-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SASxPtNhKk7dYYpwpSczT5bWF0bnu9f4sT7nEPO9SmC7luMH54IzdzGntP4Q3oEN nd19YM7JMAe+wuEIZ+J9bw== 0001144204-04-011833.txt : 20040813 0001144204-04-011833.hdr.sgml : 20040813 20040813151145 ACCESSION NUMBER: 0001144204-04-011833 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IONATRON, INC. CENTRAL INDEX KEY: 0000879911 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 770262908 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14015 FILM NUMBER: 04973875 BUSINESS ADDRESS: STREET 1: C/O IONATRON, INC. STREET 2: 3590 EAST COLUMBIA STREET CITY: TUCSON STATE: AZ ZIP: 85714 BUSINESS PHONE: 520-628-7415 MAIL ADDRESS: STREET 1: C/O IONATRON, INC. STREET 2: 3590 EAST COLUMBIA STREET CITY: TUCSON STATE: AZ ZIP: 85714 FORMER COMPANY: FORMER CONFORMED NAME: US HOME & GARDEN INC DATE OF NAME CHANGE: 19950714 FORMER COMPANY: FORMER CONFORMED NAME: NATURAL EARTH TECHNOLOGIES INC DATE OF NAME CHANGE: 19930328 10-Q 1 v05667_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FROM THE TRANSITION PERIOD FROM ___________________ TO ___________________ Commission File Number 001-14015 Ionatron, Inc. -------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 77-0262908 - --------------------------------- -------------------- (State or other jurisdiction IRS Employer of incorporation or organization) (Identification No.) 3590 East Columbia 85714 Tucson, AZ ------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (520) 628 7415 ---------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) - -------------------------------------------------------------------------------- (former name, former address and former fiscal year, if changed since last report) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes [_] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of August 10, 2004 there were 69,579,190 shares of the issuer's common stock, par value $.001 per share, outstanding. IONATRON, INC. June 30, 2004
PART I - FINANCIAL INFORMATION Item 1- Consolidated Financial Statements (Unaudited) Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 3 Consolidated Statements of Operations for the three months ended June 30, 2004 and 2003 4 Consolidated Statements of Operations for the six months ended June 30, 2004 and 2003 5 Consolidated Statement of Cash Flows for the six months ended June 30, 2004 and 2003 6 Consolidated Statement of Stockholder's Equity (Deficit) for the six months ended June 30, 2004 7 Notes to Consolidated Financial Statements 8 Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations 17 Item 3- Quantitative and Qualitative Disclosures About Market Risk 25 Item 4- Controls and Procedures 25 PART I I - OTHER INFORMATION Item 2- Changes in Securities and Use of Proceeds 26 Item 4- Submission of Matters to a Vote of Security Holders 26 Item 6- Exhibits and Reports on Form 8-K 26 (a) Exhibits (b) Reports on Form 8-K SIGNATURES 27
-2- PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IONATRON, INC. CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 DECEMBER 31, 2003 ------------- ----------------- (Unaudited) (Audited) ASSETS CURRENT ASSETS Cash and cash equivalents $ 6,639,403 $ 103,392 Accounts receivable 686,930 73,027 Costs and estimated earnings in excess of billings on uncompleted contracts 1,091,324 31,427 Inventory 22,861 21,000 Receivables from stockholder 2,713 107,482 Prepaid expenses 90,544 47,905 ----------- ----------- TOTAL CURRENT ASSETS 8,533,775 384,233 PROPERTY AND EQUIPMENT, NET 1,079,760 1,141,887 ----------- ----------- TOTAL ASSETS $ 9,613,535 $ 1,526,120 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Current portion of capital lease obligation $ 2,363 $ -- Note payable to stockholder 2,800,000 4,300,000 Accounts payable 599,506 330,696 Accrued expenses 342,042 365,208 ----------- ----------- TOTAL CURRENT LIABILITIES 3,743,911 4,995,904 CAPITAL LEASE OBLIGATION 4,718 -- COMMITMENTS AND CONTINGENCIES -- -- STOCKHOLDERS' EQUITY Preferred stock, 1,000,000 shares authorized and unissued -- -- Common stock, $.001 par value, 100,000,000 shares authorized; 69,561,690 shares issued and outstanding at June 30, 2004 and 48,452,249 shares issued and outstanding at December 31, 2003 69,561 48,452 Additional paid-in capital 8,065,472 471,548 Accumulated deficit (2,270,127) (3,989,784) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 5,864,906 (3,469,784) ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 9,613,535 $ 1,526,120 =========== ===========
See accompanying notes to unaudited consolidated financial statements -3- IONATRON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, ----------------------------------- 2004 2003 ------------ ------------ REVENUE $ 1,833,572 $ -- COST OF REVENUE 1,726,753 -- ------------ ------------ GROSS PROFIT 106,819 -- OPERATING EXPENSES: General and administrative 1,199,390 743,365 Selling and marketing 119,566 98,538 Research and development 120,133 162,116 ------------ ------------ TOTAL OPERATING EXPENSES 1,439,089 1,004,019 ------------ ------------ OPERATING LOSS (1,332,270) (1,004,019) OTHER (EXPENSE) INCOME Interest expense (43,184) (47,546) Interest income 21,221 -- ------------ ------------ TOTAL OTHER (21,963) (47,546) ------------ ------------ NET LOSS $ (1,354,233) $ (1,051,565) ============ ============ NET LOSS PER SHARE - BASIC AND DILUTED $ (0.02) $ (0.02) ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED 69,060,586 48,452,249 ============ ============
See accompanying notes to unaudited consolidated financial statements -4- IONATRON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2004 2003 ------------ ------------ REVENUE $ 2,106,014 $ -- COST OF REVENUE 1,981,753 -- ------------ ------------ GROSS PROFIT 124,261 -- OPERATING EXPENSES: General and administrative 1,764,939 1,213,217 Selling and marketing 232,072 166,261 Research and development 300,898 583,591 ------------ ------------ TOTAL OPERATING EXPENSES 2,297,909 1,963,069 ------------ ------------ OPERATING LOSS (2,173,648) (1,963,069) OTHER (EXPENSE) INCOME Interest expense (117,700) (81,357) Interest income 21,221 -- ------------ ------------ TOTAL OTHER (96,479) (81,357) ------------ ------------ NET LOSS $ (2,270,127) $ (2,044,426) ============ ============ NET LOSS PER SHARE - BASIC AND DILUTED $ (0.04) $ (0.04) ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED 60,138,283 48,452,249 ============ ============
See accompanying notes to unaudited consolidated financial statements -5- IONATRON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, --------------------------------- 2004 2003 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(2,270,127) $(2,044,426) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 368,137 550,359 Loss on equipment disposal 2,188 -- Changes in working capital components: Accounts receivable (613,903) (100,000) Costs and estimated earnings in excess of billings on uncompleted contracts (1,059,897) -- Inventory (1,861) -- Prepaid expenses (42,639) (3,459) Accounts payable 422,260 (244,926) Accrued expenses (23,166) 271,962 ----------- ----------- Net cash (used in) operating activities (3,219,008) (1,570,490) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of equipment (303,944) (587,991) Proceeds from disposal of equipment 3,208 -- Receivables from stockholder 104,769 100,000 ----------- ----------- Net cash (used in) investing activities (195,967) (487,991) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from note payable to stockholder 1,000,000 2,020,000 Repayment on note payable to stockholder (500,000) (20,000) Principal payments on capital lease obligation (381) -- Cash acquired from reverse merger 8,905,937 -- Exercise of stock options and warrants 545,430 -- ----------- ----------- Net cash provided by financing activities 9,950,986 2,000,000 ----------- ----------- Net increase (decrease) in cash and cash equivalents 6,536,011 (58,481) Cash and cash equivalents, beginning of period 103,392 97,206 ----------- ----------- Cash and cash equivalents, end of period $ 6,639,403 $ 38,725 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: Interest -- -- Income taxes -- --
