Attached files
| file | filename |
|---|---|
| EX-31.1 - APPLIED ENERGETICS, INC. | v192895_ex31-1.htm |
| EX-31.2 - APPLIED ENERGETICS, INC. | v192895_ex31-2.htm |
| EX-32.2 - APPLIED ENERGETICS, INC. | v192895_ex32-2.htm |
| EX-32.1 - APPLIED ENERGETICS, INC. | v192895_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
quarterly period ended June 30, 2010
OR
¨ Transition Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934
For the
transition period from __________ to __________
Commission
File Number 001-14015
|
APPLIED
ENERGETICS, INC.
|
(Exact
Name of Registrant as Specified in Its Charter)
|
Delaware
|
77-0262908
|
|
|
(State or Other Jurisdiction of Incorporation
or Organization)
|
(IRS Employer Identification Number)
|
|
3590
East Columbia Street
|
|||
|
Tucson,
Arizona
|
85714
|
||
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area
code (520)
628-7415
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large
accelerated filer: ¨
|
Accelerated
filer:
¨
|
Non-accelerated
filer: ¨
|
Smaller
reporting
company:
x
|
|||
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of August 5, 2010,
there were 90,599,186 shares of the issuer's common stock, par value $.001 per
share, outstanding.
APPLIED
ENERGETICS, INC.
QUARTERLY
REPORT ON FORM 10-Q
TABLE
OF CONTENTS
|
PART
I. FINANCIAL INFORMATION
|
|||||
|
ITEM
1.
|
Condensed
Consolidated Financial Statements
|
||||
|
Condensed
Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December
31, 2009
|
1 | ||||
|
Condensed
Consolidated Statements of Operations for the three months ended June 30,
2010 and 2009 (Unaudited)
|
2 | ||||
|
Condensed
Consolidated Statements of Operations for the six months ended June 30,
2010 and 2009 (Unaudited)
|
3 | ||||
|
Condensed
Consolidated Statements of Cash Flows for the six months ended June 30,
2010 and 2009 (Unaudited)
|
4 | ||||
|
Notes
to Condensed Consolidated Financial Statements
|
5 | ||||
|
ITEM
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
11 | |||
|
ITEM
4.
|
Controls
and Procedures
|
15 | |||
|
PART
II. OTHER INFORMATION
|
|||||
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
16 | |||
|
ITEM
5 -
|
Other
Information
|
16 | |||
|
ITEM
6.
|
Exhibits
|
16 | |||
|
SIGNATURES
|
17 | ||||
1
PART
I. FINANCIAL INFORMATION
ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
June 30, 2010
|
December 31, 2009
|
|||||||
|
(Unaudited)
|
||||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 8,928,536 | $ | 9,604,643 | ||||
|
Short
term investments
|
225,000 | 225,000 | ||||||
|
Accounts
receivable
|
1,959,413 | 1,074,944 | ||||||
|
Inventory
|
740,059 | 785,479 | ||||||
|
Prepaid
expenses and deposits
|
145,091 | 447,295 | ||||||
|
Other
receivables
|
53,589 | 52,295 | ||||||
|
Total
current assets
|
12,051,688 | 12,189,656 | ||||||
|
Long
term receivables - net
|
205,313 | 205,313 | ||||||
|
Property
and equipment - net
|
2,625,718 | 2,845,607 | ||||||
|
Other
assets
|
20,800 | 20,800 | ||||||
|
TOTAL
ASSETS
|
$ | 14,903,519 | $ | 15,261,376 | ||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 579,423 | $ | 428,413 | ||||
|
Estimated
loss on uncompleted contract
|
15,154 | - | ||||||
|
Accrued
expenses
|
479,238 | 313,448 | ||||||
|
Short
term financing
|
53,709 | 214,834 | ||||||
|
Accrued
compensation
|
470,231 | 505,188 | ||||||
|
Customer
deposits
|
149,120 | 104,160 | ||||||
|
Billings
in excess of costs
|
3,592 | 42,716 | ||||||
|
Total
current liabilities
|
1,750,467 | 1,608,759 | ||||||
|
Total
liabilities
|
1,750,467 | 1,608,759 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders’
equity
|
||||||||
|
Series
A Convertible Preferred Stock, $.001 par value, 2,000,000 shares
authorized; 134,572 shares issued and outstanding at June 30, 2010 and
135,572 shares issued and outstanding at December 31, 2009
|
135 | 136 | ||||||
|
Common
stock, $.001 par value, 125,000,000 shares authorized; 90,568,061 shares
issued and outstanding at June 30, 2010 and 88,968,812 shares issued and
outstanding at December 31, 2009
|
90,561 | 88,969 | ||||||
|
Additional
paid-in capital
|
78,187,809 | 76,931,065 | ||||||
|
Accumulated
deficit
|
