ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,322,341
|
|
|
$
|
2,622,142
|
|
Accounts receivable
|
|
|
2,091
|
|
|
|
47,964
|
|
Inventory
|
|
|
66,719
|
|
|
|
66,884
|
|
Prepaid expenses and deposits
|
|
|
27,042
|
|
|
|
102,610
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,418,193
|
|
|
|
2,839,600
|
|
|
|
|
|
|
|
|
|
|
Property and equipment - net
|
|
|
34,649
|
|
|
|
81,623
|
|
TOTAL ASSETS
|
|
$
|
1,452,842
|
|
|
$
|
2,921,223
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
80,008
|
|
|
$
|
116,930
|
|
Accrued expenses
|
|
|
113,925
|
|
|
|
76,188
|
|
Accrued compensation
|
|
|
38,670
|
|
|
|
140,783
|
|
Total current liabilities
|
|
|
232,603
|
|
|
|
333,901
|
|
Total liabilities
|
|
|
232,603
|
|
|
|
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 September 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 September 30, 2013 and December 31, 2012
|
|
|
91,736
|
|
|
|
91,736
|
|
Additional paid-in capital
|
|
|
79,236,073
|
|
|
|
79,218,301
|
|
Accumulated deficit
|
|
|
(78,107,677
|
)
|
|
|
(76,722,822
|
)
|
Total stockholders’ equity
|
|
|
1,220,239
|
|
|
|
2,587,322
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
1,452,842
|
|
|
$
|
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
|
|
|
|
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,091
|
|
|
$
|
311,992
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
-
|
|
|
|
263,687
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
2,091
|
|
|
|
48,305
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
262,538
|
|
|
|
378,220
|
|
Selling and marketing
|
|
|
-
|
|
|
|
36,344
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
262,538
|
|
|
|
414,564
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(260,447
|
)
|
|
|
(366,259
|
)
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,044
|
|
|
|
192
|
|
Total other income
|
|
|
1,044
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(259,403
|
)
|
|
|
(366,067
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(82,351
|
)
|
|
|
(43,539
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(341,754
|
)
|
|
$
|
(409,606
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.004
|
)
|
|
$
|
(0.004
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
91,735,662
|
|
|
|
91,735,247
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the nine months ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
40,811
|
|
|
$
|
1,215,506
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
35,852
|
|
|
|
1,018,277
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,959
|
|
|
|
197,229
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,144,067
|
|
|
|
2,286,954
|
|
Selling and marketing
|
|
|
80,286
|
|
|
|
711,846
|
|
Research and development
|
|
|
-
|
|
|
|
157,313
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,224,353
|
|
|
|
3,156,113
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,219,394
|
)
|
|
|
(2,958,884
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(1,651
|
)
|
Interest income
|
|
|
3,967
|
|
|
|
974
|
|
Total other (expense) income
|
|
|
3,967
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,215,427
|
)
|
|
|
(2,959,561
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(169,429
|
)
|
|
|
(130,616
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(1,384,856
|
)
|
|
$
|
(3,090,177
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
91,735,662
|
|
|
|
91,691,796
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
For the nine months ended
September 30,
|
|
|
|
2013
|
|
|
2012
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,215,427
|
)
|
|
$
|
(2,959,561
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
46,974
|
|
|
|
174,312
|
|
Impairment loss on property held for sale
|
|
|
-
|
|
|
|
708,000
|
|
Net gain on building, land and equipment disposal
|
|
|
(1,200
|
)
|
|
|
(98,505
|
)
|
Non-cash stock based compensation expense
|
|
|
17,771
|
|
|
|
52,617
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
45,874
|
|
|
|
391,391
|
|
Other receivable
|
|
|
-
|
|
|
|
99,447
|
|
Inventory
|
|
|
165
|
|
|
|
72,543
|
|
Prepaid expenses, deposits and other assets
|
|
|
75,568
|
|
|
|
206,887
|
|
Long term receivables - net
|
|
|
-
|
|
|
|
205,313
|
|
Accounts payable
|
|
|
(36,922
|
)
|
|
|
(271,683
|
)
|
Billings in excess of costs
|
|
|
-
|
|
|
|
(2,152
|
)
|
Accrued expenses and deposits
|
|
|
(146,727
|
)
|
|
|
(784,128
|
)
|
Net cash used in operating activities
|
|
|
(1,213,924
|
)
|
|
|
(2,205,519
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
-
|
|
|
|
(2,363
|
)
|
Proceeds from disposal of equipment
|
|
|
1,200
|
|
|
|
1,490,495
|
|
Net cash provided by investing activities
|
|
|
1,200
|
|
|
|
1,488,132
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Dividends paid (preferred stock)
|
|
|
(87,077
|
)
|
|
|
(130,616
|
)
|
Net cash used in financing activities
|
|
|
(87,077
|
)
|
|
|
(130,616
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(1,299,801
|
)
|
|
|
(848,003
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
2,622,142
|
|
|
|
3,937,135
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
1,322,341
|
|
|
$
|
3,089,132
|
|
|
|
|
|
|
|
|
|
|
Suplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
Preferred dividends accrued and unpaid
|
|
$
|
82,352
|
|
|
$
|
-
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 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 nine-month
periods ended September 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.
