-----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, Vy7pmLZrTcgiKwmvt2sXXlGydZLSGhtVvFkJv/y9ykKbUZ/eAKtYLEGq2Ou06p0u 27SYy16Faa4zxs77xEaYHw== 0001144204-05-034639.txt : 20051109 0001144204-05-034639.hdr.sgml : 20051109 20051109171735 ACCESSION NUMBER: 0001144204-05-034639 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051109 DATE AS OF CHANGE: 20051109 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: 051191061 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 v028483_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 September 30, 2005 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________ to __________ Commission File Number 001-14015 IONATRON, INC. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 77-0262908 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification Number) 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 by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X| Indicate the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of November 4, 2005 there were 71,684,946 shares of the issuer's common stock, par value $.001 per share, outstanding. IONATRON, INC. September 30, 2005 PART I - FINANCIAL INFORMATION Item 1- Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004 3 Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004 (Unaudited) 4 Consolidated Statements of Operations for the nine months ended September 30, 2005 and 2004 (Unaudited) 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (Unaudited) 6 Notes to Consolidated Financial Statements 7 Item 2- Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 3- Quantitative and Qualitative Disclosures About Market Risk 25 Item 4- Controls and Procedures 25 PART II - OTHER INFORMATION Item 1- Legal Proceedings 26 Item 2- Unregistered Sales of Equity Securities and Use of Proceeds 26 Item 6- Exhibits 26 SIGNATURES 27 -2- PART I FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS IONATRON, INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 2005 2004 ------------ ------------ (Unaudited) (Audited) ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 587,852 $ 2,495,779 Accounts receivable - net 4,867,591 4,497,350 Inventory 1,039,725 341,334 Municipal bonds available for sale -- 1,000,000 Other receivables 11,430 30,403 Prepaid expenses 460,007 404,619 ------------ ------------ Total current assets 6,966,605 8,769,485 Property and equipment, net 1,510,394 1,416,072 Goodwill 1,487,884 1,487,884 Unamortized intangible assets 603,000 603,000 Amortized intangible assets - net 196,800 261,450 ------------ ------------ TOTAL ASSETS $ 10,764,683 $ 12,537,891 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 2,587,703 $ 1,639,018 Accrued expenses 763,259 841,067 Note payable to stockholder 2,900,000 2,800,000 Billings in excess of costs 70,408 25,695 Current portion of capital lease obligation 36,938 2,435 ------------ ------------ Total current liabilities 6,358,308 5,308,215 Capital lease obligation 71,953 3,482 Deferred tax liabilities 38,308 9,577 Stockholders' equity Preferred stock, 1,000,000 shares authorized and unissued -- -- Common stock, $.001 par value, 100,000,000 shares authorized; 71,572,470 shares issued and outstanding at September 30, 2005 and 70,846,204 shares issued and outstanding at December 31, 2004 71,572 70,846 Additional paid-in capital 11,205,176 10,406,776 Accumulated deficit (6,980,634) (3,261,005) ------------ ------------ Total stockholders' equity 4,296,114 7,216,617 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,764,683 $ 12,537,891 ============ ============
See accompanying notes to consolidated financial statements (unaudited) -3- IONATRON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, ---------------------------- 2005 2004 ------------ ------------ Revenue $ 6,219,161 $ 2,628,982 Cost of revenue 5,560,579 2,441,243 ------------ ------------ Gross profit 658,582 187,739 Operating expenses: General and administrative 580,042 726,158 Selling and marketing 144,928 112,825 Research and development 231,806 211,895 ------------ ------------ Total operating expenses 956,776 1,050,878 ------------ ------------ Operating loss (298,194) (863,139) Other (expense) income Interest expense (63,897) (46,539) Interest income 9,380 13,652 Other 1,853 -- ------------ ------------ Total other (52,664) (32,887) ------------ ------------ Loss before provision for income taxes (350,858) (896,026) Income taxes 10,477 -- ------------ ------------ Net loss $ (361,335) $ (896,026) ------------ ------------ Net loss per share - basic and diluted $ (0.01) $ (0.01) ============ ============ Weighted average number of shares outstanding, basic and diluted 71,354,540 69,804,232 ============ ============
See accompanying notes to consolidated financial statements (unaudited) -4- IONATRON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 2005 2004 ------------ ------------ Revenue $ 12,745,954 $ 4,734,996 Cost of revenue 11,740,891 4,422,996 ------------ ------------ Gross profit 1,005,063 312,000 Operating expenses: General and administrative 3,449,053 2,491,097 Selling and marketing 375,590 344,897 Research and development 723,452 512,793 ------------ ------------ Total operating expenses 4,548,095 3,348,787 ------------ ------------ Operating loss (3,543,032) (3,036,787) Other (expense) income Interest expense (180,076) (164,239) Interest income 30,381 34,873 Other 2,445 -- ------------ ------------ Total other (147,250) (129,366) ------------ ------------ Loss before provision for income taxes (3,690,282) (3,166,153) Income taxes 29,347 -- ------------ ------------ Net loss $ (3,719,629) $ (3,166,153) ------------ ------------ Net loss per share - basic and diluted $ (0.05) $ (0.05) ============ ============ Weighted average number of shares outstanding, basic and diluted 71,187,716 63,383,784 ============ ============
See accompanying notes to consolidated financial statements (unaudited) -5- IONATRON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the nine months ended ---------------------------- September 30, September 30, 2005 2004 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (3,719,629) $ (3,166,153) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 920,773 601,295 Loss on equipment disposal 58,825 2,188 Stock and option compensation 211,646 153,450 Deferred income tax provision 28,731 -- Changes in working capital components: (Increase) in accounts receivable (370,241) (343,807) (Increase) in costs and estimated earnings in excess of billings on uncompleted contracts -- (1,506,155) (Increase) decrease in other receivable 18,973 (76,935) (Increase) in inventory (698,391) (281,689) (Increase) decrease in prepaid expenses 7,279 (71,752) Increase in accounts payable 948,685 674,988 Increase in billings in excess of costs 44,713 -- (Decrease) in accrued expenses (77,808) (268,897) ------------ ------------ Net cash used in operating activities (2,626,444) (4,283,467) ------------ ------------ CASH FLOW FROM INVESTING ACTIVITIES: Purchase of equipment (889,524) (722,467) Proceeds from sale of available for sale investments 1,000,000 Proceeds from disposal of equipment -- 3,208 Receivables from stockholder -- 107,482 Acquisition of business, net of cash acquired -- (573,233) ------------ ------------ Net cash provided by (used in) investing activities 110,476 (1,185,010) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from note payable to stockholder 100,000 1,000,000 Repayment on note payable to stockholder -- (500,000) Principal payments on capital lease obligation (16,772) (958) Cash acquired from reverse merger -- 8,916,628 Exercise of stock options and warrants 524,813 1,142,603 ------------ ------------ Net cash provided by financing activities 608,041 10,558,273 ------------ ------------ Net increase (decrease) in cash and cash equivalents (1,907,927) 5,089,796 Cash and cash equivalents, beginning of period 2,495,779 103,392 ------------ ------------ Cash and cash equivalents, end of period $ 587,852 $ 5,193,188 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: CASH PAID DURING THE PERIOD FOR: Interest 118,563 164,036 Income taxes -- 66,232