(65,125,453 | ) | (63,367,553 | ) | ||||
|
Total
stockholders’ equity
|
13,153,052 | 13,652,617 | ||||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 14,903,519 | $ | 15,261,376 | ||||
See
accompanying notes to condensed consolidated financial statements
(unaudited)
-1-
APPLIED
ENERGETICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
For the three months ended
June 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenue
|
$ | 2,879,932 | $ | 1,730,141 | ||||
|
Cost
of revenue
|
2,794,693 | 1,631,316 | ||||||
|
Gross
profit
|
85,239 | 98,825 | ||||||
|
Operating
expenses
|
||||||||
|
General
and administrative
|
525,354 | 2,825,062 | ||||||
|
Selling
and marketing
|
232,699 | 191,001 | ||||||
|
Research
and development
|
3,658 | 322,986 | ||||||
|
Total
operating expenses
|
761,711 | 3,339,049 | ||||||
|
Operating
loss
|
(676,472 | ) | (3,240,224 | ) | ||||
|
Other
(expense) income
|
||||||||
|
Interest
expense
|
(1,667 | ) | - | |||||
|
Interest
income
|
2,110 | 16,807 | ||||||
|
Total
other
|
443 | 16,807 | ||||||
|
Net
loss
|
(676,029 | ) | (3,223,417 | ) | ||||
|
Preferred
stock dividends
|
(57,557 | ) | (55,076 | ) | ||||
|
Deemed
dividend from induced conversion of Series A Preferred
Stock
|
(11,478 | ) | - | |||||
|
Net
loss attributable to common stockholders
|
$ | (745,064 | ) | $ | (3,278,493 | ) | ||
|
Net
loss per common share – basic and diluted
|
$ | (0.01 | ) | $ | (0.04 | ) | ||
|
Weighted
average number of shares outstanding, basic and diluted
|
89,687,321 | 86,137,728 | ||||||
See
accompanying notes to condensed consolidated financial statements
(unaudited)
-2-
APPLIED
ENERGETICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
For the six months ended
June 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Revenue
|
$ | 6,474,709 | $ | 4,317,539 | ||||
|
Cost
of revenue
|
6,163,369 | 4,032,763 | ||||||
|
Gross
profit
|
311,340 | 284,776 | ||||||
|
Operating
expenses
|
||||||||
|
General
and administrative
|
1,602,586 | 5,260,785 | ||||||
|
Selling
and marketing
|
304,353 | 429,024 | ||||||
|
Research
and development
|
36,520 | 840,647 | ||||||
|
Total
operating expenses
|
1,943,459 | 6,530,456 | ||||||
|
Operating
loss
|
(1,632,119 | ) | (6,245,680 | ) | ||||
|
Other
(expense) income
|
||||||||
|
Interest
expense
|
(3,334 | ) | (19 | ) | ||||
|
Interest
income
|
4,572 | 47,834 | ||||||
|
Total
other
|
1,238 | 47,815 | ||||||
|
Net
loss
|
(1,630,881 | ) | (6,197,865 | ) | ||||
|
Preferred
stock dividends
|
(115,541 | ) | (110,152 | ) | ||||
|
Deemed
dividend from induced conversion of Series A Preferred
Stock
|
(11,478 | ) | - | |||||
|
Net
loss attributable to common stockholders
|
$ | (1,757,900 | ) | $ | (6,308,017 | ) | ||
|
Net
loss per common share – basic and diluted
|
$ | (0.02 | ) | $ | (0.07 | ) | ||
|
Weighted
average number of shares outstanding, basic and diluted
|
89,281,990 | 86,201,037 | ||||||
See
accompanying notes to condensed consolidated financial statements
(unaudited)
-3-
APPLIED
ENERGETICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For
the six months ended
June
30,
|
||||||||
|
2010
|
2009
|
|||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net
loss
|
$ | (1,630,881 | ) | $ | (6,197,865 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
216,600 | 389,351 | ||||||
|
Loss
on equipment disposal
|
5,726 | 105,841 | ||||||
|
Provision
for inventory reserves
|
15,154 | - | ||||||
|
Provision
for losses on projects
|
22,000 | 22,000 | ||||||
|
Non-cash
stock based compensation expense
|
658,139 | 1,098,923 | ||||||
|
Changes
in assets and liabilities:
|
||||||||
|
Accounts
receivable
|
(884,469 | ) | 1,545,383 | |||||
|
Insurance
receivable
|
- | (5,641,907 | ) | |||||
|
Other
receivable
|
(1,294 | ) | (264,637 | ) | ||||
|
Inventory
|
23,420 | (234,056 | ) | |||||
|
Prepaid
expenses and deposits
|
302,204 | 306,852 | ||||||
|
Long
term receivables - net
|
- | 253,129 | ||||||
|
Accounts
payable
|
151,010 | (453,655 | ) | |||||
|
Litigation
settlement liability
|
- | 5,525,000 | ||||||
|
Billings
in excess of costs
|
(39,124 | ) | 21,533 | |||||
|
Accrued
expenses, customer deposits and deferred rent
|