Liquidity and Management’s Plan
These interim financial
statements should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form
10-K for the year ended December 31, 2012. The report of our independent registered public accounting firm that accompanies the
audited consolidated financial statements for the year ended December 31, 2012, included in that Annual Report on Form 10-K, contains
a going concern explanatory paragraph in which our independent registered public accounting firm expressed substantial doubt about
our ability to continue as a going concern. We have experienced significant losses and negative cash flows and have an accumulated
deficit in excess of $78 million as of September 30, 2013
The interim results
reported in these condensed consolidated financial statements are not necessarily indicative of the results to be expected for
the full fiscal year, or any other future period, and have been prepared assuming we will continue as a going concern based on
the realization of assets and the satisfaction of liabilities in the normal course of business.
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 all of 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 have one existing agreement for the lease of our High Voltage equipment. 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 November 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 are unable
to determine if 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. Absent the award of a significant new Government
contract, 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 nine months ended September 30, 2013, the company incurred a net loss
of approximately $1.2 million, had negative cash flows from operations of $1.2 million 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 October 31, 2013,
the company had approximately $1.3 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
September 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:
|
|
September 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.
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
Costs and Estimated Earnings on Uncompleted Contracts
|
|
September 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
|
|
Our inventories consist
of the following:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
Raw materials
|
|
$
|
66,719
|
|
|
$
|
66,719
|
|
Work-in-process
|
|
|
-
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66,719
|
|
|
$
|
66,884
|
|
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
|
4.
|
PROPERTY AND EQUIPMENT
|
Our property and equipment
consist of the following:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
15,141
|
|
|
$
|
15,141
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
|
1,889,884
|
|
|
|
1,898,920
|
|
|
|
|
|
|
|
|
|
|
Furniture
|
|
|
5,333
|
|
|
|
5,333
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
801,498
|
|
|
|
801,498
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,711,856
|
|
|
|
2,720,892
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(2,677,207
|
)
|
|
|
(2,639,269
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
34,649
|
|
|
$
|
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 September 30, 2013 and 2012, share-based compensation expense totaled approximately $2,000 and $6,000, respectively. For
the nine months ended September 30, 2013 and 2012, share-based compensation expense totaled approximately $18,000 and $53,000,
respectively.
There was no related
income tax benefit recognized because our deferred tax assets are fully offset by a valuation allowance.
As of September 30,
2013, $9,000 of total unrecognized compensation cost related to restricted stock units is expected to be recognized over a weighted
average period of approximately 0.47 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 nine months
ended September 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 511,333 options to
purchase shares expired; no restricted stock awards were granted or exercised, nor forfeited. At September 30, 2013, 660,833 options
with an average exercise price of $0.55 were outstanding.
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013
(Unaudited)
Substantially, all of our revenues for the three month period ended September 30, 2013 were derived from
one agreement for the lease of our High Voltage equipment. Approximately 90% of revenue for the three-month periods ended September
30, 2012 was generated from either the U.S. Government or contractors to the U.S. Government. Approximately 65% and 90% of revenue
for the nine-month periods ended September 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
nine months ended September 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:
|
|
Nine months Ended September 30,
|
|
|
|
2013
|
|
|
2012
|
|
Options to purchase common shares
|
|
|
660,833
|
|
|
|
1,658,166
|
|
Unvested restricted stock units
|
|
|
16,771
|
|
|
|
83,684
|
|
Convertible preferred stock
|
|
|
107,172
|
|
|
|
107,172
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive securities
|
|
|
784,776
|
|
|
|
1,849,022
|
|
As of September 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 dividends due August 1, 2013 and November 1, 2013. Accordingly, the company did not pay these dividends. Dividend
arrearages as of September 30, 2013 is $67,000.
