UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 20172022
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) |
Tucson, Arizona | |||
(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), (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 or an emerging growth company .company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer: | ☐ | Accelerated filer: | ☐ |
Non-accelerated filer: | ☐ | Smaller reporting company: | ☒ |
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered | ||
Common Stock, par value $0.001 per share | AERG | OTCQB |
As of November 12, 20178, 2022, there were 157,785,520207,817,878 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
i
PART I.I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2017 | December 31, 2016 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 14,521 | $ | 680 | ||||
Other assets | 312 | 312 | ||||||
Total current assets | 14,833 | 992 | ||||||
TOTAL ASSETS | $ | 14,833 | $ | 992 | ||||
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 91,363 | $ | 66,986 | ||||
Accrued compensation | 245,733 | 108,333 | ||||||
Accrued officer compensation | 223,000 | 125,500 | ||||||
Notes payable face value $53,000 less $2,549 discount at September 30, 2017 | 50,451 | — | ||||||
Accrued dividends | 48,079 | 48,080 | ||||||
Total current liabilities | 658,626 | 348,899 | ||||||
Total liabilities | 658,626 | 348,899 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ (deficit) | ||||||||
Series A Convertible Preferred Stock, $.001 par value, 2,000,000 shares authorized;13,602 shares issued and outstanding at September 30, 2017 and at December 31, 2016 | 14 | 14 | ||||||
Common stock, $.001 par value, 500,000,000 shares authorized; 157,785,520 and 154,785,520 shares issued and outstanding at September 30, 2017 and at December 31, 2016, respectively | 157,785 | 154,785 | ||||||
Additional paid-in capital | 79,344,831 | 79,179,432 | ||||||
Accumulated deficit | (80,146,423 | ) | (79,682,138 | ) | ||||
Total stockholders’ (deficit) | (643,793 | ) | (347,907 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) | $ | 14,833 | $ | 992 |
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 1,155,349 | $ | 3,662,615 | ||||
Accounts receivable | 219,618 | - | ||||||
Other assets | 117,728 | 43,391 | ||||||
Total current assets | 1,492,695 | 3,706,006 | ||||||
Long-term assets | ||||||||
Property and equipment - net | 220,765 | 206,810 | ||||||
Deferred compensation | - | 416,666 | ||||||
Right of use asset - operating | 460,705 | 544,670 | ||||||
Security deposit | 17,004 | 17,004 | ||||||
Total long-term assets | 698,474 | 1,185,150 | ||||||
Total assets | $ | 2,191,169 | $ | 4,891,156 | ||||
Liabilities and Stockholders’ Equity (Deficit) | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 249,880 | $ | 195,381 | ||||
Notes payable | 738,985 | 1,000,001 | ||||||
Notes payable CARES Act PPP Loan | - | 24,189 | ||||||
Due to related parties | 50,000 | 50,000 | ||||||
Operating lease liability - current | 104,117 | 76,227 | ||||||
Accrued expenses | 10,807 | 21,870 | ||||||
Accrued dividends | 48,079 | 48,079 | ||||||
Subscription payable | 585,000 | - | ||||||
Total current liabilities | 1,786,868 | 1,415,747 | ||||||
Long-term liabilities | ||||||||
Operating lease liability - non-current | 425,339 | 507,188 | ||||||
Total long-term liabilities | 425,339 | 507,188 | ||||||
Total liabilities | 2,212,207 | 1,922,935 | ||||||
Stockholders’ Equity (Deficit) | ||||||||
Series A convertible preferred stock, $.001 par value, 2,000,000 shares authorized and 13,602 shares issued and outstanding at September 30, 2022 and December 31, 2021 (Liquidation preference $340,050 and $340,050, respectively) | 14 | 14 | ||||||
Common stock, $.001 par value, 500,000,000 shares authorized; 207,817,878 and 207,562,461 shares issued and outstanding at September 30, 2022 and at December 31, 2021, respectively | 207,817 | 207,562 | ||||||
Additional paid-in capital | 101,728,483 | 100,452,862 | ||||||
Accumulated deficit | (101,957,353 | ) | (97,692,217 | ) | ||||
Total Stockholders’ Equity (Deficit) | (21,038 | ) | 2,968,221 | |||||
Total Liabilities and Stockholders’ Equity (Deficit) | $ | 2,191,169 | $ | 4,891,156 |
See accompanying notes to condensed consolidated financial statements (unaudited).
- 1 -
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended September 30, | ||||||||
2017 | 2016 | |||||||
Operating expenses | ||||||||
General and administrative | $ | 180,353 | $ | 145,439 | ||||
Total operating expenses | 180,353 | 145,439 | ||||||
Operating loss | (180,353 | ) | (145,439 | ) | ||||
Other income/(expense) | ||||||||
Interest income | — | 3 | ||||||
Interest (expense) | (451 | ) | — | |||||
Total other income | (451 | ) | 3 | |||||
Net loss | (180,804 | ) | (145,436 | ) | ||||
Preferred stock dividends | (8,501 | ) | (8,501 | ) | ||||
Net loss attributable to common stockholders | $ | (189,305 | ) | $ | (153,937 | ) | ||
Net loss per common share – basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted average number of shares outstanding, basic and diluted | 157,785,520 | 154,785,520 |
For The Three Months Ended September 30, | For The Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenue | $ | 572,766 | $ | - | $ | 763,688 | $ | - | ||||||||
Cost of revenue | 127,668 | - | 142,835 | - | ||||||||||||
Gross profit | 445,098 | - | 620,853 | - | ||||||||||||
Operating expenses | ||||||||||||||||
General and administrative | 1,249,132 | 1,304,875 | 4,365,823 | 3,412,603 | ||||||||||||
Selling and marketing | 56,416 | 83,173 | 231,528 | 235,897 | ||||||||||||
Research and development | 65,364 | 61,968 | 286,365 | 192,783 | ||||||||||||
Total operating expenses | 1,370,912 | 1,450,016 | 4,883,716 | 3,841,283 | ||||||||||||
Operating loss | (925,813 | ) | (1,450,016 | ) | (4,262,863 | ) | (3,841,283 | ) | ||||||||
Other income/(expense) | ||||||||||||||||
Other income | 637 | - | 637 | 81,218 | ||||||||||||
Interest expense | (1,227 | ) | (1,794 | ) | (2,910 | ) | (3,542 | ) | ||||||||
Total other income/(expense) | (590 | ) | (1,794 | ) | (2,273 | ) | 77,676 | |||||||||
Net Loss before provision for income taxes | (926,404 | ) | (1,451,810 | ) | (4,265,136 | ) | (3,763,607 | ) | ||||||||
Provision for income taxes | - | - | - | - | ||||||||||||
Net loss | (926,404 | ) | (1,451,810 | ) | (4,265,136 | ) | (3,763,607 | ) | ||||||||
Preferred stock dividends | (8,501 | ) | (8,502 | ) | (25,504 | ) | (25,504 | ) | ||||||||
Net loss attributable to common stockholders | $ | (934,905 | ) | $ | (1,460,312 | ) | $ | (4,290,640 | ) | $ | (3,789,111 | ) | ||||
Net loss attributable to common stockholders per common share - basic and diluted | $ | (0.00 | ) | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.01 | ) | ||||
Weighted average number of common shares outstanding | 207,794,526 | 203,857,408 | 207,726,711 | 198,786,305 |
See accompanying notes to condensed consolidated financial statements (unaudited).
