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AERG > SEC Filings for AERG > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for APPLIED ENERGETICS, INC.

Form 10-Q for APPLIED ENERGETICS, INC.


13-Nov-2012

Quarterly Report


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, 2011.

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, as amended, for the year ended December 31, 2011. 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 develop and manufacture high-voltage systems for government and commercial customers for a range of applications.

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RESULTS OF OPERATIONS



COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011:



                                               2012            2011
               Revenue                      $  311,992     $    611,206
               Cost of revenue                 263,687          633,868
               General and administrative      378,220          844,135
               Selling and marketing            36,344          220,522
               Research and development              -          677,665
               Other (expense) income:
               Interest expense                      -           (1,392 )
               Interest income                     192              707

               Net loss                     $ (366,067 )   $ (1,765,669 )

REVENUE

Revenue decreased by approximately $299,000 to $312,000 for the three months ended September 30, 2012 compared to $611,000 for the three months ended September 30, 2011. Revenues from the LGE product line decreased by $239,000 to $167,000 and High Voltage revenues decreased by $60,000 to $144,000 for the three months ended September 30, 2012 compared to the three months ended September 30, 2011. There were no revenues from the C-IED product line for either quarter as we completed all deliverables and testing required in the second quarter of 2011 and there were no Laser revenues for the quarters.

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 $370,000 to $264,000 for the three months ended September 30, 2012, compared to $634,000 for the three months ended September 30, 2011. The decrease in cost of revenue is directly tied to the decrease in sales activity of approximately 49%. Cost of revenue as a percentage of revenue decreased from last year.

GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased approximately $466,000 to $378,000 for the three months ended September 30, 2012 compared to $844,000 for the three months ended September 30, 2011. Salaries, wages and benefits decreased by approximately $687,000, which is reflective of our reduction in workforce; supplies and building related expenses decreased by approximately $178,000, which reflects the gains on sale of miscellaneous supplies and tools during the downsizing of our operations; professional services decreased by approximately $168,000; miscellaneous expenses decreased by $70,000, which reflects the gains on sale of depreciable assets sold during the quarter, non-cash compensation costs decreased by approximately $44,000; and depreciation and amortization decreased by $42,000, reflecting the sale of our building and the sale of other depreciable assets as we downsized to a smaller facility. Offsetting these reductions in operating expenses totaling approximately $1.2 million was a decrease in absorption of labor and overheads of approximately $745,000 previously charged to government contracts. Cost saving measures were instituted throughout 2011 and continuing into 2012 to compensate for the decrease in revenues, including reductions of our workforce and reductions in other operating expenses.

SELLING AND MARKETING

Selling and marketing expenses decreased $184,000 to $36,000 for the three months ended September 30, 2012 compared to $221,000 for the three months ended September 30, 2011. The decrease in sales and marketing expenses is represented by decreases in marketing expenses of $87,000, bid and proposal expenses of $58,000 and business development expense of $39,000 predominantly due to our headcount reductions.

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RESEARCH AND DEVELOPMENT

There were no research and development expenses during the three months ended September 30, 2012 as compared to $678,000 for the three months ended September 30, 2011. 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 September 30, 2012 was higher by approximately $900 as compared to the three months ended September 30, 2011.

NET LOSS

Our operations for the three months ended September 30, 2012 resulted in a net loss of approximately $366,000, a decrease of approximately $1,400,000 compared to the $1.8 million loss for the three months ended September 30, 2011.

COMPARISON OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011:



                                               2012             2011
              Revenue                      $  1,215,506     $  4,450,549
              Cost of revenue                 1,018,277        4,233,710
              General and administrative      2,286,954        2,742,705
              Selling and marketing             711,846          886,422
              Research and development          157,313        1,309,453
              Other (expense) income:
              Interest expense                   (1,651 )         (3,732 )
              Interest income                       974            2,847

              Net loss                     $ (2,959,561 )   $ (4,722,626 )

REVENUE

Revenue decreased by approximately $3.2 million to $1.2 million for the nine months ended September 30, 2012 compared to $4.5 million for the nine months ended September 30, 2011. Revenues from the C-IED product line decreased by $2.2 million to $0 as we completed all deliverables and testing required in the second quarter of 2011, LGE revenues decreased by $987,000 to $633,000, Laser revenues decreased by $181,000 to $0 and High Voltage revenues increased by $104,000 to $582,000 for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

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 $3.2 million to $1.0 million for the nine months ended September 30, 2012, compared to $4.2 million for the nine months ended September 30, 2011. The decrease in cost of revenue is directly tied to the decrease in sales activity of approximately 73%. Cost of revenue as a percentage of revenue decreased from last year.