See non cash investing and financing activities at Note 11 See accompanying notes to unaudited consolidated financial statements -6- IONATRON, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) SIX MONTHS ENDED JUNE 30, 2004 (Unaudited)
------------------------- COMMON STOCK ------------------------- PAID-IN SHARES AMOUNT CAPITAL DEFICIT TOTAL ----------- ----------- ----------- ----------- ----------- Balance as of January 1, 2004 48,452,249 $ 48,452 $ 471,548 $(3,989,784) $(3,469,784) Transfer of deficit on termination of Subchapter S election -- -- (3,989,784) 3,989,784 -- Contribution of note payable to stockholders' equity -- -- 2,000,000 -- 2,000,000 Issuance of common stock in merger 19,346,090 19,346 8,886,591 -- 8,905,937 Exercise of stock options and warrants 1,763,351 1,763 543,667 -- 545,430 Shares delivered for services performed -- -- 153,450 -- 153,450 Net loss for the six months ended June 31, 2004 -- -- -- (2,270,127) (2,270,127) ----------- ----------- ----------- ----------- ----------- Balance as of June 30, 2004 69,561,690 $ 69,561 $ 8,065,472 $(2,270,127) $ 5,864,906 =========== =========== =========== =========== ===========
See Accompanying Notes to the Consolidated Financial Statements. -7- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION, NATURE OF OPERATIONS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Ionatron, Inc. and its wholly owned subsidiary, Ionatron Technologies, Inc. (collectively, "Company," "Ionatron," "we," "our" and "us"). All intercompany balances and transactions have been eliminated. The consolidated financial statements and related notes thereto as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 are presented as unaudited, but in the opinion of management include all adjustments necessary to present fairly the information set forth therein. The consolidated balance sheet information for December 31, 2003 was derived from the audited financial statements. The interim results are not necessarily indicative of the results for any future periods. MERGER AND RECAPITALIZATION On March 18, 2004, a subsidiary of U. S. Home & Garden, Inc (USHG), a non-operating, publicly traded company merged into Ionatron, Inc. (the "Merger"). Following the Merger, USHG stockholders held 33.89 % and Ionatron stockholders held 66.11% of USHG common stock on a fully diluted basis. The combination has been accounted for as a recapitalization of Ionatron, Inc., effective from our inception on June 3, 2002 and the issuance of 19,346,090 common shares and 5,492,009 options and warrants to the USHG stockholders on the date of merger in exchange for the cash. We also acquired in the Merger a $1.6 million principal amount subordinated promissory note from a highly leveraged entity. This note matures in 2009 and accrues interest on a compound basis at the rate of 9% per annum until maturity. We recorded a 100% valuation allowance for this note due to the uncertainty of collectibility. The consolidated financial statements reflect the historical results of Ionatron, Inc., prior to March 18, 2004 and the consolidated results of operations of the Company since March 18, 2004. All outstanding shares of Ionatron common stock were converted to 48,452,249 shares of USHG common stock. On April 29, 2004, our stockholders approved the change of our corporate name to Ionatron, Inc., an increase of our authorized common stock to 100,000,000 shares, and the classification of the Board of Directors into three classes. We also changed our fiscal year end from June 30 to December 31. The common stock and per share information in the consolidated financial statements and related notes have been retroactively adjusted to give effect to the recapitalization. NATURE OF BUSINESS AND SUMMARY OF OPERATIONS Ionatron was formed on June 3, 2002 to develop and market Directed Energy Weapon technology products initially for sale to the U.S. Government. The goal of the Company is to produce products that incorporate our technology initially for specific U.S. Government customer applications and platforms. Ionatron and the U.S. Government has entered into several contracts for products and services as well as Cooperative Research and Development Agreements for joint research on Laser Induced Plasma Channel ("LIPC") based directed energy weapons. We expect to offer U.S. Government approved versions of our products for commercial security applications in the future. During 2003 and 2002, the Company engaged in research and development and business development activities. Ionatron has demonstrated its laser guided man-made lightning directed energy technology in the laboratory and now has government contracts for effects testing, compact laser source development and the delivery of a system on a mobile platform for field demonstration and testing. -8- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Revenues under long-term U.S. Government contracts are recorded under the percentage of completion method. Revenues under cost plus fixed fee contracts are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. Costs include direct labor, direct materials, and subcontractor costs and manufacturing and administrative overhead. As contracts can extend over one or more accounting periods, revisions in costs and earnings estimated during the course of work are reflected during the accounting period in which the facts become known. When the current contract estimate indicates a loss, provision is made for the total anticipated loss in the current period. The asset "costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. Such revenues are expected to be billed and collected within one year on contracts in progress. The liability "billings in excess of costs and estimated earnings on uncompleted contracts" represents billings in excess of revenues recognized. Revenues for other products and services are recognized when such products and services are delivered and, in connection with certain sales to government agencies, when the products and services are accepted, which is normally negotiated as part of the initial contract. CASH AND CASH EQUIVALENTS Cash and cash equivalents are considered to be all highly liquid investments purchased with an initial maturity of three (3) months or less and municipal bonds with a variable interest rate that is adjusted to the current market rate of interest every seven days and are readily convertible into cash. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of accounts receivable, accounts payable, accrued expenses and related party debt approximate fair value due to the short maturity of these instruments. CONCENTRATIONS OF CREDIT RISK We maintain cash balances at a major bank and at times, balances exceed FDIC limits. We generally do not have a significant concentration of credit risk on accounts receivable from the U.S. Government. ALLOWANCE FOR DOUBTFUL ACCOUNTS We do not generally provide an allowance for receivables from the U.S. Government. Allowances for doubtful accounts will be maintained for estimated losses resulting from the failure of other customers to make required payments on their accounts. -9- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) PROPERTY AND EQUIPMENT Property and equipment are recorded at historical cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets from 3 to 10 years. Leasehold improvements are depreciated over the life of the related lease or asset, if shorter. Amortization of assets acquired under capital leases is included in depreciation and amortization expense. Significant improvements extending the useful life of property are capitalized. When property is retired or otherwise disposed of, the cost of the property and the related accumulated depreciation are removed from the accounts, and any resulting gains or losses are reflected in the consolidated statement of operations. Repair and maintenance costs are expensed as incurred. COMPUTER SOFTWARE DEVELOPMENT COSTS Direct development costs associated with internal-use computer software are accounted for under Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" and are capitalized, including external direct costs of material and services and payroll costs for employees devoting time to the software projects. Costs incurred during the preliminary project stage, as well as for maintenance and training are expensed as incurred. Amortization is provided on a straight-line basis over the shorter of 3 years or the estimated useful life of the software. VALUATION OF LONG-LIVED ASSETS We review long-lived assets and certain identifiable intangibles for possible impairment whenever events or changes in circumstances (rapid pace of technology) indicate that the carrying amount of any asset may not be recoverable. We assess the recoverability of long-lived assets and certain identifiable intangibles by determining whether the amortization of the balances over their remaining lives can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of long-lived assets will be impacted if estimated future operating cash flows are not achieved. Factors we consider important that could trigger an impairment review include the following: o Significant underperformance relative to historical or projected future operating results, o Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; o Significant negative industry or economic trends; and o Significant decline in our stock price for a sustained period and market capitalization relative to net book value. INCOME TAXES Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized currently for the future tax consequences attributable to the temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized. -10- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) We consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a net deferred tax asset. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. We record a valuation allowance to reduce our deferred tax assets and review the amount of such allowance annually. When we determine certain deferred tax assets are more likely than not to be utilized, we will reduce our valuation allowance accordingly. Prior to January 1, 2004, we elected to be taxed as a Subchapter S-corporation with the individual shareholders reporting their respective share of our losses on their income tax return. Accordingly, we have no deferred tax assets or liabilities arising in prior periods. We have provided a valuation allowance for the deferred tax assets related to the $6.7 million operating and $7.8 million capital loss carryovers of USHG. The USHG operating losses are available for deduction from our taxable income at a rate of $2.8 million per year. The tax benefits related to deduction of the USHG losses will be added to paid-in capital. RESEARCH AND DEVELOPMENT EXPENSES We expense our research and development costs as incurred. NET LOSS PER SHARE Basic earnings per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. No adjustment has been made to net loss attributable to common stockholders. Diluted earnings per share reflect the effect of common shares issuable upon exercise of stock options and warrants when such effect is not anti-dilutive. As such, no diluted weighted average number of shares outstanding nor diluted loss per share has been reflected as the effect is anti-dilutive. STOCK-BASED COMPENSATION We account for our stock option awards under the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, including FASB Interpretation No. 44 "Accounting for Certain Transactions Including Stock Compensation," an interpretation of APB Opinion No. 25. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. Pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied as required by SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS 123." For purposes of pro forma disclosures under SFAS 123, pro-forma compensation expense measured at date of grant for options granted near the end of the first quarter is assumed to be amortized for pro-forma disclosure purposes over the two - four year vesting periods of the options. As a result of the grant date at the end of the first quarter, there was no pro-forma compensation expense for the first quarter. Nonemployee stock-based transactions are accounted for under SFAS 123. -11- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Pro-forma compensation and nonemployee compensation is based on the fair value of the options granted which has been estimated at the various dates of the grants using the Black-Scholes option-pricing model with the following assumptions: - Fair market value of the underlying common stock based on our closing common stock price on the date the option is granted; - Risk-free interest rate based on the weighted averaged 5-year U.S. Treasury note strip rates; - Volatility has been based on comparable companies considered as we do not have sufficient trading history for our common stock; and - No expected dividend yield based on future dividend payment plans. No compensation cost has been recognized for options granted to employees for the three and six months ended June 30, 2004 and 2003. The following pro forma information presents pro forma net loss information as if compensation expense had been recognized for stock options as determined under the fair-value-based method prescribed by SFAS No. 123 using the Black-Scholes options pricing model: FOR THE SIX MONTHS ENDED JUNE 30, - ------------------------------------------------------------------------------ 2004 2003 -------------- --------------- Net loss: As reported $ (2,270,127) $ (2,044,426) ============= =============== Pro forma stock compensation expense $ (195,531) $ -- ------------- --------------- Pro forma $ (2,465,658) $ (2,044,426) ============= =============== Net loss per share - basic and diluted: As reported $ (0.04) $ (0.04) ============= =============== Pro forma $ (0.04) $ (0.04) ============= =============== Compensation expense recorded for shares delivered to employees and non-employees for the six months ended June 30, 2004 was approximately $153,000. No compensation expense was recorded for options to purchase shares or shares delivered for the six months ended June 30, 2003. COMPREHENSIVE INCOME We have no items of comprehensive income or expense. Accordingly, our comprehensive income (loss) and net income (loss) are equal for all periods presented. NEW ACCOUNTING PRONOUNCEMENTS There are no new accounting pronouncements that affect our consolidated financial statements. However recent proposals by the Financial Accounting Standards Board relating to stock based compensation would, if adopted, require us to use the fair value method of accounting (as described above) for our stock options issued in the future. -12- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS Costs and estimated earnings in excess of billings on uncompleted contracts included $1,091,000 at June 30, 2004 and $31,000 at December 31, 2003 of recoverable costs for progress completed, but not yet billed at the end of the period. These were billed in the month following the relevant period. 