See non-cash investing and financing activities at Note 15 See accompanying notes to consolidated financial statements (unaudited) -6- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION NATURE OF BUSINESS AND SUMMARY OF OPERATIONS: Ionatron, Inc. ("Ionatron") was formed on June 3, 2002 to develop and market Directed Energy Weapon technology products initially for sale to the U.S. Government. The goal of the Company is to produce products that incorporate our technology initially for specific U.S. Government customer applications and platforms. Ionatron and the U.S. Government have entered into several contracts for products and services as well as Cooperative Research and Development Agreements for joint research on Laser Induced Plasma Channel ("LIPC") based directed energy weapons. We expect to offer U.S. Government approved versions of our products for commercial security applications in the future. During 2003 and 2002, the Company engaged in research and development and business development activities culminating in our first U.S. Government contract in September of 2003. During 2004 we demonstrated the laser guided man-made lightning directed energy technology in the laboratory; demonstrated the technology effects on a variety of targets both under U.S. Government contract and using internal research and development funding; delivered a compact laser source specifically designed to enable the technology under a U.S. Government contract; and commenced a U.S. Government contract for the development of a system on a mobile platform for field demonstration and testing. In 2005, we developed a counter IED ("Improvised Explosive Device") vehicle for use in Iraq called the Joint IED Neutralizer ("JIN"). Our JIN units have been tested by the government and have been determined to have military utility - which the Government requires before it will consider ordering production units. 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. North Star power supplies are utilized in Ionatron products. 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 September 30, 2005 (collectively, "Company," "Ionatron," "we," "our" and "us"). All intercompany balances and transactions have been eliminated. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented have been made. The results for the nine month period ended September 30, 2005, may not be indicative of the results for the entire year. The interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements contained in its Annual Report on Form 10-K. Certain amounts in the 2004 consolidated financial statements have been reclassified to conform to the 2005 presentation. MERGER AND RECAPITALIZATION: On March 18, 2004, a subsidiary of U.S. Home & Garden (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, 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 borad 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"). 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 should be read in conjunction with these financial statements. 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. -7- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 September 30, - -------------------------------------------------------------------------------- 2005 2004 ----------- ----------- Net loss: As reported $ (361,335) $ (896,026) Pro forma stock compensation expense (380,154) (526,611) ----------- ----------- Pro forma $ (741,489) $(1,422,637) =========== =========== Net loss per share - basic and diluted: As reported $ (0.01) $ (0.01) =========== =========== Pro forma $ (0.01) $ (0.02) =========== =========== Compensation expense recorded for shares and options delivered to non-employees for the three months ended September 30, 2005 and 2004, was approximately $66,000 and $0, respectively, which was charged to operating expenses with an offsetting entry to additional paid-in capital. For the nine months ended September 30, - -------------------------------------------------------------------------------- 2005 2004 ----------- ----------- Net loss: As reported $(3,719,629) $(3,166,153) Pro forma stock compensation expense (3,190,581) (722,142) ----------- ----------- Pro forma $(6,910,210) $(3,888,295) =========== =========== Net loss per share - basic and diluted: As reported $ (0.05) $ (0.05) =========== =========== Pro forma $ (0.10) $ (0.06) =========== =========== -8- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Compensation expense recorded for shares and options delivered to non-employees for the nine months ended September 30, 2005 and 2004, was approximately $212,000 and $153,000, respectively, which was charged to operating expenses with an offsetting entry to additional paid-in capital. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for the three month periods ended September 30, 2005 and 2004, respectively: risk-free interest rates of 4.0% and 3.0% per annum; and expected volatility of 68% and 75%, respectively. We used the following assumptions for the nine month periods ended September 30, 2005 and 2004, respectively: risk-free interest rates of 3.5% and 3.0% per annum; and expected volatility of 68% and 75%. A summary of the activity of options under the plans for the nine months ended September 30, 2005 follows: Weighted Average Number of Options Exercise Price ----------------- -------------- Outstanding at December 31, 2004 3,647,925 $2.34 Granted 862,850 7.70 Exercised (714,083) 0.87 Forfeited (116,625) 6.05 ---------- ----- Outstanding at September 30, 2005 3,680,067 $3.71 ========== ===== Additional information about outstanding options to purchase the Company's common stock as of September 30, 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 1,376,750 3.46 $0.63 1,376,750 $0.63 $2.85 - $5.77 1,285,717 3.58 $3.85 901,097 $4.00 $6.00 - $8.79 1,017,600 4.33 $7.68 389,369 $7.92 ------------ ----------- Total 2,667,216 $2.83 ------------ -----------
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 September 30, 2005 563,600 $0.63 ---------- -------------- -9- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Additional information about outstanding warrants to purchase the Company's common stock as of September 30, 2005 is as follows:
Warrants Outstanding Warrants Exercisable -------------------------------------------------- --------------------------- Weighted Avg. Weighted Weighted Remaining Avg. Avg. Number of Contractual Exercise Number of Exercise Exercise Price Shares Life (In Years) Price Shares Price - -------------- --------------- ----------------- ---------- ------------ ----------- $0.63 563,600 3.46 $0.63 563,600 $0.63 ------------ ----------- Total 563,600 $0.63 ------------ -----------
3. PENDING ACCOUNTING PRONOUNCEMENTS The Securities and Exchange Commission (SEC) has changed the effective date of the Statement of Financial Accounting Standards No. 123 (revised 2004) (SFAS 123(R)), "Share-Based Payment," to the beginning of the first annual period beginning after June 15, 2005. In addition, the SEC has issued interpretation of SFAS No. 123(R) in its Staff Accounting Bulleting (SAB) 107. Thus, Ionatron must adopt SFAS 123(R), while taking into consideration the guidance in SAB 107 no later than January 1, 2006. SFAS No. 123(R) and SAB 107 may negatively impact our earnings; however, we have not completed an analysis of all of the differences between Statement No. 123(R), SFAS No. 123 and SAB 107, including the specific transition method to be utilized upon adoption. 4. ACCOUNTS RECEIVABLE Accounts receivable consist of the following at:
September 30, December 31, 2005 2004 -------------------------- Billed: Completed contracts $ 309,292 $ 17,432 Contracts in progress 4,425,755 2,264,509 Retained 100,000 100,000 Unbilled cost and estimated earnings on uncompleted contracts 32,544 2,132,841 -------------------------- 4,867,591 4,514,782 Less: Allowance for doubtful accounts -- 17,432 -------------------------- Total $4,867,591 $4,497,350 ==========================
-10- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The components of unbilled cost and estimated earnings on uncompleted contracts consist of the following at:
September 30, December 31, 2005 2004 ------------------------------- Cost incurred on uncompleted contracts $ 22,699,468 $ 10,054,620 Estimated earnings 1,601,906 739,332 ------------------------------- Total billable costs and estimated earnings 24,301,374 10,793,952 Less: Billings to date 24,339,238 8,686,806 ------------------------------- Total $ (37,864) $ 2,107,146 =============================== Included in accompanying balance sheet under the following captions: Unbilled costs and estimated earnings on uncompleted contracts included in accounts receivable $ 32,544 $ 2,132,841 Billings in excess of costs (70,408) (25,695) ------------------------------- Total $ (37,864) $ 2,107,146 ===============================