- 2 -
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(Unaudited)
For the nine months ended September 30, | ||||||||
2017 | 2016 | |||||||
Operating expenses | ||||||||
General and administrative | $ | 463,834 | $ | 396,410 | ||||
Total operating expenses | 463,834 | 396,410 | ||||||
Operating loss | (463,834 | ) | (396,410 | ) | ||||
Other income/(expense) | ||||||||
Other income | — | 2,542 | ||||||
Interest income | — | 32 | ||||||
Interest (expense) | (451 | ) | — | |||||
Total other income | (451 | ) | 2,574 | |||||
Net loss | (464,285 | ) | (393,836 | ) | ||||
Preferred stock dividends | (25,504 | ) | (25,504 | ) | ||||
Net loss attributable to common stockholders | $ | (489,789 | ) | $ | (419,340 | ) | ||
Net loss per common share – basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
Weighted average number of shares outstanding, basic and diluted | 155,118,854 | 93,679,681 |
Preferred Stock | Common Stock | Additional Paid- | Accumulated | Total Stockholders’ (Deficit) | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | In Capital | Deficit | Equity | ||||||||||||||||||||||
Balance at December 31, 2021 | 13,602 | $ | 14 | 207,562,461 | $ | 207,562 | $ | 100,452,862 | $ | (97,692,217 | ) | $ | 2,968,221 | |||||||||||||||
RSU restricted Stock | - | - | 130,417 | 130 | (130 | ) | - | - | ||||||||||||||||||||
Stock-based compensation | - | - | - | - | 554,877 | - | 554,877 | |||||||||||||||||||||
Net loss for the quarter ended March 31, 2022 | - | - | - | - | - | (1,781,190 | ) | (1,781,190 | ) | |||||||||||||||||||
Balance at March 31, 2022 | 13,602 | 14 | 207,692,878 | 207,692 | 101,007,609 | (99,473,407 | ) | 1,741,908 | ||||||||||||||||||||
Stock-based compensation | - | - | - | - | 449,508 | - | 449,508 | |||||||||||||||||||||
Common stock issued on exercise of option | - | - | 100,000 | 100 | 12,900 | - | 13,000 | |||||||||||||||||||||
Net loss for the quarter ended June 30, 2022 | - | - | - | - | - | (1,557,542 | ) | (1,557,542 | ) | |||||||||||||||||||
Balance at June 30, 2022 | 13,602 | $ | 14 | 207,792,878 | $ | 207,792 | $ | 101,470,017 | $ | (101,030,949 | ) | $ | 646,874 | |||||||||||||||
Stock-based compensation | - | - | - | - | 257,241 | - | 257,241 | |||||||||||||||||||||
Common stock issued on exercise of warrants | 25,000 | 25 | 1,225 | - | 1,250 | |||||||||||||||||||||||
Net loss for the quarter ended September 30, 2022 | - | - | - | - | - | (926,404 | ) | (926,404 | ) | |||||||||||||||||||
Balance at September 30, 2022 | 13,602 | 14 | 207,817,878 | $ | 207,817 | $ | 101,728,483 | $ | (101,957,353 | ) | $ | (21,038 | ) |
Preferred Stock | Common Stock | Additional Paid- | Accumulated | Total Stockholders’ (Deficit) | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | In Capital | Deficit | Equity | ||||||||||||||||||||||
Balance at December 31, 2020 | 13,602 | $ | 14 | 190,529,320 | $ | 190,529 | $ | 93,778,591 | $ | (92,266,764 | ) | $ | 1,702,370 | |||||||||||||||
RSU restricted Stock | - | - | 31,250 | 31 | 4,519 | - | 4,550 | |||||||||||||||||||||
Stock-based compensation | - | - | - | - | 170,029 | - | 170,029 | |||||||||||||||||||||
Common stock issued on cashless exercise of options and warrant | - | - | 1,005,682 | 1,006 | (1,006 | ) | - | - | ||||||||||||||||||||
Common stock issued on exercise of options and warrant | - | - | 600,000 | 600 | 41,400 | - | 42,000 | |||||||||||||||||||||
Common stock issued on exercise of convertible note | - | - | 158,329 | 158 | 47,340 | - | 47,498 | |||||||||||||||||||||
Sale of common stock | - | - | 7,056,250 | 7,056 | 2,250,944 | - | 2,258,000 | |||||||||||||||||||||
Net loss for the three months ended March 31, 2021 | - | - | - | - | - | (1,086,438 | ) | (1,086,438 | ) | |||||||||||||||||||
Balance at March 31, 2021 | 13,602 | 14 | 199,380,821 | 199,380 | 96,291,817 | (93,353,202 | ) | 3,138,010 | ||||||||||||||||||||
Stock-based compensation | - | - | - | - | 318,818 | - | 318,818 | |||||||||||||||||||||
Common stock issued on cashless exercise of options and warrant | - | - | 259,741 | 260 | (260 | ) | - | - | ||||||||||||||||||||
Common stock issued on exercise of options and warrant | - | 450,010 | 450 | 28,550 | - | 29,000 | ||||||||||||||||||||||
Net loss for the three months ended June 30, 2021 | - | - | - | - | - | (1,225,360 | ) | (1,225,360 | ) | |||||||||||||||||||
Balance at June 30, 2021 | 13,602 | $ | 14 | 200,090,572 | $ | 200,090 | $ | 96,638,926 | $ | (94,578,562 | ) | $ | 2,260,468 | |||||||||||||||
Stock-based compensation | - | - | - | - | 354,880 | - | 354,880 | |||||||||||||||||||||
Common stock issued on cashless exercise of options and warrant | - | - | 957,143 | 957 | (957 | ) | - | - | ||||||||||||||||||||
Common stock issued on exercise of stock options and warrants | - | - | 600,000 | 600 | 36,400 | - | 37,000 | |||||||||||||||||||||
Sale of common stock | - | - | 4,054,665 | 4,054 | 3,036,946 | - | 3,041,000 | |||||||||||||||||||||
Net loss for the quarter ended September 30, 2021 | - | - | - | - | - | (1,451,810 | ) | (1,451,810 | ) | |||||||||||||||||||
Balance as of September 30, 2021 | 13,602 | $ | 14 | 205,702,380 | $ | 205,701 | $ | 100,066,194 | $ | (96,030,372 | ) | $ | 4,241,539 |
See accompanying notes to condensed consolidated financial statements (unaudited).
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APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the nine months ended September 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (464,285 | ) | $ | (393,836 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Non-cash stock based compensation expense | 65,309 | 63,000 | ||||||
Warrant expense | 40,590 | — | ||||||
Interest expense | 279 | — | ||||||
Amortization of financing costs | 172 | — | ||||||
Changes in assets and liabilities: | ||||||||
Prepaid expenses, deposits and other assets | — | (2,768 | ) | |||||
Accounts payable | 24,376 | 9,843 | ||||||
Accrued compensation | 234,900 | 196,582 | ||||||
Net cash used in operating activities | (98,659 | ) | (127,179 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Net cash provided by investing activities | — | — | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from notes payable net of financing costs | 50,000 | — | ||||||
Proceeds from issuance of common stock | 62,500 | — | ||||||
Net cash provided by financing activities | 112,500 | — | ||||||
Net increase (decrease) in cash and cash equivalents | 13,841 | (127,179 | ) | |||||
Cash and cash equivalents, beginning of period | 680 | 136,840 | ||||||
Cash and cash equivalents, end of period | $ | 14,521 | $ | 9,661 | ||||
Supplemental Cash Flow Information | ||||||||
Cash paid for interest and taxes | $ | — | $ | — |
For the Nine Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Cash Flows from Operating Activities | ||||||||
Net loss | $ | (4,265,136 | ) | $ | (3,763,607 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Noncash stock-based compensation expense | 1,261,626 | 848,277 | ||||||
Amortization of ROU assets | 83,965 | - | ||||||
Depreciation and amortization | 50,499 | 18,021 | ||||||
PPP loan forgiveness | - | (81,550 | ) | |||||
Amortization of future compensation payable | 416,666 | 625,000 | ||||||
Amortization of prepaid assets | 162,760 | 122,660 | ||||||
Loss on disposal of equipment | 14,540 | - | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (219,618 | ) | - | |||||
Other assets | - | 2,880 | ||||||
ROU liabilities | (53,959 | ) | 24,216 | |||||
Prepaids and deposits | (237,097 | ) | (48,218 | ) | ||||
Accounts payable | 53,863 | (28,051 | ) | |||||
Accrued interest | - | 696 | ||||||
Accrued expenses and compensation | (11,063 | ) | 29 | |||||
Net cash used in operating activities | (2,742,953 | ) | (2,279,649 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchase of equipment | (78,996 | ) | (206,198 | ) | ||||
Net cash used in investing activities | (78,996 | ) | (206,198 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Repayment on note payable | (460,002 | ) | (1,102,113 | ) | ||||
Proceeds from sale of common stock | - | 5,299,000 | ||||||
Proceeds from note payable | 175,435 | - | ||||||
Proceeds from subscription payable | 585,000 | - | ||||||
Proceeds from exercise of stock options and warrants | 14,250 | 108,000 | ||||||
Net cash provided by financing activities | 314,682 | 4,304,887 | ||||||
Net change in cash and cash equivalents | (2,507,267 | ) | 1,819,042 | |||||
Cash and cash equivalents, beginning of year | 3,662,615 | 3,323,290 | ||||||
Cash and cash equivalents, end of period | $ | 1,155,349 | $ | 5,142,332 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 1,683 | $ | 1,421 | ||||
Cash paid for taxes | $ | - | $ | - | ||||
Non-cash investing and financing activities | ||||||||
Insurance financing for prepaid insurance | $ | 175,435 | $ | 117,209 | ||||
Implementation of ASC 842 | $ | - | $ | 617,569 | ||||
Forgiveness of PPP loan | $ | - | $ | 81,449 | ||||
Equipment investing in accounts payable | $ | - | $ | 64,107 | ||||
Common stock issued for repayment of convertible notes | $ | - | $ | 47,499 |
See accompanying notes to condensed consolidated financial statements (unaudited).
