ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,544,545
|
|
|
$
|
2,622,142
|
|
Accounts receivable
|
|
|
2,091
|
|
|
|
47,964
|
|
Inventory
|
|
|
66,719
|
|
|
|
66,884
|
|
Prepaid expenses and deposits
|
|
|
48,493
|
|
|
|
102,610
|
|
Total current assets
|
|
|
1,661,848
|
|
|
|
2,839,600
|
|
|
|
|
|
|
|
|
|
|
Property and equipment - net
|
|
|
45,410
|
|
|
|
81,623
|
|
TOTAL ASSETS
|
|
$
|
1,707,258
|
|
|
$
|
2,921,223
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
65,784
|
|
|
$
|
116,930
|
|
Accrued expenses
|
|
|
34,789
|
|
|
|
76,188
|
|
Accrued compensation
|
|
|
47,179
|
|
|
|
140,783
|
|
Total current liabilities
|
|
|
147,752
|
|
|
|
333,901
|
|
Total liabilities
|
|
|
147,752
|
|
|
|
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 June 30, 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 June 30, 2013 and December 31, 2012
|
|
|
91,736
|
|
|
|
91,736
|
|
Additional paid-in capital
|
|
|
79,233,586
|
|
|
|
79,218,301
|
|
Accumulated deficit
|
|
|
(77,765,923
|
)
|
|
|
(76,722,822
|
)
|
Total stockholders’ equity
|
|
|
1,559,506
|
|
|
|
2,587,322
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
1,707,258
|
|
|
$
|
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
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,263
|
|
|
$
|
504,307
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
6,957
|
|
|
|
389,523
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(2,694
|
)
|
|
|
114,784
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
377,883
|
|
|
|
511,331
|
|
Selling and marketing
|
|
|
4,500
|
|
|
|
275,937
|
|
Research and development
|
|
|
-
|
|
|
|
22,526
|
|
Impairment loss on property held for sale
|
|
|
-
|
|
|
|
708,000
|
|
Total operating expenses
|
|
|
382,383
|
|
|
|
1,517,794
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(385,077
|
)
|
|
|
(1,403,010
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
Interest income
|
|
|
2,269
|
|
|
|
390
|
|
Total other (expense) income
|
|
|
2,269
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(382,808
|
)
|
|
|
(1,402,620
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(43,539
|
)
|
|
|
(43,539
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(426,347
|
)
|
|
$
|
(1,446,159
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
91,735,662
|
|
|
|
91,735,440
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
(Unaudited)
|
|
For the six months ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
38,720
|
|
|
$
|
903,514
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
35,852
|
|
|
|
754,591
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,868
|
|
|
|
148,923
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
881,528
|
|
|
|
1,200,733
|
|
Selling and marketing
|
|
|
80,286
|
|
|
|
675,502
|
|
Research and development
|
|
|
-
|
|
|
|
157,313
|
|
Impairment loss on property held for sale
|
|
|
-
|
|
|
|
708,000
|
|
Total operating expenses
|
|
|
961,814
|
|
|
|
2,741,548
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(958,946
|
)
|
|
|
(2,592,625
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(1,651
|
)
|
Interest income
|
|
|
2,922
|
|
|
|
783
|
|
Total other (expense) income
|
|
|
2,922
|
|
|
|
(868
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(956,024
|
)
|
|
|
(2,593,493
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(87,077
|
)
|
|
|
(87,077
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(1,043,101
|
)
|
|
$
|
(2,680,570
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
91,735,662
|
|
|
|
91,702,815
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
For the six months ended
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(956,024
|
)
|
|
$
|
(2,593,493
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
36,213
|
|
|
|
159,123
|
|
Impairment loss on property held for sale
|
|
|
-
|
|
|
|
708,000
|
|
Gain on equipment disposal
|
|
|
-
|
|
|
|
(21,500
|
)
|
Non-cash stock based compensation expense
|
|
|
15,284
|
|
|
|
46,459
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
45,873
|
|
|
|
(74,608
|
)
|
Other receivable
|
|
|
-
|
|
|
|
99,447
|
|
Inventory
|
|
|
165
|
|
|
|
50,995
|
|
Prepaid expenses, deposits and other assets
|
|
|
54,117
|
|
|
|
136,493
|
|
Long term receivables - net
|
|
|
-
|
|
|
|
205,313
|
|
Accounts payable
|
|
|
(51,146
|
)
|
|
|
(249,242
|
)
|
Billings in excess of costs
|
|
|
-
|
|
|
|
6,828
|
|