5. INVENTORY Inventories, primarily consisting of labor, overhead and materials pertaining to long-term contracts, are carried at cost. At December 31, 2004, inventory was comprised only of materials. The reserve for obsolescence was zero at September 30, 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. -11- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following is a summary of the Company's investment in marketable debt securities as of September 30, 2005 and December 31, 2004: Gross Gross Gross amortized unrealized unrealized Fair cost gains losses value ------------------------------------------------------------- September 30, 2005 ------------------------------------------------------------- Municipal bonds $ -- $ -- $ -- $ -- ------------------------------------------------------------- December 31, 2004 ------------------------------------------------------------- Municipal bonds $1,000,000 $ -- $ -- $1,000,000 At 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: September 30, December 31, 2005 2004 ----------- ----------- Furniture and leasehold improvements $ 413,384 $ 201,249 Equipment and software 3,596,130 2,957,035 ----------- ----------- Total 4,009,514 3,158,284 Less accumulated depreciation and amortization (2,499,120) (1,742,212) ----------- ----------- Net property and equipment $ 1,510,394 $ 1,416,072 =========== =========== 8. 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. Ionatron has the ability to continue the business of North Star and intends to do so. The $603,000 value assigned to the trade name was determined by a valuation analysis prepared by Ionatron with the assistance of outside consultants in connection with the acquisition of North Star. The value is based on a discount of projected future cash flows. North Star is a segment of Ionatron and the trade name is used in the continued promotion of North Star products. Goodwill and indefinite life intangible assets will be tested annually for impairment or more frequently if events or changes in circumstances indicate that the assets might be impaired. In assessing the recoverability of goodwill and indefinite life intangible assets, we must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets. Assumptions about future revenue and cash flows require significant judgment because of the current state of the economy and the fluctuation of actual revenue and the timing of expenses. We develop future cash flows based on projected sales with the assumption that expenses will grow at rates consistent with historical rates. If the expected cash flows are not realized, impairment losses may be recorded in the future. For goodwill, the impairment evaluation includes a comparison of the carrying value of the reporting unit (including goodwill) to that reporting unit's fair value. If the reporting unit's estimated fair value exceeds the reporting unit's carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed the unit's carrying value, then an additional analysis is performed to allocate the fair value of the reporting unit to all of the assets and liabilities of that unit. If the excess of the fair value of the reporting unit over the fair value of the identifiable assets and liabilities is less than the carrying value of the unit's goodwill, an impairment charge is recorded for the difference. The impairment evaluation for indefinite life intangible assets is performed by a comparison of the asset's carrying value to the asset's fair value. When the carrying value exceeds fair value an impairment charge is recorded for the amount of the difference. An intangible asset is determined to have an indefinite useful life when there are no legal, regulatory, contractual, competitive, economic, or any other factors that may limit the period over which the asset is expected to contribute directly or indirectly to our future cash flows. In addition, each reporting period, we evaluate the remaining useful life of an intangible asset that is not being amortized to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is determined to have a finite useful life, the asset will be amortized prospectively over the estimated remaining useful life and accounted for in the same manner as intangible assets subject to amortization.
As of September 30, 2005 ---------------------------------------------------------------- Gross Carrying Amount Accumulated Amortization ------------------------------ ----------------------------- Amortized Intangible Assets Patent 34,000 6,800 Contractual Backlog 37,000 37,000 Technological Know-How 212,000 42,400 ------------------------------ ----------------------------- Total 283,000 86,200 ============================== ============================= Unamortized Intangible Assets ------------------------------ Tradename 603,000 ==============================
As of December 30, 2004 ---------------------------------------------------------------- Gross Carrying Amount Accumulated Amortization ------------------------------ ----------------------------- Amortized Intangible Assets Patent 34,000 1,700 Contractual Backlog 37,000 9,250 Technological Know-How 212,000 10,600 ------------------------------ ----------------------------- Total 283,000 21,550 ============================== ============================= Unamortized Intangible Assets ------------------------------ Tradename 603,000 ============================== Aggregate Amortization Expense: For the nine months ended September 30, 2005 64,650 Estimated Amortization Expense: For the three months ended December 31, 2005 12,300 For the year ended December 31, 2006 49,200 For the year ended December 31, 2007 49,200 For the year ended December 31, 2008 49,200 For the year ended December 31, 2009 36,900 ----------------------------- Total 196,800 =============================
The changes in the carrying amount of goodwill for the nine months ended September 30, 2005 are as follows: North Star Segment Company Total -------------- -------------- Balance as of December 31, 2004 $ 1,487,884 $ 1,487,884 Goodwill acquired during nine months -- -- Impairement losses -- -- -------------- -------------- Balance as of September 30, 2005 $ 1,487,884 $ 1,487,884 ============== ============== 9. ACCRUED EXPENSES Accrued expenses consisted of the following at: September 30, 2005 December 31, 2004 -------------------------------------- Payroll liability $505,039 $309,818 Deferred rent 74,769 52,874 Warranty reserve -- 40,000 Loss reserve 29,469 -- Insurance premium financing -- 199,171 Other 153,982 239,204 -------------------------------------- Total accrued expenses $763,259 $841,067 ====================================== -12- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. 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. $2.9 and $2.8 million was outstanding under the revolving credit arrangements at September 30, 2005 and December 31, 2004, respectively. Interest on this note was approximately $173,000 and $164,000 for the nine months ended September 30, 2005 and September 30, 2004, respectively. 11. INCOME TAXES We account for income taxes under an asset and liability approach that requires the expected future tax consequences of temporary differences between book and tax bases of assets and liabilities to be recognized as deferred tax assets and liabilities. During the first quarter of 2004, we established a full valuation allowance against our deferred tax assets because we determined it is more likely than not that these deferred tax assets will not be realized in the foreseeable future. Included in the deferred tax asset is a portion that is attributable to losses that were incurred prior to a "change in ownership" as defined by Internal Revenue Code rules. The amount that can be utilized each year is fixed; however, annual limitation amounts not previously utilized carry over to subsequent years and can be utilized to the extent of the total unexpired NOL carryforward amount. The pre-change of control NOL carryforwards will begin to expire in 2020. For the three and nine months ended September 30, 2005 we recorded a provision for income taxes of $10,477 and $29,347, respectively, due to an increase in deferred tax liabilities as a result of the tax amortization of goodwill related to the North Star Acquisition. 12. 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 nine months ended September 30, 2005 and 2004, respectively. 