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APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
NOTE 1 – ORGANIZATION OF BUSINESS, GOING CONCERN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATIONBasis of Presentation
The accompanying interim unaudited condensed consolidated financial statements include the accounts of Applied Energetics, Inc. and its wholly owned subsidiary North Star Power Engineering, Inc. as of September 30, 2017(“North Star”) (collectively, “company,” “Applied Energetics,” “we,” “our” or “us”). All intercompany balances and transactions have been eliminated. In
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the opinionUnited States (“GAAP”) for interim financial information, the instructions for Form 10-Q and the rules and regulations of management,the SEC. Accordingly, since they are interim statements, the accompanying unaudited condensed consolidated financial statements do not include all of the information and notes required by GAAP for annual financial statements, but reflect all adjustments (which includeconsisting of normal, recurring adjustments)adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been made. Thepresented. Interim results for the three month and nine month periods ended September 30, 2017, mayare not benecessarily indicative of the results that may be expected for any future periods. The December 31, 2021, balance sheet information was derived from the entire year.audited financial statements as of that date. 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 PLANGoing Concern
The accompanying unauditedcondensed consolidated 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, 2017,2022, the company incurred a net loss of approximately $464,000,$4,265,136, had negative cash flows from operations of approximately $99,000$2,742,953 and expects tomay incur additional future losses due to limited contract activity. At September 30, 2022, the reactivationcompany had total current assets of $1,492,695 and total current liabilities of $1,786,868, resulting in a working capital deficit of $294,173. At September 30, 2022, the company had cash of $1,155,349.
Based on the company’s current business plan, it believes its cash balance as of the date of this filing, together with anticipated revenues from a government grant and contract, will be sufficient to meet its anticipated cash requirements for the near term. However, there can be no assurance that the current business activities. These mattersplan will be achievable. Such conditions raise substantial doubt as todoubts about the company’s ability to continue as a going concern unlessfor one year from the date the financial statements are issued.
The company’s existence depends upon management’s ability to develop profitable operations. Management is devoting substantially all of its efforts to developing its business and raising capital and there can be no assurance that management’s efforts will result in profitable operations or enable it to overcome future liquidity concerns. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of assets, the amount or classification of liabilities or otherwise that might be necessary should the company is ablebe unable to obtaincontinue as a going concern.
The ongoing COVID-19 pandemic and pandemic-related trade conditions, such as exacerbated port congestion, supplier shutdowns and delays, contribute to this uncertainty. Additionally, Russia’s military action in Ukraine and related economic sanctions around the globe, could impact the company’s ability to source necessary supplies and equipment which could materially and adversely affect its ability to continue as a going concern. In addition, the company’s ability to continue as a going concern may depend on its ability to raise capital which may be impacted by these events, including as a result of increased market volatility, or decreased market liquidity. This may result in third-party financing being unavailable on terms acceptable to the company or at all. The impact of this action and related sanctions on the world economy and the specific impact on the company’s financial position and results of operations are not yet determinable. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
To further improve its liquidity position, the company’s management continues to explore additional equity financing forthrough discussions with investment bankers and private investors. There can be no assurance that the company will be successful in its continuing operations.effort to secure additional equity financing. During the three months ended September 30, 2022, the company received funds in the amount of $585,000 as part of a pending placement of equity which it has recognized as a subscription payable. 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.
AsApplied Energetics, Inc. is a corporation organized and existing under the laws of the State of Delaware. Our headquarters are located at 9070 S. Rita Road Suite 1500, Tucson, Arizona, 85747, including office and laboratory space, and our telephone number is (520) 628-7415.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017, the company had approximately $15,000 in cash and cash equivalents.2022
(Unaudited)
Use of Estimates
USE OF ESTIMATES
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States Generally Accepted Accounting Principles (“GAAP”)of America 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 estimatesassumptions 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 carrying amounts of long-lived assets, valuation assumptions for share-based payments, effective borrowing rate determinations, analysis of fair value transferred upon debt extinguishment, valuation and calculation of measurements of income tax assets and liabilities.liabilities and valuation of debt discount related to beneficial conversion features.
RECENT ACCOUNTING PRONOUNCEMENTSNet Loss Attributable to Common Stockholders
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.
2. SHARE-BASED COMPENSATION
Share-Based Compensation – Contractors
For the nine months ended September 30, 2017 and 2016, share-based compensation expense totaled approximately $65,000 and $63,000, respectively.
- 5 -
APPLIED ENERGETICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(Unaudited)
There was no related income tax benefit recognized because our deferred tax assets are fully offset by a valuation allowance.
We determine the fair value of option grant share-based awards at their grant date, using a Black-Scholes-Merton Option-Pricing Model applying the assumptions in the following table:
Nine months ended September 30, | ||||||||
2017 | 2016 | |||||||
Expected life (years) | 5 | — | ||||||
Dividend yield | 0 | % | — | |||||
Expected volatility | 80 | % | — | |||||
Risk free interest rates | 1.97 | % | — | |||||
Weighted average fair value of options at grant date | $ | 0.02980 | — |
During the nine months ended September 30, 2017 the company granted each member of the Scientific Advisory Board options to purchase 2 million shares of $.001 par value common stock at a price of $0.05 per share. These options have a five year term and vest to the extent of 500,000 shares on the first anniversary of the grant and to the extent of 62,500 options per month during the 24 months following the initial vesting date.
During the nine months ended September 30, 2017 the company also granted each member of the Scientific Advisory Board performance options to purchase 1.5 million shares of $0.001 par value common stock at a price of $0.25 per share. These options have a five year term and vest on the date the company has cumulative revenues of $5 million.
For the nine months ended September 30, 2017, 14,000,000 options to purchase stock were granted, additionally, no options to purchase stock were exercised, expired or forfeited; no restricted stock units were granted, vested or forfeited; and no restricted stock awards were granted, vested or forfeited. At September 30, 2017, options to purchase 14,000,000 shares of common stock were outstanding with a weighted average exercise price of $0.136 with a weighted average remaining contract term of approximately 4.5 years with an aggregate intrinsic value of $-0-. At September 30, 2017 no options were exercisable.
As of September 30, 2017, there was approximately $121,000 of unrecognized compensation cost related to unvested stock options granted and outstanding, net of estimated forfeitures. The cost is expected to be recognized on a weighted average basis over a period of approximately three years.
3. NET LOSS PER SHARE
Basic net loss per common share is computed by dividing net loss availableattributable to common shareholdersstockholders by the weighted average number of common shares outstanding duringfor 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 preferreddilutive common stock stock options, warrants and restricted stock units.equivalents. Contingently issuable shares are included in the computation of basic loss per share when issuance of the shares is no longer contingent. Due toThe number of warrants, options, restricted stock units and our Series A Convertible Preferred Stock, which were not included in the losses from continuing operationscomputation of earnings per share because the effect was antidilutive, was 24,424,550 and 32,019,604 for the nine months ended September 30 20172022 and 2016, basic2021, respectively.
Significant Concentrations and diluted loss per common share wereRisks
We maintain cash balances at a commercial bank, and, at times, balances exceed FDIC limits. As of September 30, 2022, $905,349 was uninsured.
NOTE 2 – NEW ACCOUNTING STANDARDS
The company has reviewed all 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.
In December 2019, the FASB issued amended guidance in the form of ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU is intended to simplify various aspects of accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020, and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same asperiod. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The company has evaluated the effectimpact of potentially dilutive securities wouldthis new standard and notes the guidance did not have been anti-dilutive.a material impact on our financial statements.
- 6 -
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
On August 5, 2020, the FASB issued ASU No. 2020-06 which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 simplifies the guidance in U.S. GAAP on the issuer’s accounting for convertible debt instruments and preferred stock. Such guidance includes multiple disparate sets of classification, measurement, and derecognition requirements whose interactions are complex. ASU 2020-06 is effective for annual periods beginning after December 15, 2021, and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The company adopted this standard on January 1, 2022. The adoption of this standard did not have a material impact on the company’s financial statements.
NOTE 3 – NOTES PAYABLE
Potentially dilutive securities not includedOn May 24, 2019, the company entered into an Asset Purchase Agreement (the “APA”) with Applied Optical Sciences, LLC (“AOS”) to acquire certain assets. As consideration for the APA, the company entered into a promissory note issued to the shareholders of AOS for $2,500,000. The note is non-interest bearing and payable in equal installments. The company made the first three payments of $500,000 on February 10, 2021, May 24, 2021, and November 19, 2021, respectively. The Promissory Note was amended on May 23, 2022 as modification of debt to extend the maturity date by one year to, May 24, 2023, and restructure the payment to time up to the adjusted maturity date. The remaining balance of $1,000,000 as of June 30, 2022 is to be paid in ten equal installments of $100,000 over a period of ten month with the final installment to paid on April 24, 2023. In accordance with the terms of the promissory note, the company made three payments of $100,000, for an aggregate total repayment of $300,000. As of September 30, 2022, $700,000 in principle was outstanding on this loan.