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 holders of shares of Series A Convertible Preferred Stock are
entitled to receive dividends at the initial rate of 6.5% of the liquidation preference per share (the "Initial Dividend Rate"),
payable, at the option of the corporation, in cash or shares of common stock or a combination of cash and common stock. Upon the
occurrence of the company's failure to pay dividends in the five business days following a dividend payment date (a "Payment
Default"), the dividend rate shall immediately and automatically increase to 7.5% of the liquidation preference per share
for as long as such Payment Default continues (or return to the Initial Dividend Rate at such time as such Payment Default no longer
continues), and if a Payment Default shall occur on two consecutive Dividend Payment Dates, the dividend rate shall immediately
and automatically increase to 10% of the Liquidation Preference for as long as such Payment Default continues and shall immediately
and automatically return to the Initial Dividend Rate at such time as the Payment Default is no longer continuing.
The company’s
management has evaluated subsequent events occurring after September 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 all of our Government contracts and do not have any other funded Government contracts
due to the lack of Government funding. We have not generated meaningful sales of our commercial systems and we have one existing
agreement for the lease of our High Voltage equipment.
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 2013 AND 2012:
|
|
2013
|
|
|
2012
|
|
Revenue
|
|
$
|
2,091
|
|
|
$
|
311,992
|
|
Cost of revenue
|
|
|
-
|
|
|
|
263,687
|
|
General and administrative
|
|
|
262,538
|
|
|
|
378,220
|
|
Selling and marketing
|
|
|
-
|
|
|
|
36,344
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,044
|
|
|
|
192
|
|
Net loss
|
|
$
|
(259,403
|
)
|
|
$
|
(366,067
|
)
|
REVENUE
Revenue decreased by
approximately $310,000 to $2,000 for the three months ended September 30, 2013 compared to $312,000 for the three months ended
September 30, 2012. Revenue from the LGE product line decreased by $167,000 to $0 and High Voltage revenue decreased by $142,000
to $2,000 for the three months ended September 30, 2013 compared to the three months ended September 30, 2012. There was no revenue
from Laser or the C-IED product line for the quarters. We have completed 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. We currently have one agreement for the lease of our High Voltage equipment.
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
from approximately $264,000 for the three months ended September 30, 2012 to $0 for the three months ended September 30, 2013.
The decrease in cost of revenue reflects the minimal revenue activity during the quarter.
GENERAL AND ADMINISTRATIVE
General and administrative
expenses decreased approximately $115,000 to $263,000 for the three months ended September 30, 2013 compared to $378,000 for the
three months ended September 30, 2012. Salaries, wages and benefits decreased by approximately $221,000, which is reflective of
our reduction in workforce; professional services decreased by approximately $70,000; insurance and miscellaneous fees decreased
by $48,000; cost of temporary help decreased by $16,000; travel related expenses decreased by $12,000; depreciation and amortization
decreased by $4,000; and non-cash compensation costs decreased by approximately $4,000. Offsetting these reductions in operating
expenses totaling approximately $374,000 was an increases in miscellaneous expense by approximately $63,000, which reflects the
gains on sale of unused fixed assets in the third quarter of 2012, and in supplies and building related expenses by approximately
$12,000, reflecting the gains on the sale of surplus supplies in the third quarter of 2012, as well as a decrease in absorption
of labor and overheads of approximately $185,000 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 to $0 for the three months ended September 30, 2013 from $36,000 for the three months ended September 30, 2012
. The decrease in sales and marketing expenses is represented by decreases in business development expense of $29,000, marketing
expenses of $3,000 and bid and proposal expenses of $4,000 predominantly due to our headcount reductions.
RESEARCH AND DEVELOPMENT
There were no research
and development expenses during the three months ended September 30, 2013 and for the three months ended September 30, 2012. This
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 September 30, 2013 was higher by approximately $1,000 as compared to the three months ended September
30, 2012.