13. NET LOSS PER SHARE Basic loss per share is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur from common shares issuable through exercise of stock options and warrants. The dilutive effect of options and warrants, which were not included in the total of diluted shares because the effect was antidilutive, was 2,553,938 and 3,225,055 shares for the quarters ended September 30, 2005 and 2004, respectively. 14. COMMITMENTS AND CONTINGENCIES OPERATING LEASES We lease office, manufacturing and storage space at our Tucson facility at an annual rental of $330,000 under a non-cancelable operating lease agreement from a company that is partially owned by our Chairman and other principal stockholders. The lease expires in November 2012, contains renewal options and an escalation provision at the end of five years that increases our annual rent by $49,500. We account for the escalation provision by straight-lining the rent expense. We are also responsible for certain property related costs, including insurance, utilities and property taxes. Rent expense was approximately $89,000 for the three months ended September 30, 2005 and 2004. We 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. Rent expense was approximately $25,000 and $0 for the three months ended September 30, 2005 and 2004, respectively. -13- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) We also lease office space in New York City for use by our Chairman with a monthly rental of $925. The lease is month to month and we pay a portion of the rent and office supplies including telephone and photocopy usage. Rent expense was approximately $2,700 for the three months ended September 30, 2005 and 2004. On April 1, 2005 we took possession of the 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. We account for the escalation provision by straight-lining the rent expense. The lease may be renewed three times in five-year increments. Through September 2005 we have paid a total of $44,000 in deposits on the facility. Rent expense was approximately $68,000 for the three months ended September 30, 2005. In addition, on September 16, 2005 we took possession of office and manufacturing space at a Tucson facility at an annual rental of $48,682 under a non-cancelable operating lease agreement that expires on September 30, 2006. We are also responsible for certain property related costs, including insurance, utilities and property taxes. Rent expense was approximately $4,000 for the three months ended September 30, 2005. The Company also leases vehicles in both the Tucson and Albuquerque facilities to facilitate our material purchasing activities. These lease commitments total approximately $1,062 per month. We are responsible for registration, licensing and insurance costs. Approximate future minimum lease payments due under these leases are: Years ending December 31, Amount -------------------------------------- ---------- For the remaining three months of 2005 $ 190,000 2006 746,000 2007 687,000 2008 660,000 2009 661,000 Thereafter 1,162,000 ---------- Total $4,106,000 ========== 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 September 30, 2005. 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- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 15. SUPPLEMENTAL CASH FLOW INFORMATION Non-cash Investing and Financing Activities: Nine months Ended September 30, ----------------------- 2005 2004 ---------- ---------- Conversion of note payable to common stock $ -- $2,000,000 Capital lease obligations incurred for use of equipment 119,746 -- 16. AGGREGATE PRODUCT WARRANTY LIABILITY: Included in the acquisition of North Star's assets, the Company assumed liabilities for warranty claims against the purchased assets for $40,000. The warranty is for products sold by North Star prior to the merger and will be re-evaluated throughout the year. Aggregate Product Warranty Liability: - -------------------------------------------------------------------------------- Beginning Balance at December 31, 2004 $ 40,000 Payments made under warranties (16,500) Change for accruals related to product warranties -- Change for accruals related to preexisting warranties (23,500) ---------- Ending Balance at September 30, 2005 $ -- ========== 17. 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 September 30, 2005
Depreciation Business and Interest Interest Net Capital Identifiable Segment Revenues Amortization Income Expense Income/(Loss) Expenditures Assets - ---------------------------------------------------------------------------------------------------------------------------- Ionatron $ 5,904,014 $ 295,285 $ 8,913 $ 63,594 $ (510,030) $ 244,233 $ 10,390,958 North Star 1,035,671 29,775 467 303 148,695 -- 2,874,105 -------------------------------------------------------------------------------------------------------- Total Company 6,939,685 325,060 9,380 63,897 (361,335) 244,233 13,265,063 Intersegment (720,524) -- -- -- -- -- (85,380) Investment in Sub -- -- -- -- -- -- (2,415,000) -------------------------------------------------------------------------------------------------------- Consolidated Company $ 6,219,161 $ 325,060 $ 9,380 $ 63,897 $ (361,335) $ 244,233 $ 10,764,683 ========================================================================================================
-15- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Selected Financial Data for the Nine months Ended September 30, 2005
Depreciation Business and Interest Interest Net Capital Segment Revenues Amortization Income Expense Income/(Loss) Expenditures - ---------------------------------------------------------------------------------------------------------------- Ionatron $ 11,785,933 $ 831,619 $ 29,132 $ 179,190 $ (3,767,329) $ 858,329 North Star 1,995,996 89,154 1,249 886 47,700 31,195 ----------------------------------------------------------------------------------------- Total Company 13,781,929 920,773 30,381 180,076 (3,719,629) 889,524 Intersegment (1,035,975) -- -- -- -- -- Investment in Sub -- -- -- -- -- -- ----------------------------------------------------------------------------------------- Consolidated Company $ 12,745,954 $ 920,773 $ 30,381 $ 180,076 $ (3,719,629) $ 889,524 =========================================================================================
18. SUBSEQUENT EVENTS Unregistered Sales of Equity Securities On October 27, 2005 we sold an aggregate of 720,000 shares (the "Offered Shares") of its 6.5% Series A Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") with a stated value of $25 per share to 16 institutional accredited investors and one accredited investor for aggregate gross proceeds of $18,000,000 (the "Financing"). The Company also granted to each investor a 30-day option to purchase a number of additional shares of Series A Preferred Stock equal to 15% of the Offered Shares, which shares will be identical to the Offered Shares (the "Optional Shares" and, together with the Offered Shares, the "Shares"). The Series A Preferred Stock has a liquidation preference of $25.00 per Share. The Series A Preferred Stock will bear dividends at the rate of 6.5% of the liquidation preference per share per annum, which shall accrue from the date of issuance, and shall be payable quarterly on February 1, May 1, August 1 and November 1 of each year, commencing May 1, 2006, to the holders of record at the close of business on the preceding January 15, April 15, July 15 and October 15, respectively. Each share of Series A Preferred Stock is convertible at any time at the option of the holder into a number of shares (the "Conversion Shares") of common stock equal to the liquidation preference (plus any accrued and unpaid dividends for periods prior to the dividend payment date immediately preceding the date of conversion by the holder) divided by the conversion price (initially $12.00 per share, subject to adjustment in the event of a stock dividend or split, reorganization, recapitalization or similar event.) The Company may redeem the Series A Preferred Stock in whole or in part at any time commencing November 1, 2008 and continuing through October 31, 2010, upon at least 30 days' notice, at a redemption price, payable in cash, equal to 100% of the liquidation preference of the shares to be redeemed, plus accrued and unpaid dividends thereon to, but excluding, the redemption date if: (1) the closing price of the Common Stock has equaled or exceeded 140% of the then effective conversion price on each of at least 20 trading days within a period of 30 consecutive trading days ending within five trading days prior to the date the Company mails the notice