10-Q 1 imsc131231_10q.htm 131231 IMSC FORM 10-Q Form 10-Q - 2014 Q1  (M0590221.DOC;3)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2013

 

o

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from:

 

to

 


Commission File No. 001-14949

 

Implant Sciences Corporation

(Exact name of registrant as specified in its charter)

 

Massachusetts

 

04-2837126

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

500 Research Drive, Unit 3, Wilmington, Massachusetts

 

01887

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(978) 752-1700

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

 

 


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 q

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x  No q

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

q  Large Accelerated Filer

q  Accelerated Filer

q  Non-accelerated Filer

x  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes q  No x

As of February 7, 2014, there were 61,860,726 shares of the registrant’s Common Stock outstanding.

 







IMPLANT SCIENCES CORPORATION

TABLE OF CONTENTS


 

 

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

 

Item 1.

 

Condensed Consolidated Financial Statements

 

 

 

 

Condensed Consolidated Balance Sheets as of December 31, 2013 (unaudited) and June 30, 2013 (audited)

 

3

 

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended  December 31, 2013 and 2012 (unaudited)

 

4

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2013 and 2012 (unaudited)

 

5

 

 

Notes to Condensed Consolidated Financial Statements

 

6-22

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23-29

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

30

Item 4.

 

Controls and Procedures

 

30

PART II

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

31

Item 1A.

 

Risk Factors

 

31

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

Item 3.

 

Defaults Upon Senior Securities

 

31

Item 4.

 

Mine Safety Disclosures

 

31

Item 5.

 

Other Information

 

31

Item 6.

 

Exhibits

 

32

 

 

Signatures

 

33





- 2 -




Implant Sciences Corporation

Condensed Consolidated Balance Sheets

(In thousands except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

Dec, 31,

 

 

 

June 30,

 

 

 

2013

 

 

 

2013

 

 

 

(Unaudited)

 

 

 

(Audited)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

271

 

 

$

80

 

Restricted cash and investments

 

312

 

 

 

433

 

Accounts receivable-trade, net

 

1,770

 

 

 

1,216

 

Inventories, net

 

1,724

 

 

 

2,145

 

Prepaid expenses and other current assets

 

315

 

 

 

395

 

Total current assets

 

4,392

 

 

 

4,269

 

Property and equipment, net

 

639

 

 

 

395

 

Restricted cash and investments

 

312

 

 

 

312

 

Other non-current assets

 

124

 

 

 

122

 

Total assets

$

5,467

 

 

$

5,098

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Senior secured convertible promissory note

$

3,184

 

 

$

3,184

 

Senior secured promissory note

 

1,000

 

 

 

1,000

 

Second senior secured convertible promissory note

 

12,000

 

 

 

12,000

 

Third senior secured convertible promissory note

 

12,000

 

 

 

12,000

 

Line of credit

 

16,499

 

 

 

12,403

 

Current maturities of obligations under capital lease

 

42

 

 

 

62

 

Payable to Med-Tec

 

15

 

 

 

19

 

Accrued expenses

 

10,244

 

 

 

6,754

 

Accounts payable

 

2,480

 

 

 

2,026

 

Deferred revenue

 

339

 

 

 

109

 

Total current liabilities

 

57,803

 

 

 

49,557

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term obligations under capital lease, net of current maturities

 

89

 

 

 

89

 

Total long-term liabilities

 

89

 

 

 

89

 

Total liabilities

 

57,892

 

 

 

49,646

 

Commitments and contingencies  (Note 17)

 

   

 

 

   

   

 

Stockholders' deficit:

 

 

 

 

 

 

 

Common stock; $0.001 par value; 200,000,000 shares authorized; 59,402,952 and 59,392,407  shares issued and outstanding at December 31, 2013 and  57,655,594 and 57,645,049 shares issued and outstanding at June 30, 2013

 

59

 

 

 

58

 

Preferred stock; no stated value; 5,000,000 shares authorized

 

 

 

 

 

 

 

Series G Convertible Preferred Stock, no stated value; 650,000 shares authorized, 0 shares issued and outstanding at December 31, 2013 and 16,167 shares issued and outstanding at June 30, 2013, (liquidation value $0 and $129,000, respectively)

 

-

 

 

 

27

 

Series H Convertible Preferred Stock; no stated value; 15,000 shares authorized, no shares issued and outstanding

 

-

 

 

 

-

 

Series I Convertible Preferred Stock; no stated value; 15,000 shares authorized, no shares issued and outstanding

 

-

 

 

 

-

 

Series J Convertible Preferred Stock; no stated value; 6,000 shares authorized, no shares issued and outstanding

 

-

 

 

 

-

 

Additional paid-in capital

 

105,853

 

 

 

103,937

 

Accumulated deficit

 

(157,278

)

 

 

(146,876

)

Deferred compensation

 

(985

)

 

 

(1,621

)

Other comprehensive loss

 

(1

)

 

 

-

 

Treasury stock, 10,545 common shares, at cost

 

(73

)

 

 

(73

)

Total stockholders' deficit

 

(52,425

)

 

 

(44,548

)

Total liabilities and stockholders' deficit

$

5,467

 

 

$

5,098

 



The accompanying notes are an integral part of these condensed consolidated financial statements.



- 3 -




Implant Sciences Corporation

Condensed Consolidated Statements of Operations and Comprehensive Loss

(In thousands except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

December 31,

 

 

For the Six Months Ended

December 31,

 

 

 

2013

 

 

 

2012

 

 

 

2013

 

 

 

2012

 

Revenues

$

3,150

 

 

$

6,938

 

 

$

4,315

 

 

$

8,353

 

Cost of revenues

 

1,980

 

 

 

4,470

 

 

 

2,932

 

 

 

5,924

 

Gross margin

 

1,170

 

 

 

2,468

 

 

 

1,383

 

 

 

2,429

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

1,191

 

 

 

1,068

 

 

 

2,422

 

 

 

2,405

 

Selling, general and administrative

 

2,686

 

 

 

3,793

 

 

 

6,094

 

 

 

13,924

 

Total operating expenses

 

3,877

 

 

 

4,861

 

 

 

8,516

 

 

 

16,329

 

Loss from operations

 

(2,707

)

 

 

(2,393

)

 

 

(7,133

)

 

 

(13,900

)

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

1

 

 

 

1

 

 

 

1

 

 

 

1

 

Interest expense

 

(1,675

)

 

 

(1,331

)

 

 

(3,270

)

 

 

(2,572

)

Total other income (expense), net

 

(1,674

)

 

 

(1,330

)

 

 

(3,269

)

 

 

(2,571

)

Net loss  

 

(4,381

)

 

 

(3,723

)

 

 

(10,402

)

 

 

(16,471

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

-

 

 

 

-

 

 

 

(1

)

 

 

-

 

Other comprehensive loss

 

-

 

 

 

-

 

 

 

(1

)

 

 

-

 

Comprehensive loss

$

(4,381

)

 

$

(3,723

)

 

$

(10,403

)

 

$

(16,471

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

$

(0.07

)

 

$

(0.08

)

 

$

(0.18

)

 

$

(0.38

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing net loss per common share, basic and diluted

 

59,358,296

 

 

 

45,465,728

 

 

 

58,776,097

 

 

 

43,222,973

 




The accompanying notes are an integral part of these condensed consolidated financial statements.




- 4 -




Implant Sciences Corporation

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

For the Six Months Ended

 

 

December 31,

 

 

2013

 

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(10,402

)

 

$

(16,471

)

Adjustments to reconcile net loss to net cash flows used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

74

 

 

 

40

 

Provision for doubtful accounts

 

2

 

 

 

1

 

Stock-based compensation expense

 

1,825

 

 

 

10,793

 

Loss on disposal of equipment

 

42

 

 

 

-

 

Warrants issued to non-employees

 

494

 

 

 

335

 

Common stock issued to consultants

 

142

 

 

 

19

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

(557

)

 

 

(334

)

Inventories

 

421

 

 

 

1,724

 

Prepaid expenses and other current assets

 

78

 

 

 

351

 

Accounts payable

 

461

 

 

 

(206

)

Accrued expenses

 

3,490

 

 

 

1,295

 

Deferred revenue

 

230

 

 

 

(732

)

Net cash used in operating activities

 

(3,700

)

 

 

(3,185

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(334

)

 

 

(51

)

Transfer from (to) restricted funds, net

 

121

 

 

 

(221

)

Net cash used in investing activities

 

(213

)

 

 

(272

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Proceeds from common stock issued in connection with exercise of                          stock options and warrants

 

54

 

 

 

26

 

Principal repayments of capital lease obligations

 

(46

)

 

 

(23

)

Net borrowings on line of credit

 

4,096

 

 

 

3,404

 

Net cash provided by financing activities

 

4,104

 

 

 

3,407

 

Net change in cash and cash equivalents

 

191

 

 

 

(50

)

Cash and cash equivalents at beginning of period

 

80

 

 

 

84

 

Cash and cash equivalents at end of period

$

271

 

 

$

34

 

 

 

 

 

 

 

 

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

Interest paid

$

138

 

 

$

2,068

 

 

 

 

 

 

 

 

 

Non-cash Financing Activity:

 

 

 

 

 

 

 

Conversions of senior secured convertible promissory note to common shares

$

-

 

 

$

40

 

Conversion of convertible preferred stock to common shares

 

27   

 

 

 

-   

 

Conversion of line of credit to second senior convertible promissory note

 

-

 

 

 

12,000

 

Exercise of stock options

 

-   

 

 

 

150

 

Exercise of stock purchase warrants

 

11

 

 

 

16

 



The accompanying notes are an integral part of these condensed consolidated financial statements.




- 5 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.

Description of Business, Liquidity and Going Concern

Implant Sciences Corporation provides systems and sensors for the homeland security market and related industries.  We have developed and acquired technologies using ion mobility spectrometry to develop a product line for use in trace explosives and narcotics detection.  We currently market and sell our existing trace explosives and narcotics detector products while continuing to make significant investments in developing the next generation of these products.

We are party to several loan and credit agreements with DMRJ Group LLC (“DMRJ”), an accredited institutional investor (see Note 13).  As of December 31, 2013, our obligation to DMRJ under a senior secured convertible promissory note, as amended, a second senior secured convertible promissory note, a third senior secured convertible promissory note, a senior secured promissory note and under a revolving line of credit approximated $3,184,000, $12,000,000, $12,000,000, $1,000,000 and $16,499,000, respectively.  Further, as of December 31, 2013, our obligation to DMRJ for accrued interest under these instruments approximated $8,233,000 and is included in current liabilities in the condensed consolidated financial statements.