3. INVENTORIES Inventories, primarily consisting of labor, overhead and materials pertaining to long-term contracts, are carried at cost. At June 30, 2004, inventory was comprised only of materials. 4. PROPERTY AND EQUIPMENT Property and equipment consist of the following: June 30, 2004 December 31, 2003 ------------- ----------------- Furniture and leasehold improvements $ 35,036 $ 16,559 Equipment and software 2,257,148 2,000,617 ----------- ----------- 2,292,184 2,017,176 Less accumulated depreciation (1,212,424) (875,289) ----------- ----------- Net property and equipment $ 1,079,760 $ 1,141,887 =========== =========== 5. NOTE PAYABLE TO STOCKHOLDER The Company's Chairman, a significant stockholder, has provided funds from the inception of the Company under a revolving credit arrangement. The maximum amount borrowed was $5.3 million. After pay down of $500,000 and contribution of $2 million of the revolving credit into equity in the first quarter of 2004, the remainder of $2.8 million was incorporated into a new $3 million revolving credit arrangement with same terms of the original revolving credit agreement. The note payable to stockholder bears interest at a variable annual rate equal to the prime rate plus two percent (2%), is due upon demand subject to Board approval, and is collateralized by the assets of our subsidiary, Ionatron Technologies, Inc. $2.8 million and $4.3 million were outstanding under the revolving credit arrangements at June 30, 2004 and December 31, 2003, respectively. Interest paid to stockholder was approximately $116,000 and $78,000 for the six months ended June 30, 2004 and 2003, respectively. 6. STOCKHOLDERS' EQUITY PREFERRED STOCK The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, rights and preference as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which could adversely affect the voting power or other rights of the holders of the Company's common stock. No shares of the preferred stock are outstanding. -13- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) COMMON STOCK On April 29, 2004, our stockholders approved the increase in our authorized common stock to 100,000,000 shares. We have given retroactive effect to this increase in the accompanying balance sheet. A Rights Agreement commonly known as a "poison pill", currently exists which provides that in the event an individual or entity becomes a beneficial holder of 12% or more of the shares of our capital stock, without the approval of the Board of Directors, other stockholders of the Company shall have the right to purchase shares of our (or in some cases, the acquiror's) common stock from the Company at 50% of its then market value. In connection with the Merger, the acquisition of greater than 12% of our capital stock by each of our Chairman and Chief Executive Officer was approved by the Board of Directors. STOCK WARRANT AND DEVELOPMENT AGREEMENT In October 2003, we entered a Development Agreement with a third party whereby the Company issued a warrant, which expires October 2008, to purchase 1,028,076 common shares at $0. Substantially all of the non-financial terms of the development agreement including the identity of the third party are classified by the U.S. Government. The Development Agreement provides the third party with ownership rights to intellectual property developed on behalf of the third party and certain license rights in exchange for a payment of $2,400,000. In addition, the Development Agreement provides for reimbursement of up to one third of our actual labor, material and external consulting costs expended under the Development Agreement. The initial $500,000 payment under the agreement was considered as payment for the warrant and was recorded as additional paid-in-capital. 1,028,076 shares of common stock issued in the Merger are being held in escrow pending issuance under the warrant. The third party and our management met on April 29, 2004 and both parties intend to enter a modified joint development agreement for the remaining $1.9 million payment due under the original agreement. STOCK OPTIONS AND WARRANTS At June 30, 2004 there were options and warrants to purchase approximately 4.8 million shares of common stock outstanding. Options and warrants issued by USHG covering approximately 5.5 million shares of common stock exercisable, at exercise prices ranging from $.25 to $.63, until 2013 were outstanding at the date of the merger. Subsequent to the Merger and through June 30, 2004, options to purchase 1,107,500 shares of common stock were granted and options to purchase 1,763,351 shares of common stock were exercised. Of the total options granted, options to purchase 300,000 shares with an exercise price of $3.00 were granted to consultants for services provided in connection with the Merger. The remainder, which vest over one year to four year periods, were granted to directors and employees and have exercise prices ranging from $2.85 to $3.35. We may issue up to 3,000,000 shares of common stock at terms and conditions approved by the Board at dates of issuances under the stock incentive plan approved by our stockholders on April 29, 2004. Subsequent of June 30, 2004, options to purchase 324,400 shares of common stock were granted under the 2004 incentive plan. 7. SIGNIFICANT CUSTOMERS Currently our sole customer is the U. S. Government. -14- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 8. RETIREMENT PLANS We established a 401(k) plan for the benefit of our employees. We may make discretionary contributions to the plan. In the first two quarters of 2004 and fiscal years 2003 and 2002, the Company did not contribute to the 401(k) plan. 9. COMMITMENTS AND CONTINGENCIES LEASES We lease office, manufacturing and storage space at an annual rental of $330,000 under a non-cancelable operating lease agreement from a company that is majority owned by our Chairman and other principal stockholders. The lease expires in November 2012, contains renewal options and an escalation provision at the end of five years that increases our annual rent by $49,500. We are also responsible for certain property related costs, including insurance, utilities and property taxes. Rent expense for 2003 and 2002 was approximately $90,000 for each quarter. Future annual minimum lease payments under these leases are: Years ending December 31, Amount ------------------------- -------------- 2004 $ 165,000 2005 330,000 2006 330,000 2007 352,000 2008 379,500 Thereafter 1,454,750 -------------- Total $ 3,011,250 ============== GUARANTEES We agree to indemnify our officers and directors for certain events or occurrences arising as a result of the officer or director's serving in such capacity. The term of the indemnification period is for the officer's or director's lifetime. The maximum amount of future payments that we could be required to make under these indemnification agreements is unlimited. However, we maintain a directors and officer liability insurance policy that limits our exposure and enables us to recover a portion of any future amounts paid. As a result, we believe the estimated fair value of these indemnification agreements is minimal because of our insurance coverage and we have not recognized any liabilities for these agreements as of June 30, 2004. 