In March and September 2010, we were awarded significant task orders under the IDIQ contract.  For the three months ended March 31,June 30, 2011 and 2010, we realized revenues of $970,169$107,155 and $154,778,$1,268,319, respectively, related to the ADEPT production orders received in March and September 2010.  For the six months ended June 30, 2011 and 2010, we realized revenues of $591,011 and $1,423,097, respectively, related to the ADEPT production orders.  We delivered 27 units in 2010 and an additional 1618 units during the first quartertwo quarters of 2011.  In July 2011, we received orders to produce and deliver an additional 36 ADEPT units and related support.  We expect the remainingto produce and deliver a majority of these units to be shippedduring 2011 and delivered during 2011.  We expectreceive additional delivery orders during the five year term of the contract.  It should be noted that contractingContracting with the federal government is a lengthy and complex process and that many factors could materialize that would negatively impact our ability to secure future ADEPT orders.

 

Since June 2004, we have been working with the Office of Naval Research regarding emerging Wireless Local Area Network systems (WLANs) and DoD radar systems to, among other things, evaluate and quantify the potential improvements which may be afforded by selected mitigation techniques.  We continue to perform contracts in connection with this project and are working closely with engineers from the Naval Air Warfare Center, Weapons Division (NAWCWD).  The technical objective of this effort is to develop simulation models that can be used to predict the performance of data links in a jamming environment.

 

 

In February 2009, we were awarded a $68,000 production support contract on the Navy’s Next Generation Command and Control Processor (NGC2P) program by Northrop Grumman Corporation.  The NGC2P system is a tactical data link (TDL) communications processor which provides warfighters with critical real-time information during combat operations.  We anticipate future work with Northrop Grumman in areas associated with our expertise in electronic systems development and wireless technologies.

 

In April 2010, we were awarded a $250,000 subcontract with a major defense prime contractor to perform design of shipboard wireless networks for a new U.S. Navy communications program.

 

In July 2010, we received a $750,000 Small Business Innovation Research (SBIR) Phase II contract from the Naval Sea Systems Command for development of a “Wave Energy MicroBuoy” to be used as an at-sea platform for a communications relay or network gateway.   Ocean Power Technologies, Inc. (OPT), who we collaborate with on certain projects, has been a key team member in the pursuit of the contract and will be a major subcontractor.  We intend to work with OPT in the design and development of a miniaturized, self-powered ocean buoy which can be deployed at sea for extended periods to support various on-board payload packages, such as network communications nodes.  The main objective of the SBIR Phase II Program is the development and testing of a prototype MicroBuoy and demonstration of a persistent power level specified for the Navy system.

 

As substantially all of our revenue is derived from contracts with the federal government, our key performance indicator is the dollar volume of contracts awarded to us.  Increases in the number and value of contracts awarded will generally result in increased revenues in future periods and, assuming relatively stable variable costs associated with our fulfilling such contracts, increased profits in future periods.  The timing of such awards is uncertain as we sell to federal government agencies where the process of obtaining such awards can be lengthy and at times uncertain.  As the majority of our revenue during the first quartertwo quarters of  2011, and expected revenue over the next ninesix months, is or will be from sales of ADEPT units under our IDIQ contract, continued generation of task orders and our ability to expand the market and potential customer base for ADEPT units will be a key indicator of future revenue.

 

Our strategy for continued growth is three-fold.  First, we expect to continue expanding our technology base, backlog and revenue by continuing our active participation in the DoD SBIR program and bidding on projects that fall within our areas of expertise.  These areas include electronic systems engineering and integration, radar systems engineering, combat/C4I (Command, Control, Communications, Computers & Intelligence) systems engineering, and communications engineering.  We believe that we can utilize the intellectual property developed under our various SBIR awards to develop proprietary products, such as the ADEPT described above, with broad appeal in both the government and commercial marketplace.  This state-of-the-art test equipment can be used by many commercial and governmental customers such as the FAA, radio and television stations, cellular phone service providers and airlines.  Second, we will continue to pursue SBIR projects with the Department of Homeland Security, the U.S. Navy, and other government agencies.  Third, we believe that through our marketing of products such as ADEPT, we will develop key relationships with prime defense system contractors.  Our strategy is to develop these relationships into longer-term, key subcontractor roles on future major defense programs awarded to these prime contractors.