As of February 4, 2014, our obligations to DMRJ under those four secured promissory notes and our credit facility approximated $2,987,000, $12,000,000, $12,000,000, $1,000,000 and $16,899,000 respectively.  Further, as of February 4, 2014, our obligation to DMRJ for accrued interest under these instruments approximated $8,886,000.

On December 10, 2008, we entered into a note and warrant purchase agreement with DMRJ pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock.  We have entered into a series of amendments, waivers and modifications with DMRJ.  On February 28, 2013, we amended our credit agreements with DMRJ pursuant to which, amongst other matters, we extended the maturity date of all of our indebtedness from March 31, 2013 to March 31, 2014. On November 14, 2013, we amended our credit agreements with DMRJ to extend  the maturity date of all of our indebtedness from March 31, 2014 to September 30, 2014 (see Note 13).

Despite our current sales, expense and cash flow projections and $4,593,000 in cash available from our line of credit with DMRJ, at February 4, 2014, we will require additional capital in the first quarter of fiscal 2015 to fund operations and continue the development, commercialization and marketing of our products. Our failure to achieve our projections and/or obtain sufficient additional capital on acceptable terms would have a material adverse effect on our liquidity and operations and could require us to file for protection under bankruptcy laws.

In addition, while we strive to bring new products to market, we are subject to a number of risks similar to the risks faced by other technology-based companies, including risks related to: (a) our dependence on key individuals and collaborative research partners; (b) competition from substitute products and larger companies; (c) our ability to develop and market commercially usable products and obtain regulatory approval for its products under development; and (d) our ability to obtain substantial additional financing necessary to adequately fund the development, commercialization and marketing of our products.  For the six months ended December 31, 2013, we reported a net loss of $10,402,000 and used $3,700,000 in cash for operations.  As of December 31, 2013, the Company had an accumulated deficit of approximately $157,278,000 and a working capital deficit of $53,411,000.  Management continually evaluates its operating expenses and its cash flow from operations.  Failure of the Company to achieve its projections will require that we seek additional financing or discontinue operations.

These conditions raise substantial doubt as to our ability to continue as a going concern.

Based on current sales, operating expense and cash flow projections, and the cash available from our line of credit, management believes there are plans in place to sustain operations for the next several months.  These plans depend on a substantial increase in sales of our handheld trace explosives detector product and our benchtop explosives and narcotics trade detector product.  However, there can be no assurances that sales will materialize as forecasted, and/or that management will be successful in refinancing or extending our obligations with DMRJ, which mature on September 30, 2014. To further sustain us, improve our cash position, and enable us to grow while reducing debt, management plans to continue to seek additional capital through private financing sources during the next twelve months.  However, there can be no assurance that management will be successful in executing these plans.  Management will continue to closely monitor and attempt to control our costs and actively seek needed capital through sales of our products, equity infusions, government grants and awards, strategic alliances, and through our lending institutions.



- 6 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


We have suffered recurring losses from operations.  Our condensed consolidated financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

There can be no assurances that our forecasted results will be achieved or that we will be able to raise additional capital necessary to operate our business.  These conditions raise substantial doubt about our ability to continue as a going concern.  The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Security product sales tend to have a long sales cycle, and are often subject to export controls.  In an effort to identify new opportunities and stimulate sales, we hired additional sales personnel during fiscal 2013 who have specific industry experience. However, there can be no assurance that these efforts will increase revenue.  

We have a history of being active in submitting proposals for government sponsored grants and contracts and successful in being awarded grants and contracts from government agencies. However, we have recorded no revenues from government contracts, due our inability to secure new contracts.  Management will continue to pursue these grants and contracts to support our research and development efforts primarily in the areas of trace explosives detection.

Our ability to comply with our debt covenants in the future depends on our ability to generate sufficient sales and to control expenses, and will require that we seek additional capital through private financing sources.  There can be no assurances that we will achieve our forecasted financial results or that we will be able to raise additional capital to operate our business.  Any such failure would have a material adverse impact on our liquidity and financial condition and could force us to curtail or discontinue operations entirely.  Further, upon the occurrence of an event of default under certain provisions of our agreements with DMRJ, we could be required to pay default rate interest equal to the lesser of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance outstanding. The failure to refinance or otherwise negotiate further extensions of our obligations to DMRJ would have a material adverse impact on our liquidity and financial condition and could force us to curtail or discontinue operations entirely and/or file for protection under bankruptcy laws.

We are currently expending significant resources to develop the next generation of our current products and to develop new products.  We will require additional funding in order to continue the advancement of the commercial development and manufacturing of the explosives detection system.  We will attempt to obtain such financing by: (i) government grants, (ii) private financing, or (iii) strategic partnerships.  However, there can be no assurance that we will be successful in our attempts to raise such additional financing.

We will require substantial funds for further research and development, regulatory approvals, and the marketing of our explosives detection products.  Our capital requirements depend on numerous factors, including but not limited to the progress of our research and development programs; the cost of filing, prosecuting, defending and enforcing any intellectual property rights; competing technological and market developments; changes in our development of commercialization activities and arrangements; and the hiring of additional personnel, and acquiring capital equipment. Our failure to achieve our projections and/or obtain sufficient additional capital on acceptable terms would have a material adverse effect on our liquidity and operations and could require us to file for protection under bankruptcy laws.

2.

Interim Financial Statements and Basis of Presentation

Principles of Consolidation

The accompanying condensed consolidated financial statements include our operations in Massachusetts and California and those of our wholly-owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation.



- 7 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Accounting Principles

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).  In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments), which we consider necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for the periods presented.  The results of operations and cash flows for the six months ended December 31, 2013 may not necessarily be indicative of results that may be expected for any succeeding quarter or for the entire fiscal year.  The balance sheet at June 30, 2013 has been derived from our audited consolidated financial statements at that date, but does not include all of the information and notes required by U.S. GAAP for complete financial statements.

The information contained in this Form 10-Q should be read in conjunction with our audited financial statements, included in our Form 10-K, as of and for the year ended June 30, 2013.

Use of Accounting Estimates

The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Some of the more significant estimates include allowance for doubtful accounts, allowance for sales returns, inventory valuation, warranty reserves, and long-lived assets.  Management's estimates are based on the facts and circumstances available at the time estimates are made, past historical experience, risk of loss, general economic conditions and trends and management's assessments of the probable future outcome of these matters.  Consequently, actual results could differ from such estimates.

Significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 7 of our Form 10-K for the fiscal year ended June 30, 2013.

3.

Fair Value Measurement

Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” establishes a three-level fair value hierarchy to classify the inputs used in measuring fair value, which are as follows:

Level 1 inputs to the valuation methodology are based on quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 inputs to the valuation methodology are based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

Level 3 inputs to the valuation methodology are based on unobservable inputs that reflect the company’s own assumptions about the assumptions market participants would use in pricing the asset or liability.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  

Our financial instruments at December 31, 2013 and June 30, 2013 include cash equivalents, restricted cash and investments, accounts receivable, accounts payable and borrowings under our senior secured convertible promissory note, senior secured promissory notes and a revolving line of credit. The carrying amounts of cash and cash equivalents, restricted cash, receivables and accounts payable are representative of their respective fair values because of the short-term maturities or expected settlement dates of these instruments. The fair value of debt, included in Note 13, is based on the fair value of similar instruments.  These instruments are short-term in nature and there is no known trading market for our debt.



- 8 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The following table provides the fair value measurements of assets and liabilities as of December 31, 2013:

 

 

 

 

 

Fair Value Measurements as of

December 31, 2013

(In thousands)

 

 

Carrying

Value at

December 31, 2013

 

 

Quoted Prices in Active Markets for Identical Asset

Level 1

 

 

Significant Other Observable Inputs

Level 2

 

 

Significant Unobservable Inputs

Level 3

Certificates of deposit

 

$

624

 

$

624

 

$

-   

 

$

-   

Senior secured convertible promissory note

 

 

3,184

 

 

-   

 

 

-   

 

 

3,184

Second senior secured convertible promissory note

 

 

12,000   

 

 

-

 

 

-

 

 

12,000

Third senior secured convertible promissory note

 

 

12,000

 

 

-

 

 

-

 

 

12,000

Senior secured promissory note

 

 

1,000

 

 

-   

 

 

-   

 

 

1,000

Line of credit

 

 

16,499

 

 

-

 

 

-

 

 

16,499

The following table provides the fair value measurements of assets and liabilities as of June 30, 2013:

 

 

 

 

 

Fair Value Measurements as of June 30, 2013

(In thousands)

 

 

Carrying

Value at

June 30, 2013

 

 

Quoted Prices in Active Markets for Identical Asset

Level 1

 

 

Significant Other Observable Inputs

Level 2

 

 

Significant Unobservable Inputs

Level 3

Certificates of deposit

 

$

624

 

$

624

 

$

-   

 

$

-   

Senior secured convertible promissory note

 

 

3,184

 

 

-   

 

 

-   

 

 

3,184

Senior secured promissory note

 

 

1,000

 

 

-   

 

 

-   

 

 

1,000

Second senior secured convertible promissory note

 

 

12,000

 

 

-

 

 

-

 

 

12,000

Third senior secured convertible promissory note

 

 

12,000

 

 

-

 

 

-

 

 

12,000

Line of credit

 

 

12,403

 

 

-

 

 

-

 

 

12,403


4.

Restricted Cash and Investments – Current and Long-Term

As of December 31, 2013 and June 30, 2013, we had restricted cash and investments, with maturities of less than one year, of $312,000 and $433,000, respectively, and restricted investments, with maturities of more than one year, of $312,000 and $312,000, respectively.  Restricted cash and investments consisted of the following:

 

 

 

December 31,

 

 

June 30,

(In thousands)

 

 

2013

 

 

2013

Current assets

 

 

 

 

 

 

Certificates of deposit

 

$

312

 

$

312

Blocked account deposit

 

 

-

 

 

121

 

 

$

312

 

$

433

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

Certificates of deposit

 

$

312

 

$

312

 

 

$

312

 

$

312




- 9 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Pursuant to our September 2009 credit agreement with DMRJ, we agreed to cause all of our receivables and collections to be deposited in a bank deposit account pledged to DMRJ pursuant to a blocked account agreement. All funds deposited in the blocked collections account are applied towards the repayment of our obligations to DMRJ under the revolving line of credit. Until the line of credit and all of our obligations thereunder have been paid and satisfied in full, we will have no right to access or make withdrawals from the blocked account without DMRJ’s consent. As of December 31, 2013 and June 30, 2013, the balance in the blocked collections account was $0 and $121,000, respectively.