Accrued expenses and deposits
|
|
|
(135,002
|
)
|
|
|
(702,931
|
)
|
Net cash used in operating activities
|
|
|
(990,520
|
)
|
|
|
(2,229,116
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from disposal of equipment
|
|
|
-
|
|
|
|
21,500
|
|
Net cash provided by investing activities
|
|
|
-
|
|
|
|
21,500
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Dividends paid (preferred stock)
|
|
|
(87,077
|
)
|
|
|
(87,077
|
)
|
Net cash provided by (used in) financing activities
|
|
|
(87,077
|
)
|
|
|
(87,077
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,077,597
|
)
|
|
|
(2,294,693
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
2,622,142
|
|
|
|
3,937,135
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,544,545
|
|
|
$
|
1,642,442
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
June 30, 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 June 30, 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-month and six-month periods ended June
30, 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 have completed our Government contracts and do not have any funded Government contracts for future work. We have
also developed our USP laser technologies and systems for commercial markets. We have not generated meaningful sales of our commercial
systems and we do not have any existing commercial contracts. We are not investing company funds or resources to further develop
and enhance our technologies and systems or market our systems other than the submission of proposals for Government contracts.
As of August 7, 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.
Since we do not believe
we will be able to obtain any meaningful contracts or generate meaningful revenue or profitable operations in our current line
of business, 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. We do not expect to continue our current businesses for any
meaningful period of time and our continuation as a going concern is dependent upon the success of our strategic efforts.
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 six months ended June 30, 2013, the company incurred a net loss of approximately
$956,000, had negative cash flows from operations of $991,000 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 July 31, 2013,
the company had approximately $1.5 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
June 30, 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:
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Contracts receivable
|
|
$
|
2,091
|
|
|
$
|
46,221
|
|
Costs and estimated earnings on uncompleted contracts
|
|
|
-
|
|
|
|
1,743
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
2,091
|
|
|
$
|
47,964
|
|
Contracts receivable
are expected to be collected within a year.
Costs and Estimated Earnings on Uncompleted
Contracts
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Costs incurred on uncompleted contracts
|
|
$
|
697,459
|
|
|
$
|
6,350,706
|
|
Estimated earnings
|
|
|
48,642
|
|
|
|
601,755
|
|
|
|
|
|
|
|
|
|
|
Total billable costs and estimated earnings
|
|
|
746,101
|
|
|
|
6,952,461
|
|
Less:
|
|
|
|
|
|
|
|
|
Billings to date
|
|
|
746,101
|
|
|
|
6,950,718
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
1,743
|
|
|
|
|
|
|
|
|
|
|
Included in accompanying balance sheet
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled costs and estimated earnings on uncompleted contracts included in
accounts receivable
|
|
$
|
-
|
|
|
$
|
1,743
|
|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
1,743
|
|
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)
Our inventories consist
of the following:
|
|
June 30, 2013
|
|
|
December 31, 2012
|
|
Raw materials
|
|
$
|
66,719
|
|
|
$
|
66,719
|
|
Work-in-process
|
|
|
-
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66,719
|
|
|
$
|
66,884
|
|
|
4.
|
PROPERTY
AND EQUIPMENT
|
Our property and equipment
consist of the following:
|
|
June 30, 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
|
|
|
(2,675,482
|
)
|
|
|
(2,639,269
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
45,410
|
|
|
$
|
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 June 30, 2013 and 2012, share-based compensation expense totaled approximately $2,000 and $5,000, respectively. For the
six months ended June 30, 2013 and 2012, share-based compensation expense totaled approximately $15,000 and $46,000, respectively.