Paycheck Protection Program
On April 28, 2020, the company entered into a loan agreement with Alliance Bank of Arizona, N.A. for a loan in the diluted lossamount of $132,760 pursuant to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 (the “CARES Act”). This loan is evidenced by a promissory note, dated April 27, 2020, and matured two years from the disbursement date. This loan bears interest at a rate of 1.00% per share calculation,annum, with the first six-months ended of interest deferred. Principal and interest are payable monthly commencing six-months ended after the disbursement date and may be prepaid by the company at any time prior to maturity with no prepayment penalties. This loan contains customary events of default relating to, among other things, payment defaults or breaches of the terms of the loan. Upon the occurrence of an event of default, the lender may require immediate repayment of all amounts outstanding under the note.
Under the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent loan proceeds are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration (“SBA”) under the PPP. The company partially used the loan amount for designated qualifying expenses and received notice from the SBA on June 30, 2021, that the company would not be required to repay $81,550 in proceeds. As a result, the company received partial forgiveness of the PPP amounting to $80,594 in principal and $956 in interest which is reflected within PPP forgiveness and other income on the statements of operations. During the six months ended June 30, 2020, the company paid the remaining balance of the loan in the aggregate of $23,553 in four equal payments, with loan formally repaid on April 20, 2022. As a result, as of September 30, 2022, no principal or interest was outstanding on this loan.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Premium Financing
On April 8, 2022, the company entered into an agreement with Oakwood D&O Insurance to provide financing in an amount of $234,367 for the insurance premium associated with two D&O policies. Both policies commenced March 12, 2022, and provided coverage for the next 12 months, expiring March 12, 2023. The loan bears interest at a fixed rate of 5% per annum and required the company to prepay $58,932 and appears on the balance sheet as a current asset. On April 12, 2022, the company commenced monthly principal and interest payments of $19,901, which was the first payment of nine remaining months due of $175,435, the last payment of which is scheduled to net losses from continuing operations, werebe made on December 31, 2022. As of September 30, 2022, the outstanding balance on the note was $38,985 and was recorded as notes payable, a currently liability, in the company’s condensed consolidated balance sheet.
Notes Payable Reconciliation
The following reconciles notes payable as of September 30, 2022, and December 31, 2021:
September 30, 2022 | December 31, 2021 | |||||||
Beginning balance | $ | 1,024,190 | $ | 2,681,157 | ||||
Notes payable | 175,435 | 117,209 | ||||||
Accrued interest | (640 | ) | 1,385 | |||||
Payments on notes payable | (460,002 | ) | (1,646,513 | ) | ||||
Extinguishment of debt | - | (81,550 | ) | |||||
Converted into common stock | - | (47,498 | ) | |||||
Total | 738,985 | 1,024,190 | ||||||
Less-Notes payable – current | 738,985 | 1,024,190 | ||||||
Notes payable – non-current | $ | - | $ | - |
Future principal payments for the company’s Notes as of September 30, 2022, are as follows:
Nine months ended September 30, | ||||||||
2017 | 2016 | |||||||
Options to purchase common shares | 14,000,000 | — | ||||||
Warrants to purchase common shares | 1,320,598 | — | ||||||
Convertible preferred stock | 40,381 | 37,548 | ||||||
Total potentially dilutive securities | 15,360,979 | 37,548 |
2022 | $ | 338,985 | ||
2023 | 400,000 | |||
Thereafter | ||||
Total | $ | 738,985 |
4. DIVIDENDSThe company’s note payable balance of $738,985 is due within the next twelve months, in accordance with the terms of note payable. $700,000 of the outstanding notes payable balance at September 30, 2022 will be paid in seven equal installments of $100,000 over the next seven months, with the final installment to paid on April 24, 2023.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
NOTE 4 – DEFERRED COMPENSATION
DividendsOn May 24, 2019, the company entered into the APA with AOS to acquire certain assets. As consideration for the APA, the company entered into a promissory note issued to the shareholders of AOS for $2,500,000. The company also recorded a debt discount, which is reported on Preferred Stock are accrued whenthe balance sheet as deferred compensation, in the amount and kindof $2,500,000, in relation to the transaction which is being amortized over the life of the dividendloan as compensation expense. The amortization of deferred compensation for the nine months ended September 30, 2022, and 2021 was $416,666 and $625,000, respectively.
NOTE 5 – DUE TO RELATED PARTIES
It has come to the board’s attention that on July 31, 2018, our now deceased CEO deposited $50,000 into the company’s account. Although it has been suggested that the funds may have been intended for use toward Mr. Dearmin’s healthcare, the board does not know for certain what the purpose of the funds were or the nature of any intended investment. Accordingly, the board is determined and are payable quarterly oninvestigating the first dayappropriate disposition of February, May, August and November, in cash orthe funds which will likely be to the estate of Mr. Dearmin. Until such a determination is made, the board does not intend to use these funds for any corporate purpose. For reporting purposes, the company has treated the deposit as a due to related party.
NOTE 6 – STOCKHOLDERS’ EQUITY
Authorized Capital Stock
During the nine months ended September 30, 2021, the company issued 7,056,250 shares of common stock.stock in a private placement to accredited investors for $0.32 per share or $2,258,000 of net cash proceeds, in the aggregate.
During the nine months ended September 30, 2021, the company issued 158,329 shares of common stock upon the conversion of $47,499 of convertible notes (see Note 3).
During the nine months ended September 30, 2021, the company issued 31,250 shares of common stock in relation to a restricted stock agreement with a value of $4,550.
During the nine months ended September 30, 2021, the company issued 800,000 shares of common stock upon the exercise of 800,000 warrants at an exercise price of $0.07 a share.
During the nine months ended September 30, 2021, the company issued 250,000 shares of common stock upon the exercise of 250,000 warrants at an exercise price of $0.06 a share.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
During the nine months ended September 30, 2021, the company issued 259,741 shares of common stock upon the exercise of 500,000 options at an exercise price of $0.37 a share. This exercise was performed on a cashless basis.
During the nine months ended September 30, 2021, the company issued 1,760,000 options to purchase common stock at an exercise price of $0.40 a share. The holdersoptions vest over a period of three years from the date of the amendment.
During the nine months ended September 30, 2021, the company issued 4,054,665 shares of common stock in a private placement to accredited investors for $0.75 per share or $3,041,000 of net cash proceeds, in the aggregate.
During the nine months ended September 30, 2021, the company issued 50,000 shares of common stock upon the exercise of 50,000 warrants at an exercise price of $0.06 a share. During the nine months ended September 30, 2021, the company issued 100,000 shares of common stock upon the exercise of 100,000 warrants at an exercise price of $0.07 a share.
During the nine months ended September 30, 2021, the company issued 200,000 shares of common stock upon the exercise of 200,000 warrants at an exercise price of $0.06 a share.
During the nine months ended September 30, 2021, the company issued 125,000 shares of common stock upon the exercise of 125,000 warrants at an exercise price of $0.06 a share.
During the nine months ended September 30, 2021, the company issued 60,000 shares of common stock upon the exercise of 60,000 warrants at an exercise price of $0.06 a share.
During the nine months ended September 30, 2021, the company issued 65,000 shares of common stock upon the exercise of 65,000 warrants at an exercise price of $0.06 a share.
During the nine months ended September 30, 2021, the company issued 475,000 shares of common stock with an exercise of 500,000 options. 25,000 shares of common stock were withheld with the exercise. This exercise was performed on a cashless basis.
During the nine months ended September 30, 2021, the company issued the company issued 482,143 shares of common stock with an exercise of 500,000 options. 17,857 shares of common stock were withheld with the exercise. This exercise was performed on a cashless basis
During the nine months ended September 30, 2022, the company issued 130,417 shares of common stock for previously vested and expensed shares in relation to a restricted stock agreement. For the nine months ended September 30, 2022, the Company recorded $0 in relation to these shares.
During the nine months ended September 30, 2022, the company issued 100,000 shares of common stock upon the exercise of 100,000 options at an exercise price of $0.13 a share. As a result, the company received $13,000 in cash proceeds as part of the transaction.
During the nine months ended September 30, 2022, the company issued 25,000 shares of common stock upon result of the two warrant exercises of 12,500 shares each, or 25,000 shares of common stock in the aggregate, at an exercise price of $0.05 a share. The company received $1,250 in cash proceeds as part of the transaction.
