ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,080,906
|
|
|
$
|
2,622,142
|
|
Accounts receivable
|
|
|
8,818
|
|
|
|
47,964
|
|
Inventory
|
|
|
67,649
|
|
|
|
66,884
|
|
Prepaid expenses and deposits
|
|
|
77,890
|
|
|
|
102,610
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
2,235,263
|
|
|
|
2,839,600
|
|
|
|
|
|
|
|
|
|
|
Property and equipment – net
|
|
|
63,517
|
|
|
|
81,623
|
|
TOTAL ASSETS
|
|
$
|
2,298,780
|
|
|
$
|
2,921,223
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
219,603
|
|
|
$
|
116,930
|
|
Accrued expenses
|
|
|
39,026
|
|
|
|
76,188
|
|
Accrued compensation
|
|
|
56,113
|
|
|
|
140,783
|
|
Total current liabilities
|
|
|
314,742
|
|
|
|
333,901
|
|
Total liabilities
|
|
|
314,742
|
|
|
|
333,901
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies - See Note 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock, $.001 par value, 2,000,000 shares authorized;107,172 shares issued and outstanding at March 31, 2013 and at December 31, 2012
|
|
|
107
|
|
|
|
107
|
|
Common stock, $.001 par value, 500,000,000 shares authorized; 91,735,662 shares issued and outstanding at March 31, 2013 and December 31, 2012
|
|
|
91,736
|
|
|
|
91,736
|
|
Additional paid-in capital
|
|
|
79,231,770
|
|
|
|
79,218,301
|
|
Accumulated deficit
|
|
|
(77,339,575
|
)
|
|
|
(76,722,822
|
)
|
Total stockholders’ equity
|
|
|
1,984,038
|
|
|
|
2,587,322
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
2,298,780
|
|
|
$
|
2,921,223
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the three months ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
34,457
|
|
|
$
|
399,207
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
28,894
|
|
|
|
365,067
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
5,563
|
|
|
|
34,140
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
503,645
|
|
|
|
689,402
|
|
Selling and marketing
|
|
|
75,786
|
|
|
|
399,565
|
|
Research and development
|
|
|
-
|
|
|
|
134,788
|
|
Total operating expenses
|
|
|
579,431
|
|
|
|
1,223,755
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(573,868
|
)
|
|
|
(1,189,615
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(1,651
|
)
|
Interest income
|
|
|
653
|
|
|
|
393
|
|
Total other (expense) income
|
|
|
653
|
|
|
|
(1,258
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(573,215
|
)
|
|
|
(1,190,873
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(43,539
|
)
|
|
|
(43,539
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(616,754
|
)
|
|
$
|
(1,234,412
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
91,735,662
|
|
|
|
91,670,192
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
For the three months ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(573,215
|
)
|
|
$
|
(1,190,873
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
18,106
|
|
|
|
79,562
|
|
Non-cash stock based compensation expense
|
|
|
13,469
|
|
|
|
41,069
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
39,146
|
|
|
|
401,201
|
|
Other receivable
|
|
|
-
|
|
|
|
51,630
|
|
Inventory
|
|
|
(765
|
)
|
|
|
372
|
|
Prepaid expenses, deposits and other assets
|
|
|
24,720
|
|
|
|
76,588
|
|
Accounts payable
|
|
|
102,673
|
|
|
|
(184,660
|
)
|
Billings in excess of costs
|
|
|
-
|
|
|
|
(2,152
|
)
|
Accrued expenses and deposits
|
|
|
(121,831
|
)
|
|
|
(541,371
|
)
|
Net cash used in operating activities
|
|
|
(497,697
|
)
|
|
|
(1,268,634
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net cash provided by (used in ) investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Dividends paid (preferred stock)
|
|
|
(43,539
|
)
|
|
|
(43,539
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(43,539
|
)
|
|
|
(43,539
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(541,236
|
)
|
|
|
(1,312,173
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
2,622,142
|
|
|
|
3,937,135
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,080,906
|
|
|
$
|
2,624,962
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
The accompanying interim
unaudited condensed consolidated financial statements include the accounts of Applied Energetics, Inc. and its wholly owned subsidiaries,
Ionatron Technologies, Inc. and North Star Power Engineering, Inc. as of March 31, 2013 (collectively, "company," "Applied
Energetics," "we," "our" or "us"). All intercompany balances and transactions have been eliminated.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of
the results for the interim periods presented have been made. The results for the three- period ended March 31, 2013, may not be
indicative of the results for the entire year. The interim unaudited condensed consolidated financial statements should be read
in conjunction with the company's audited consolidated financial statements contained in our Annual Report on Form 10-K.