The restricted investments of $624,000 held in certificates of deposit collateralize our performance under irrevocable letters of credit issued in April 2010, aggregating to $595,000, in connection with our contract with the India Ministry of Defence, plus the bank required collateralization deposit of $19,000.  These letters of credit (1) provide performance security equal to 5% of the amount of our contract with the India Ministry of Defence; and (2) provide warranty performance security equal to 5% of the contract amount.  We have amended each of the letters of credit, extending the expiration dates to November 4, 2014 and May 4, 2015, respectively.   

5.

Stock Based Compensation

In December 2000, we adopted the 2000 Incentive and Non-Qualified Stock Option Plan (the “2000 Plan”). The 2000 Plan provides for the grant of incentive stock options and non-qualified stock options to employees and affiliates. The exercise price of the options equal 100% of the fair market value on the date of the grant or 110% of the fair market value for beneficial owners of more than 5% of our stock. Options expire between five and ten years from the date of the option grant and have various vesting periods. Options may be exercised by delivering to the company cash in an amount equal to such aggregate exercise price of the options exercised, or with the consent of the Committee, shares of our common stock having a fair market value equal to such aggregate exercise price, a personal recourse note issued to the company in a principal amount equal to such aggregate exercise price, other acceptable considerations including a cashless exercise/resale procedure, or any combination of the foregoing. The Committee may in its discretion provide upon the grant of any option that we may repurchase, upon terms and conditions determined by the Committee, all or any number of shares purchased upon exercise of such option. A total of 600,000 shares were originally reserved for issuance under the 2000 Plan. In December 2003, our stockholders approved an increase in the 2000 Plan from 600,000 shares to 1,000,000 shares. In December 2004, our stockholders approved an increase in the 2000 Plan from 1,000,000 shares to 1,500,000 shares. The 2000 Plan expired in October 2010, as such no further options grants may be issued under this plan.

In December 2004, we adopted the 2004 Stock Option Plan (the “2004 Plan”). The 2004 Plan provides for the grant of incentive stock options and non-qualified stock options to employees and affiliates. The exercise price of the options equa1 100% of the fair market value on the date of the grant or 110% of the fair market value for beneficial owners of more than 10% of our stock. Options expire between five and ten years from the date of the option grant and have various vesting periods. Options may be exercised by delivering to the company cash in an amount equal to such aggregate exercise price of the options exercised, or with the consent of the Committee, shares of our common stock having a fair market value equal to such aggregate exercise price, a personal recourse note issued to the company in a principal amount equal to such aggregate exercise price, other acceptable considerations including a cashless exercise/resale procedure, or any combination of the foregoing. A total of 500,000 shares were originally reserved for issuance under the 2004 Plan. In December 2005, our stockholders approved an increase in the 2004 Plan from 500,000 shares to 1,000,000 shares.  In December 2007, our stockholders approved an increase in the 2004 Plan from 1,000,000 shares to 2,000,000 shares. In March 2012, our stockholders approved an increase in the 2004 Plan from 2,000,000 shares to 4,000,000 shares.



- 10 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


In September 2012, our Board of Directors adopted an amendment to the 2004  Plan increasing the total number of shares of our common stock issuable thereunder from 4,000,000 shares to 20,000,000 shares and approved the following grants of options under the amended plan:


Named Executives and Directors

 

Shares Granted

 

Glenn D. Bolduc

 

5,442,490

 

Dr. William J. McGann

 

1,498,972

 

Roger P. Deschenes

 

1,058,498

 

Dr. Darryl K. Jones

 

1,258,498

 

Michael C. Turmelle

 

640,949

 

Howard Safir

 

303,399

 

Robert P. Liscouski

 

806,798

 

John A. Keating

 

303,399

 

Todd A. Silvestri

 

730,949

 

Brenda L. Baron

 

730,949

 

Estate of Joseph E. Levangie

 

525,099

 

 

 

13,300,000

 

The September 2012 amendment has not been approved by our stockholders.

Each of the options has an exercise price of $1.40 per share. One-half of options granted to each of Messrs. Bolduc, Deschenes, Silvestri and Ms. Baron were immediately exercisable and the other one-half became exercisable on September 7, 2013. One-third of the new options granted to each of Dr. McGann and Dr. Jones were immediately exercisable, one-third became exercisable on September 7, 2013, and the remaining one-third will become exercisable on September 7, 2014, subject to acceleration of vesting upon a “Change in Control.” Options granted to Messrs. Turmelle, Safir, Liscouski, Keating and the Estate of Mr. Levangie are immediately exercisable in full. All of the options will expire on September 6, 2022, subject to earlier expiration with respect to Messrs. Bolduc, McGann, Deschenes, Jones, Silvestri and Ms. Baron in connection with the termination or cessation of their respective employment with the company.

On September 7, 2012, the Board of Directors adopted the Implant Sciences Corporation Change of Control Payment Plan, the purpose of which is to reward management for the increases in shareholder value generated between January 2009 and the present.  

On January 2, 2009, the closing price of our common stock on the NYSE Amex LLC was $.18 per share. On the date the plan was adopted, the closing price of the common stock on the OTC Markets Group’s OTCPK tier was $1.40. Our Board of Directors believes that this increase in shareholder value is directly attributable to the dedication and hard work of our management team, employees and directors. The Board also believes, however, that our management and directors own significantly less equity in the company than do the officers and directors of most publicly traded early-stage (i.e., turn-around) businesses. Accordingly, our management and directors have not significantly benefitted from the increase in shareholder value between January 2009 and the present, and the plan is intended to provide value to our management and directors equivalent to the value they would have earned had they owned a more significant portion of our equity.  

Pursuant to the plan, the Board established a target level of stock ownership for each officer as a percentage of our fully diluted capitalization, and a corresponding ownership percentage for directors. To reflect the increase in shareholder value between January 2009 and the adoption of the plan, the Board determined that each officer and director should be allocated a “Change of Control Payment” equal to the product of (x) the closing price of our common stock on September 7, 2012 (i.e., $1.40) less a “floor price,” multiplied by (y) the number of additional stock options granted to each participant on the same date. The floor price applicable to directors and officers who served us at the beginning of the turn-around is $.20, i.e., slightly above the closing price of the common stock on January 2, 2009. The floor prices for Dr. McGann and Dr. Jones are $.51 and $.67, respectively, reflecting the closing prices of the common stock on the dates those officers joined us. The benefits under the plan are payable upon, and only upon, a “Change of Control,” as defined in the plan, involving the company.  Accordingly, the payment of the benefits allocated under the plan will be further deferred until such time that all shareholders receive payments for or in respect of their common stock in a transaction constituting a Change of Control.



- 11 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Our condensed consolidated statements of operations and comprehensive loss for the three months ended December 31, 2013 and 2012 include $460,000 and $1,528,000, respectively, of compensation costs and no income tax benefit related to our stock-based compensation arrangements for employee and non-employee director awards.  For the six months ended December 31, 2013 and 2012, our condensed consolidated statements of operations and comprehensive loss include $1,825,000 and $10,793,000, respectively, of compensation costs and no income tax benefit related to our stock-based compensation arrangements for employee and non-employee director awards, as follows:

 

 

For the Three Months Ended December 31,

 

For the Six Months Ended December 31,

 

 

2013

 

2012

 

2013

 

2012

Cost of revenues

 

$

17

 

$

113

 

$

110

 

$

578

Research and development

 

 

87

 

 

157

 

 

246

 

 

655

Selling, general and administrative

 

 

356

 

 

1,258

 

 

1,469

 

 

9,560

Total

 

$

460

 

$

1,528

 

$

1,825

 

$

10,793

As of December 31, 2013, the total amount of unrecognized stock-based compensation expense was approximately $2,178,000, which will be recognized over a weighted average period of 1.62 years.

As of December 31, 2013, there were options outstanding to purchase 18,747,138 shares of our common stock at exercise prices ranging from $0.08 to $10.00.

6.

Related Party Transactions

Robert Liscouski, a member of our Board of Directors, had served as a partner at Secure Strategy Group, a homeland security-focused banking and strategic advisory firm that has been retained by us to assist with our efforts to acquire additional capital.  During the six months ended December 31, 2013 and 2012, we paid Secure Strategy Group $0 and $48,000, respectively.  On March 31, 2013, we terminated our relationship with Secure Strategy Group and, as of December 31, 2013, our obligation to Secure Strategy Group was $118,000. In April 2011, we entered into an advisory and consulting agreement with Mr. Liscouski to assist our U.S. government sales and marketing team with our efforts to advance our interests with the U.S. government.  During the three  months ended December 31, 2013 and 2012, we paid Mr. Liscouski $45,000 and $45,000, respectively for services performed under this agreement.  For the six months ended December 31, 2013 and 2012, we paid Mr. Liscouski $90,000 and $90,000, respectively for services performed under this agreement.  As of December 31, 2013, we had no obligation to Mr. Liscouski under this agreement. Mr. Liscouski also serves as a senior partner at Edge360, a security technology and situational awareness solutions provider to the homeland security marketplace that had been retained by us.  During the six months ended December 31, 2013 and 2012, we paid Edge360 $4,000 and $12,000, respectively.  On August 31, 2013, we terminated our relationship with Edge360 and, as of December 31, 2013, we had no obligation to Edge360.

7.

Note Payable – Related Party

In June 2009, Michael Turmelle, a member of our Board of Directors, loaned $100,000 to us.  

As of December 31, 2013 and June 30, 2013, we had no obligation to Mr. Turmelle for borrowed funds.  As of December 31, 2013 and June 30, 2013, our obligation to Mr. Turmelle for accrued interest was $0 and $1,000, respectively.

8.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

(In thousands)

 

 

December 31,       2013

 

 

June 30,

2013

Inventory

 

$

-

 

$

5

Insurance

 

 

70

 

 

83

Bank fees

 

 

26

 

 

16

Other prepaid expenses

 

 

219

 

 

291

 

 

$

315

 

$

395




- 12 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


9.

Inventories, net

We value our inventories at lower of cost or market.  Cost is determined by the first-in, first-out (FIFO) method, including material, labor and factory overhead.  The components of inventories, net of reserves, consist of the following:

(In thousands)

 

 

December 31,   2013

 

 

June 30,

2013

Raw materials

 

$

990

 

$

1,811

Work in progress

 

 

238

 

 

279

Finished goods

 

 

496

 

 

55

Total inventories

 

$

1,724

 

$

2,145

As of December 31, 2013 and June 30, 2013, our reserves for excess and slow-moving inventories were $53,000 and $73,000, respectively.