There was no related
income tax benefit recognized because our deferred tax assets are fully offset by a valuation allowance.
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)
As of June 30, 2013,
$11,000 of total unrecognized compensation cost related to restricted stock units is expected to be recognized over a weighted
average period of approximately 0.72 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 six months
ended June 30, 2013, no restricted stock units were granted, 38,228 shares of restricted stock units were vested and 21,459 shares
of restricted stock units were forfeited; no options to purchase shares were granted or exercised and 211,333 options to purchase
shares expired; no restricted stock awards were granted or exercised, nor forfeited. At June 30, 2013, 960,833 options with an
average exercise price of $0.52 were outstanding.
All of our revenues
for the three month period ended June 30, 2013 were derived from two commercial contracts. Approximately 83% of revenue for the
three-month periods ended June 30, 2012 was generated from either the U.S. Government or contractors to the U.S. Government.
Approximately 98% and 90% of revenue for the six-month periods ended June 30, 2013 and 2012, respectively, were 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 six months ended June 30, 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:
|
|
Six Months Ended June 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Options to purchase common shares
|
|
|
960,833
|
|
|
|
2,661,334
|
|
Unvested restricted stock units
|
|
|
16,771
|
|
|
|
88,440
|
|
Convertible preferred stock
|
|
|
107,172
|
|
|
|
107,172
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive securities
|
|
|
1,084,776
|
|
|
|
2,856,946
|
|
As of June 30, 2013,
we had 107,172 shares of our 6.5% Series A Convertible Preferred Stock outstanding. The company’s Board of Directors did
not declare the dividend due August 1, 2013. Accordingly, the company did not pay the August 1, 2013 quarterly dividend.
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 June 30, 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”) has developed
and manufactured 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 are not investing
company funds to further develop and enhance our technologies of systems or market our systems other than the submission of proposals
for Government contracts. We have completed our Government contracts and do not have any remaining funded Government contracts
due to the lack of Government funding. We have not generated meaningful sales of our commercial systems and we do not have any
existing commercial contracts.
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE THREE
MONTHS ENDED JUNE 30, 2013 AND 2012:
|
|
2013
|
|
|
2012
|
|
Revenue
|
|
$
|
4,263
|
|
|
$
|
504,307
|
|
Cost of revenue
|
|
|
6,957
|
|
|
|
389,523
|
|
General and administrative
|
|
|
377,883
|
|
|
|
511,331
|
|
Selling and marketing
|
|
|
4,500
|
|
|
|
275,937
|
|
Research and development
|
|
|
-
|
|
|
|
22,526
|
|
Impairment loss on property held for sale
|
|
|
-
|
|
|
|
708,000
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,269
|
|
|
|
390
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(382,808
|
)
|
|
$
|
(1,402,620
|
)
|
REVENUE
Revenue decreased
by approximately $500,000 to $4,000 for the three months ended June 30, 2013 compared to $504,000 for the three months ended June
30, 2012. Revenue from the LGE product line decreased by $250,000 to $4,000 and High Voltage revenue decreased by $250,000 to
$0 for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. There was no revenue from Laser
or the C-IED product line for the quarters. We have completed substantially all work under our Government contracts and do not
have any funded Government contracts for future work due to the lack of Government funding and are not investing company funds
or resources to develop or enhance our technologies or systems. Although we continue to make proposals for Government contracts
we do not anticipate receiving additional Government funding in the near future and expect our revenue to remain at these reduced
levels because of the significant reduction in U.S. Government spending.
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 $383,000 to $7,000 for the three months ended June 30, 2013, compared to $390,000 for the three months ended
June 30, 2012. The decrease in cost of revenue is directly tied to the decrease in sales activity of approximately 99%.