Effective August 1, 2022, the Company entered into an Executive Employment Agreement with Mr. Donaghey who was appointed the Company’s Chief Financial Officer ("CFO"). As part of the Executive Employment Agreement, the Company granted 1,000,000 options to purchase shares of common stock at an exercise price of $2.36 per share. The options vest over a period of four years and expire ten years from the date of the grant. Mr. Donaghey was also granted 400,000 shares of restricted to units as part of his Executive Employment Agreement (see “Share-Based Payments” below). Further, Mr. Donaghey forfeited unvested options to purchase 950,000 shares of common stock which he had previously received for his service on the Company’s Board of Advisors. The forfeiture of the unvested options resulted in the reversal of previously recorded stock-based compensation expense in the amount of approximately $176,000.
As of nine months ended, September 30, 2022, the company recognized a subscription payable for $585,000 from the sale of common stock as a current liability on its balance sheet, reflecting the receipt of $585,000 in cash proceeds as part of a pending private equity placement transaction.
During the nine months ended September 30, 2022 and 2021, the company recognized stock-based compensation in the amount of $1,261,626 and $848,277, respectively.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Preferred Stock
As of September 30, 2022, and December 31, 2021, there were 13,602 shares of Series A Redeemable 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”“Series A Preferred Stock”), payable, at the option of the corporation, in cash or shares of common stock or a combination of cash issued 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.
As of September 30, 2017, we had 13,602 shares of our 6.5% Series A Convertible Preferred Stock outstanding.outstanding, respectively. The company has not paid the dividends commencing with the quarterly dividend due August 1, 2013. Dividend arrearages as of SeptemberJune 30, 2017 was2022, including previously accrued dividends included in our balance sheet are approximately $145,000.$314,546. Our Board of Directors suspended the declaration of the dividend, commencing with the dividend payable as of February 1, 2015, since we did not have a surplus (as such term is defined in the Delaware general corporation Law) as of December 31, 2014, until such time as we have a surplus or net profits for a fiscal year.
Our Series A Preferred Stock has a liquidation preference of $25.00 per Share. The Series A Preferred Stock bears dividends at the rate of 6.5% of the liquidation preference per share per annum, which accrues from the date of issuance, and is payable quarterly. Dividends may be paid in: (i) cash, (ii) shares of our common stock (valued for such purpose at 95% of the weighted average of the last sales prices of our common stock for each of the trading days in the ten trading day period ending on the third trading day prior to the applicable dividend payment date), provided that the issuance and/or resale of all such shares of our common stock are then covered by an effective registration statement and the company’s common stock is listed on a U.S. national securities exchange or the Nasdaq Stock Market at the time of issuance or (iii) any combination of the foregoing. If the Companycompany fails to make a dividend payment within five business days following a dividend payment date, the dividend rate shall immediately and automatically increase by 1% from 6.5% of the liquidation preference per offered share of Series A preferred stock to 7.5% of such liquidation preference. 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.
Each share of Series A Preferred Stock is convertible at any time at the option of the holder into a number of shares of common stock equal to the liquidation preference (plus any unpaid dividends for periods prior to the dividend payment date immediately preceding the date of conversion by the holder) divided by the conversion price (initially $12.00 per share, subject to adjustment in the event of a stock dividend or split, reorganization, recapitalization or similar event). If the closing sale price of the common stock is greater than 140% of the conversion price on 20 out of 30 trading days, the company may redeem the Series A Preferred Stock in whole or in part at any time through October 31, 2010, upon at least 30 days’ notice, at a redemption price, payable in cash, equal to 100% of the liquidation preference of the shares to be redeemed, plus unpaid dividends thereon to, but excluding, the redemption date, subject to certain conditions. In addition, beginning November 1, 2010, the company may redeem the Series A Preferred Stock in whole or in part, upon at least 30 days’ notice, at a redemption price, payable in cash, equal to 100% of the liquidation preference of the Series A Preferred Stock to be redeemed, plus unpaid dividends thereon to, but excluding, the redemption date, under certain conditions.
- 7 - If a change of control occurs, each holder of shares of Series A Convertible Preferred Stock that are outstanding immediately prior to the change of control shall have the right to require the corporation to purchase, out of legally available funds, any outstanding shares of Series A Convertible Preferred Stock at the defined purchase price. The purchase price is defined as: per share of Preferred Stock, 101% of the liquidation preference thereof, plus all unpaid and accumulated dividends, if any, to the date of purchase thereof. The purchase price is payable, at the corporation’s option, (x) in cash, (y) in shares of the common stock at a discount of 5% from the fair market value of Common Stock on the Purchase Date (i.e. valued at a 95% discount of the Common Stock on the Purchase Date), or (z) any combination thereof.
If the Corporation pays all or a portion of the Purchase Price in Common Stock, no fractional shares of Common Stock will be issued; instead, the company will round the applicable number of shares of Common Stock up to the nearest whole number of shares; provided that the Corporation may pay the Purchase Price (or a portion thereof), whether in cash or in shares of Common Stock, only if the Corporation has funds legally available for such payment and may pay the Purchase Price (or a portion thereof) in shares of its Common Stock only if (i) the Common Stock is listed on a U.S. national securities exchange or the Nasdaq Stock Market at the time of issuance and (ii) a shelf registration statement covering the issuance by the Corporation and/or resales of the Common Stock issuable as payment of the Purchase Price is effective on the Payment Date unless such shares are eligible for immediate resale in the public market by non-affiliates of the Corporation.
The company pays an annual dividend on its preferred stock of approximately $34,000. For the nine months ended September 30, 2022 and 2021, the company has recorded $25,004 and $25,504 respectively as preferred stock dividends on its condensed consolidated statements of operations in relation to its annual dividend. Dividends on our Preferred Stock are payable quarterly on the first day of February, May, August and November, in cash or shares of Common Stock, at our discretion.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20172022
(Unaudited)
Share-Based Payments
5. NOTES PAYABLEEffective November 12, 2018, the Board of Directors of Applied Energetics, Inc. adopted the 2018 Incentive Stock Plan. The plan provides for the allocation and issuance of stock, restricted stock purchase offers and options (both incentive stock options and non-qualified stock options) to officers, directors, employees and consultants of the company. The board reserved a total of 50,000,000 shares for possible issuance under the plan.
OnWe have, from time to time, also granted non-plan options to certain officers, directors, employees and consultants. Total stock-based compensation expense for grants to officers, employees and consultants was $1,261,626 and $848,277 for the nine months ended September 15, 201730, 2022, and 2021, respectively, which was charged to general and administrative expense.
Stock-based compensation for the Company borrowed $53,000year ended December 31, 2021, was comprised of 140,000 shares under a convertible note maturing June 20, 2018.restricted stock agreement the company entered into in May of 2021. The note bears interestrestricted stock awards were valued at $84,000 of 12% payable at maturity. Any amount of principal or interest onwhich the note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid. The note is convertible into shares of the Company’s $0.001 par value common stock after March 24, 2018 (the “Initial Conversion Date”). The conversion rate is variable and will be 58% of the average of the lowest one day trading price during the twenty trading days preceding the holders notice of conversion. The number of shares issuable on conversion is limited to 4.99% of the Company’s then issued and outstanding Common Stock. The Company at the request of the Note Holder has reserved 36,369,879 shares of its $0.001 common stock for conversion. The Note is prepayable at the Company’s option until the Initial Conversion Date. The following reconciles notes payablefull $84,000 was recognized as of September 30, 20172022. The shares vest annually over two years with the first installment one year from the agreement; provided, however, if either party terminates the agreement at any time prior to the last date of it ending, then the shares will vest, pro rata, for each month served since the most recent prior annual vesting date.
As part of his Executive Employment Agreement dated July 13, 2022 the company granted 400,000 shares issued as restricted stock units to the Chief Financial Officer. The restricted stock units were valued at $928,000 of which $50,780 was recognized as of September 30, 2022. The shares vest in equal annual installments over four years. If either party terminates the agreement at any time prior to the last date of it ending, then the shares will vest, pro rata, for each month served since the most recent prior annual vesting date. The Restricted Stock Units are issued pursuant to a Restricted Stock Unit Agreement, dated as of July 13, 2022.
Stock based compensation for the nine months ended September 30, 2022, was comprised of 250,000 shares issued pursuant to the restricted stock unit agreement, dated July 13, 2022. The restricted stock units were valued at $580,000 of which $42,297 was recognized as of September 30, 2022. The shares vest with 25% being vested at the end of year one and two respectively, with the remaining 50% being expensed at the end of year three. If either party terminates the agreement at any time prior to the last date of it ending, then the shares will vest, pro rata, for each month served since the most recent prior annual vesting date.
The $1,261,626 stock-based compensation for the nine months ended September 30, 2022, was comprised of $930,077 option expense, $108,549 expense from the vesting of the restricted stock and $223,000 was the amortization of 5,000,000 shares of stock valued at $0.4014 over three years for the acquisition of assets of Applied Optical Sciences.