10.

Property and Equipment, net

Property and equipment consist of the following:

(In thousands)

 

 

December 31,   2013

 

 

June 30,

2013

Machinery and equipment

 

$

466

 

$

356

Computers and software

 

 

419

 

 

378

Furniture and fixtures

 

 

57

 

 

28

Leasehold improvements

 

 

139

 

 

30

Equipment under capital lease

 

 

157

 

 

182

 

 

 

1,238

 

 

974

Less: accumulated depreciation and amortization

 

 

599

 

 

579

 

 

$

639

 

$

395

For the three months ended December 31, 2013 and 2012, depreciation expense was approximately $38,000  and $21,000, respectively.  For the six months ended December 31, 2013 and 2012, depreciation expense was approximately $74,000 and $40,000, respectively.  

11.

Accrued Expenses

Accrued expenses consist of the following:

(In thousands)

 

 

December 31,   2013

 

 

June 30,

2013

Accrued interest

 

$

8,233

 

$

5,103

Accrued compensation and benefits

 

 

784

 

 

746

Accrued warranty costs

 

 

574

 

 

517

Accrued legal and accounting

 

 

112

 

 

163

Accrued taxes

 

 

29

 

 

9

Other accrued liabilities

 

 

512

 

 

216

 

 

$

10,244

 

$

6,754




- 13 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


12.

Earnings Per Share

Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period.  Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method and assumed conversion of certain convertible promissory notes and convertible preferred stock.  In addition, the numerator is adjusted for any changes in income or loss that would result from the assumed conversion of potential shares. As of December 31, 2013 and 2012, potentially dilutive shares would have been excluded from the earnings per share calculation, because their effect would be antidilutive.  Shares deemed to be antidilutive include stock options, warrants, convertible debt and convertible preferred stock.

 

 

For the Three Months Ended December 31,

 

 

For the Six Months Ended December 31,

 

(In thousands, except share and per share amounts)

 

2013

 

 

2012

 

 

2013

 

 

2012

 

Basis loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,381

)

 

$

(3,723

)

 

$

(10,402

)

 

$

(16,471

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares

 

 

59,358,296

 

 

 

45,465,728

 

 

 

58,776,097

 

 

 

43,222,973

 

BBBasic loss per share

 

$

(0.07

)

 

$

(0.08

)

 

$

(0.18

)

 

$

(0.38

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DDDiluted loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(4,381

)

 

$

(3,723

)

 

$

(10,402

)

 

$

(16,471

)

DDDenominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

W Weighted average shares

 

 

59,358,296

 

 

 

45,465,728

 

 

 

58,776,097

 

 

 

43,222,973

 

EEEffect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Stock options

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

  Warrants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

        Convertible debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Co     Convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

W   Weighted average share and equivalents

 

 

59,358,296

 

 

 

45,465,728

 

 

 

58,776,097

 

 

 

43,222,973

 

BBDiluted loss per share

 

$

(0.07

)

 

$

(0.08

)

 

$

(0.18

)

 

$

(0.38

)


Common stock equivalents excluded from the diluted earnings per share calculation for the three and six months ended December 31, 2013 and 2012, were as follows:

 

 

 

For the Three Months Ended

December 31,

 

 

For the Six Months Ended   December 31,

 

 

 

2013

 

 

2012

 

 

2013

 

 

2012

Common stock equivalents excluded

 

 

 

 

 

 

 

 

 

 

 

 

   Stock options

 

 

1,876,783

 

 

2,502,525

 

 

2,025,522

 

 

2,676,504

   Warrants

 

 

267,242

 

 

1,522,098

 

 

364,479

 

 

1,593,553

   Convertible debt

 

 

39,800,000

 

 

50,809,174

 

 

39,800,000

 

 

46,865,666

   Convertible preferred stock

 

 

-

 

 

11,944,722

 

 

808,400

 

 

13,890,197

 

 

 

41,944,025

 

 

66,778,519

 

 

42,998,401

 

 

65,025,920





- 14 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


13.

Long-Term Debt and Credit Arrangements

Med-Tec Payment Obligation

In July 2003, we entered into an asset purchase agreement with Med-Tec Iowa, Inc., our former exclusive distributor of prostate seeds, to purchase Med-Tec’s customer lists and further to release each other from further obligations under an earlier distribution agreement.  The purchase price of $1,250,000, which was payable in varying amounts over 28 months, with the final payment payable on December 1, 2005, was recorded at the present value of the future payment stream, using a rate of 10.24%, which equaled $1,007,000.  This amount was recorded as an intangible asset and was amortized over our estimated useful life of 29 months.  The outstanding and past due principal balance as of December 31, 2013 and June 30, 2013 was approximately $15,000 and $19,000, respectively.

Term Debt and Revolving Credit Facility with DMRJ Group, LLC

We are a party to several loan and credit agreements with DMRJ Group LLC (“DMRJ”), an accredited institutional investor. In December 2008, we entered into a note and warrant purchase agreement with DMRJ pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock.  Thereafter, we entered into a series of amendments, waivers and modifications of this facility. The note, which is collateralized by all of our assets, originally bore interest at 11.0% per annum.

The note contains restrictions and financial covenants including: (i) restrictions against declaring or paying dividends or making any distributions; against creating, assuming or incurring any liens; against creating, assuming or incurring any indebtedness; against merging or consolidating with any other company, provided, however, that a merger or consolidation is permitted if we are the surviving entity; against the sale, assignment, transfer or lease of our assets, other than in the ordinary course of business and excluding inventory and certain asset sales expressly permitted by the note purchase agreement; against making investments in any company, extending credit or loans, or purchasing stock or other ownership interest of any company; and (ii) covenants that we have authorized or reserved for the purpose of issuance, 150% of the aggregate number of shares of our common stock issuable upon exercise of  the warrant; that we maintain a minimum cash balance of at least $500,000; that the aggregate dollar amount of all accounts payable be no more than 100 days past due; and that we maintain a current ratio, defined as current assets divided by current liabilities, of no less than 0.60 to 1.00.

In September 2011, we amended each of our credit instruments with DMRJ. Pursuant to those amendments: (i) the maturity of our indebtedness to DMRJ was extended from September 30, 2011 to March 31, 2012; (ii) DMRJ waived our compliance with certain financial covenants in the notes and all related credit agreements through maturity; (iii) our line of credit under the September 2009 credit agreement was increased from $15,000,000 to $23,000,000; and (iv) we were required to repay sufficient amounts of our outstanding indebtedness under the notes and related credit agreements and other amounts owing to DMR such that as of December 31, 2011, the outstanding obligations to DMRJ shall not exceed $15,000,000.

In October 2011, we further amended each of our credit instruments with DMRJ, to eliminate the obligation to repay any portion of our outstanding indebtedness to DMRJ by December 31, 2011.

In February 2012, we amended each of our credit instruments with DMRJ, to extend the maturity of all of our indebtedness to DMRJ to September 30, 2012.

In September 2012, we further amended each of our credit instruments with DMRJ. Pursuant to those amendments: (i) we extended the maturity date of all of our indebtedness from September 30, 2012 to March 31, 2013 and (ii) issued to DMRJ a second senior secured convertible promissory note in the principal amount of $12,000,000 (the “September 2012 Note”).



- 15 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The second senior secured convertible promissory note bears interest at the rate of 15% per annum. The principal balance of this note, together with all outstanding interest and all other amounts owed thereunder, was due and payable on March 31, 2013. The second senior secured convertible promissory note is convertible in whole or in part, at DMRJ’s option, into shares of Series H Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series H Preferred Stock, the “Series H Original Issue Price”).

The second senior secured convertible promissory note originally gave DMRJ the option to require us to repurchase any or all of the shares of Series H Preferred Stock owned by DMRJ, at the Series H Original Issue Price per share, if we did not (i) by March 31, 2013, have at least one of our products receive qualified or approved status on the “Transportation Security Administration Air Cargo Screening Technology List (ACSTL) – For Passenger Aircraft” or placed on the Transportation Security Administration’s “Explosive Trace Detector Qualified Product List (QPL)”; or (ii) achieve revenues of at least $7,500,000 per fiscal quarter, commencing with fiscal quarter ending June 30, 2013. As described below, the note was subsequently amended to eliminate this option.

The holders of the Series H Preferred Stock will be entitled to receive, prior to the payment of any dividends with respect to our Common Stock and/or Series G Convertible Preferred Stock, cumulative dividends on each share of Series H Preferred Stock at a rate equal to 15% of the Series H Original Issue Price per annum, (i) when, as and if declared by our Board of Directors, (ii) upon a liquidation, dissolution or winding up of the Company (a “Liquidation Event”), or (iii) upon the repurchase or conversion of the Series H Preferred Stock All dividends accruing on the Series H Preferred Stock are payable by the issuance of additional shares of Series H Preferred Stock.

Upon a Liquidation Event, the holders of shares of Series H Preferred Stock then outstanding will be entitled to be paid out of the assets of the company available for distribution to its stockholders, before any payment is made to the holders of Common Stock and/or Series G Preferred Stock in respect of such stock, an amount per share equal to the Series H Original Issue Price, plus any accrued but updated dividends thereon, whether or not declared. At the option of holders of a majority of the outstanding Series H Preferred Stock, (i) a consolidation or merger of us with or into another entity or person, or any other corporate reorganization, in which the our stockholders immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities’ voting power immediately following such consolidation, merger or reorganization, or (ii) a sale or transfer of all or substantially all of our assets for cash, securities or other property, will be deemed to be a Liquidation Event.

Each share of Series H Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by (i) dividing the Series H Original Issue Price by the Series H Conversion Price (as defined below) in effect at the time of conversion and (ii) multiply the result by 1,000. The “Series H Conversion Price” will initially be equal to $1,090, and is subject to adjustment in the event that (a) we issue additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series H Original Issue Price or the Series H Conversion Price, the New Note will be convertible indirectly, at DMRJ’s option, into shares of Common Stock at an effective conversion price of $1.09 per share, which represents a discount of approximately 20% from the daily volume weighted average price of the Common Stock over the 20 trading days preceding the date of the amendment.

The holders of the Series H Preferred Stock will have no voting rights except as required by applicable law. However, without the consent of the holders of a majority of the outstanding Series H Preferred Stock, we may not (i) amend, alter or repeal any provision of its Articles of Organization or By-laws in a manner that adversely affects the powers, preferences or rights of the Series H Preferred Stock; (ii) authorize or issue any equity securities (or any equity or debt securities convertible into equity securities) ranking prior and superior to the Series H Preferred Stock with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up; or (iii) consummate any capital reorganization or reclassification of any of its equity securities (or debt securities convertible into equity securities) into equity securities ranking prior and superior to the Series H Preferred Stock with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up.