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GENERAL AND ADMINISTRATIVE

General and administrative expenses decreased approximately $456,000 to $2.3 million for the nine months ended September 30, 2012 compared to $2.7 million for the nine months ended September 30, 2011. Salaries, wages and benefits decreased by approximately $2.2 million, professional services decreased by approximately $871,000, supplies and building related expenses decreased by approximately $368,000, non-cash compensation costs decreased by approximately $175,000, recruiting expense decreased by approximately $95,000, depreciation and amortization decreased by approximately $80,000 and travel related expenses decreased by approximately $40,000. Offsetting these reductions in operating expenses totaling approximately $3.9 million was an increase in miscellaneous expense of $618,000 reflecting the $708,000 impairment reserve against the sale of the building and contents posted net of gains on sales of miscellaneous depreciable assets. Also offsetting the reductions in operating expenses is the decrease in absorption of labor and overheads of approximately $2.9 million previously charged to government contracts. Cost saving measures were instituted throughout 2011 and continuing into 2012 to compensate for the decrease in government revenues, including reductions of our workforce and reductions in other operating expenses.

SELLING AND MARKETING

Selling and marketing expenses decreased by approximately $175,000 to $712,000 for the nine months ended September 30, 2012 compared to $886,000 for the nine months ended September 30, 2011. The decrease in sales and marketing expenses is mostly tied to decreases in marketing expenses of $184,000 and bid and proposal expenses of $135,000 tied to headcount reductions, partially offset by increases in business development expenses of $144,000 associated with the introduction of our new products into the commercial market and participation in trade shows.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased by $1.2 million to $157,000 during the nine months ended September 30, 2012 as compared to $1.3 million for the nine months ended September 30, 2011. During the first quarter of 2012, we completed the development of our ultrafast laser prototype. This decrease represents our goal to reduce our investment in research and development efforts as a cost reduction measure.

INTEREST INCOME AND INTEREST EXPENSE

Net interest expense for the nine months ended September 30, 2012 was higher by approximately $200 as compared to the nine months ended September 30, 2011.

NET LOSS

Our operations for the nine months ended September 30, 2012 resulted in a net loss of approximately $3.0 million, a decrease of approximately $1.8 million compared to the $4.7 million loss for the nine months ended September 30, 2011.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2012, we had approximately $3.1 million of cash and cash equivalents, an increase of approximately $1.5 million from June 30, 2012. This increase was primarily from the proceeds on the sale of our building in September. Our cash position decreased during the first nine months of 2012 by approximately $848,000. During the first nine months of 2012 the net cash outflow from operating activities was approximately $2.2 million. This amount is comprised primarily of our net loss of $3.0 million and decreases in our accrued expenses and deposits of $784,000, accounts payable of $272,000 and net gain on building, land and equipment disposal of $99,000, partially offset by the $708,000 impairment loss on property held for sale, $391,000 decrease in accounts receivables, $207,000 decrease in prepaid expenses, deposits and other assets, $205,000 decrease in long term receivables and $174,000 depreciation and amortization. Investing activities resulted in net cash inflow of approximately $1.5 million, resulting primarily from the sale of our building and financing activities resulted in net cash outflow of approximately $131,000.

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; 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 continue to consider and investigate strategic alternatives, including mergers, joint ventures, strategic teaming arrangements, the acquisition of one or more businesses or technologies, and/or the disposition of one or more of our existing businesses.

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Our continuance in business beyond 2012 is dependent on successful development of commercial customers, sales of our USP laser systems, obtaining new contracts from Department of Defense customers and additional financing necessary to fund our operations and achieving profitability. Since there can be no assurances regarding the above, these factors raise substantial doubt about our ability to continue as a going concern.

In their report accompanying our financial statements, our independent auditors stated that our financial statements for the year ended December 31, 2011 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' doubts are based on the net loss of $6.4 million for 2011, negative cash flows from operations of $4.8 million in 2011 and the fact that we may incur additional future losses due to the reduction in Government contract activity that raise substantial doubt about our ability to continue as a going concern.

BACKLOG OF ORDERS

At September 30, 2012, we had a backlog (workload remaining on signed contracts) of approximately $146,000, to be completed within the next twelve months.

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