Recent Developments
The U.S. Government
has significantly reduced defense spending and we do not anticipate receiving significant additional Government funding in the
near future. We intend to continue to seek U.S. Government funding for our Laser Guided Energy, Laser Induced Plasma Channel, counter-improvised
explosive devices (“IED”) and high voltage and ultrashort pulse laser technologies and systems. We have suspended the
majority of our Government work due to the lack of Government funding. We have also developed our USP laser technologies and systems
for commercial markets. We are not investing company funds or resources to further develop and enhance our technologies and systems.
As of March 18, 2013, our backlog was $0.
As a result of the
decrease in U.S. Government funding, we have significantly reduced our workforce to a level consistent with our expected operations.
We are considering
strategic alternatives, including mergers, the acquisition of one or more businesses or technologies, and/or the disposition of
one or more of our existing businesses.
Our continuance in
business beyond 2013 is dependent on successful development of commercial customers, sales of our USP laser systems, obtaining
profitable operations and additional financing necessary to fund our operations. Additional contracts from our Department of Defense
customers, if available and substantial, will assist in funding our operations and contribute to revenue and cash flow.
The accompanying unaudited
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. For the three months ended March 31, 2013, the company incurred a net loss of
approximately $573,000, had negative cash flows from operations of $498,000 and may incur additional future losses due to the reduction
in Government contract activity. These matters raise substantial doubt as to the company’s ability to continue as a going
concern. The financial statements do not include any adjustments relating to the recoverability of assets and the amount or classification
of liabilities that might be necessary should the company be unable to continue as a going concern.
As of April 30, 2013,
the company had approximately $1.8 million in cash and cash equivalents.
USE OF ESTIMATES
The preparation of
consolidated financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”)
requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Management bases its assumptions on historical experiences and on various other estimates that it believes
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. In addition, management considers the basis and methodology
used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the
amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues
concerning accounting principles and financial statement presentation. Such estimates and assumptions could change in the future,
as more information becomes known which could materially impact the amounts reported and disclosed herein. Significant estimates
include revenue recognition under the percentage of completion method of contract accounting, estimating costs at completion on
a contract, the valuation of inventory, carrying amount of long-lived assets, expected forfeiture rate on stock-based compensation
and measurements of income tax assets and liabilities.
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
CASH AND CASH EQUIVALENTS
Cash equivalents are
investments in money market funds or securities with an initial maturity of three months or less. These money market funds are
invested in government and US treasury based securities.
FAIR VALUE OF CURRENT ASSETS AND LIABILITIES
The carrying amount
of accounts receivable and accounts payable approximate fair value due to the short maturity of these instruments.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company has reviewed issued accounting
pronouncements and plans to adopt those that are applicable to it. The Company does not expect the adoption of any other pronouncements
to have an impact on its results of operations or financial position.
Accounts receivable
consists of the following:
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Contracts receivable
|
|
$
|
6,990
|
|
|
$
|
46,221
|
|
Costs and estimated earnings on uncompleted contracts
|
|
|
1,828
|
|
|
|
1,743
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
8,818
|
|
|
$
|
47,964
|
|
Contracts receivable
are expected to be collected within a year.