- 16 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


On February 28, 2013, we further amended each of our credit instruments with DMRJ. Pursuant to those amendments:

·

the maturity of all of our indebtedness to DMRJ was extended from March 31, 2013 to March 31, 2014;

·

DMRJ waived our compliance with certain financial covenants in each of our promissory notes and all related credit agreements through the new maturity date;

·

DMRJ’s option to require us to repurchase any or all of the shares of Series H Convertible Preferred Stock ) which may be issued upon conversion of the September 2012 Note was eliminated;

·

we issued to DMRJ a third senior secured convertible promissory note dated February 28, 2013, in the aggregate principal amount of $12,000,000. Payment for the February 2013 Note was made by the cancellation of $12,000,000 of principal of the outstanding indebtedness under our credit agreement;

·

DMRJ acquired the option to convert the amended and restated senior secured convertible promissory note dated March 12, 2012 (the “March 2009 Note”) into shares of Series J Convertible Preferred Stock in lieu of shares of Common Stock; and

·

the March 2009 Note and the September 2012 Note were amended to permit us to prepay any or all of our indebtedness thereunder on 30 days’ prior notice.

The third senior secured convertible promissory note bears interest at the rate of 15% per annum. The principal balance of this note, together with all outstanding interest and all other amounts owed thereunder, will be due and payable on March 31, 2014. The third senior secured convertible promissory note is convertible in whole or in part, at DMRJ’s option, into shares of Series I Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series I Preferred Stock, the “Series I Original Issue Price”). We may prepay this note on 30 days’ prior notice.

As amended, the March 2009 Note is convertible in whole or in part, at DMRJ’s option, into shares of Series J Convertible Preferred Stock at an initial conversion rate of $1,000 per share (as adjusted in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series J Preferred Stock, the “Series J Original Issue Price”).

The holders of the Series I Preferred Stock will be entitled to receive, prior to the payment of any dividends with respect to our Common Stock and/or Series G Preferred Stock, cumulative dividends on each share of Series I Preferred Stock at a rate equal to 15% of the Series I Original Issue Price per annum, (i) when, as and if declared by our Board of Directors, (ii) upon a “Liquidation Event”, or (iii) upon the conversion of the Series I Preferred Stock All dividends accruing on the Series I Preferred Stock are payable by the issuance of additional shares of Series I Preferred Stock.

The holders of Series J Preferred Stock will be entitled to participate on an “as converted” basis in all dividends or distributions declared or paid on our Common Stock.

Upon a Liquidation Event, the holders of shares of Series I Preferred Stock and Series J Preferred Stock then outstanding will be entitled to be paid out of the assets of the company available for distribution to its stockholders, pari passu with distributions made with respect to the Series H Preferred Stock but before any payment is made to the holders of Common Stock and /or Series G Preferred Stock in respect of such stock, (i) an amount per share of Series I Preferred Stock equal to the Series I Original Issue Price, plus any accrued but updated dividends thereon, whether or not declared, and (ii) an amount per share of Series J Preferred Stock equal to the Series J Original Issue Price, plus any dividends declared but unpaid thereon. At the option of holders of a majority of the outstanding Series I Preferred Stock, (i) a consolidation or merger of the company with or into another entity or person, or any other corporate reorganization, in which the stockholders of the company immediately prior to such consolidation, merger or reorganization do not hold at least a majority of the resulting or surviving entities’ voting power immediately following such consolidation, merger or reorganization, or (ii) a sale or transfer of all or substantially all of our assets for cash, securities or other property, will be deemed to be a Liquidation Event.



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IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Upon any such Liquidation Event, and after all payments described in the preceding paragraph are made in full in respect of the Series H Preferred Stock, the Series I Preferred Stock and the Series J Preferred Stock, the holders of the Series G Preferred Stock will be entitled to be paid out of the assets of the company available for distribution to its stockholders an amount equal to $8.00 per share of Series G Preferred Stock, plus any declared but unpaid dividends, prior to the payment of any amounts to the holders of our Common Stock by reason of their ownership of such stock.

Each share of Series I Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by (i) dividing the Series I Original Issue Price by the Series I Conversion Price (as defined below) in effect at the time of conversion and (ii) multiplying the result by 1,000. The “Series I Conversion Price” will initially be equal to $1,180.00, and is subject to adjustment in the event that (a) we issue additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series I Original Issue Price or the Series I Conversion Price, the February 2013 Note will be convertible indirectly, at DMRJ’s option, into shares of Common Stock at an effective conversion price of $1.18 per share, which represents premium of approximately 3% over the closing price of the Common Stock on the trading day preceding the date of the February 28, 2013 amendments.

Each share of Series J Preferred Stock will be convertible, at the option of the holder, into that number of shares of Common Stock as is determined by dividing the Series J Original Issue Price by the Series J Conversion Price (as defined below) in effect at the time of conversion. The “Series J Conversion Price” will initially be equal to $.08, and is subject to adjustment in the event that (a) the Company issues additional shares of Common Stock as a dividend or other distribution on outstanding shares of Common Stock, (b) there is a split or subdivision of outstanding shares of Common Stock, or (c) there is a combination or reverse stock split of outstanding shares of Common Stock into a smaller number of shares of Common Stock. Assuming no adjustments to the Series J Original Issue Price or the Series J Conversion Price, the March 2009 Note will be convertible indirectly, at DMRJ’s option, into shares of Common Stock at an effective conversion price of $.08 per share. Prior to the execution of the amendment, the March 2009 Note was convertible directly into shares of Common Stock at a conversion price of $.08 per share. Accordingly, we do not believe this change to be material.

The holders of the Series I Preferred Stock and the Series J Preferred Stock will have no voting rights except as required by applicable law. However, without the consent of the holders of a majority of the outstanding Series I Preferred Stock or Series J Preferred Stock, as the case may be, with each such series voting as a separate class, we may not (i) amend, alter or repeal any provision of our Articles of Organization or By-laws in a manner that adversely affects the powers, preferences or rights of the Series I Preferred Stock or Series J Preferred Stock, as the case may be; (ii) authorize or issue any equity securities (or any equity or debt securities convertible into equity securities) ranking prior and superior to the Series I Preferred Stock or Series J Preferred Stock, as the case may be, with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up; or (iii) consummate any capital reorganization or reclassification of any of its equity securities (or debt securities convertible into equity securities) into equity securities ranking prior and superior to the Series I Preferred Stock or Series J Preferred Stock, as the case may be, with respect to dividends, distributions, redemption rights or rights upon liquidation, dissolution or winding up.

On November 14, 2013, we further amended each of our credit agreements with DMRJ,  to  extend the maturity of all of our indebtedness to DMRJ was extended from March 31, 2014 to September 30, 2014.

As of December 31, 2013, there were no shares of Series H Preferred Stock, Series I Preferred Stock or Series J Preferred Stock outstanding.

The failure to refinance this indebtedness or otherwise negotiate extensions of our obligations to DMRJ would have a material adverse impact on our liquidity and financial condition and could force us to curtail or discontinue operations entirely and/or file for protection under bankruptcy laws.



- 18 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Our ability to comply with our debt covenants in the future depends on our ability to generate sufficient sales and to control expenses, and will require us to seek additional capital through private financing sources.  There can be no assurances that we will achieve our forecasted financial results or that we will be able to raise additional capital to operate our business.  Any such failure would have a material adverse impact on our liquidity and financial condition and could force us to curtail or discontinue operations entirely and/or file for protection under bankruptcy laws.  Further, upon the occurrence of an event of default under certain provisions of our agreements with DMRJ, we could be required to pay default rate interest equal to the lesser of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance outstanding.

As of December 31, 2013, our obligation to DMRJ under a senior secured convertible promissory note, as amended, a second senior secured convertible promissory note, a third senior secured convertible promissory note, a senior secured promissory note and under a revolving line of credit approximated $3,184,000, $12,000,000, $12,000,000, $1,000,000 and $16,499,000, respectively.  Further, as of December 31, 2013, our obligation to DMRJ for accrued interest under these instruments approximated $8,233,000 and is included in current liabilities in the condensed consolidated financial statements.

As of February 4, 2014, our obligations to DMRJ under those four secured promissory notes and our credit facility approximated $2,987,000, $12,000,000, $12,000,000, $1,000,000 and $16,899,000 respectively.  Further, as of February 4, 2014, our obligation to DMRJ for accrued interest under these instruments approximated $8,886,000.

14.

Series G Convertible Preferred Stock

In April 2011, in conjunction with the amendment to the December 10, 2008 note and warrant purchase agreement with DMRJ, we issued 164,667 shares of our Series G Convertible Preferred Stock to DMRJ in exchange for 1,646,663 shares of our Series F Convertible Preferred Stock.

The Series G Preferred Stock is convertible into that number of shares of common stock which equals the original issue price of the Series G Preferred Stock ($0.08 per share) divided by the “Series G Conversion Price” (originally $0.08 per share) multiplied by 100. All of the 164,667 shares of Series G Preferred Stock held by DMRJ were convertible into 16,466,700 shares of common stock, or 25% of our common stock, calculated on a fully diluted basis.  We have concluded that the April 2011 amendment to the DMRJ credit facility was a debt modification, not an extinguishment, and have not recognized a gain or loss on this transaction in our statements of operations.  Further, we did not recognize a beneficial conversion feature on the Series G Preferred Stock or reassess an existing beneficial conversion feature as a result of this amendment.

During the six months ended December 31, 2013, DMRJ converted 16,167 shares of Series G Preferred Stock into 1,616,700 shares of our common stock.  As of December 31, 2013, there were no shares of Series G Preferred Stock outstanding.

15.

Stockholders’ Deficit

Common Shares Authorized

On January 17, 2013, we filed Articles of Amendment to our Restated Articles of Organization with the Commonwealth of Massachusetts increasing the total number of shares of common stock we are authorized to issue to 200,000,000 from 50,000,000 and decreased the par value of our common stock from $0.10 to $0.001. We reclassified $5,450,000 from common stock to additional paid in capital as a result of the change in par value. Our shareholders approved the proposal to increase the number of shares of common stock we are authorized to issue in June 2010.

Stock Purchase Warrants

In connection with various financing agreements and services provided by consultants, we have issued warrants to purchase shares of our common stock.  The fair value of warrants issued is determined using the Black-Scholes option pricing model.  