14,668 | 1,401,510 | ||||||
|
Net
cash (used in) operating activities
|
(1,146,847 | ) | (2,122,598 | ) | ||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
(Purchase)/disposal
of land, building and equipment
|
(16,498 | ) | 2,807 | |||||
|
Proceeds
from disposal of equipment
|
14,061 | 460 | ||||||
|
Net
cash (used in)/provided by investing activities
|
(2,437 | ) | 3,267 | |||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Dividends
paid (preferred stock)
|
- | (110,152 | ) | |||||
|
Exercise
of stock options
|
473,177 | - | ||||||
|
Principal
payments on capital lease obligations
|
- | (2,028 | ) | |||||
|
Net
cash (used in)/provided by financing activities
|
473,177 | (112,180 | ) | |||||
|
Net
decrease in cash and cash equivalents
|
(676,107 | ) | (2,231,511 | ) | ||||
|
Cash
and cash equivalents, beginning of period
|
9,604,643 | 15,467,386 | ||||||
|
Cash
and cash equivalents, end of period
|
$ | 8,928,536 | $ | 13,235,875 | ||||
See
accompanying notes to condensed consolidated financial statements
(unaudited)
-4-
APPLIED
ENERGETICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
1. BASIS
OF PRESENTATION
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, 2010 (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 six month period ended June 30, 2010, 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.
The
following unaudited condensed financial statements are presented pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the company believes that the disclosures made are adequate to make the
information not misleading.
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 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, and expected forfeiture
rate on stock-based compensation.
CASH
AND CASH EQUIVALENTS
We
consider all highly liquid investments with maturities of three months or less
to be cash equivalents. At June 30, 2010, we had approximately $8.9
million of cash and cash equivalents.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The
carrying amounts of the certificate of deposit, accounts receivable, accounts
payable, and accrued expenses approximate fair value due to the short maturity
of these instruments.
RECENT
ACCOUNTING PRONOUNCEMENTS
The
Financial Accounting Standards Board (“FASB”) has issued Accounting Standards
Update (“ASU”) No. 2010-12, "Accounting for Certain Tax Effects of the 2010
Health Care Reform Acts" ("ASU 2010-12"), which clarifies the effect, if any,
that the different signing dates of the Patient Protection and Affordable Care
Act (signed March 23, 2010) and the Health Care and Education Reconciliation Act
of 2010 (signed March 30, 2010). ASU 2010-12 was effective for us
upon issuance. The adoption of the standard is not expected to have a
significant impact on the company’s consolidated financial
statements.
The FASB
has issued ASU 2010-13, “Effect of Denominating the Exercise Price of a
Share-Based Payment Award in the Currency of the Market in Which the Underlying
Equity Security Trades”. ASU 2010-13 clarifies that a share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades should not
be considered to contain a condition that is not a market, performance, or
service condition. Therefore, such an award should not be classified
as a liability if it otherwise qualifies as equity. ASU 2010-13 will
be effective for us beginning January 2011. The adoption of the
standard is not expected to have a significant impact on the company’s
consolidated financial statements.
-5-
APPLIED
ENERGETICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
2. ACCOUNTS
RECEIVABLE
Accounts
receivable consists of the following:
|
June 30, 2010
|
December 31, 2009
|
|||||||
|
Contracts
receivable
|
$ | 1,949,153 | $ | 1,031,960 | ||||
|
Costs
and estimated earnings on uncompleted contracts
|
10,260 | 42,984 | ||||||
|
Accounts
receivable, net
|
$ | 1,959,413 | $ | 1,074,944 | ||||
|
Short
term receivable (contract retention)
|
47,817 | 47,817 | ||||||
|
Long
term receivable (contract retention)
|
205,313 | 205,313 | ||||||
| $ | 2,212,543 | $ | 1,328,074 | |||||
Contracts
receivable are expected to be collected within a year.