Costs and Estimated Earnings on Uncompleted
Contracts
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
694,167
|
|
|
$
|
6,350,706
|
|
Estimated earnings
|
|
|
53,471
|
|
|
|
601,755
|
|
|
|
|
|
|
|
|
|
|
Total billable costs and estimated earnings
|
|
|
747,638
|
|
|
|
6,952,461
|
|
Less:
|
|
|
|
|
|
|
|
|
Billings to date
|
|
|
745,810
|
|
|
|
6,950,718
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,828
|
|
|
$
|
1,743
|
|
|
|
|
|
|
|
|
|
|
Included in accompanying balance sheet
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled costs and estimated earnings on uncompleted contracts included in accounts receivable
|
|
$
|
1,828
|
|
|
$
|
1,743
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,828
|
|
|
$
|
1,743
|
|
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
Our inventories consist
of the following:
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
Raw materials
|
|
$
|
66,718
|
|
|
$
|
66,719
|
|
Work-in-process
|
|
|
931
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,649
|
|
|
$
|
66,884
|
|
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
|
4.
|
PROPERTY AND EQUIPMENT
|
Our property and equipment
consist of the following:
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
15,141
|
|
|
$
|
15,141
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
1,898,920
|
|
|
|
1,898,920
|
|
|
|
|
|
|
|
|
|
|
Furniture
|
|
|
5,333
|
|
|
|
5,333
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
801,498
|
|
|
|
801,498
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,720,892
|
|
|
|
2,720,892
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(2,657,375
|
)
|
|
|
(2,639,269
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
63,517
|
|
|
$
|
81,623
|
|
We review long-lived
assets, including intangible assets subject to amortization, for possible impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable.
We annually assess
the recoverability of such long-lived assets by determining whether the amortization of the balances over their remaining lives
can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected
discounted future operating cash flows. The assessment of the recoverability of long-lived assets will be impacted if estimated
future operating cash flows are not achieved.
|
5.
|
SHARE-BASED COMPENSATION
|
Share-Based Compensation – Employees
and Directors
For the three months
ended March 31, 2013 and 2012, share-based compensation expense totaled approximately $13,000 and $41,000, respectively.
There was no related
income tax benefit recognized because our deferred tax assets are fully offset by a valuation allowance.
As of March 31, 2013,
$31,000 of total unrecognized compensation cost related to restricted stock units is expected to be recognized over a weighted
average period of approximately 1.97 years.
We determine the fair
value of option grant share-based awards at their grant date, using a Black-Scholes-Merton Option-Pricing Model.
During the three months
ended March 31, 2013, 38,228 shares of restricted stock units were vested and no shares of restricted stock units or restricted
stock awards were forfeited, no options to purchase shares were granted or exercised, nor forfeited. At March 31, 2013, 1,172,166
options with an average exercise price of $0.51 were outstanding.
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2013
(Unaudited)
Approximately 81% and
99% of revenues for the three-month periods ended March 31, 2013 and 2012, respectively, are generated from either the U.S. Government
or contractors to the U.S. Government.
Basic net loss per
common share is computed by dividing net loss available to common shareholders by the weighted average number of common shares
outstanding during the period before giving effect to stock options, stock warrants, restricted stock units and convertible securities
outstanding, which are considered to be dilutive common stock equivalents. Diluted net loss per common share is calculated based
on the weighted average number of common and potentially dilutive shares outstanding during the period after giving effect to convertible
preferred stock, stock options, warrants and restricted stock units. Contingently issuable shares are included in the computation
of basic loss per share when issuance of the shares is no longer contingent. Due to the losses from continuing operations for the
three months ended March 31, 2013 and 2012, basic and diluted loss per common share were the same, as the effect of potentially
dilutive securities would have been anti-dilutive.
Potentially dilutive
securities not included in the diluted loss per share calculation, due to net losses from continuing operations, were as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Options to purchase common shares
|
|
|
1,172,166
|
|
|
|
2,824,001
|
|
Unvested restricted stock units
|
|
|
38,230
|
|
|
|
224,001
|
|
Convertible preferred stock
|
|
|
107,172
|
|
|
|
107,172
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive securities
|
|
|
1,317,568
|
|
|
|
3,155,174
|
|
As of March 31, 2013,
we had 107,172 shares of our 6.5% Series A Convertible Preferred Stock outstanding. A dividend was declared and was paid in cash
on May 1, 2013 to the holders of record as of April 15, 2013.
Dividends on Preferred
Stock are accrued when the amount and kind of the dividend is determined and are payable quarterly on the first day of February,
May, August and November, in cash or shares of common stock.