For the remainder of 2011, our primary strategic focus is to continue to: (i) establish ourselves as a premium provider of research and development and product development services to the defense industry; and (ii) grow our business, generate profits and increase our cash reserves through obtaining additional SBIR contracts and positioning ourselves to obtain future SBIR contracts.  From an operational prospective, we expect to focus substantial resources on generating purchase orders under the IDIQ contract for ADEPT units and exploring commercialization opportunities.  We intend to capitalize on the Navy modernization program which could result in two or three ADEPT units being placed on each destroyer and cruiser in the U.S. Navy, with the potential to install multiple units on additional U.S. Navy ships and submarines.

 

Over the longer term, we expect to further develop technology based on existing and additional SBIR contracts and to develop these technologies into products for wide deployment to DoD customers and contractors as well as developing potential commercial applications.  For example, we recently entered into a memorandum of understanding with a global provider of telecommunications equipment and related services pursuant to which we will assist the global provider in marketing its products to the DoD.

 

 

Our critical accounting policies and estimates are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.   As of March 31,June 30, 2011, there have been no changes to such critical accounting policies and estimates.   Certain amounts for the prior period have been reclassified to conform to the current presentation.  

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America and the requirements of the U.S. Securities and Exchange Commission.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to bad debts, recoverability of long-lived assets, income taxes and commitments.  We base our estimates on historical experience and on various other assumptions that we believe 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. Actual results may differ from these estimates under different assumptions or conditions.  The accounting estimates and assumptions discussed in the footnotes to our financial statements included herein are those that we consider to be the most critical to an understanding of our financial statements because they inherently involve significant judgments and uncertainties.

We generated revenues of $1,232,405$726,751 during the three months ended March 31,June 30, 2011 compared to $562,381$1,553,315 during the three months ended March 31,June 30, 2010, an increasea decrease of $670,024$826,744 or 119%53%.  The increasedecrease was primarily due to the delay in receipt of additional purchase orders under the IDIQ contract for ADEPT units.  Orders for an additional 36 units were received in March and September 2010 and the SBIR Phase II contract received in August 2010.July 2011.

Cost of revenues consist of direct contract costs such as labor, material, subcontracts, travel, and other direct costs.  Cost of revenues for the three months ended March 31,June 30, 2011 was $613,919$349,788 compared to $258,219$975,911 for the three months ended March 31,June 30, 2010, an increasea decrease of $355,700$626,123 or 138%64%.  The increasedecrease was primarily due to the increasereduction in material and subcontractinglabor costs forupon completion of the purchase orders under the IDIQ contract for ADEPT units received in March and September 2010 andApril 2011.  The decrease was also attributable to the SBIR Phase IIdelay in receipt of additional purchase orders under the IDIQ contract received in August 2010.for ADEPT units.

 

The majority of our engineering costs consist of (i) salary, wages and related fringe benefits paid to engineering employees, (ii) rent-related costs, and (iii) consulting fees paid to engineering consultants.  As the nature of these costs benefit the entire organization and all research and development efforts, and their benefit cannot be identified with a specific project or contract, these engineering costs are classified as part of “engineering overhead” and included in operating expenses.  Engineering costs for the three months ended March 31,June 30, 2011 were $227,629$181,614 compared to $151,571$177,081 for the three months ended March 31,June 30, 2010, an increase of $76,058$4,533 or 50%3%.  The increase was due to a mix of costs primarily to increases in salaries and incentive compensation expense.related benefits.

General and administrative expenses consist primarily of salary, consulting fees paid to bid and proposal consultants and related costs, professional fees, business insurance, franchise tax, SEC compliance costs, travel, and unallowable expenses (representing(consisting of those expenses for which the government will not reimburse us.us).  General and administrative costs for the three months ended March 31,June 30, 2011 were $299,698$265,132 compared to $268,434$257,465 for the three months ended March 31,June 30, 2010, an increase of $31,264$7,667 or 12%3%.  The increase was primarily due to increases in professional feeslabor related research and unallowable costs.development.

At March 31,June 30, 2011, we estimate our annual effective tax rate for 2011 to be 28.2%25.0%.  We are recognizing a tax expensebenefit of $17,800$12,300 for the quarter ended March 31,June 30, 2011 primarily due to expected net income for the remainder of 2011 and the tax benefit recognized from the decrease in valuation allowance established for net deferred tax assets.  At March 31,June 30, 2011, the difference from the expected federal income tax rate is attributable to state income taxes and changes in the valuation allowance established for net deferred tax assets.

We reported a net loss of $56,870 during the three months ended June 30, 2011 as compared to net income of $146,892 during the three months ended June 30, 2010.  The decrease was primarily attributable to the delay in receiving additional orders under the IDIQ contract.