|
Costs
and Estimated Earnings on Uncompleted Contracts
|
||||||||
|
June 30, 2010
|
December 31, 2009
|
|||||||
|
Costs
incurred on uncompleted contracts
|
$ | 24,998,335 | $ | 18,890,642 | ||||
|
Estimated
earnings
|
1,822,076 | 1,479,680 | ||||||
|
Total
billable costs and estimated earnings
|
26,820,411 | 20,370,322 | ||||||
|
Less:
|
||||||||
|
Billings
to date
|
26,813,743 | 20,370,054 | ||||||
|
Total
|
$ | 6,668 | $ | 268 | ||||
|
Included
in accompanying balance sheet:
|
||||||||
|
Unbilled
costs and estimated earnings on uncompleted contracts included in accounts
receivable
|
$ | 10,260 | $ | 42,984 | ||||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
(3,592 | ) | (42,716 | ) | ||||
|
Total
|
$ | 6,668 | $ | 268 | ||||
-6-
APPLIED
ENERGETICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
3. INVENTORY
Our
inventories consist of the following:
|
June 30, 2010
|
December 31, 2009
|
|||||||
|
Raw
materials
|
$ | 95,901 | $ | 103,451 | ||||
|
Work-in-process
|
688,158 | 704,028 | ||||||
|
Provision
for loss on project
|
(44,000 | ) | (22,000 | ) | ||||
|
Total
|
$ | 740,059 | $ | 785,479 | ||||
4. PROPERTY
AND EQUIPMENT
Our
property and equipment consist of the following:
|
June 30, 2010
|
December 31, 2009
|
|||||||
|
Land
and buildings
|
$ | 2,072,215 | $ | 2,072,215 | ||||
|
Equipment
|
2,266,199 | 2,677,926 | ||||||
|
Furniture
and building improvements
|
843,464 | 858,379 | ||||||
|
Software
|
800,566 | 800,566 | ||||||
|
Total
|
5,982,443 | 6,409,086 | ||||||
|
Less
accumulated depreciation and amortization
|
(3,356,725 | ) | (3,563,479 | ) | ||||
|
Net
property and equipment
|
$ | 2,625,718 | $ | 2,845,607 | ||||
Periodically,
we evaluate general impairment of assets. As an element of our annual
business planning process conducted in the fourth quarter of each year, we
consider expected revenues and resulting cash flow from operations. Revenue
planning is based upon actual and expected contract awards as the majority of
our revenues are sourced from Government contracts. During this process, we
evaluate the current carrying values of all long-lived assets on our books.
We compare these values against business plans to determine if carrying
values are recoverable.
Our most
recent asset impairment test was performed on February 15, 2010, when we
determined that as of December 31, 2009 the net book values of long-lived assets
were recoverable through expected undiscounted business cash flows based on
anticipated and actual future revenue bookings and backlog. We will continue to
evaluate the carrying values in the future. We evaluate impairments as
such circumstances warrant.
-7-
APPLIED
ENERGETICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
5. SHARE-BASED
COMPENSATION
Share-Based Compensation –
Employees and Directors
For the
three months ended June 30, 2010 and 2009, share-based compensation expense
totaled $132,000 and $221,000, respectively. For the six months ended
June 30, 2010 and 2009, share-based compensation expense totaled $658,000 and
$1.1 million, respectively.
There was
no related income tax benefit recognized because our deferred tax assets are
fully offset by a valuation allowance.
As of
June 30, 2010, $202,000 of total unrecognized compensation cost related to
restricted stock is expected to be recognized over a weighted average period of
approximately .42 years.
The
compensation committee granted options to purchase an aggregate of 50,000 shares
of our common stock during the three months ended June 30, 2010 to a new
employee. The options are exercisable at a price per share of $1.23
and expire on May 21, 2015. One-third of the options became
exercisable on May 21, 2011, and on the yearly anniversary of grant date until
completely vested.
The
weighted average grant-date fair value of all outstanding option grants was
$0.24 and $0.10 per share, for the six months ended June 30, 2010 and 2009,
respectively. We determine the fair value of share-based awards at
their grant date, using a Black-Scholes Option-Pricing Model applying the
assumptions in the following table.
|
Six
Months Ended June 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
Expected
life (years)
|
2.9
- 3 years
|
3.41
years
|
||||||
|
Dividend
yield
|
0.0 | % | 0.0 | % | ||||
|
Expected
volatility
|
93.6 | % | 67.3 | % | ||||
|
Risk
free interest rates
|
1.5 | % | 1.3 | % | ||||
|
Weighted
average fair value of options at grant date
|
$ | 0.24 | $ | 0.10 | ||||
During
the six months ended June 30, 2010, 112,507 shares of restricted stock vested
and 16,407 shares of restricted stock were forfeited. The
compensation committee granted 460,000 shares of common stock to the members of
the Board of Directors, which were fully vested upon grant. Options
to purchase 1,014,219 shares of common stock were exercised and the cash
proceeds from the option exercises totaled approximately $473,000.