of redemption; (2) the Common Stock is listed on a U.S. national securities exchange or The Nasdaq Stock Market; and (3) a shelf registration statement covering resales of the Series A Preferred Stock and the Common Stock issuable upon conversion of the Series A Preferred Stock is effective on the redemption date, unless registration is no longer required. In addition, beginning November 1, 2010, the Company may redeem the Series A Preferred Stock in whole or in part, upon at least 30 days' notice, at a redemption price, payable in cash, equal to 100% of the liquidation preference of the Series A Preferred Stock to be redeemed, plus accrued and unpaid dividends thereon to, but excluding, the redemption date, if: (1) the Common Stock is listed on a U.S. national securities exchange or The Nasdaq Stock Market; and (2) a shelf registration statement covering resales of the Preferred Stock and the Common Stock issuable upon conversion of the Series A preferred stock is effective on the redemption date, unless registration is no longer required. -16- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) If a Change of Control (as defined in the Certificate of Designation of the Series A Preferred Stock (the "Designation")) occurs, the holders of Preferred Stock may require the Company to purchase all or part of their outstanding shares of Preferred Stock at a repurchase price equal to 101% of their liquidation preference, plus accrued and unpaid dividends thereon to, but excluding, the repurchase date. The Company will have the option to pay for these shares either in cash, shares of Common Stock valued at 95% of the weighted average closing sale price of the Common Stock for the ten-trading day period ending on the third trading day prior to the date of purchase, or a combination of cash and shares of Common Stock. If a Make Whole Change of Control (defined below) becomes effective prior to December 12, 2007, holders of Series A Preferred Stock shall be entitled to receive a make whole premium, payable in shares of Common Stock or in the same form of consideration into which all or substantially all of the Common Stock has been converted or exchanged in connection with the Make Whole Change of Control. The make whole premium is a dollar amount as specified in the Designation and will be based on the effect date of the Make Whole Change of Control. Holders of Preferred Stock will not be entitled to the make whole premium if the per share cash consideration paid to the Company's Common Stock holders for the related Make Whole Change of Control as determined in accordance with the Designation is less than $10.34 or greater than $20.68 (which amounts are subject to adjustment as of any date on which the conversion rate is adjusted). A "Make Whole Change of Control" means a change of control transaction involving a merger or consolidation in which the Company is not the surviving entity, unless (x) at least 90% of the consideration (excluding cash payments for fractional shares and cash and cash payments for dissenters' appraisal rights) in the make whole change of control consists of common stock of a United States company traded on a U.S. national securities exchange or quoted on the Nasdaq Stock Market (or will be so quoted or traded when issued or exchanged in connection with such transaction) and (y) as a result of such transaction or transactions, the outstanding shares of Series A Preferred Stock become convertible into such common stock. The Series A Preferred Stock will rank, with respect to dividend rights and rights upon liquidation, winding-up or dissolution: > junior to all of the existing and future liabilities, whether or not for borrowed money; > junior to each class or series of the Company capital stock the terms of which expressly provide that it will rank senior to the Series A Preferred Stock; > on a parity with any other class or series of the Company's capital stock that has terms which expressly provide that it will rank on a parity with the Series A Preferred Stock; > senior to the Common Stock and each other class or series of capital stock that has terms which do not expressly provide that it will rank senior to or on a parity with the Series A Preferred Stock; and > effectively junior to all of the existing and future liabilities of existing and future subsidiaries. Holders of the Series A Preferred Stock will have no voting rights with respect to such shares except as required by law and except that the Company may not create or increase the amount of any class or series of capital stock that ranks senior to the Series A Preferred Stock or amend its certificate of incorporation or alter or change any power, preference or special right of the outstanding Series A Preferred Stock in any manner materially adverse to the interest of the holders thereof without the consent of the holders of at least two-thirds of the shares of Series A Preferred Stock then outstanding. In connection with the Financing, the Company entered into a registration rights agreement with each purchaser of Series A Preferred Stock in which the Company agreed to file a shelf registration statement with the SEC covering the resale of Shares, including any Option Shares and the shares of Common Stock issuable upon conversion of the Shares within 45 days after the closing. The Company also agreed in the registration rights agreement to use its best efforts to have the registration statement declared effective within 150 days, subject to extension in certain circumstances to date no later than March 31, 2006 and to keep the shelf registration statement effective for a specified period. -17- IONATRON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) If the shelf registration statement is not timely filed or made effective or if the prospectus in the registration statement is unavailable for periods in excess of specified periods (referred to as a "registration default") or the Company fails to make a dividend payment within five business days following a dividend payment date, the dividend rate shall immediately and automatically increase by 1% from 6.5% of the liquidation preference per share of Series A Preferred Stock to 7.5% of such liquidation preference for as long as such failure continues and immediately return to 6.5% of the liquidation preference per shares of Series A Preferred Stock per annum at such time as such failure no longer continues), but only up to 90 days in the case of a registration default and thereafter in the case of a registration default if, at such time, the failure is continuing, the dividend rate shall immediately and automatically further increase to 10% of the liquidation preference per offered share per annum for as long as such failure continues and shall immediately and automatically return to 6.5% at such time as the failure is no longer continuing; and, if a dividend payment default occurs for two consecutive dividend payment dates, the dividend rate shall immediately and automatically increase to 10% of the liquidation preference per share of Series A Preferred Stock per annum until such dividend payment default is no longer continuing. The Company entered into an agency agreement with J Giordano Securities Group ("J Giordano"), pursuant to which J Giordano served as placement agent in connection with the Financing. For serving as placement agent, J Giordano received a placement agent fee of $1,220,000 and issued to J Giordano five-year warrants to purchase an aggregate of 101,666 shares of Common Stock (the "Agent Warrants"). The Agent Warrants are exercisable at a price of $12.00 per share and contain a cashless exercise provision. J Giordano will also receive additional placement agent fees of up to 7% of the gross proceeds from the sale of any Option Shares issued upon the exercise of options by the investors and additional Agent Warrants of up to 7% of the number of shares of Common Stock issuable upon conversion of the Option Shares issued to investors upon exercise of options exercised by investors. The Company granted J Giordano certain registration rights with respect to the Shares of Common Stock issuable upon exercise of the Agent Warrants. In addition, if within twelve months following the closing of the Financing, the Company sells, directly or indirectly, securities to any purchasers (other than securities in connection with a working capital loan or facility or project debt financing), J Giordano will be entitled to receive the same compensation