The Company’s
management has evaluated subsequent events occurring after March 31, 2013, the date of our most recent balance sheet, through the
date our financial statements were issued.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our discussion and
analysis of the financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated
financial statements and the related disclosures included elsewhere herein and in Management’s Discussion and Analysis of
Financial Condition and Results of Operations included as part of our Annual Report on Form 10-K for the year ended December 31,
2012.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
Certain statements
in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the securities laws. Forward-looking
statements include all statements that do not relate solely to the historical or current facts, and can be identified by the use
of forward looking words such as "may", "believe", "will", “would”, “could”,
“should”, "expect", "project", "anticipate", “estimates", “possible”,
"plan", "strategy", "target", "prospect" or "continue" and other similar terms
and phrases. These forward looking statements are based on the current plans and expectations of our management and are subject
to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results
of operations and financial condition and may cause our actual results, performances or achievements to be materially different
from any future results, performances or achievements expressed or implied by such forward-looking statements. Important factors
that could cause our actual results to differ materially from our expectations are described in Item 1A. (Risk Factors) of our
Annual Report on Form 10-K, for the year ended December 31, 2012. Although we believe that the expectations reflected in such forward-looking
statements are reasonable, there can be no assurance that such expectations will prove to have been correct. We do not assume any
obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors
affecting such forward-looking statements.
OVERVIEW
Applied
Energetics, Inc. (“company”, “Applied Energetics”, “we”, “our” or “us”)
designs, develops and manufactures solid state Ultra Short Pulse (“USP”) lasers for commercial applications and applied
energy systems for military applications. Through our technology development efforts, we have gained expertise and proprietary
knowledge in high performance lasers and high-voltage electronics.
We believe our proprietary
USP laser systems, which are a commercial adaptation of our prior military development activities, offer better performance for
high pulse energy and high average power compared to commercially available USP lasers for micromachining. Micromachining applications
include drilling, cutting, and engraving metals, composites and ceramics.
Additionally, we have
also developed high-voltage systems for government and commercial customers for a range of applications. We are not investing company
funds to further develop and enhance our technologies of systems.
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2013 AND 2012:
|
|
2013
|
|
|
2012
|
|
Revenue
|
|
$
|
34,457
|
|
|
$
|
399,207
|
|
Cost of revenue
|
|
|
28,894
|
|
|
|
365,067
|
|
General and administrative
|
|
|
503,645
|
|
|
|
689,402
|
|
Selling and marketing
|
|
|
75,786
|
|
|
|
399,565
|
|
Research and development
|
|
|
-
|
|
|
|
134,788
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(1,651
|
)
|
Interest income
|
|
|
653
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(573,215
|
)
|
|
$
|
(1,190,873
|
)
|
REVENUE
Revenue decreased by
approximately $365,000 to $34,000 for the three months ended March 31, 2013 compared to $399,000 for the three months ended March
31, 2012. Revenues from the LGE product line decreased by $212,000 to $0 and High Voltage revenues decreased by $153,000 to $34,000
for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. There were no revenues from Laser
or the C-IED product line for the quarters. Because of the significant reduction in U.S. Government spending, we do not anticipate
receiving additional Government funding in the near future and expect our revenue to remain at these reduced levels.
COST OF REVENUE
Cost of revenue includes
manufacturing labor, benefits and overhead, and an allocation of allowable general and administration and research and development
costs in accordance with the terms of our government contracts.
Cost of revenue decreased
by approximately $336,000 to $29,000 for the three months ended March 31, 2013, compared to $365,000 for the three months ended
March 31, 2012. The decrease in cost of revenue is directly tied to the decrease in sales activity of approximately 91%. Cost of
revenue as a percentage of revenue decreased from last year by approximately 8%. We have suspended the majority of our Government
work due to the lack of Government funding and are not investing company funds or resources to develop or enhance our technologies
or systems.