The company recognized no related income tax benefit because our deferred tax assets are fully offset by a valuation allowance.
We determine the fair value of option grant share-based awards at their grant date, using a Black-Scholes- Merton Option-Pricing Model.
As of September 30, 2022, the company has $4,998,280 of unrecognized compensation cost related to unvested stock options granted and outstanding, net of estimated forfeitures. The cost is expected to be recognized on a weighted average basis over a period of approximately six years.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
The following table summarizes the activity of our stock options for the nine-months ended September 30:
Shares | Weighted Average Exercise Price | Weighted Average Contractual Term Outstanding | Intrinsic Value | |||||||||||||
Outstanding at December 31, 2021 | 28,415,000 | $ | 0.1859 | 5.84 | $ | 50,673,665 | ||||||||||
Granted | 2,390,000 | 2.2130 | 9.48 | 17,378,564 | ||||||||||||
Exercised | (100,000 | ) | (0.1300 | ) | 6.09 | (961,438 | ) | |||||||||
Forfeited or expired | (7,950,000 | ) | - | - | (75,400,831 | ) | ||||||||||
Outstanding at September 30, 2022 | 22,755,000 | 0.3378 | 6.66 | 208,131,088 | ||||||||||||
Outstanding and exercisable at September 30, 2022 | 20,308,888 | 0.1751 | 6.34 | 189,061,250 |
We determine the fair value of option grant share-based awards at their grant date, using a Black-Scholes- Merton Option-Pricing Model applying the assumptions in the following table:
Nine-Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Assumptions: | ||||||||
Risk-free interest rate | 1.26-1.30 | % | .05-0.07 | % | ||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 126 | % | 128-130 | % | ||||
Expected life (in years) | 5 | 2-3 |
The fair value of restricted stock and restricted stock units was estimated using the closing price of our common stock on the date of award and fully recognized upon vesting. Restricted stock activity for the nine months ended September 30, 2022, was as follows:
Restricted Stock Outstanding | ||||||||
Shares | Weighted Average Fair Value per Share at Grant Date | |||||||
Outstanding at December 31, 2021 | 215,000 | $ | 0.52 | |||||
Granted – restricted stock units and awards | 650,000 | 2.32 | ||||||
Granted – performance-based stock units | - | - | ||||||
Canceled | - | - | ||||||
Vested and converted to shares | - | - | ||||||
Outstanding at September 30, 2022 | 865,000 | $ | 1.8708 |
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
As of September 30, 2022, and December 31, 2016:2021, there was $1,414,923 and $15,355 respectively in unrecognized stock-based compensation related to unvested restricted stock agreements, net of estimated forfeitures.
As of September 30, 2022 and December 31, 2021, the company in aggregate recorded $1,561,000 and $1,338,000, respectively, in stock-based compensation related to a lockup agreement on 5,000,000 shares of common stock in the acquisition of assets of AOS valued at $0.4014 per share, representing the closing price on the date of the contract which is amortized over 36 months, of which, $223,000 and $501,750, respectively, was amortized for the nine months ended September 30, 2022, and 2021.
On October 18, 2017Warrant stock activity for the nine-months ended September 30, 2022, was as follows:
Warrant Activity | ||||||||||||
Shares | Weighted Average Exercise Price | Weighted Average remaining Contractual Term (years) | ||||||||||
Outstanding at December 31, 2021 | 1,775,000 | $ | 0.0599 | 7.43 | ||||||||
Granted | - | - | - | |||||||||
Exercised | (25,000 | ) | 0.0500 | - | ||||||||
Forfeited | - | - | - | |||||||||
Outstanding and exercisable at September 30, 2022 | 1,750,000 | $ | 0.0600 | 6.78 |
Warrants Outstanding | Warrants Exercisable | |||||||||||||||||||
Range of Exercise Prices | Shares Outstanding | Weighted Avg. Remaining Contractual Life in Years | Weighted Avg. Exercise Price | Shares Exercisable | Weighted Avg. Exercise Price | |||||||||||||||
$0.05 - $0.07 | 1,750,000 | 0.01 | $ | 0.0600 | 1,750,000 | $ | 0.0600 | |||||||||||||
1,750,000 | 0.01 | $ | 0.0600 | 1,750,000 | $ | 0.0600 |
We determine the fair value of option grant share-based awards at their grant date, using a Black-Scholes- Merton Option-Pricing Model applying the assumptions in the following table:
Nine-months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Assumptions: | ||||||||
Risk-free interest rate | 0 | % | 0 | % | ||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 0 | % | 0 | % | ||||
Expected life (in years) | 0 | 0 |
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
NOTE 7 – REVENUE RECOGNITION
The Company derives revenue from technical research detailing the findings of its investigations to its customers under contract for specific projects. Under Topic 606, revenue is recognized when control of promised goods and services is transferred to customers, and the amount of revenue recognized reflects the consideration to which an entity expects to be entitled to in exchange for the goods and services transferred. A performance obligation is a contractual promise to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price of a contract is allocated to distinct performance obligations and recognized as revenue when or as the performance obligations are satisfied. The Company’s contracts require significant integrated services and are accounted for as a single performance obligation, and revenue is recognized by the Company borrowed $33,000 underover the contract term at a convertible note maturing July 20, 2018. The note bears interest of 12% payable at maturity. Any amount of principal or interest on the note which is not paid when due shall bear interest at the rate of twenty two percent (22%) per annum from the due date thereof until the same is paid. The note is convertible into shares of the Company’s $0.001 par value common stock after April 16, 2018 (the “Initial Conversion Date”). The conversion rate is variable and will be 58% of the average of the lowest one day trading price during the twenty trading days preceding the holders notice of conversion. The number of shares issuable on conversion is limited to 4.99% of the Company’s then issued and outstanding Common Stock. The Company at the request of the Note Holder has reserved 18,062,397 shares of its $0.001 common stock for conversion. The Note is prepayable at the Company’s option until the Initial Conversion Date.fixed contract price.
Concentrations
6. EQUITY
During the nine months ended September 30, 20172022, the company issued 2,500,00earned revenue from two contracts with two separate customers. One customer accounted for $648,905 or 85% of revenue recognized during the period. As of September 30, 2022. The company has $219,618 of accounts receivable recorded as current assets on the balance sheet. As of September 30, 2022, one customer accounted for $162,226 or 74% of accounts receivable. The company had no revenue during the nine months ended, September 30, 2021.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Operating Leases
In March 2021, the company signed a five-year lease for a 13,000 square foot laboratory/office space in Tucson. The initial base rent was $6.7626 per rentable square foot for year one, and escalated to $9.2009 in year two, $11.4806 in year three, $13.1740 in year four and $14.9306 in year five, plus certain operating expenses and taxes.
The company incurred lease expense for its operating leases of $193,326 which was included in general and administrative expenses in the statements of operation for the periods ended September 30, 2022. During the nine months ended September 30, 2022, the company made cash lease payments in the amount of $166,501.
At September 30, 2022, we had approximately $128,000 in future minimum lease payments due in less than a year. The below table presents the future minimum lease payments due reconciled to lease liabilities.
Operating Lease | ||||
For the fiscal years ending December 31, 2022: | ||||
2022 | $ | 30,752 | ||
2023 | 143,325 | |||
2024 | 168,577 | |||
2025 | 191,779 | |||
2026 | 66,536 | |||
Thereafter | - | |||
Total undiscounted lease payments | 600,969 | |||
Present value discount, less interest | 71,512 | |||
Lease Liability | $ | 529,426 |
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Guarantees
The company agrees to indemnify its officers and directors for certain events or occurrences arising as a result of the officers or directors serving in such capacity. The maximum amount of future payments that the company could be required to make under these indemnification agreements is unlimited. However, the company maintains a director’s and officer’s liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result, it believes the estimated fair value of these indemnification agreements is minimal because of its insurance coverage, and it has not recognized any liabilities for these agreements as of September 30, 2022 and 2021.
Litigation
On July 3, 2019, Gusrae, Kaplan & Nusbaum and its partner, Ryan Whalen filed a complaint in the United States District Court for the Southern District of New York against the company, its directors, officers, attorneys and a consultant. The action alleged libel, securities fraud and related claims. The company filed a motion to dismiss the complaint on October 24, 2019. On December 13, 2019, Gusrae Kaplan and Mr. Whalen filed an opposition to the company’s motion. On January 10, 2020, the company filed a reply brief. On August 5, 2021, the plaintiffs filed a Notice of Voluntary Dismissal of the action without prejudice.