with respect to such sale of securities as it will receive in connection with the Financing. The net proceeds to the Company from the Financing, after deducting placement agent fees and expenses and other expenses were approximately $16.6 million. The Company intends to use a portion of the net proceeds from the Financing to repay the $2.9 million principal amount note payable to the Company's Chairman of the Board under its revolving credit facility. The shares and the Agent Warrant (the "Financing Securities") were issued in the Financing without registration under the Securities Act of 1933, as amended (the "Act"), in reliance upon the exemptions from registration provided under Section 4(2) of the Act and Regulation D promulgated there under. The issuances did not involve any public offering; the Company made no solicitation in connection with the Financing other than communications with the investors; the Company obtained representations from the investors and J Giordano regarding their investment intent, experience and sophistication; the investors and J Giordano either received or had access to adequate information about the Company in order to make informed investment decisions; the Company reasonably believed that the investors and J Giordano were sophisticated within the meaning of Section 4(2) of the Act and "accredited investors" as defined in Regulation D; and the Financing Securities were issued with restricted securities legends. Amendment to Articles of Incorporation On October 27, 2005, the Company filed a Certificate of Elimination, filed with the Secretary of State of the State of Delaware a Certificate of Elimination electing its primarily designated 10% Series A Convertible Preferred Stock, par value $.001 per share (the "10% Preferred Stock"). The elimination of the 10% Preferred Stock was approved by the Company's Board of Directors on October 18, 2005 and did not require a vote of stockholders. No shares of 10% Preferred Stock were outstanding. On October 27, 2005, the Company filed a Certificate of Designation with the Secretary of State of the State of Delaware designating 950,000 shares of 6.5% Series A Convertible Preferred Stock. -18- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Our discussion and analysis of the financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the related disclosures included elsewhere herein and in Management's Discussion and Analysis of Financial Condition and Results of Operations included as part of our Annual Report on Form 10-K for the year ended December 31, 2004. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the securities laws. Forward-looking statements include all statements that do not relate solely to the historical or current facts, and can be identified by the use of forward looking words such as "may", "believe", "will", "expect", "expected", "project", "anticipate", "anticipated estimates", "plans", "strategy", "target", "prospects" or "continue". These forward looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results of operations and financial condition and may cause our actual results, performances or achievements to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. Important factors that could cause our actual results to differ materially from our expectations are described in Exhibit 99.1 (Risk Factors) to our Annual Report on From 10-K for the year ended December 31, 2004. In making these forward-looking statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Private Securities Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to have been correct. We do not assume any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements. OVERVIEW Ionatron was formed on June 3, 2002 to develop and market Directed Energy Weapon technology products initially for sale to the U.S. Government. Ionatron and the U.S. Government have entered into several contracts for products and services as well as Cooperative Research and Development Agreements for joint research on Laser Induced Plasma Channel ("LIPC") based directed energy weapons. We expect to offer U.S. Government approved versions of our products for commercial security applications in the future. During 2003 and 2002, the Company engaged in research and development and business development activities culminating in our first U.S. Government contract in September of 2003. During 2004, we demonstrated the laser guided man-made lightning directed energy technology in the laboratory; demonstrated the technology effects on a variety of targets both under U.S. Government contract and using internal research and development funding; delivered a compact laser source specifically designed to enable the technology under a U.S. Government contract; and commenced a U.S. Government contract for the development of a system on a mobile platform for field demonstration and testing. In 2005, we developed a counter IED ("Improvised Explosive Device") vehicle for use in Iraq called the Joint IED Neutralizer ("JIN"). Our JIN units have been tested by the government and have been determined to have military utility - which the Government requires before it will consider ordering production units. 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"). North Star power supplies are utilized in Ionatron products. OPERATING SEGMENTS: We are currently engaged in developing and marketing through two distinct segments: (1) Ionatron, where the focus is on Directed Energy Weapon technology products for sale to the U.S. Government and (2) North Star, where the focus is on the manufacture of custom high voltage equipment for sale to a more broad-based market. -19- 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 through June 2006. 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. Ionatron has the ability to continue the business of North Star and intends to do so. The $603,000 value assigned to the trade name was determined by a valuation analysis prepared by Ionatron with the assistance of outside consultants in connection with the acquisition of North Star. The value is based on a discount of projected future cash flows. North Star is a segment of Ionatron and the trade name is used in the continued promotion of North Star products. -20- Goodwill and indefinite life intangible assets will be tested annually for impairment or more frequently if events or changes in circumstances indicate that the assets might be impaired. In assessing the recoverability of goodwill and indefinite life intangible assets, we must make assumptions about the estimated future cash flows and other factors to determine the fair value of these assets. Assumptions about future revenue and cash flows require significant judgment because of the current state of the economy and the fluctuation of actual revenue and the timing of expenses. We develop future cash flows based on projected sales with the assumption that expenses will grow at rates consistent with historical rates. If the expected cash flows are not realized, impairment losses may be recorded in the future. For goodwill, the impairment evaluation includes a comparison of the carrying value of the reporting unit (including goodwill) to that reporting unit's fair value. If the reporting unit's estimated fair value exceeds the reporting unit's carrying value, no impairment of goodwill exists. If the fair value of the reporting unit does not exceed the unit's carrying value, then an additional analysis is performed to allocate the fair value of the reporting unit to all of the assets and liabilities of that unit. If the excess of the fair value of the reporting unit over the fair value of the identifiable assets and liabilities is less than the carrying value of the unit's goodwill, an impairment charge is recorded for the difference. The impairment evaluation for indefinite life intangible assets is performed by a comparison of the asset's carrying value to the asset's fair value. When the carrying value exceeds fair value an impairment charge is recorded for the amount of the difference. An intangible asset is determined to have an indefinite useful life when there are no legal, regulatory, contractual, competitive, economic, or any other factors that may limit the period over which the asset is expected to contribute directly or indirectly to our future cash flows. In addition, each reporting period, we evaluate the remaining useful life of an intangible asset that is not being amortized to determine whether events and circumstances