more broad-based market.
14
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.
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.
15
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
Our consolidated financial information for the three months ending
March 31, 2005 and 2004 is as follows:
2005 2004
------------ ------------
Revenue $ 2,570,271 $ 272,442
Cost of revenue 2,404,486 255,000
General and administrative 1,523,204 565,549
Selling and marketing 135,529 112,506
Research and development 105,990 180,765
Other (expense) income:
Interest expense (58,077) (74,516)
Interest income 10,902 --
Other 8,092 --
------------ ------------
Loss before provision for income taxes (1,638,021) (915,894)
Provision for income taxes 9,577 --
------------ ------------
Net loss $ (1,647,598) $ (915,894)
============ ============
REVENUE
The increase in revenue for the three months ended March 31, 2005
compared to 2004 was attributed to increased revenue from governmental contracts
as well as the inclusion of North Star's revenue. Our revenue, however declined
from approximately $6.2 million for the fourth quarter of 2004 as our existing
projects are coming to completion.
COST OF REVENUE
Cost of revenue also increased when compared to the three months ended
of March 31, 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.
Cost of revenue includes an allocation of general and administrative expenses
and research and development costs in accordance with the terms of our
contracts.
16
GENERAL AND ADMINISTRATIVE
The increase in general and administrative costs for the three months
ended March 31, 2005 from the three months ended March 31, 2004 is primarily due
to an increase of approximately $685,000 in personnel costs. Also contributing
to the increase is a rise in depreciation and amortization expense of
approximately $118,000. Additionally, as a result of becoming a publicly traded
company in March 2004, we incurred costs of approximately $329,000 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.
Total revenue for the three months ended March 31, 2005 decreased from the
previous three months ended December 31, 2004. This decline in revenue resulted
in a lower percentage of costs allocated to cost of revenue, therefore
increasing general and administrative expenses for the period.
SELLING AND MARKETING
Selling and marketing expenses increased during the three months ended
March 31, 2005 primarily resulting from an increase in business development
activity as we broadened our efforts to inform potential customers of our LIPC
technology in pursuit of Government contracts.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 41% during the three months
ended March 31, 2005 as compared to 2004 primarily due to our shift from
internally funded proof of concept and research and development to production
and research and development under contracts in mid 2004.
INTEREST EXPENSE
The interest expense on our credit line payable to our Chairman
decreased $22,000 from the first three months of 2004 to the same period in 2005
primarily as a result of the decrease in amount borrowed. See "Liquidity and
Capital Resources" for further information concerning the restructuring of the
credit line agreement.
INTEREST INCOME
The interest income in the first quarter of 2005 was a result of the
investment of the cash acquired in the merger with USHG into a short-term
investment fund.
NET LOSS
The operations for the three months ended March 31, 2005 resulted in a
net loss of $1,647,598 an increase from the 2004 net loss of $915,894. General
and administrative expenses increased 162% primarily due to additional staff,
additional costs associated with being a publicly held company and depreciation
expense. Selling and marketing expenses increased 20% resulting from an increase
in business development activity as we broadened our efforts to inform potential
customers of our technology in pursuit of Government contracts. Offsetting the
impact of these increases, 2005 research and development expenses decreased by
41% from 2004 as expected due to the shift from internal research and
development to development under contracts.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005 we had approximately $1.9 million of cash and cash
equivalents, a decrease of $586,000 from cash and cash equivalents at December
31, 2004 of $2.5 million. Additionally at March 31, 2005 and December 31, 2004
we had $1.0 million of investments held in a bond fund which is re-priced
weekly.
During the first quarter of 2005, we used $569,000 of cash in operating
activities, consisting primarily of our net loss of $1.6 million and an increase
in inventory and a decrease in accounts payable of $1,079,000 and $579,000,
respectively, partially offset by a decrease in accounts receivable of $2.4
million and depreciation and amortization of $276,000. The increase in inventory
17
is primarily the result of labor and material acquisitions in anticipation of a
prototype development contract 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 quarter of 2005, we used $259,000 in cash in
investing activities, consisting of equipment purchases. During the quarter,
financing activities provided $242,000 of cash, due to option exercises.
Our cash position increased during the first quarter of 2004 by $8.4
million primarily as a result of the merger with USHG that provided $8.9 million
of cash. At March 31, 2004 we had approximately $8.5 million of cash and cash
equivalents. We used $951,000 in operations and purchased $74,000 of equipment
during the quarter, 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 working capital to fulfill
existing contracts and expected additional contracts in 2005 and into 2006. The
transportable demonstrator contract and at least two other contracts, 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. Other contracts are at fixed prices which have
commercial type gross margins associated with them.
BACK-LOG OF ORDERS
At March 31, 2005, we had a backlog (that is, work load remaining on
signed contracts) of $800,000, to be completed within the next twelve months. In
April 2005, we received a $1.7 million prototype development contract with the
U.S. government for a counter roadside bomb/Improvised Explosive Device System.
The Department of Defense 2005 budget bill included $12.6 million in the United
States Navy budget for the development of a transportable LIPC demonstration
system. This work is a follow on to the fiscal year 2004 funding, and that
program effort has been on hold pending release of funding. Funding has now been
released and final negotiations on this effort are in process and we expect to
re-commence work on this program within the next two weeks.
CONTRACTUAL OBLIGATIONS
As of March 31, 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 leases $ 34,036 $ 8,672 $ 21,304 $ 4,060 $ --
Insurance premium financing 114,534 114,534 -- -- --
Note payable to stockholder 2,800,000 2,800,000 -- -- --
Operating leases 4,385,000 530,000 1,380,000 1,314,000 1,161,000
-------------- -------------- -------------- -------------- --------------
Total $ 7,333,570 $ 3,453,206 $ 1,401,304 $ 1,318,060 $ 1,161,000
============== ============== ============== ============== ==============
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.
18
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 three months ended March 31, 2005 by $7,000.
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 March 31, 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.
19
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 three months ended March 31, 2005, the Company issued
337,159 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 6 EXHIBITS
EXHIBIT DESCRIPTION
NUMBER
--------- --------------------------------------------------------------
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.
20
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: May 10, 2005
21