On January 15, 2021, the company filed a complaint in the United States District Court, Southern District of New York, against Gusrae, Kaplan & Nusbaum and Ryan Whalen for malpractice and breach of New York Rules of Professional Conduct by both parties as former counsel to the company. On May 28, 2021, Gusrae, Kaplan & Nusbaum and Mr. Whalen filed a motion to dismiss the complaint. On June 25, 2021, the company filed an opposition to the motion. On July 13, 2021, Gusrae Kaplan & Nusbaum and Mr. Whalen filed their reply brief. On March 30, 2022, United States Magistrate Judge Debra Freeman signed an order denying the motion of GKN and Mr. Whalen to dismiss the company’s claim for malpractice and for rescission of the shares-for-fees agreement under which GKN and Whalen received shares of the company’s common stock. The motion was partially granted as to the separate claim for violation of NYRPC 1.7 and 1.8 because the court found that it was duplicative of the malpractice claim. The parties are currently engaged in discovery. No trial date has been set.
On September 7, 2021, Gusrae Kaplan & Nusbaum and its common stockpartner Ryan Whalen filed a complaint in the New York Supreme Court against the company, its directors, officers, attorneys and a consultant, alleging a single claim for $62,500, or $0.025defamation per share through subscription agreements with three investors.se based on the same conduct underlying their claim of libel in their voluntarily dismissed federal court action. The company also issued 500,000 shares of common stock in April 2017, valued at $10,000 or $0.02 per share,filed a motion to a consultant for services.dismiss the complaint on October 29, 2021, to which Gusrae Kaplan & Nusbaum and Mr. Whalen filed an opposition on January 13, 2022, and the company filed its reply brief on February 17, 2022.
In September, 2017, Company borrowed $53,000 underOn May 23, 2022, the New York Supreme Court held a convertible note maturing June 20, 2018. The Company issued the note holder warrants to purchase 1,320,598 shares of it’s $0.001 par value common stock at an exercise price of $0.0301, The Warrants are exercisable at any time over a 7 year period commencinghearing on the datemotion to dismiss, and Judge Hagler ruled from the bench, granting all defendants’, including Applied Energetics’, motions to dismiss the claim, in its entirety, with prejudice. While he noted that defendants’ arguments regarding the claim being time-barred and the court lacking personal jurisdiction over certain defendants may have merit, he elected not to rule on those issues as he believed it appropriate to reach the merits. The judge declined to award sanctions requested by the defendants in this claim. The plaintiffs have filed a notice of issuance.intent to appeal the dismissal but have not filed their actual appeal brief, which is due on December 21, 2022.
7. LEGAL PROCEEDINGSAs with any litigation, the company cannot predict the outcome with certainty, but the company expects to provide further updates on the status of the litigation as circumstances warrant.
On August 4, 2017, the previously reported legal proceeding Three of the Company’s shareholders commenced an action entitled Superius Securities Group, Inc.et. al. vs George Farley, et.al. (CA No. 2017-0024-VCMR) in the Court of Chancery of the state of Delaware was dismissed.
We may, from time to time, be involved in legal proceedings arising from the normal course of business.
8.NOTE 9 – SUBSEQUENT EVENTEVENTS
The company’s management has evaluated subsequent events occurring after September 30, 2017,2022, the date of our most recent balance sheet, through the date our financial statements were issued. Where applicable, all material subsequent events have been disclosed in their respective footnotes..
- 8 - Subsequent to September 30, 2022, the Company received $2,931,000 in cash proceeds from a pending placement of common stock at a price of $2.20 per share, as amended in November 2022 per agreement between the company and the investors.
As of October 20, 2022, the Company issued incentive stock options to purchase up to 50,000 shares of common stock to an employee. The options are exercisable at a price of $2.30 per share.
As of November 4, 2022, the Company issued incentive stock options to purchase up to 50,000 shares of common stock to an employee. The options are exercisable at a price of $2.24 per share.
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 the 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, 2016.2021, and Quarterly Report on Form 10-Q from the nine months ended September 30, 2022.
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 lookingforward-looking words such as “may”, “believe”, “will”, “would”, “could”, “should”, “expect”, “project”, “anticipate”, “estimates”, “possible”, “plan”, “strategy”, “target”, “prospect”“may,” “believe,” “will,” “would,” “could,” “should,” “expect,” “project,” “anticipate,” “estimates,” “possible,” “plan,” “strategy,” “target,” “prospect,” or “continue”“continue,” and other similar terms and phrases. These forward lookingforward-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, performancesperformance or achievements to be materially different from any future results, performancesperformance 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, 2016.2021. 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., (sometimes referred to as the “company”) is a corporation organized and existing under the laws of the State of Delaware. Our executive office is located at 2480 W Ruthrauff9070 S. Rita Road, Suite 140 Q,1500, Tucson, Arizona 85705 and our telephone number is85747, (520) 628-7415. www.aergs.com
StartingApplied Energetics, Inc., specializes in the fourth quarterdevelopment and manufacture of 2014advanced high-performance lasers, advanced optical systems, and through the first quarter of 2017, the company reportedintegrated guided energy systems for prospective defense, national security, industrial, biomedical, and scientific customers worldwide.
Technology, Capabilities and Patents
Applied Energetics, Inc. is recognized as a “shell company” as such termglobal leader in developing the next generation optical sources exhibiting ever-increasing output energy, peak power and frequency agility while also providing decreased size, weight, and cost of these systems for customers. Applied Energetics utilizes patented, dual-use technologies to advance critical industries. Leveraging our proprietary fiber-based architecture and wavelength- and pulse-agility capability, our Ultrashort Pulse (“USP™”) technology can enable users to achieve specific effects across different use cases with an unmatched blend of size, weight and power attributes. While initially designed to meet the emerging needs and priorities for the national security community, our directed energy technology also has commercial applications in both the biomedical and advanced manufacturing industries.
The Applied Energetics scientific team is defined in Rule 12b-2continuously innovating and expanding our patent portfolio to cover these technological breakthroughs and further enhance our suite of the Securities Exchange Act of 1934, as amended due to the suspension its previous business activities in October, 2014. The Company has developed a comprehensive research and development program and commenced R&D Activities in April, 2017. Accordingly, the Company is no longer a “shell company” and is reporting as a “smaller reporting company”.
The Company has reactivated its previous business activities pursuant to Teaming and Consulting Agreements with (i) Applied Optical Sciences, Inc. (“AOS”), (ii) Stephen W. McCahon, Ph.D., one of the company’s founders, a significant shareholder of the Company and owner of AOS, who was primarily responsiblesolutions for development of the Company’s existing Intellectual Property portfolio, and (iii) each of the members of the Scientific Advisory Board (collectively the “Consultants”).
The members of the Scientific Advisory Board (‘SAB”) have agreed to assist in our Strategic Roadmap Development, expected R&D activities, and provide a sound technical basisthreat disruption for future teaming, investment, and market analysis. These members have been chosen based upon their areas of subject matter expertise and senior experience levels that span both the Department of Defense, the intelligence community, and for commercial, medical and space applications with optical sources operating from the deep ultraviolet to the far infrared portions of the electromagnetic spectrum.
Applied Energetics has developed, successfully demonstrated and holds all crucial intellectual property rights to a dynamic directed energy technology called Laser Guided Energy (“DOD”LGE®”) and Laser Induced Plasma Channel (“LIPC®”). LGE and LIPC are technologies that can be used in a new generation of high-tech directed energy systems. The Department of Defense (DOD) previously recognized only two key types of Directed Energy Weapon (“DEW”) technologies, High Energy Lasers (“HEL”), and High-Power Microwave (“HPM”). Neither the HEL nor the HPM intellectual property portfolio is owned by a single entity. The DOD then designated a third DEW technology, LGE. Applied Energetics’ LGE and LIPC technologies are wholly owned by Applied Energetics and protected by one or more of Applied Energetics’ 26 issued patents and 11 Government Sensitive Patent Applications (“GSPA”). These GSPA’s are held under secrecy orders of the US government, providing the company with greatly extended protection rights. The company also has seven provisional patent applications, and we continue to file patent applications as we deem appropriate.
Applied Energetics’ Directed Energy technologies are vastly different from conventional directed energy systems, i.e. HEL, and HPM. LGE uses Ultrashort Pulse (USP™) laser technology to combine the speed and precision of lasers with the overwhelming impact on targeted threats with high-voltage electricity. A key element of LGE is its novel ability to offer selectable and tunable properties that can help protect non-combatants and combat zone infrastructure. Applied Energetics’ proprietary fiber-based architecture is a key differentiator for our most recent technology demonstrators. Compared with traditional continuous wave technologies with their larger footprints, AE’s architecture enables orders of magnitude size-weight-power reductions on all deliverables, creating powerful, dual-use and agile systems that can fit a host of platforms while delivering very high intensity, ultrashort pulses of light to the required target. This unique directed energy solution allows extremely high peak power and energy, with target and effects tenability, and is effective against a wide variety of potential targets.