10. INCOME TAXES Income tax benefits of approximately $890,000 resulting from the loss in the six months ended June 30, 2004 are available for deduction from future taxable income. We have provided a valuation allowance for all of these income tax benefits -15- 11. SUPPLEMENTAL CASH FLOW INFORMATION Non-Cash Investing and Financing Activities: Six months ended June 30, ------------------------- 2004 2003 ---------- ---------- Conversion of note payable to common stock $2,000,000 $ -- Equipment purchased under capital lease 7,462 -- Shares delivered to consultants for services performed 153,450 -- -16- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with our Consolidated Financial Statements included elsewhere in this Form 10-Q and any subsequent filings. Certain of the statements contained herein may be considered forward-looking statements. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements for purposes of the securities laws. Forward-looking statements include all statements that do not relate solely to the historical or current facts, and can be identified by the use of forward looking words such as "may", "believe", "will", "expect", "expected", "project", "anticipate", "anticipated" estimates", "plans", "strategy", "target", "prospects" or "continue". These forward looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results of operations and financial condition and may cause our actual results, performances or achievements to be materially difficult from any future results, performances or achievements expressed or implied by such forward-looking statements. This Form 10-Q contains important information as to risk factors in the notes to financial statements and below. In making these forward-looking statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Private Securities Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to have been correct. We do not assume any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements. OVERVIEW On March 18, 2004, a subsidiary of U. S. Home & Garden Inc. (USHG), a non-operating, publicly traded company merged into Ionatron Technologies, Inc., formerly Ionatron, Inc. (the "Merger"). Following the Merger, USHG stockholders held 33.89 % and Ionatron stockholders held 66.11% of the outstanding USHG common stock. The combination has been accounted for as a recapitalization of Ionatron, Inc., from our inception on June 3, 2002, and the issuance of 19,346,090 common shares and 5,492,009 options and warrants to the USHG stockholders on the date of merger in exchange for cash. The consolidated financial statements reflect the historical results of Ionatron, Inc., prior to March 18, 2004 and the consolidated results of operations of the Company since March 18, 2004. On April 29, 2004, our stockholders approved the change of our corporate name to Ionatron, Inc., an increase of our authorized common stock to 100,000,000 shares and the classification of our Board of Directors into three classes. We also changed our fiscal year end from June 30 to December 31. The common stock and per share information in the consolidated financial statements and related notes have been retroactively adjusted to give effect to the re-capitalization. Ionatron was formed on June 3, 2002 to develop and market Directed Energy Weapon technology products initially for sale to the U.S. Government. The goal of the Company is to initially produce products that incorporate our technology for specific U.S. Government customer applications and platforms. Ionatron and the U.S. Government have entered into several contracts for products and services as well as Cooperative Research and Development Agreements for joint research on Laser Induced Plasma Channel ("LIPC") based directed energy weapons. We expect to offer U.S. Government approved versions of our products for commercial security applications in the future. During 2003 and 2002, the Company engaged in research and development and business development activities. Ionatron has demonstrated its laser guided man-made lightning directed energy technology in the laboratory and has entered into government contracts for effects testing, compact laser source development and the delivery of a system on a mobile platform for field demonstration and testing. -17- We are a new technology company working under contracts with agencies of the U.S. Government concerned with national security that has developed and demonstrated in our laboratory a novel internally developed directed energy weapon technology called LIPC. Our technology controls and directs electrical energy between two points. Our business strategy is to continue long-term development of the technology for multiple national security and defense applications, as well as develop applications in other commercial sectors. Short-term military applications have been demonstrated to our customers. Our immediate plan is to manufacture transportable demonstrators for those applications for various U.S. Government organizations, in order to demonstrate the field utility of the technology. In April 2004, we received a $9 million contract for one such unit. Upon completion of this contract our intent is to transition to building prototypes and a limited number of production units as soon as it is practicable. We cannot assure that the demonstrator will perform to the specifications required or that additional prototypes or units will be ordered. Currently the LIPC technology lends itself to many non-lethal and lethal military applications. We have demonstrated the technology and effectiveness for many application areas in our laboratory. We cannot assure that the technology will perform its intended applications outside of the laboratory. Recently, we were requested by one branch of the military to put forth a proposal, which we have done, that details the requirements and funding needed to start low rate initial production and deliver units of a specific Ionatron LIPC system during 2005. The funding for this proposal is currently being identified with attempts to include it into the 2005 U.S. Defense Budget that begins with the government fiscal year on October 1, 2004. We cannot assure that this proposal will result in contract awards. We have had meetings and performed demonstrations of the technology for all branches of the U.S. Military, as well as many other U.S. Government organizations involved in various defensive, anti-terrorism, or