GENERAL AND ADMINISTRATIVE
General and administrative
expenses decreased approximately $133,000 to $378,000 for the three months ended June 30, 2013 compared to $511,000 for the three
months ended June 30, 2012. Salaries, wages and benefits decreased by approximately $288,000, which is reflective of our reduction
in workforce; professional services decreased by approximately $148,000; 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 and building
related expenses decreased by approximately $60,000; insurance and miscellaneous fees decreased by $40,000; and non-cash compensation
costs decreased by approximately $4,000. Offsetting these reductions in operating expenses totaling approximately $601,000 was
a decrease in absorption of labor and overheads of approximately $462,000 previously charged to Government contracts. Cost saving
measures were initiated in 2011 and have continued, in response to the decrease in revenue and lack of Government contracts, including
reductions of our workforce and reductions in other operating expenses.
SELLING AND MARKETING
Selling and marketing
expenses decreased by $271,000 to $5,000 for the three months ended June 30, 2013 compared to $276,000 for the three months ended
June 30, 2012. The decrease in sales and marketing expenses is represented by decreases in business development expense of $193,000,
marketing expenses of $60,000 and bid and proposal expenses of $18,000 predominantly due to our headcount reductions.
RESEARCH AND DEVELOPMENT
There were no research
and development expenses during the three months ended June 30, 2013 as compared to $23,000 for the three months ended June 30,
2012. This decrease reflects our goal to limit the investment of our own resources in research and development efforts as a cost
reduction measure.
IMPAIRMENT LOSS
The impairment loss
is the recognition that, in 2012, we did not expect to recover the carrying value of our land and building through expected future
operating cash flows. In July 2012, we entered into an agreement to sell our principal office, manufacturing, storage, and primary
research and development facility in Tucson, Arizona for approximately $1.4 million which was approximately $708,000 less than
the carrying amount of these assets.
INTEREST INCOME AND INTEREST EXPENSE
Net interest income
for the three months ended June 30, 2013 was higher by approximately $2,000 as compared to the three months ended June 30, 2012.
NET LOSS
Our operations for
the three months ended June 30, 2013 resulted in a net loss of approximately $383,000, a decrease of approximately $1.0 million
compared to the $1.4 million loss for the three months ended June 30, 2012.
COMPARISON OF OPERATIONS FOR THE SIX
MONTHS ENDED JUNE 30, 2013 AND 2012:
|
|
2013
|
|
|
2012
|
|
Revenue
|
|
$
|
38,720
|
|
|
$
|
903,514
|
|
Cost of revenue
|
|
|
35,852
|
|
|
|
754,591
|
|
General and administrative
|
|
|
881,528
|
|
|
|
1,200,733
|
|
Selling and marketing
|
|
|
80,286
|
|
|
|
675,502
|
|
Research and development
|
|
|
-
|
|
|
|
157,313
|
|
Impairment loss on property held for sale
|
|
|
-
|
|
|
|
708,000
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(1,651
|
)
|
Interest income
|
|
|
2,922
|
|
|
|
783
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(956,024
|
)
|
|
$
|
(2,593,493
|
)
|
REVENUE
Revenue decreased
by approximately $865,000 to $39,000 for the six months ended June 30, 2013 compared to $904,000 for the six months ended June
30, 2012. Revenue from the LGE product line decreased by $462,000 to $4,000 and High Voltage revenue decreased by $404,000 to
$33,000 for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. There was no revenue from Laser
or the C-IED product line for the quarters. There was no revenue from Laser or the C-IED product line for the six months ended
June 30, 2013. We have completed substantially all work under our Government contracts and do not have any funded Government contracts
for future work due to the lack of Government funding and are not investing company funds or resources to develop or enhance our
technologies or systems. Although we continue to make proposals for Government contracts we do not anticipate receiving additional
Government funding in the near future and expect our revenue to remain at these reduced levels because of the significant reduction
in U.S. Government spending.
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 $719,000 to $36,000 for the six months ended June 30, 2013, compared to $755,000 for the six months ended June
30, 2012. The decrease in cost of revenue is directly tied to the decrease in sales activity of approximately 96%.