Warrants –
Non-Employees
At June
30, 2010 and December 31, 2009 there were outstanding warrants to purchase
approximately 1.0 million shares of common stock, which were either (i) issued
in connection with the August 2006 financing, or (ii) issued to outside
consultants. The exercise price of the warrants ranges from $9.15 to
$12.00.
6. SIGNIFICANT
CUSTOMERS
Approximately
99% and 95% of revenues for the three-month periods ended June 30, 2010 and 2009
are generated from either the U.S. Government or contractors to the U.S.
Government. Approximately 100% and 98% of revenues for the six month
periods ended June 30, 2010 and 2009 are generated from either the U.S.
Government or contractors to the U.S. Government.
-8-
APPLIED
ENERGETICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
7. NET
LOSS PER SHARE
Basic net
income (loss) per common share is computed by dividing net income (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
income (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 earnings (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, 2010 and 2009, 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,
|
||||||||
|
2010
|
2009
|
|||||||
|
Options to purchase common
shares
|
4,480,130 | 2,517,832 | ||||||
|
Warrants to purchase common
shares
|
1,024,939 | 1,091,605 | ||||||
|
Unvested restricted stock
units
|
- | 180,841 | ||||||
|
Convertible preferred
stock
|
134,572 | 135,572 | ||||||
|
Total potentially dilutive
securities
|
5,639,641 | 3,925,850 | ||||||
8. DIVIDENDS
As of
June 30, 2010, we had 134,572 shares of our 6.5% Series A Convertible Preferred
Stock outstanding. A dividend was declared and paid in common stock
on August 1, 2010 to the holders of record as of July 15, 2010.
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, at the discretion of the
company.
On May
10, 2010, we exchanged 1,000 shares of Series A Preferred Stock for 10,000
shares of common stock. The company accounted for the transaction
pursuant to Accounting Standards Codification (“ASC”) 470-20-25. The
exchange was made at terms other than the original conversion terms, therefore
the Company recorded a charge (stock dividend) to accumulated deficit of
approximately $11,000, which equaled the excess of the fair value of the common
stock issued over the fair value of the common stock issuable pursuant to the
original conversion terms. Furthermore, the historical carrying value
of the Series A Preferred Stock exchanged was reclassified within paid-in
capital at the time of conversion.
9. COMMITMENTS
AND CONTINGENCIES
LITIGATION
On
February 1, 2010, NewOak Capital Markets, LLC, formerly known as J. Giordano
Securities, LLC, the placement agent for our October 2005 private placement of
preferred stock, commenced an arbitration proceeding against us with Financial
Industry Regulatory Authority (“FINRA”). NewOak alleges that we made
material misrepresentations between May 2005 and May 10, 2006 concerning the
status of its products.
We
previously settled class action and derivative lawsuits relating to the alleged
misrepresentations. NewOak, however, opted out of the class action
and alleges that the alleged misrepresentations constituted breaches of its
agreement with the company and that we breached warranties we made to NewOak in
connection with the 2005 private placement. NewOak seeks
indemnification and recovery for alleged breach of contract, unjust enrichment,
quantum meruit, fraudulent misrepresentation, tortuous interference with
prospective economic relations and violation of Section 10(b) of the Exchange
Act and Rule 10b-5 promulgated thereunder, and seeks an award of monetary
damages in excess of $10 million, plus punitive damages and attorney’s fees and
costs.
-9-
APPLIED
ENERGETICS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2010
(Unaudited)
We filed
a petition in the Supreme Court of the State of New York, New York County to
stay the arbitration on the ground that the claims are not subject to
arbitration. NewOak removed the proceeding to the United States
District Court, Southern District of New York, and filed a motion to compel
arbitration.
We intend
to defend ourselves vigorously in any arbitration or legal proceedings and
believe we have substantial defenses to the claims.
In
addition, we may from time to time be involved in legal proceedings arising from
the normal course of business. As of the date of this report, we have
not received notice of any other legal proceedings.
10. SUBSEQUENT
EVENTS
We
performed an evaluation of subsequent events and determined that no events
required disclosure.
-10-
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, 2009.