offensive military type operations. We currently have many potential contracts in the negotiation stage and have U.S. Government customers actively seeking short-term and long-term funding for Ionatron projects. We cannot assure that any such contracts will become finalized in a timely manner or at all. In order to help manage the Ionatron interface with our government customers and their congressional funding counterparts, we maintain an ongoing relationship with a well-known and qualified Washington, DC based government relations firm. We also have an established Vice President of Business Development, whose group will be expanding this year as we aggressively market our U.S. Government products. We also have various U.S. Government contracts in the following areas: - Transportable demonstrator for field trials; - Portal ingress/egress denial demonstration; - Effects of LIPC technology on various targets; and - Compact architecture development of the equipment to allow placement on smaller platforms. The LIPC technology is designed as a line of sight weapon, which allows the propagation of various forms and quantities of electrical energy to be aimed and directs electrical energy between two points. The laboratory demonstrations of the technology have ranged from low voltage disruptive type energies to the target to very high voltages and currents which have demonstrated energy densities that physically damage different types of materials, such as ablating concrete. -18- We intend to take advantage of, and utilize, existing and mature laser targeting and tracking technology for our systems with slight modifications. We are in negotiations with three vendors to supply, to our specifications, the electrical system requirements and have received a working prototype from one vendor. Outsourcing such supply requirements is intended to free up our technical personnel and other resources to work on development of next generation electrical sources, now that we have developed at least one electrical source that can be manufactured for us by outside sources. We also have optical components and sections of our laser sources manufactured by outside vendors, which are then assembled and integrated at Ionatron to produce the final laser source for our LIPC systems. These LIPC systems will be self-contained units that operate off of existing power supplies found on typical mobile military platforms, such as HMMWV's. Due to the low average power requirements of our systems, no additional or exotic power systems will be required to support these systems. Future systems will utilize the advanced electrical technologies developed for other military programs to support more compact sources, and smaller, lighter LIPC systems that can be mounted on smaller, autonomous platforms now under development in other government programs. The targets, effects, ranges, voltages and currents delivered, along with many other aspects of the technology are classified under specific Department of Defense guidelines and, consequently, cannot be disclosed to the public. Patents/Proprietary Information Ionatron has numerous patent applications in various stages of preparation and prosecution, which Ionatron believes it has novel intellectual property and that it might be able to secure patents that operate to protect our proprietary technical information and capabilities that will give us the competitive advantage to continue to be the leader in the technology. Some of these patents will be evaluated by the government to determine if they will be classified in nature, and thus may not be seen by the general public. Ionatron also has proprietary information in the form of trade secrets and technology specific know how that should give us additional competitive advantages. Research and Development Ionatron has funded its original research and development through capital investment by its founders and we retain the ownership of all the original intellectual property, which we believe is necessary to use and control the technology. Ionatron also out sources certain research tasks to experienced individuals or companies for some activities that require sophisticated laboratory equipment or optical modeling programs we do not have at our disposal. We have over ten relationships of this kind, which provide that any intellectual property developed under the agreement is the sole property of Ionatron. Our short-term research and development goals are to complement our existing system design by developing more efficient and compact laser sources, electrical sources, and lower cost more efficient optical beam trains. Our government customers fund some of this development work. Most of our research related work is funded internally in order to capture any intellectual property rights from novel processes and inventions that may arise. Our long-term research is to identify the long-range physical limits of the technology. This work relates to understanding the long-range capabilities of our LIPC's from alternative and potentially technically superior optical sources and new potential wavelengths that it may be advantageous to exploit. This work includes efforts to achieve a more complete understanding of the entire physical laws we work within regarding atmospheric physics, plasma physics, and the future capabilities of new solid-state laser materials and laser processes that may enable the technology to be more fully exploited. We also intend to explore other uses of the technology in the existing application area as well as completely novel applications in commercial sectors outside the defense and national security application areas. -19- Properties Ionatron currently is located in a 25,000 square foot research and development and prototyping facility. We have numerous LIPC system test beds, laser source design and assembly, optical design and assembly, machine shop, engineering, research and development, electrical source design and fabrication, indoor test and effects range, as well as the general and administrative functions. The facility is limited in production capabilities but is capable of performing our existing contracts and the LIPC transportable demonstrator contract. As additional contracts are expected, we are preparing to move operations to the NASA Stennis Space facility located on the Gulf Coast of Mississippi in 2005. This facility is a 150,000 acre federally owned secure facility which currently has a decommissioned Army Ammunition Manufacturing facility, with approximately 600,000 square feet available to meet our long-term secure research, development, manufacturing, and test range requirements. We are currently negotiating to have just over 100,000 square feet upgraded, to our specifications, as soon as possible in order to relocate operations to the Stennis facility. Employees We currently have thirty-three employees, compared to twenty-six on March 31, 2004, ten of which are in management and general administrative, two are in human resources, fourteen are in technical and engineering and seven are in manufacturing. We expect to significantly increase the number of our personnel by the end of the year, primarily in research, engineering and manufacturing. CRITICAL ACCOUNTING POLICIES The Company has identified the following accounting policy that requires significant judgment. The Company believes its judgments