NET LOSS
Our operations for
the three months ended September 30, 2013 resulted in a net loss of approximately $259,000, a decrease of approximately $107,000
compared to the $366,000 loss for the three months ended September 30, 2012.
COMPARISON OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2013 AND 2012:
|
|
2013
|
|
|
2012
|
|
Revenue
|
|
$
|
40,811
|
|
|
$
|
1,215,506
|
|
Cost of revenue
|
|
|
35,852
|
|
|
|
1,018,277
|
|
General and administrative
|
|
|
1,144,067
|
|
|
|
2,286,954
|
|
Selling and marketing
|
|
|
80,286
|
|
|
|
711,846
|
|
Research and development
|
|
|
-
|
|
|
|
157,313
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
-
|
|
|
|
(1,651
|
)
|
Interest income
|
|
|
3,967
|
|
|
|
974
|
|
Net loss
|
|
$
|
(1,215,427
|
)
|
|
$
|
(2,959,561
|
)
|
REVENUE
Revenue decreased by
approximately $1.2 million to $41,000 for the nine months ended September 30, 2013 compared to $1.2 million for the nine months
ended September 30, 2012. Revenue from the LGE product line decreased by $629,000 to $4,000 and High Voltage revenue decreased
by $545,000 to $37,000 for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. There
was no revenue from Laser or the C-IED product line for the nine months ended September 30, 2013. We have completed 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. We currently have one
agreement for the lease of our High Voltage equipment.
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 $982,000 to $36,000 for the nine months ended September 30, 2013, compared to $1.0 million for the nine months
ended September 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 $1.2 million to $1.1 million for the nine months ended September 30, 2013 compared to $2.3 million
for the nine months ended September 30, 2012. Salaries, wages and benefits decreased by approximately $945,000, which is reflective
of our reduction in workforce; miscellaneous expense decreased by $631,000 which reflects the $720,000 loss on the sale of our
building and land in 2012, partially offset by gains on the sales of fixed assets; professional services decreased by approximately
$367,000; depreciation and amortization decreased by $127,000, reflecting the sale of our building and the sale of other depreciable
assets as we downsized to a smaller facility; insurance and miscellaneous fees decreased by $127,000; supplies and building related
expenses decreased by approximately $97,000; non-cash compensation costs decreased by approximately $35,000; cost of temporary
help decreased by $27,000; and travel related expenses decreased by $19,000. Offsetting these reductions in operating expenses
totaling approximately $2.4 million was a decrease in absorption of labor and overheads of approximately $1.2 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 $632,000 to $80,000 for the nine months ended September 30,
2013 compared to $712,000 for the nine months ended September 30, 2012. The decrease in sales and marketing expenses is represented
by decreases in business development expense of $455,000, marketing expenses of $101,000 and bid and proposal expenses of $75,000
predominantly due to our headcount reductions
RESEARCH AND DEVELOPMENT
There were no research
and development expenses during the nine months ended September 30, 2013 as compared to $157,000 for the nine months ended September
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.
INTEREST INCOME AND INTEREST EXPENSE
Net interest income
for the nine months ended September 30, 2013 was higher by approximately $5,000 as compared to the nine months ended September
30, 2012.
NET LOSS
Our operations for
the nine months ended September 30, 2013 resulted in a net loss of approximately $1.2 million, a decrease of approximately $1.8
million compared to the $3.0 million loss for the nine months ended September 30, 2012.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2013,
we had approximately $1.3 million of cash and cash equivalents, a decrease of approximately $1.3 million from December 31, 2012.
During the first nine months of 2013 the net cash outflow from operating activities was approximately $1.2 million. This amount
is comprised primarily of our net loss of $1.2 million and decreases in our accrued expenses and deposits of $147,000 and accounts
payable of $37,000, partially offset by a decrease in prepaid expenses, deposits and other assets of $76,000, depreciation and
amortization of $47,000, a decrease in accounts receivables of $46,000 and noncash stock based compensation of $18,000. Investing
activities had $1,000 proceeds from disposal of equipment while financing activities reflected the cash dividend payment of $87,000,
resulting in net cash outflow of approximately $1.3 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 have one existing agreement for the lease of our High Voltage equipment. 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 November 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 are unable
to determine if 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. Absent the award of a significant new Government
contract, 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 November 7 2013,
we had a backlog (workload remaining on signed contracts) of approximately $0, to be completed within the next twelve months.