GENERAL AND ADMINISTRATIVE
General and administrative
expenses decreased approximately $186,000 to $504,000 for the three months ended March 31, 2013 compared to $689,000 for the three
months ended March 31, 2012. Salaries, wages and benefits decreased by approximately $436,000, which is reflective of our reduction
in workforce; professional services decreased by approximately $149,000; depreciation and amortization decreased by $61,000, reflecting
the sale of our building and the sale of other depreciable assets as we downsized to a smaller facility; supplies; building related
expenses decreased by approximately $44,000; insurance and miscellaneous fees decreased by $39,000; and non-cash compensation costs
decreased by approximately $28,000. Offsetting these reductions in operating expenses totaling approximately $775,000 was a decrease
in absorption of labor and overheads of approximately $589,000 previously charged to government contracts. Cost saving measures
were instituted throughout 2011 and continuing into 2012 and 2013 to compensate for the decrease in revenue, including reductions
of our workforce and reductions in other operating expenses.
SELLING AND MARKETING
Selling and marketing
expenses decreased by $324,000 to $76,000 for the three months ended March 31, 2013 compared to $400,000 for the three months ended
March 31, 2012. The decrease in sales and marketing expenses is represented by decreases in business development expense of $233,000,
bid and proposal expenses of $53,000 and marketing expenses of $38,000 predominantly due to our headcount reductions.
RESEARCH AND DEVELOPMENT
There were no research
and development expenses during the three months ended March 31, 2013 as compared to $135,000 for the three months ended March
31, 2012. This decrease reflects our goal to limit the investment of our own resources in research and development efforts as a
cost reduction measure.
INTEREST INCOME AND INTEREST EXPENSE
Net interest income
for the three months ended March 31, 2013 was higher by approximately $2,000 as compared to the three months ended March 31, 2012.
NET LOSS
Our operations for
the three months ended March 31, 2013 resulted in a net loss of approximately $573,000, a decrease of approximately $618,000 compared
to the $1.2 million loss for the three months ended March 31, 2012.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2013, we
had approximately $2.1 million of cash and cash equivalents, a decrease of approximately $541,000 from December 31, 2012. During
the first three months of 2013 the net cash outflow from operating activities was approximately $498,000. This amount is comprised
primarily of our net loss of $573,000 and decreases in our accrued expenses and deposits of $122,000 partially offset by the increase
in accounts payable of $103,000, decreases in accounts receivables of $39,000 and prepaid expenses, deposits and other assets of
$25,000, depreciation and amortization of $18,000 and noncash stock based compensation of $13,000. Investing activities had no
activity while financing activities reflected the cash dividend payment of $44,000, resulting in net cash outflow of approximately
$541,000.
The fiscal year 2012
Department of Defense budget was approved in January of 2012. This budget and the President’s proposed budget for 2013 reflect
significant reductions in research and development funding for the foreseeable future. This area has historically generated greater
than 90% of revenues. We have suspended the majority of our Government work due to the lack of Government funding; therefore we
expect to continue having significantly reduced revenues from the US Government. Furthermore, it is expected that revenue generated
from commercial sales of our new USP laser and High Voltage systems will not become significant for at least the next twelve months
as these products gain market acceptance. The combination of these conditions will cause further depletion our cash reserves during
the transition to commercialize our USP laser technologies. We are considering strategic alternatives, including mergers, the acquisition
of one or more businesses or technologies, and/or the disposition of one or more of our existing businesses.
Our continuance in business
beyond 2013 is dependent on successful development of new commercial customers and sales of our USP laser systems and high voltage
systems, obtaining profitable operations and additional financing necessary to fund our operations. Additional contracts from our
Department of Defense customers, if available and substantial, may assist in funding our operations and contribute to our overall
cash flow.
In their report accompanying
our financial statements, our independent auditors stated that our financial statements for the year ended December 31, 2012 were
prepared assuming that we would continue as a going concern, and that they have substantial doubt as to our ability to continue
as a going concern. Our auditors’ have noted that our recurring losses from operations and negative cash flow from operations
and the concern that we may incur additional losses due to the reduction in Government contract activity raise substantial doubt
about our ability to continue as a going concern.
BACKLOG OF ORDERS
At March 31, 2013,
we had a backlog (workload remaining on signed contracts) of approximately $0, to be completed within the next twelve months.