relating to revenue are appropriate. Revenues Revenues have been recognized from ongoing contract work for effects testing and the design and development of an in house demonstration system for a government customer. It is expected that continued work on effects testing, design and development of use specific Ionatron systems, advanced design and proof of principle on an existing contract, compact laser source development and the manufacture of a transportable demonstrator will contribute to revenues going forward in 2004. This work is expected to be generally performed under cost-plus contracts with U.S. Government customers. Revenues under long-term U.S. Government contracts are recorded under the percentage of completion method. Revenues under cost plus fixed fee contracts are recorded as costs are incurred and include estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. Costs include direct labor, direct materials, and subcontractor costs and overhead. As contracts can extend over one or more accounting periods, revisions in costs and earnings estimated during the course of work are reflected during the accounting period in which the facts become known. When the current contract estimate indicates a loss, provision is made for the total anticipated loss in the current period. Revenues for other products and services are recognized when such products are delivered and, in connection with certain sales to government agencies, when the products and services are accepted, which is normally negotiated as part of the initial contract. -20- RESULTS OF OPERATIONS COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003 The following table sets forth certain financial data for each three months ended: June 30, June 30, 2004 2003 ----------- ----------- Revenue $ 1,833,572 $ -- Cost of revenue 1,726,753 -- Expenses: General and administrative 1,199,390 743,365 Selling and marketing 119,566 98,538 Research and development 120,133 162,116 Interest 43,184 47,546 Interest income 21,221 -- Net loss $(1,354,233) $(1,051,565) REVENUE Revenue for the three months ended June 30, 2004 was derived from continued work on four existing contracts. There was no revenue for the June 30, 2003. We are presently working on three contracts with a backlog of approximately $10,560,000. The contracts are expected to be completed in 2004. Additionally, the Department of Defense budget contains a funding line item in the amount of $12.6 million for the development of Laser Induced Plasma Channel Technology in which the Company anticipates participating. This line item is a Navy program, which is a follow on to our 2004 Navy Congressional defined program. We anticipate getting a contract and, upon completion of the contractual agreements with the Navy and the approval of the 2005 Defense budget, we anticipate that the majority of this amount will be added to our backlog. COST OF REVENUE Our cost of revenue for the three months ended June 30, 2004 was $1,720,000 and was comprised of direct costs and administrative and manufacturing overhead. Our costs of revenue are expected to increase in connection with our completion of our projects in process as well as anticipated future projects. GENERAL, ADMINISTRATIVE AND SELLING EXPENSES The increase in general, administrative and selling expenses during the three months ended June 30, 2004 as compared with the three months ended June 30, 2003 was primarily payroll related due to building infrastructure to support current and planned operations. We expect a continued trend toward increased general and administrative to support our planned activities. -21- RESEARCH AND DEVELOPMENT EXPENSES The decrease in research and development expenses during the three months ended June 30, 2004 as compared with the three months ended June 30, 2003 was primarily due to the transfer of certain material, personnel and consulting expenses to cost of sales in 2004 as certain research and development, in which we retain rights to the results of the research, begins to be funded under our contracts. COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 The following table sets forth certain financial data for the six months ended: June 30, June 30, 2004 2003 ----------- ----------- Revenue $ 2,106,014 $ -- Cost of revenue 1,981,753 -- Expenses: General and administrative 1,764,939 1,213,217 Selling and marketing 232,072 166,261 Research and development 300,898 583,591 Interest 117,700 81,357 Interest income 21,221 -- Net loss $(2,270,127) $(2,044,426) REVENUE Revenue for the six months ended June 30, 2004 was derived from continued work on four existing contracts. There was no revenue for the six months ended June 30, 2003. COST OF REVENUES Our cost of revenues consisting of materials purchased, direct labor and manufacturing and administrative overhead for the six months ended June 30, 2004 was $1,982,000. GENERAL, ADMINISTRATIVE AND SELLING EXPENSES The increase in general, administrative and selling expenses during the six months ended June 30, 2004 as compared with the six months ended June 30, 2003 was primarily payroll related due to building infrastructure to support current and planned operations. We expect a continued trend toward increased general, administrative to support our planned activities. RESEARCH AND DEVELOPMENT EXPENSES The decrease in research and development expenses during the six months ended June 30, 2004 as compared with the six months ended June 30, 2003 was primarily due to the transfer of certain material, personnel and consulting expenses to cost of sales in 2004 as certain research and development, in which we retain rights to the results of the research, is funded under our contracts. -22- LIQUIDITY AND CAPITAL RESOURCES Our cash position increased during six months ended June 30, 2004 by $6.5 million. At June 30, 2004 we had approximately $6.6 million of cash and cash equivalents. During the six months ended June 30, 2004, we used $3.2 million in operations primarily as a result of a net loss of $2.3 million, and an increase in accounts receivable and cost and estimated earnings in excess of billings on uncompleted contracts of $1.7 million, which were partially offset by a net increase in accounts payable and accrued expenses of $400,000 and non-cash charges for depreciation and amortization of $368,000. We also purchased $0.3 million of equipment during the six months ended June 30, 2004, which was financed in part, by borrowings from our Chairman. Our borrowing arrangement with our Chairman was restructured following a $500,000 payment and $2,000,000 conversion to equity, resulting in a $3 million revolving credit arrangement. We believe that we will have sufficient working capital to fulfill this year's existing contracts and expected contracts. The transportable demonstrator contract and at least two of the other Ionatron contracts that presently represent a major portion of our current activity are on a cost plus fee basis. This means all work is performed at Ionatron government-approved rates, which include general and administrative costs, overhead, labor and materials, fees and profit. These costs are accrued as incurred and billed monthly. Other contracts are at fixed prices which have commercial type gross margins associated with them. As additional contracts are expected, we are preparing to move operations to the NASA Stennis Space facility located on the Gulf Coast of Mississippi in 2005. It is expected that the cost of upgrading the facility will be paid for by through the U.S. Army's Armament Retooling and Manufacturing Support initiative. The actual facility moving expenses to relocate from Tucson, AZ to Mississippi is estimated at approximately $1,000,000 to be incurred in 2005. CONTRACTUAL COMMITMENTS As of June 30, 2004, the Company had contractual obligations in the form of non-cancelable operating leases and note payable to stockholder as follows:
PAYMENTS DUE BY PERIOD ---------------------------------------- TOTAL CURRENT 1-3 YEARS 4-5 YEARS ---------- ---------- ---------- ---------- Operating leases $2,928,750 $ 330,000 $1,012,000 $1,586,750 Capital leases 7,081 2,363 4,718 -- Note payable to stockholder 2,800,000 2,800,000 -- -- ---------- ---------- ---------- ---------- Total $5,735,831 $3,132,363 $1,016,718 $1,586,750 ========== ========== ========== ==========
-23- RISKS AND UNCERTAINTIES Future results of operations of Ionatron involve a number of known and unknown risks and uncertainties. Factors that could affect future operating results and cash flows and cause actual results to vary materially from historical results include, but are not limited to: - Failure or difficulties in managing our operations, including attracting and retaining qualified personnel; - Failure or inability to attain profit levels necessary to sustain our business - Interruption or failure of, or failure to manage, our technology and information systems; - Changes in government policy, regulation and enforcement or adverse judicial or administrative interpretations and ruling or legislative action relating to procurement regulations enforcement and pricing; - Availability of budgetary allocations for governmental agencies to purchase our products; - Inability to adapt to technological change; - Inability to successfully manufacture and assemble our products; - Competition from defense contractors with greater financial and manufacturing resources; - Dependence upon sales to the U.S. government; - Sales agreements with the U.S. government typically provide for termination at any time and may contain unfavorable terms; - Dependence on qualified subcontractors for parts of our research and development activities; - Inability to raise sufficient financing for expanded manufacturing and assembly activity; - Failure to successfully field test our weapon products; - Inability to collect amounts due to us from our customers; and - Our failure to provide adequate customer service. Negative developments in these areas could have a material effect on our business, financial condition and results of operations. -24- ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, our financial position is subject to a variety of risks, such as the collectibility of our accounts receivable and the recoverability of the carrying values of our long-term assets. We do not presently enter into any transactions involving derivative financial instruments for risk management or other purposes. Our available cash balances are invested on a short-term basis and are not subject to significant risks associated with changes in interest rates. Substantially all of our cash flows are derived from our operations within the United States and we are not subject to market risk associated with changes in foreign exchange rates. We are exposed to market risk for the impact of interest rate changes, as the interest rate of our borrowings under our revolving credit agreement with our Chairman is subject to changes based on changes in the prime interest rate on the revolving credit agreement. ITEM 4 CONTROLS AND PROCEDURES As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including our chief executive officer/chief financial officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our chief executive officer/chief financial officer has concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. During the quarter ended June 30, 2004, there were no significant changes in our internal controls over financial reports that have materially affected, or which are reasonably likely to materially affect our internal controls over financial reporting. -25- PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES During the three months June 30, 2004, the Company issued 1,763,351 shares of common stock upon exercise of outstanding options to employees, directors and consultants. The securities were issued pursuant to an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A special meeting of Stockholders was held on April 29, 2004. At the special meeting, the following matters were voted on and approved by our stockholders:
Matter Votes For Votes Against Votes Abstaining - ------ --------- ------------- ---------------- Amendment of Certificate of Incorporation to change our name to Ionatron, Inc. 52,754,515 17,152 13,000 Amendment of Certificate of Incorporation to increase our authorized shares of common stock from 75,000,000 to 100,000,000 52,402,852 371,615 10,200 Amendment of Certificate of Incorporation to classify our Board of Directors into three classes 52,436,045 338,092 10,530 Approve our 2004 Stock Incentive Plan 52,248,917 509,500 26,500
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of Chief Executive and Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certification of Chief Executive and Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished to the Commission herewith). (b) Reports on Form 8-K, (i) Report on form 8-K filed with the SEC on April 29, 2004 (ii) Report on form 8-K filed with the SEC on June 1, 2004 -26- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IONATRON, INC. /s/ Thomas C. Dearmin ------------------------------------------ Thomas C. Dearmin President, Chief Executive Officer, and Chief Financial Officer Date: August 13, 2004 -27- EX-31.1 2 v05667_ex31-1.txt EXHIBIT 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas C Dearmin, the Chief Executive Officer and Chief Financial Officer of Ionatron, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Ionatron Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [omitted pursuant to the guidance of Release No. 33-8283 (June 5, 2003)] (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and -28- 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Thomas C. Dearmin --------------------- Thomas C. Dearmin Chief Executive Officer and Chief Financial Officer August 13, 2004 -29- EX-32.1 3 v05667_ex32-1.txt EXHIBIT 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Thomas C. Dearmin, Chief Executive and Chief Financial Officer of Ionatron, Inc. (the "Company"), does hereby certify with respect to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004 (the "Report") that: (i) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. This certificate is being made for the exclusive purpose of compliance by the Chief Executive Officer and Chief Financial Officer of Ionatron, Inc. with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be used for any other purposes. A signed original of this written statement required by Section 906 has been provided to Ionatron, Inc. and will be retained by Ionatron, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Thomas C. Dearmin Thomas C. Dearmin Chief Executive Officer and Chief Financial Officer August 13, 2004 -30- -----END PRIVACY-ENHANCED MESSAGE-----