- 19 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Stock Purchase Warrants and Stock Issuances

In April 2013, we issued 600,000 shares of common stock having a value of $660,000 and warrants to purchase an aggregate of 2,000,000 shares of our common stock to two advisors, in consideration of services rendered to us under two advisory and consulting services agreements.  

As of December 31, 2013, there were warrants outstanding to purchase 3,743,860 shares of our common stock at exercise prices ranging from $0.54 to $1.40 expiring at various dates between April 15, 2014 and June 27, 2018.

We issued 112,812 and 889,766 shares of common stock during the three months ended December 31, 2013 and 2012, respectively, and issued 130,658 and 1,288,099 shares of common stock during the six months ended December 31, 2013 and 2012, respectively, as a result of the exercise of options by employees and the exercise of warrants by consultants.

16.

Income Taxes

We are required to file federal and state income tax returns in the United States.  The preparation of these tax returns requires us to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by us. In consultation with our tax advisors, we base our tax returns on interpretations that are believed to be reasonable under the circumstances. The tax returns, however, are subject to routine reviews by the various federal and state taxing authorities in the jurisdictions in which we file tax returns. As part of these reviews, a taxing authority may disagree with respect to the income tax positions taken by us (“uncertain tax positions”) and, therefore, may require us to pay additional taxes. As required under applicable accounting rules, we accrue an amount for our estimate of additional income tax liability, including interest and penalties, which we could incur as a result of the ultimate or effective resolution of the uncertain tax positions.

We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carry-forwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  A valuation allowance is established when necessary to reduce deferred tax assets to amounts expected to be realized.

We account for uncertain income tax positions by accruing for the estimated additional amount of taxes for the uncertain tax positions when the uncertain tax position does not meet the more likely than not standard for sustaining the position. We review and update our accrual as more definitive information becomes available from taxing authorities, upon completion of tax audits, upon expiration of statutes of limitation, or upon occurrence of other events.  This requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. Significant judgment is required in assessing the timing and amounts of deductible and taxable items and the probability of sustaining uncertain tax positions. The benefits of uncertain tax positions are recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax positions will withstand challenge, if any, from tax authorities. When facts and circumstances change, we reassess these probabilities and record any changes in the consolidated financial statements as appropriate.

Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of the assets and liabilities using the enacted tax rate in effect in the years in which the differences are expected to reverse.  A valuation allowance has been recorded against the deferred tax asset as it is more likely than not, based upon our analysis of all available evidence, that the tax benefit of the deferred tax asset will not be realized.



- 20 -



IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


As of December 31, 2013, the Company has the following unused net operating loss and tax credit carryforwards available to offset future federal and state taxable income, both of which expire at various times as noted below:


(In thousands)

 

Net Operating Losses

 

Investment AMT & Research Credits

 

Expiration Dates

 

Federal

 

$

73,331

 

$

1,095

 

2024 to 2033

 

State

 

$

53,883

 

$

760   

 

2014 to 2028

 

We have recorded a full valuation allowance against our net deferred tax assets of $34,834,000 as of December 31, 2013 due to uncertainties related to our ability to utilize these assets. The valuation allowance is based on our estimates of taxable income and the period over which our deferred tax assets will be recoverable.

Potential 382 Limitation

Our net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service.  Our ability to utilize our net operating loss (“NOL”) and alternative minimum tax (“AMT”) and research and development credit (“R&D”) carryforwards may be substantially limited due to ownership changes that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions.  These ownership changes may limit the amount of NOL, AMT and R&D credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively.  In general, an ownership change, as defined in Section 382 of the Code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups.

We have not completed a study to assess whether one or more ownership changes have occurred since we became a loss corporation as defined in Section 382 of the Code, but we believe that it is likely that an ownership change has occurred.  If we have experienced an ownership change, utilization of the NOL, AMT and R&D credit carryforwards would be subject to an annual limitation, which is determined by first multiplying the value of our common stock at the time of the ownership change by the applicable long-term, tax-exempt rate, and then could be subject to additional adjustments, as required.  Any such limitation may result in the expiration of a portion of the NOL, AMT or R&D credit carryforwards before utilization.  Until a study is completed and any limitation known, no amounts are being considered as an uncertain tax position or disclosed as an unrecognized tax benefit underASC 740.  Any carryforwards that expire prior to utilization as a result of such limitations will be removed from deferred tax assets with a corresponding adjustment to the valuation allowance.  Due to the existence of the valuation allowance, it is not expected that any potential limitation will have a material impact on our operating results.

Our net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and are subject to certain limitations in the event of cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%.

From time to time we may be assessed interest or penalties by major tax jurisdictions, namely the states of Massachusetts and California.  As of December 31, 2013, we had no material unrecognized tax benefits and no adjustments to liabilities or operations were required. No interest and penalties have been recognized by the Company to date.

Tax years 2010 through 2013 are subject to examination by the federal and state taxing authorities.  There are no income tax examinations currently in process.

For the three and six months ended December 31, 2013 and 2012, we provided for no taxes in our consolidated condensed statement of operations as we have significant net loss carryforwards.



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IMPLANT SCIENCES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


17.

Commitments and Contingencies

On April 1, 2013, we entered into a lease for manufacturing, research and office space in Wilmington, Massachusetts which expires on June 30, 2020.  Under the terms of the lease, we are responsible for our proportionate share of real estate taxes and operating expenses relating to this facility.  We lease research and office space in San Diego, California, which lease expires on March 31, 2016 and lease 300 square feet of office space in Shanghai, China, under a lease expiring on November 30, 2014. Total rent expense, including assessments for maintenance and real estate taxes for the six months ended December 31, 2013 and 2012, was $448,000 and $198,000, respectively.

In April 2007, in conjunction with our plans to conduct research, development and minor manufacturing work in New Mexico, we executed an operating lease which was initially to expire on May 1, 2010.  The lease allowed for early termination, which we elected in February 2008.  As a result of the early termination, we are responsible for reimbursing the landlord for certain leasehold improvements over a 24-month period.  As of December 31, 2013 and June 30, 2013, the balance due is approximately $27,000 and is included in current liabilities in the condensed consolidated balance sheets.

18.

Financial Information By Segment

Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker or decision making group, in determining how to allocate resources and in accessing performance.  Our chief operating decision making group is composed of the chief executive officer and members of senior management.  Based on qualitative and quantitative criteria, we have determined that we operate within one reportable segment, which is the Security Products Segment.

19.

Subsequent Events

We have evaluated subsequent events after the balance sheet date through the date these financial statements were issued for appropriate accounting and disclosure and concluded that there were no subsequent events requiring adjustment or disclosure in these financial statements.





- 22 -





Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations


Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain statements that are “forward-looking” within the meaning of the federal securities laws. These forward looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements.  Such statements reflect our current views with respect to future events, are subject to certain risks, uncertainties and assumptions, and are not guaranties of future performance.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or using other similar expressions.

We are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Report. Important factors that could cause actual results to differ from our predictions include those discussed under this “Management’s Discussion and Analysis” and under “Risk Factors,” as well as those discussed under “Risk Factors,” “Management’s Discussion and Analysis” and “Business” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. Although we have sought to identify the most significant risks to our business, we cannot predict whether, or to what extent, any of such risks may be realized, nor can there be any assurance that we have identified all possible issues which we might face.  In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our marketing, capital expenditure or other budgets, which may in turn affect our financial position and results of operations.  For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof.  We assume no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law.  We urge readers to review carefully the risk factors described in this Quarterly Report, in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 and in the other documents that we file with the Securities and Exchange Commission.  You can read these documents at www.sec.gov.

When we say “we,” “us,” “our,” “Company,” or “Implant Sciences,”, we mean Implant Sciences Corporation and its subsidiaries.

Overview

We develop, manufacture and sell sophisticated sensors and systems for the security, safety and defense industries.  A variety of technologies are currently used worldwide in security and inspection applications.  In broad terms, the technologies focus on detection in two major categories: (i) the detection of “bulk” contraband, which includes materials that would be visible to the eye, such as weapons, explosives, narcotics and chemical agents; and (ii) the detection of “trace” amounts of contraband, which includes trace particles or vapors of explosives, narcotics and chemical agents.  Technologies used in the detection of “bulk” materials include computed tomography, transmission and backscatter x-ray, metal detection, trace detection and x-ray, gamma-ray, passive millimeter wave, and neutron analysis.  Trace detection techniques used include mass spectrometry, gas chromatography, chemical luminescence, and ion mobility spectrometry.

We have developed proprietary technologies used in explosives and narcotics trace detection (“ETD” and “NTD”, respectively) applications and market and sell handheld ETD and benchtop ETD and NTD systems that use our proprietary technologies.  Our products are marketed and sold to a growing number of locations domestically and internationally.  These systems are used by private companies and government agencies to screen baggage, cargo, other objects and people for the detection of trace amounts of explosives and narcotics.



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Recent Developments

On October 18, 2013, our QS-B220 Benchtop Explosives and Narcotics Detector was accepted into the “Qualified” section of the Air Cargo Screening Technology List published by the United States Transportation Security Administration (the “TSA”). With this acceptance, which is a follow-on to the “Approved” status granted by the TSA in January 2013, the QS-B220 joined the list of products from which regulated parties, such as air carriers, independent cargo screening facilities and shippers, are encouraged to purchase security solutions. In July 2013, the QS-B220 successfully completed Independent Testing and Evaluation with the Transportation Security Laboratory, the TSA’s testing body, and, in January 2014, the QS-B220 passed all requirements of the Qualification Testing and Evaluation portion of the checkpoint and checked baggage qualification tests at the TSA’s Systems Integration Facility. On September 30, 2013, the Service Technique de l’Aviation Civile in France certified the QS-B220 for use in passenger and air cargo screening at airports throughout France, French territories and several European Union member nations.

Please see our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 for a complete description of our business.

Critical Accounting Policies

Our significant accounting policies are summarized in Note 2 to our consolidated financial statements included in Item 7 of our Annual Report on Form 10-K, for the fiscal year ended June 30, 2013.  However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our condensed consolidated financial statements.  In applying these policies, our management uses judgment to determine the appropriate assumptions to be used in the determination of estimates.  Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our strategic partners and information available from other outside sources, as appropriate.  Actual results may differ significantly from the estimates contained in our condensed consolidated financial statements.  