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, 2009 and Quarterly Report on Form 10-Q for the period ended March
31, 2010. In making these forward-looking statements, we claim the
protection of the safe-harbor for forward-looking statements contained in the
Private Securities Reform Act of 1995. 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 is a leader in the development and manufacture of applied energy
systems for military and commercial applications. Through our efforts
in developing our core technology, Laser Guided Energy (“LGE”™), we have gained
expertise and proprietary knowledge in high performance ultrashort pulse lasers,
high-voltage electronics, advanced dynamic optics and atmospheric and plasma
interactions. We apply these technologies to deliver innovative
solutions to urgent military requirements, including neutralizing improvised
explosive devices (“IEDs”) and other high priority missions of U.S. and allied
military forces. We have developed an effective and robust
counter-IED (“CIED”) technology as a result of our research and
development. Additionally, we develop and manufacture high-voltage
and ultrashort pulse laser products for government and commercial customers for
a range of applications.
During
the second quarter of 2010, we continued to support our US Marine Corps (“USMC”)
customers’ CIED requirements. This has involved supporting extended
field operations overseas beyond the successful conclusion of the Operational
Assessment at the request of the field commander, including the production of
additional systems and spare parts, training of new operators and support of
additional military units. We continue to work with the Marine Corps
Systems Command on developing a smaller version of the technology for
installation on other military platforms and vehicles, and upgrading the
engineering documentation of the system. This work is being performed
under the $10.4 million contract modification received in January of
2010. Discussions with other large defense contractors in developing
teaming arrangements to support the next generation of CIED systems are
continuing. We expect that utilizing the resources and capabilities
of established Department of Defense (“DoD”) contractors will allow us to focus
on the technology development within our core
capabilities. Organizations we have identified have experience and a
sound track record in delivering fully qualified military systems and the
associated documentation and certifications to DoD customers. We will
continue to concentrate our efforts on maintaining our excellent customer
relationships.
During
the second quarter of 2010, we continued the development and advancement of our
LGE technology by working with our customer, the U.S. Army’s Research,
Development and Engineering Command, who provided a $1.8 million increase in
funding in June to our existing Army contract. This brings the total
contract value to $4.9 million. In June, we delivered our ultrashort
pulse laser system to the U.S Navy, which involved factory acceptance testing,
training of Government personnel on the system operation and maintenance,
delivery, installation and final acceptance testing at NSWC Crane,
IN. The delivery of the system has led to discussions concerning the
next phase of this program, which may include the development of an ultrashort
pulse laser suitable for installation on a test aircraft, and delivery of
similar systems to other U.S. Government organizations.
-11-
RESULTS
OF OPERATIONS
COMPARISON
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2010 AND 2009:
|
2010
|
2009
|
|||||||
|
Revenue
|
$ | 2,879,932 | $ | 1,730,141 | ||||
| 2,794,693 | 1,631,316 | |||||||
|
General
and administrative
|
525,354 | 2,825,062 | ||||||
|
Selling
and marketing
|
232,699 | 191,001 | ||||||
|
Research
and development
|
3,658 | 322,986 | ||||||
|
Other
(expense) income:
|
||||||||
|
Interest
expense
|
(1,667 | ) | - | |||||
|
Interest
income
|
2,110 | 16,807 | ||||||
|
Net
loss
|
$ | (676,029 | ) | $ | (3,223,417 | ) | ||
REVENUE
Revenue
increased approximately $1.2 million to $2.9 million for the three months ended
June 30, 2010 compared to $1.7 million for the three months ended June 30,
2009. Revenues from the CIED product line increased by $1.4 million
to $2.1 million as work continues on the contract modification of $10.4 million
received in January 2010. Additional revenue of $100,000 was derived
from our new Ultrashort Pulse Laser product line. LGE product line
revenues decreased by $257,000 to $667,000, and High Voltage product line
revenues decreased by $77,000 for the three months ended June 30, 2010 compared
to the three months ended June 30, 2009.
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 increased approximately $1.2 million to $2.8 million for the three
months ended June 30, 2010, compared to $1.6 million for the three months ended
June 30, 2009. The increase in cost of revenue is tied to the
increase in sales revenue of 66%, and to provisions for losses on current
contracts of approximately $38,000, which are tied to the High Voltage and Laser
product lines.