continue to support an indefinite useful life. If an intangible asset that is not being amortized is determined to have a finite useful life, the asset will be amortized prospectively over the estimated remaining useful life and accounted for in the same manner as intangible assets subject to amortization. RESULTS OF OPERATIONS COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 IS AS FOLLOWS: 2005 2004 ---------------------------- Revenue $ 6,219,161 $ 2,628,982 Cost of revenue 5,560,579 2,441,243 General and administrative 580,042 726,158 Selling and marketing 144,928 112,825 Research and development 231,806 211,895 Other (expense) income: Interest expense (63,897) (46,539) Interest income 9,380 13,652 Other 1,853 -- ---------------------------- Loss before provision for income taxes (350,858) (896,026) Provision for income taxes 10,477 -- ---------------------------- Net loss $ (361,335) $ (896,026) ============================ REVENUE The increase in revenue for the three months ended September 30, 2005 compared to 2004 was derived from work on existing contracts with agencies of the U.S. government, revenue from the Company's JIN pre-production contract as well as the inclusion of North Star's revenue of approximately $315,000, which is net of intersegment revenue. Ionatron had total revenues of approximately $6.3 million for the three months ended September 30, 2005 compared to approximately $2.6 million for the three months ended September 30, 2004. North Star had total revenues of approximately $315,000, which is net of intersegment revenues, for the three months ended September 30, 2005. Ionatron acquired North Star on September 30, 2004. Accordingly, North Star's operations had no impact on Ionatron's consolidated results of operations for the three months ended September 30, 2004. -21- COST OF REVENUE Cost of revenue increased when compared to the three months ended September 30, 2004 due to more work being done and more materials acquired under our government contracts by approximately $2.9 million and the inclusion of North Star's cost of revenue of approximately $227,000, net of intersegment cost of revenue. Cost of revenue includes an allocation of general and administrative expenses and research and development costs in accordance with the terms of our contracts. GENERAL AND ADMINISTRATIVE The decrease in general and administrative expenses for the three months ended September 30, 2005 from the three months ended September 30, 2004 was due to significant rise in the amount of indirect costs which were allocated to cost of sales. This was offset in part by an increase of approximately $113,000 in personnel costs, higher insurance costs of approximately $70,000, increases in recruiting costs of approximately $57,000 and increases in depreciation and amortization expense of approximately $68,000. SELLING AND MARKETING Selling and marketing expenses increased by approximately $32,000 during the three months ended September 30, 2005 primarily resulting from increased efforts to market our technology and increase our customer base. RESEARCH AND DEVELOPMENT Research and development expenses increased approximately $20,000 during the three months ended September 30, 2005 as compared to 2004 primarily due to our shift to internally funded proof of concept and research and development from production and research and development under contracts in 2005. INTEREST EXPENSE The interest expense on our credit line payable to our Chairman increased approximately $17,000 from the second quarter of 2004 to the same period in 2005 primarily as a result of the increase in prime rate. See "Liquidity and Capital Resources" for further information concerning the restructuring of the credit line agreement. INTEREST INCOME Interest income in the third quarter of 2005 decreased approximately $4,000 from the second quarter of 2004 as a result of reduction of investment in the short-term investment fund. NET LOSS The operations for the three months ended September 30, 2005 resulted in a net loss of approximately $361,000, an improvement from the 2004 net loss of approximately $896,000. Revenues increased 137% primarily due to increased work under our JIN project and other government contracts, cost of sales increased 128% primarily due to more work being done and more materials being acquired, general and administrative expenses decreased 20% primarily due to a significant rise in the amount of indirect costs allocated to cost of sales. Research and development expenses increased 9% from 2004 due to the shift to internal research and development from development under contracts. Selling and marketing expenses increased 29% during the third quarter of 2005 as compared to the third quarter of 2004 due to efforts to market our technology and increase our customer base. -22- COMPARISON OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 IS AS FOLLOWS: 2005 2004 ------------------------------ Revenue $ 12,745,954 $ 4,734,996 Cost of revenue 11,740,891 4,422,996 General and administrative 3,449,053 2,491,097 Selling and marketing 375,590 344,897 Research and development 723,452 512,793 Other (expense) income: Interest expense (180,076) (164,239) Interest income 30,381 34,873 Other 2,445 -- ------------------------------ Loss before provision for income taxes (3,690,282) (3,166,153) Provision for income taxes 29,347 -- ------------------------------ Net loss $ (3,719,629) $ (3,166,153) ============================== REVENUE The increase in revenue for the nine months ended September 30, 2005 compared to 2004 was derived from approximately $7.2 million increased revenue from work on existing contracts with agencies of the U.S. government, revenue from the Company's JIN pre-production contract as well as the inclusion of North Star's revenue of approximately $960,000, which is net of intersegment revenue. COST OF REVENUE Cost of revenue also increased when compared to the nine months ended of September 30, 2004 due to more work being done and more materials acquired under government contracts and under the JIN contracts as well as the inclusion of North Star's cost of revenue of approximately $663,000, which is net of intersegment costs. Cost of revenue includes an allocation of general and administrative expenses and research and development costs in accordance with the terms of our contracts. GENERAL AND ADMINISTRATIVE The increase in general and administrative expenses for the nine months ended September 30, 2005 from the nine months ended September 30, 2004 is primarily due to an increase of approximately $1.4 million in personnel costs. Also contributing to the increase is a rise in depreciation and amortization expense of approximately $256,000 and increases in professional fees and insurance of approximately $662,000 and $288,000, respectively. Included in the professional fees are costs of approximately $386,000 related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Offsetting these increases was a significant rise in the amount of indirect costs which were allocated to cost of sales. North Star's general and administrative expense for the nine months ended September 30, 2005 was approximately $119,000. SELLING AND MARKETING Selling and marketing expenses increased approximately $31,000 during the nine months ended September 30, 2005 when compared to the nine months ended September 30, 2004 due to increased efforts to market our technology and increase our customer base. RESEARCH AND DEVELOPMENT Research and development expenses increased approximately $211,000 during the nine months ended September 30, 2005 as compared to 2004 primarily due to our shift to internally funded proof of concept and research and development from production and research and development under contracts in 2005. -23- NET LOSS The operations for the nine months ended September 30, 2005 resulted in a net loss of $3,720,000 an increase from the 2004 net loss of $3,166,000. Revenue increased 169% and cost of revenue increased 166%. General and administrative expenses increased 39% primarily due to additional staff, additional costs associated with being a publicly held company and depreciation expense. 2005 research and development expenses increased by 41% from 2004 as expected due to the shift to internal research and development from development under contracts. Selling and marketing expenses increased 8% resulting from increased efforts to market our technology and increase our customer base. North Star's net income for the nine months ended September 30, 2005 was approximately $58,000. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2005, we had approximately $588,000 of cash and cash equivalents, a decrease of $1.9 million from cash and cash equivalents at December 31, 2004 of $2.5 million. Additionally at December 31, 2004, we had $1.0 million of investments held in a bond fund which is re-priced weekly. During the first three quarters of 2005, we used $2.6 million of cash in operating activities, consisting primarily of our net loss of $3.7 million and an increase in inventory and accounts receivable of $698,000 and $370,000, respectively, offset by depreciation and amortization expense of $921,000 and an increase in accounts payable of $1 million. The increase in inventory is primarily the result of material acquisitions in the JIN project with the U.S. government. We anticipate that short-term and long-term funding needs will be provided from cash on hand, cash flow from government contracts, as well as our available line of credit. In the first nine months of 2005, investing activities provided approximately $110,000 of cash, consisting of liquidation of the investments of $1 million partially offset by equipment purchases of $890,000. During the first nine months of 2005, financing activities provided $608,000 of cash, primarily due to cash proceeds of $525,000 from option exercises. During the third quarter of 2005, we increased outstanding borrowings under the revolving credit agreement with our Chairman by $100,000 to $2.9 million. On October 27, 2005 we sold an aggregate of 720,000 shares of its 6.5% Series A Redeemable Convertible Preferred Stock with a stated value of $25 per share to 16 institutional accredited investors and one accredited investor for aggregate gross proceeds of $18,000,000. In connection with the financing, we granted each purchaser a 30-day option to purchase an additional 15% of the number of shares of preferred stock purchased by the purchasers at the same price as the shares sold in the offering. After payment of placement agent fees and other transaction expenses, we received proceeds of approximately $16.6 million. As a result of Hurricane Katrina, we temporarily shifted our manufacturing operations from our Stennis facility in Mississippi to a temporary facility in Tucson. This move did not create any material interruption in our production nor result in any additional material costs. We are in process of bringing Stennis facility up to production status. We believe that we have sufficient cash, or access to sufficient cash through potential banking or investing relationships to meet current and future cash needs. The transportable demonstrator contract, the JIN contract and one other contract, that presently represent a major portion of our current activity, are on a cost plus fixed fee basis. This means the majority of work performed is done at our government-approved rates, which include general and administrative costs, overhead, labor and materials, fees and profit. These costs are accrued as incurred and billed monthly. These government-approved rates are adjusted periodically and will be adjusted in the future to incorporate additional costs as the operations expand. Other contracts are at fixed prices which have commercial type gross margins associated with them. BACK-LOG OF ORDERS At September 30, 2005, we had a backlog (that is, work load remaining on signed contracts) of $10,080,000 to be completed within the next twelve months. In July 2005, we received a $6.4 million contract for the further development of our LIPC technology which was increased to $6.9 million in September. The funding for this contract is derived from the Fiscal Year 2005 Congressional Plus Up contained in the 2005 Department of Defense budget. The contract allows work to begin on critical items desired by the customer while further discussions continue as to the remainder of the Scope of Work for that funding. In September 2005, we definitized the contract for production of the first JIN (Joint IED Neutralizer) system prototypes for $7.6 million. We then received a new letter contract for an additional $2.1 million from the U.S. government for this project to complete the training and testing phases. Final contract details are being negotiated for deployment and system improvements. With respect to the LIPC Transportable Demonstrator project, that effort remains on hold as the Government is transferring responsibility for the project to a different end user organization. Upon completion of the formal transfer for project responsibility, we expect the funding will be restarted and the Demonstrator will be completed and delivered to the new sponsoring organization. -24- CONTRACTUAL OBLIGATIONS As of September 30, 2005, the Company had contractual obligations in the form of non-cancelable and cancelable leases and note payable to stockholder as follows:
Payment by Period -------------------------------------------------------------- Less than 1 to 3 4 to 5 More than Total 1 Year Years Years 5 Years -------------------------------------------------------------- Capital lease $ 120,513 $ 43,561 $ 76,010 $ 942 $ -- Note payable to stockholder 2,900,000 2,900,000 -- -- -- Operating lease 4,106,000 758,000 1,360,000 1,181,000 807,000 -------------------------------------------------------------- Total $7,126,513 $3,701,561 $1,436,010 $1,181,942 $ 807,000 ==============================================================
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS In the normal course of business, our financial position is subject to a variety of risks, such as the collectibility of our accounts receivable and the recoverability of the carrying values of our long-term assets. We do not presently enter into any transactions involving derivative financial instruments for risk management or other purposes. Our available cash balances are invested on a short-term basis and are not subject to significant risks associated with changes in interest rates. Substantially all of our cash flows are derived from our operations within the United States and we are not subject to market risk associated with changes in foreign exchange rates. We are exposed to market risk for the impact of interest rate changes, as the interest rate of our borrowings under our revolving credit agreement with our Chairman is subject to changes based on changes in the prime interest rate; should that rate increase by 1%, the effect would be an increase in the net loss for the nine months ended September 30, 2005 by approximately $21,000. 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 September 30, 2005, there were no significant changes in our internal controls over financial reports that have materially affected, or which are reasonably likely to materially affect our internal controls over financial reporting. -25- 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 nine months ended September 30, 2005, the Company issued 668,708 shares of common stock upon exercise of outstanding options and warrants to employees, directors and consultants, as well as 10,000 shares of common stock issued to consultants for services. 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 NUMBER DESCRIPTION -------------------------------------------------------------------------- 31.1 Certificationv 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. -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. By /s/ Thomas C. Dearmin --------------------- Thomas C. Dearmin Chief Executive Officer, President and Chief Financial Officer Date: November 9, 2005 -27- EX-31.1 2 v028483_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 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)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; (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 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 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 Date: November 9, 2005 EX-31.2 3 v028483_ex31-2.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 In connection with the filing by Ionatron, Inc. (the "Company") of its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 (the "Report") I, Thomas C. Dearmin, Chief Executive and Chief Financial Officer of the Company certify pursuant to 18 U.S.C. Section. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 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 Date: November 9, 2005 -----END PRIVACY-ENHANCED MESSAGE-----