Results of Operations

Three Months Ended December 31, 2013 vs. December 31, 2012

Revenues

 

 

For the Three Months Ended December 31, 2013

 

 

 

For the Three Months Ended December 31, 2012

 

 

 

 

 

 

 

(In thousands)

 

Amount

 

Mix

 

 

 

Amount

 

Mix

 

 

 

 

Change %

 

 

QS-H150

 

$

1,272

 

 

40.4

 

%

 

$

6,118

 

 

88.2

 

%

 

 

(79.2

)

%

QS-B220

 

 

1,763

 

 

56.0

 

%

 

 

145

 

 

2.1

 

%

 

 

1,115.9

 

%

Parts & supplies

 

 

115

 

 

3.6

 

%

 

 

675

 

 

9.7

 

%

 

 

(83.0

)

%

Total

 

$

3,150

 

 

100.0

 

%

 

$

6,938

 

 

100.0

 

%

 

 

(54.6

)

%


Revenues for the three months ended December 31, 2013 were $3,150,000 as compared with $6,938,000 for the comparable prior year period, a decrease of $3,788,000, or 54.6%.  The decrease in revenue is due primarily to an 80.1% decrease in the number of QS-H150 handheld units sold in the three months ended December 31, 2013, primarily due to the shipment of QS-H150 handheld units under our contract with the India Ministry of Defence in the three months ended December 31, 2012, which resulted in a 79.2% decrease in QS-H150 revenues, and, to a lesser extent, decreased sales of parts and supplies in the three months ended December 31, 2013, as compared to the comparable prior year period, partially offset by a 1,115.9% increase in sales of our QS-B220 benchtop units, due to increased shipments to U.S. air cargo screening facilities and increased shipments into Latin America and, a 4.3% increase in average unit sell prices on sales of our QS-H150 handheld units. We began shipping the QS-B220 in the second quarter of fiscal 2013.



- 24 -





Cost of Revenues

Cost of revenues for the three months ended December 31, 2013 were $1,980,000 as compared with $4,470,000 for the comparable prior year period, a decrease of $2,490,000 or 55.7%.  The decrease in cost of revenues recorded in the three months ended December 31, 2013 is primarily due to decreased unit sales of our QS-H150 handheld units and a $96,000 decrease in stock-based compensation recorded on stock option grants to officers and directors in September 2012, partially offset by a $137,000 increase in manufacturing overhead due to an increase in manufacturing personnel costs and increased occupancy costs, as compared to the prior year period.

Gross Margin

Gross margin for the three months ended December 31, 2013 was $1,170,000 or 37.1% of revenues as compared with $2,468,000 or 35.6% of revenues for the comparable prior year period.  The increase in gross margin as a percent of revenues is primarily the result of higher margins achieved on sales of our QS-B220 benchtop units and a $96,000 decrease in stock-based compensation recorded on stock option grants to officers and directors in September 2012, partially offset by increased manufacturing overhead due to an increase in manufacturing personnel costs and increased occupancy costs, as compared to the prior year period.

Research and Development Expense

Research and development expense for the three months ended December 31, 2013 was $1,191,000 as compared with $1,068,000 for the comparable prior year period, an increase of $123,000 or 11.5%.  The increase in research and development expense is due primarily to a $90,000 increase in payroll and related benefit costs, a $52,000 increase in occupancy costs, a $32,000 increase in government testing fees and a $27,000 increase in prototype expense, offset partially by a $71,000 decrease in stock-based compensation recorded on the September 2012 officer and director option grants. We continue to expend funds to further the development of new products in the areas of explosives and narcotics detection, as well as expenses incurred to obtain the necessary approvals from the TSA and other non-U.S. government approvals. Spending on research and development will increase in the next nine to twelve months due to the ongoing development of the QS-B220 benchtop detector, the development of the QS-H150E portable explosives and narcotics detector and continued development of a hyphenated system employing conventional ion mobility, differential mobility and quadrupole mass spectrometry.  

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2013 were $2,686,000 as compared with $3,793,000 for the comparable prior year period, a decrease of $1,107,000, or 29.2%. The decrease in selling, general and administrative expenses is due primarily to a $902,000 decrease in stock-based compensation recorded on the September 2012 officer and director option grants, the imposition of liquidated damages of $298,000 under our contract with the India Ministry of Defence in the prior year period, a $136,000 decrease in bank charges and a $67,000 decrease in variable sales expenses due to lower revenues, offset partially by a $137,000 increase in occupancy costs, due to the relocation of our corporate offices, an $83,000 increase in stock-based compensation on non-employee warrants, a $61,000 increase in selling expenses due to the opening of our Shanghai representative office, increased participation at industry trade shows and an increase in demonstration units provided to our sales force and a $61,000 increase in payroll, related benefit costs and travel expense resulting from the addition of sales personnel.

 Other Expense

For the three months ended December 31, 2013, other expense was $1,674,000 as compared with other expense of $1,330,000, for the comparable prior year period, an increase of $344,000. The increase is due to increased interest expense on higher borrowings under our credit facility with DMRJ.

Net Loss

Our net loss for the three months ended December 31, 2013 was $4,381,000 as compared with a net loss of $3,723,000 for the comparable prior year period, an increase of $658,000, or 17.7%.  The increase in the net loss is primarily due to lower sales, increased operating expenses and increased interest expense, partially offset by the decrease in stock-based compensation recorded on the September 2012 officer and director option grants in the three months ended December 31, 2013.



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Six Months Ended December 31, 2013 vs. December 31, 2012

Revenues

 

 

For the Six Months Ended December 31, 2013

 

 

 

For the Six Months Ended December 31, 2012

 

 

 

 

 

 

 

(In thousands)

 

Amount

 

Mix

 

 

 

Amount

 

Mix

 

 

 

 

Change %

 

 

QS-H150

 

$

1,522

 

 

35.3

 

%

 

$

7,314

 

 

87.6

 

%

 

 

(79.2

)

%

QS-B220

 

 

2,599

 

 

60.2

 

%

 

 

245

 

 

2.9

 

%

 

 

960.8

 

%

Parts & supplies

 

 

194

 

 

4.5

 

%

 

 

794

 

 

9.5

 

%

 

 

(75.6

)

%

Total

 

$

4,315

 

 

100.0

 

%

 

$

8,353

 

 

100.0

 

%

 

 

(48.3

)

%


Revenues for the six months ended December 31, 2013 were $4,315,000 as compared with $8,353,000 for the comparable prior year period, a decrease of $4,038,000, or 48.3%.  The decrease in revenue is due primarily to an 80.2% decrease in the number of QS-H150 handheld units sold in the six months ended December 31, 2013, primarily due to the shipment of QS-H150 handheld units under our contract with the India Ministry of Defence in the six months ended December 31, 2012, which resulted in a 79.2% decrease in QS-H150 revenues, and, to a lesser extent, decreased sales of parts and supplies in the six months ended December 31, 2013, as compared to the comparable prior year period, partially offset by a 960.8% increase in sales of our QS-B220 benchtop units, due to increased shipments to U.S. air cargo screening facilities, increased shipments into Latin America and agencies of the U.S. government and, a 5.0% increase in average unit sell prices on sales of our QS-H150 handheld units.

Cost of Revenues

Cost of revenues for the six months ended December 31, 2013 were $2,932,000 as compared with $5,924,000 for the comparable prior year period, a decrease of $2,992,000 or 50.5%.  The decrease in cost of revenues recorded in the six months ended December 31, 2013 is primarily due to decreased unit sales of our QS-H150 handheld units and a $468,000 decrease in stock-based compensation recorded on stock option grants to officers and directors in September 2012, partially offset by a $221,000 increase in manufacturing overhead due to an increase in manufacturing personnel costs and increased occupancy costs, as compared to the prior year period.

Gross Margin

Gross margin for the six months ended December 31, 2013 was $1,383,000 or 32.1% of revenues as compared with $2,429,000 or 29.1% of revenues for the comparable prior year period.  The increase in gross margin as a percent of revenues is primarily the result of the $468,000 decrease in stock-based compensation recorded on stock option grants to officers and directors in September 2012, partially offset by increased manufacturing overhead due to an increase in manufacturing personnel costs and increased occupancy costs, as compared to the prior year period.

Research and Development Expense

Research and development expense for the six months ended December 31, 2013 was $2,422,000 as compared with $2,405,000 for the comparable prior year period, an increase of $17,000 or 0.7%.  The increase in research and development expense is due primarily to a $307,000 increase in payroll and related benefit costs, a $97,000 increase in occupancy costs, a $32,000 increase in government testing fees and a $37,000 increase in prototype expense, offset partially by a $409,000 decrease in stock-based compensation recorded on the September 2012 officer and director option grants and a $31,000 decrease in contract engineering services. We continue to expend funds to further the development of new products in the areas of explosives and narcotics detection, as well as expenses incurred to obtain the necessary approvals from the TSA and other non-U.S. government approvals. Spending on research and development will increase in the next nine to twelve months due to the ongoing development of the QS-B220 benchtop detector, the development of the QS-H150E portable explosives and narcotics detector and continued development of a hyphenated system employing conventional ion mobility, differential mobility and quadrupole mass spectrometry.  



- 26 -





Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended December 31, 2013 were $6,094,000 as compared with $13,924,000 for the comparable prior year period, a decrease of $7,830,000, or 56.2%. The decrease in selling, general and administrative expenses is due primarily to a $8,091,000 decrease in stock-based compensation recorded on the September 2012 officer and director option grants, the imposition of liquidated damages of $298,000 under our contract with the India Ministry of Defence in the prior year period, a $177,000 decrease in bank charges, a $118,000 decrease in legal expenses and a $67,000 decrease in variable sales expenses due to lower revenues, offset partially by a $360,000 increase in payroll, related benefit costs and travel expense resulting from the addition of sales personnel, a $336,000 increase in occupancy costs, due to the relocation of our corporate offices, a $159,000 increase in stock-based compensation on non-employee warrants and a $175,000 increase in selling expenses due to the opening of our Shanghai representative office, increased participation at industry trade shows and an increase in demonstration units provided to our sales force.

Other Expense

For the six months ended December 31, 2013, other expense was $3,269,000 as compared with other expense of $2,571,000, for the comparable prior year period, an increase of $698,000. The increase is due to increased interest expense on higher borrowings under our credit facility with DMRJ.

Net Loss

Our net loss for the six months ended December 31, 2013 was $10,402,000 as compared with a net loss of $16,471,000 for the comparable prior year period, a decrease of $6,069,000, or 36.8%.  The decrease in the net loss is primarily due to the decrease in stock-based compensation recorded on the September 2012 officer and director option grants in the six months ended December 31, 2013, partially offset by increased operating expenses and increased interest expense.