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses decreased approximately $2.3 million to $525,000 for
the three months ended June 30, 2010 compared to $2.8 million for the three
months ended June 30, 2009. The change was the result of decreases in
salaries and wages of approximately $490,000 as a result of our staff reductions
which took place in 2009; supplies and building related expenses of $200,000 as
a result of consolidating facilities, which reduced overall operational costs in
2010; depreciation and amortization expense of $88,000; and non-cash
compensation costs of approximately $80,000. Applied labor, overhead
and material handling costs allocated to cost of revenue increased by
approximately $224,000, reducing general and administrative
expense. In addition, there was a reduction in professional services
of approximately $1.1 million from the settlement of the class action and
derivative lawsuits that occurred in 2009 and asset disposals of $93,000 for
leasehold improvements made to the St. Louis facility in 2009.
-12-
SELLING
AND MARKETING
Selling
and marketing expenses increased approximately $42,000 to $233,000 for the three
months ended June 30, 2010 compared to $191,000 for the three months ended June
30, 2009. The increase is mostly related to business development
activities associated with the new Laser and High voltage product lines as we
continue to focus on entering new markets for these products and grow our
non-government market revenue.
RESEARCH
AND DEVELOPMENT
Internal
research and development expenses decreased by approximately $319,000 to $4,000
during the three months ended June 30, 2010 as compared to $323,000 for the
three months ended June 30, 2009. Our internal research and
development costs involve experimentation, design, development and enhancement
of proprietary technologies and new products. The decrease in
internal research and development expense is primarily due to the deployment of
key technical personnel to fulfilling current contracts.
INTEREST
INCOME AND INTEREST EXPENSE
Net
interest income for the three months ended June 30, 2010 was lower by
approximately $15,000 as compared to the three months ended June 30, 2009
primarily due to the lower balance of invested funds.
NET
LOSS
Our
operations for the three months ended June 30, 2010 resulted in a net loss of
approximately $676,000, a reduction of approximately $2.5 million compared to
the $3.2 million loss for the three months ended June 30, 2009.
COMPARISON
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009:
|
2010
|
2009
|
|||||||
|
Revenue
|
$ | 6,474,709 | $ | 4,317,539 | ||||
|
Cost
of revenue
|
6,163,369 | 4,032,763 | ||||||
|
General
and administrative
|
1,602,586 | 5,260,785 | ||||||
|
Selling
and marketing
|
304,353 | 429,024 | ||||||
|
Research
and development
|
36,520 | 840,647 | ||||||
|
Other
(expense) income:
|
||||||||
|
Interest
expense
|
(3,334 | ) | (19 | ) | ||||
|
Interest
income
|
4,572 | 47,834 | ||||||
|
Net
loss
|
$ | (1,630,881 | ) | $ | (6,197,865 | ) | ||
REVENUE
Revenue
increased approximately $2.2 million to $6.5 million for the six months ended
June 30, 2010 compared to $4.3 million for the six months ended June 30,
2009. Revenues from the CIED product line increased by $2.8 million
to $4.3 million and the new Ultrashort Pulse Laser product line had revenues of
approximately $665,000 in the 2010 period. Offsetting these increases
were the decreases in the LGE product line of approximately $1.2 million and the
High Voltage line of approximately $78,000.
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 increased approximately $2.2 million to $6.2 million for the six months
ended June 30, 2010, compared to $4.0 million for the six months ended June 30,
2009. The increase in cost of revenue is tied to the increase in
sales revenue of 50% and to provisions for losses on current contracts of
approximately $38,000; which are tied to the High Voltage and Laser product
lines.
-13-
GENERAL
AND ADMINISTRATIVE
General
and administrative expenses decreased approximately $3.7 million to $1.6 million
for the six months ended June 30, 2010 compared to $5.3 million for the six
months ended June 30, 2009. The change was the result of decreases in
salaries and wages of approximately $1.3 million as a result of downsizing
efforts which took place in 2009; non-cash compensation costs of approximately
$434,000; supplies and building related expenses of $278,000 as a result of
consolidation of facilities which reduced overall operations costs in 2010;
depreciation and amortization expense of $173,000, and travel expenses of
approximately $43,000. Applied labor, overhead and material handling
costs allocated to cost of revenue increased by $187,000 reducing general and
administrative expense. In addition, there was a reduction in
professional services of approximately $1.1 million from the settlement of the
class action and derivative lawsuits that occurred in 2009 and asset disposals
of $93,000 for leasehold improvements made to our former St. Louis facility in
2009.
SELLING
AND MARKETING
Selling
and marketing expenses decreased approximately $125,000 to $304,000 for the six
months ended June 30, 2010 compared to $429,000 for the six months ended June
30, 2009. The decrease is mostly related to business development
activities that occurred in the first quarter of 2009 associated with our former
St. Louis facility. Additionally, we continue to invest in our new
Laser and High Voltage product lines as we continue to focus on entering new
markets for these products, thus to grow our non-government market
share.