GENERAL AND ADMINISTRATIVE
General and administrative
expenses decreased approximately $318,000 to $882,000 for the six months ended June 30, 2013 compared to $1.2 million for the
six months ended June 30, 2012. Salaries, wages and benefits decreased by approximately $724,000, which is reflective of our reduction
in workforce; professional services decreased by approximately $298,000; depreciation and amortization decreased by $123,000,
reflecting the sale of our building and the sale of other depreciable assets as we downsized to a smaller facility; supplies and
building related expenses decreased by approximately $109,000; insurance and miscellaneous fees decreased by $72,000; and non-cash
compensation costs decreased by approximately $31,000. Offsetting these reductions in operating expenses totaling approximately
$1.4 million was a decrease in absorption of labor and overheads of approximately $1.1 million previously charged to Government
contracts. Cost saving measures were initiated in 2011 and have continued, in response to the decrease in revenue and lack of
Government contracts, including reductions of our workforce and reductions in other operating expenses.
SELLING AND MARKETING
Selling and marketing
expenses decreased by $595,000 to $80,000 for the six months ended June 30, 2013 compared to $675,000 for the six months ended
June 30, 2012. The decrease in sales and marketing expenses is represented by decreases in business development expense of $426,000,
marketing expenses of $98,000 and bid and proposal expenses of $71,000 predominantly due to our headcount reductions.
RESEARCH AND DEVELOPMENT
There were no research
and development expenses during the six months ended June 30, 2013 as compared to $157,000 for the six months ended June 30, 2012.
This decrease reflects our goal to limit the investment of our own resources in research and development efforts as a cost reduction
measure.
IMPAIRMENT LOSS
The impairment loss
is the recognition that, in 2012, we did not expect to recover the carrying value of our land and building through expected future
operating cash flows. In July 2012, we entered into an agreement to sell our principal office, manufacturing, storage, and primary
research and development facility in Tucson, Arizona for approximately $1.4 million which was approximately $708,000 less than
the carrying amount of these assets.
INTEREST INCOME AND INTEREST EXPENSE
Net interest income
for the six months ended June 30, 2013 was higher by approximately $4,000 as compared to the six months ended June 30, 2012.
NET LOSS
Our operations for
the six months ended June 30, 2013 resulted in a net loss of approximately $956,000, a decrease of approximately $1.6 million
compared to the $2.6 million loss for the six months ended June 30, 2012.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2013, we
had approximately $1.5 million of cash and cash equivalents, a decrease of approximately $1.1 million from December 31, 2012.
During the first six months of 2013 the net cash outflow from operating activities was approximately $991,000. This amount is
comprised primarily of our net loss of $956,000 and decreases in our accrued expenses and deposits of $135,000 and accounts payable
of $51,000, partially offset by the decreases in prepaid expenses, deposits and other assets of $54,000, accounts receivables
of $46,000 and depreciation and amortization of $36,000 and noncash stock based compensation of $15,000. Investing activities
had no activity while financing activities reflected the cash dividend payment of $87,000, resulting in net cash outflow of approximately
$1.1 million.
The U.S. Government
has significantly reduced defense spending and we do not anticipate receiving significant additional Government funding in the
near future. We have completed our Government contracts and do not have any funded Government contracts for future work. We have
also developed our USP laser technologies and systems for commercial markets. We have not generated meaningful sales of our commercial
systems and we do not have any existing commercial contracts. We are not investing company funds or resources to further develop
and enhance our technologies and systems or market our systems other than the submission of proposals for Government contracts.
As of August 7, 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.
Since we do not believe
we will be able to obtain any meaningful contracts or generate meaningful revenue or profitable operations in our current businesses,
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. We do not expect to continue our current businesses for any meaningful
period of time and our continuation as a going concern is dependent upon the success of our strategic efforts.
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 August 7 2013,
we had a backlog (workload remaining on signed contracts) of approximately $0, to be completed within the next twelve months.