Liquidity and Capital Resources

As of December 31, 2013 and June 30, 2013, we had cash and cash equivalents of $271,000 and $80,000, respectively. On September 30, 2014, we must repay in full our obligations to DMRJ under four secured promissory notes and a revolving credit facility. As of December 31, 2013, our obligation to DMRJ under these instruments approximated $3,184,000, $12,000,000, $12,000,000, $1,000,000 and $16,499,000, respectively.  Further, as of December 31, 2013, our obligation to DMRJ for accrued interest under these instruments approximated $8,233,000.  

As of February 4, 2014, our obligations to DMRJ under those four secured promissory notes and our credit facility approximated $2,987,000, $12,000,000, $12,000,000, $1,000,000 and $16,899,000 respectively.  Further, as of February 4, 2014, our obligation to DMRJ for accrued interest under these instruments approximated $8,886,000.

Each of these notes and the credit facility are described in Note 13 of the Notes to Condensed Consolidated Financial Statements, accompanying this Quarterly Report.

During the six months ended December 31, 2013, we had net cash outflows of $3,700,000 from operating activities as compared to net cash outflows from operating activities of $3,185,000 for the comparable prior year period.  The $515,000 increase in net cash outflows used in operating activities during the six months ended December 31, 2013, as compared to the comparable prior year period, was due to the following changes in working capital: (i) a $557,000 increase in accounts receivable, compared to a $334,000 increase in the prior period, due to the timing of our product shipments during the quarter ended December 31, 2013; (ii) a $421,000 decrease in inventories compared to a $1,724,000 decrease in the prior period, due primarily to the November 2012 shipment of our order with India Ministry of Defence; (iii) an increase in accrued expenses of $3,490,000, compared to a $1,295,000 increase in the prior period, due to primarily to increased accruals for unpaid interest on our borrowings with DMRJ;  (iv) a $230,000 increase in deferred revenue, compared to a $732,000 decrease in deferred revenue in the prior year period, due primarily to the release of the India Ministry of Defence advance deposit due to the November 2012 shipment; and, (v) a $461,000 increase in accounts payable, compared to a $206,000 decrease in the prior period, due to the timing of vendor payments in the current fiscal year.



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During the six months ended December 31, 2013, we had net cash outflows of $213,000 from investing activities as compared to net cash outflows of $272,000 from investing activities for the prior year period.  The $59,000 decrease in net cash used in investing activities during the six months ended December 31, 2013, as compared to the prior year period, was primarily due to the receipt of $121,000 in restricted funds, compared to the transfer to restricted funds of $221,000 in the prior year period, partially offset by a $283,000 increase in purchases of equipment and fixtures, due to the July 2013 move to our new corporate offices and the build out of our manufacturing facility.

During the six months ended December 31, 2013 we had net cash inflows of $4,104,000 from financing activities as compared to net cash inflows of $3,407,000 from financing activities for the comparable prior year period.  The $697,000 increase in net cash from financing activities during the six months ended December 31, 2013, as compared to the comparable prior year period, was primarily due to a $692,000 increase in additional borrowings under our credit facility with DMRJ, compared to the prior fiscal year and a $28,000 increase in proceeds received due to the exercise of stock options, partially offset by a $23,000 increase in principal repayments of capital lease obligations.

Credit Facilities with DMRJ Group LLC

In December 2008, we entered into a note and warrant purchase agreement with DMRJ, pursuant to which we issued a senior secured convertible promissory note in the principal amount of $5,600,000 and a warrant to purchase 1,000,000 shares of our common stock.  Thereafter, we entered into a series of amendments, waivers and modifications of this facility.  On September 30, 2014, we must repay in full our obligations to DMRJ under the facility. The facility with DMRJ is described in Note 13 of the Notes to Condensed Consolidated Financial Statements, accompanying this Quarterly Report. There can be no assurance that we will be successful in refinancing or extending our obligations to DMRJ.  

Our ability to comply with our debt covenants in the future depends on our ability to generate sufficient sales and to control expenses, and will require us to seek additional capital through private financing sources.  In addition, we will require substantial funds for further research and development, regulatory approvals, and the marketing of our explosives detection products.  Our capital requirements depend on numerous factors, including but not limited to the progress of our research and development programs; the cost of filing, prosecuting, defending and enforcing any intellectual property rights; competing technological and market developments; changes in our development of commercialization activities and arrangements; and the hiring of additional personnel, and acquiring capital equipment.  There can be no assurances that we will achieve our forecasted financial results or that we will be able to raise additional capital to operate our business.  

Any failure to comply with our debt covenants, to achieve our projections and/or obtain sufficient capital on acceptable terms would have a material adverse impact on our liquidity, financial condition and operations and could force us to curtail or discontinue operations entirely and/or file for protection under bankruptcy laws.  Further, upon the occurrence of an event of default under certain provisions of our agreements with DMRJ, we could be required to pay default rate interest equal to the lesser of 2.5% per month and the maximum applicable legal rate per annum on the outstanding principal balance outstanding.

Based on current sales, operating expense and cash flow projections, and the cash available from our line of credit, management believes there are plans in place to sustain operations for the next several months. Because there can be no assurances that sales will materialize as forecasted, and/or that management will be successful in refinancing or extending our obligations with DMRJ, management will continue to closely monitor and attempt to control our costs and will continue to actively seek the needed capital through government grants and awards, strategic alliances, private financing sources, and through its lending institutions.  Future expenditures for research and product development are discretionary and can be adjusted as can certain selling, general and administrative expenses, based on the availability of cash.  The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.



- 28 -





Despite our current sales, expense and cash flow projections and the cash available from our line of credit with DMRJ, we will require additional capital in the first quarter of fiscal 2015 to fund operations and continue the development, commercialization and marketing of our products. Our failure to achieve our projections and/or obtain sufficient additional capital on acceptable terms would have a material adverse effect on our liquidity and operations and could require us to file for protection under bankruptcy laws. These conditions raise substantial doubt as to our ability to continue as a going concern.

Off-Balance Sheet Arrangements

As of December 31, 2013, we had two irrevocable standby letters of credit outstanding in the approximate amount of $595,000.  These letters of credit (1) provide performance security equal to 5% of the amount of our contract with the India Ministry of Defence; and, (2) provide warranty performance security equal to 5% of the contract amount.  We have amended each of the letters of credit, extending the expiration dates to November 4, 2014 and May 4, 2015, respectively.

As of December 31, 2013, we did not have any other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

Recent Accounting Pronouncements

In July 2013, the FASB issued Accounting Standards Update 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (“ASU 2013-11”).  ASU 2013-11 amends accounting guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or tax credit carryforward exists. This new guidance requires entities, if certain criteria are met, to present an unrecognized tax benefit, or portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when such items exist in the same taxing jurisdiction. The adoption of ASU 2013-11 is expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits. The provisions of ASU 2013-11 are effective for fiscal years and interim periods beginning after December 15, 2013 and can be applied prospectively to all unrecognized tax benefits that exist at the effective date.  Retrospective application is permitted.  The adoption of this update did not have a material effect on our consolidated financial position and results of operations.



- 29 -





Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not required pursuant to Item 305(e) of Regulation S-K.

Item 4.

Controls and Procedures

The certifications of our Chief Executive Officer and Chief Financial Officer attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures, and internal control over financial reporting.  Such certifications should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certifications.

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2013.  The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions to be made regarding required disclosure.  It should be noted that any system of controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met and that management necessarily applies its

judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer, concluded that we did maintain effective internal control over financial reporting as of December 31, 2013 and further concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes to our internal control over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




- 30 -





PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

From time to time, we are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Each of these matters is subject to various uncertainties.

We are not a party to any legal proceedings, other than ordinary routine litigation incidental to our business, which we believe will not have a material affect on our business, assets or results of operations.

Item 1A.

Risk Factors

Other than as set forth below, there have not been any material changes from the risk factors previously disclosed under Item 1A of our Annual Report on Form 10-K, for the fiscal year ended June 30, 2013.

We will be required to repay our borrowings from DMRJ Group LLC on September 30, 2014.  

We will be required to repay all of our borrowings from DMRJ on September 30, 2014.  Our obligations to DMRJ are secured by a security interest in substantially all of our assets. As of February 4, 2014, our obligations to DMRJ under those four secured promissory notes and our credit facility approximated $2,987,000, $12,000,000, $12,000,000, $1,000,000 and $16,899,000 respectively.  Further, as of February 4, 2014, our obligation to DMRJ for accrued interest under these instruments approximated $8,886,000.

If we are unable to repay these amounts as required, refinance our obligations to DMRJ, or negotiate extensions of these obligations, DMRJ may seize our assets and we may be forced to curtail or discontinue operations entirely and/or file for protection under bankruptcy laws.

We will require additional capital to fund operations and continue the development, commercialization and marketing of our products.  Our failure to raise capital could have a material adverse effect on our business.

Management continually evaluates plans to reduce our operating expenses, increase sales and increase our cash flow from operations.  Despite our current sales, expense and cash flow projections, we will require additional capital in the first quarter of fiscal 2015 to fund operations and continue the development, commercialization and marketing of our products. Our failure to achieve our projections and/or obtain sufficient additional capital on acceptable terms would have a material adverse effect on our liquidity and operations and could require us to file for protection under bankruptcy laws.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

None.

Item 5.

Other Information

None.



- 31 -





Item 6.

Exhibits

Exhibit No.

Ref. No.

Description

31.1

(1)

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

(1)

Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

(2)

Certification of the Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

(2)

Certification of the Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS

(3)

XBRL Instance Document.

101.SCH

(3)

XBRL Taxonomy Extension Schema Document.

101.CAL

(3)

XBRL Taxomony Extension Calculation Linkbase Document.

101.LAB

(3)

XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

(3)

XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

(3)

XBRL Taxonomy Extension Definition Linkbase Document.


 

(1)

Filed herewith.

 

(2)

In accordance with Item 601(b)(32)(ii) of Regulation S-K, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed to be “filed” for purposes of Section 18 of the Exchange Act.  Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

 

(3)

In accordance with Rule 406T of Regulation S-T, the information in these exhibits shall not be deemed to be “filed” or part of a registration statement for purposes of Sections 11 and 12 of the Securities Act, shall not be deemed “filed” for purposes of Section 18 of the Exchange Act and is not otherwise subject to liability under these sections, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act, except as expressly set forth by specific reference in such filing.

 

 

 




- 32 -





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.


 

Implant Sciences Corporation

 

By:

/s/ Glenn D. Bolduc

 

 

Glenn D. Bolduc

President and, Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

By:

/s/ Roger P. Deschenes

 

 

Roger P. Deschenes

Vice President, Finance and Chief Financial Officer

(Principal Financial Officer and Chief Accounting Officer)

 

 

 

Dated:  February 14, 2014

 

 




- 33 -