RESEARCH
AND DEVELOPMENT
Internal
research and development expenses decreased by approximately $804,000 to $36,000
during the six months ended June 30, 2010 as compared to $841,000 for the six
months ended June 30, 2009. Our internal research and development
costs involve experimentation, design, development and enhancement of
proprietary technologies and new products. The decrease in internal
research and development expense is primarily due to deployment of key technical
personnel to fulfill current contracts.
INTEREST
INCOME AND INTEREST EXPENSE
Net
interest income for the six months ended June 30, 2010 was lower by
approximately $43,000 as compared to the six months ended June 30, 2009
primarily due to the lower balance of invested funds.
NET
LOSS
Our
operations for the six months ended June 30, 2010 resulted in a net loss of
approximately $1.6 million, a reduction of approximately $4.6 million compared
to the $6.2 million loss for the six months ended June 30, 2009.
LIQUIDITY
AND CAPITAL RESOURCES
At June
30, 2010, we had approximately $8.9 million of cash and cash equivalents, and
$225,000 in a certificate of deposit. Our cash position increased by
$46,000 for the three months ended June 30, 2010, while the total cash decreased
for the first six months of 2010 by approximately $676,000. During
the first six months of 2010, we used $1.1 million of cash in operating
activities, which was primarily comprised of our net loss of $1.6 million, and
increases in accounts receivables and other receivables of approximately
$886,000. Partially offsetting these amounts were non-cash
compensation expense of $658,000, an increase in accounts payable and accrued
expenses of $127,000, a decrease in prepaid expenses of $302,000, and
depreciation and amortization of approximately
$217,000. Additionally, investing activities used approximately
$2,000, and financing activities provided approximately $473,000 in proceeds
from employee option exercises.
We
anticipate that short-term and long-term funding needs will be provided by
existing cash and cash equivalents and the cash flows from servicing our
government contracts. We believe that we have sufficient working
capital to fulfill existing contracts and expected contracts in 2010 and into
2011. Government contracts, which currently represent a major portion
of our current activity, are on a cost plus fixed fee basis. This
means all work performed is done at our Government-approved rates, which include
general and administrative costs, overhead, labor and materials, fees and
profit. These costs are accrued as incurred and billed monthly.
-14-
BACKLOG
OF ORDERS
At June
30, 2010, we had a backlog (workload remaining on signed contracts) of
approximately $9.4 million, to be completed within the next twelve
months.
ITEM
4. CONTROLS AND PROCEDURES
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
management, with the participation of our Principal Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of June 30, 2010. Based on that evaluation, our
Principal Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
During
the three months ended June 30, 2010, there was no significant change in our
internal controls over financial reporting that has materially affected or which
is reasonably likely to materially affect our internal controls over financial
reporting.
-15-
PART
II – OTHER INFORMATION
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
|
Issuer Purchases of Equity Securities
|
|||||||||||||
|
Period
|
(a)
Total number
of Shares (or
Units)
Surrendered
|
(b)
Average
Price Paid
per Share
(or Unit)
|
(c)
Total Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced Plans
or Programs
|
(d)
Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs
|
|||||||||
|
Mar.
2010
|
115,000 | $ | 0.60 | 115,000 |
Undetermined
|
||||||||
On May
10, 2010, we exchanged 1,000 shares of Series A Preferred Stock for 10,000
shares of common stock. The company accounted for the transaction
pursuant to Accounting Standards Codification (“ASC”) 470-20-25. The
exchange was made at terms other than the original conversion terms, therefore
the Company recorded a charge (stock dividend) to accumulated deficit of
approximately $11,000, which equaled the excess of the fair value of the common
stock issued over the fair value of the common stock issuable pursuant to the
original conversion terms. Furthermore, the historical carrying value
of the Series A Preferred Stock exchanged was reclassified within paid-in
capital at the time of conversion.
|
ITEM
5.
|
OTHER
INFORMATION
|
On July
27, 2010, the Compensation Committee of the Board of Directors determined to
increase the base salary of Humberto Astorga, Chief Financial Officer of the
corporation, from $137,500 to $150,000, effective August 2, 2010.
|
ITEM
6.
|
EXHIBITS
|
|
EXHIBIT
NUMBER
|
DESCRIPTION
|
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Principal
Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
|
Chief
Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
-16-
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
APPLIED
ENERGETICS, INC.
|
||
|
By
|
/s/ Joseph C. Hayden
|
|
|
Joseph
C. Hayden
|
||
|
President,
Chief Operating Officer and Principal Executive Officer
|
||
|
Date: August
9, 2010
|
||
-17-