Applied Energetics’ unique optical fiber-based laser architectures enable unmatched wavelength agility as well as pulse duration agility. Using innovative and highly specialized frequency shifting techniques, wavelengths can be custom tuned from the deep ultraviolet to the far infrared. In addition, temporal outputs can be adjusted from continuous wave to sub-picoseconds. The technology enables the customer to adjust the lasers’ operating parameters, ultimately creating more flexibility to change wavelength and pulse width. This feature allows for optimization of laser performance for defense or commercial applications.
Our proprietary USP laser technology provides a significantly more compact solution than current continuous wave laser platforms while still delivering high peak power. Continuous wave laser systems are typically used to heat a target and, during continuous illumination, this heat transfer leads to melting or charring of the material. Using continuous wave output powers that now exceed 100 kilowatts (1kW = 1000 watts), it can take anywhere from seconds to minutes to impact a target. By contrast, Applied Energetics has delivered USP lasers to national security users that exceed five terawatts (1 TW = 1 trillion watts) in peak power, with the difference being that this peak power from a USP laser is delivered in a pulse that is less than a trillionth of a second. During this short pulse duration, and having such a high peak intensity, near-instantaneous ablation of the surface of the threat takes place. The net results of our innovative USP approaches are highly effective lasers with mountable footprints that require only a fraction of the size and weight of other directed energy technologies.
As Applied Energetics looks toward the future, our corporate strategic roadmap builds upon the significant value of the company’s USP capabilities and key intellectual property, including LGE and LIPC, to offer our prospective partners, co-developers and system integrators a variety of next-generation ultrashort pulse and frequency-agile optical sources, from the ultraviolet to the far infrared portion of the electromagnetic spectrum, to address numerous challenges within the national security, medical device, and advanced manufacturing market sectors.
Recent Developments
In May 2022, Applied Energetics was awarded a $3.89 million, two-year grant from the Department of the Navy, Office of Naval Research (ONR), to develop an optical system capable of defeating customer-specified threats for integration onto U.S. Marine Corps (USMC) platforms. We were awarded this grant to accelerate the development and testing of Infrared (IR) optical technology with an ultrashort pulse laser (USPL) system. The overall objective is to advance and ruggedize optical technologies that can be fielded on a variety of USMC platforms and are able to operate in harsh conditions.
We also executed a Phase I Small Business Technology Transfer (STTR) contract with the U.S. Army on June 2, 2022. The objective of the contract is the delivery of an ultra-broadband infrared (IR) source. Under this contract, Applied Energetics, will model novel approaches for the eye-safe delivery of ultra-broadband infrared laser pulses to electro-optic sensors. Electro-Optical/Infrared (EO/IR) sensors are imaging systems used for military applications. The STTR program is a federally funded initiative to incorporate small business technological innovation into government supported research and development programs. STTRs require the small business to team with a university or non-profit and are structured in three potential phases. Applied Energetics proposed to partner with the James C. Wyant College of Optical Sciences at the University of Arizona for Phase I.
We have begun work on each of these projects and anticipate producing all deliverables required under them in a successful and timely manner.
Effective August 1, 2022, our board of directors appointed Christopher Donaghey, age 50, to serve as Chief Financial and Chief Operating Officer. The company and Mr. Donaghey entered into an Executive Employment Agreement, pursuant to which he is to serve for an initial term of four years, with automatic renewal for additional one-year periods thereafter unless either party terminates the agreement. The agreement calls for salary of $350,000 per year, plus standard benefits and eligibility for a bonus at the discretion of the board. The company has also granted Mr. Donaghey additional options to purchase up to 1,000,000 shares of its common stock under its 2018 Incentive Stock Plan, which vest over four years and have an exercise price of $2.36 per share, and Restricted Stock Units representing up to 400,000 shares of the company’s common stock which also vest over four years. The Restricted Stock Units are issued pursuant to a Restricted Stock Unit Agreement, dated as of July 13, 2022. Mr. Donaghey forfeited unvested options to purchase up to 950,000 shares of common stock which he had previously received for service on the company’s Board of Advisors.
Mr. Donaghey is an experienced financial executive with a proven track-record in delivering profitable growth, including extensive experience within the defense industry. He joins Applied Energetics from Science Applications International Corporation (SAIC), a defense and government agency technology integrator, where he served as the senior vice president and head of corporate development. In this role, he was responsible for executing the company’s mergers and acquisitions (M&A) and strategic ventures strategy, working closely with the senior management team to support the development and implementation of SAIC’s strategic plan with an emphasis on M&A and external emerging technology investments to complement organic growth strategies and value creation. He joined SAIC in 2017, as senior vice president of finance for SAIC’s operations, and provided strategic leadership and business guidance to the organization. Mr. Donaghey is also a Founder and Executive Board member of the Silicon Valley Defense Group, a non-profit organization whose mission is to create the nexus of pioneering ideas, people, and capital that will unlock new sources of innovation for national security and power the digital evolution of the defense industrial base.
Prior to joining SAIC, Donaghey was vice president of Corporate Strategy and Development for KeyW Corporation, a national security solutions provider for the Intelligence, Cyber and Counterterrorism Communities, where he guided the overall corporate strategy, M&A, and capital markets activities.
Mr. Donaghey was also a senior research analyst for SunTrust Robinson Humphrey Capital Markets where he provided investment advice and insight to institutional investors covering public defense technology, government IT services, and commercial sectorsaerospace industries. During his tenure at SunTrust, Donaghey was ranked the number one defense analyst and number two analyst overall for stock selection by Forbes/Starmine in 2005 and was named in the Wall Street Journal Best on the Street survey in 2005, 2008, and 2009.
Mr. Donaghey served in the U.S. Navy Reserve where he provided scientific and technical analysis of missile guidance and control systems and advanced electronics for the Short-Range Ballistic Missile group at the Defense Intelligence Agency’s Missile and Space Intelligence Center. Donaghey earned his bachelor’s degree in mechanical engineering from Texas Tech University and served as an officer in the U.S. Navy.
Mr. Donaghey previously served on Applied Energetics’ Board of Advisors since April 30, 2019, providing input into the strategic direction of the company and assistance in building relationships in the defense markets.
Upon the successful examination, and with no opposition, the United States Patent and Trademark Office (USPTO) officially entered the marks LGE® (Reg. No. 6,289,892) and LIPC® (Reg. No. 6,316,069) on March 9, 2021, and April 6, 2021, respectively, in the principal register. Applied Energetics has applications pending before the USPTO for the marks USPTM, USPLTM, AERGTM and AETM and anticipates allowance and/or registration within the next six months. The company is engagedalso has seven provisional patents, and we continue to file patent applications as we deem appropriate.
In April 2022, we repaid the remaining balance on the Paycheck Protection Program loan, which we took out in 2020. The original loan was in the design, developmentamount of applied energy systems$132,760, but our compliance with the guidelines set forth by the Small Business Administration regarding use of the proceeds of the loan qualified us for a waiver of a portion of this amount. We had been repaying the remaining balance in monthly installments at an annual interest rate of 1%.
Ongoing Business Development Activities
Over the past several quarters, we have submitted multiple proposals to, and attended briefings with, various defense and other various government agencies and attended briefings with various defense and other government agencies who have expressed an interest in our technology and applications. Due to the closures of multiple agencies and work-from-home orders during the Coronavirus pandemic, reviews and funding decisions on these proposals were delayed longer than anticipated as resources were focused on other matters within the government. We have received multiple notices from government agencies stating that “the vast number of proposals received, and the challenges posed by the COVID-19 pandemic, have impacted the government’s evaluation timelines.” Several of the government agencies that have received and are reviewing our proposals started to open their facilities to limited off-site briefings starting on June 1, 2021. and since that date, our team has been invited to, and completed, multiple briefings focused on our capabilities and submissions. Over time, the DOD has increased and reduced its facility occupancy limits and remote work requirements depending upon the local infection rates, and we have continued to make use of the time to submit proposals and attend briefings as and when permitted. We intend to continue developing and submitting proposals and to be available to attend on-site briefings to the extent possible.
In addition to these review-based delays, the US federal budget for 2022 was not approved by Congress by the October 1, 2021, start of the U.S. federal government fiscal year. The US government final fiscal year 2022 appropriations bill was signed into law by President Biden on the night of March 11, 2022 and includes increases in areas of particular interest to the company.
Two other significant pieces of legislation impacted Applied Energetics that were signed by the President on September 30, 2022. The first piece, bill S. 4900, the “SBIR and STTR Extension Act of 2022,” authorizes the Small Business Innovation Research (SBIR), Small Business Technology Transfer (STTR), and six related pilot programs through Fiscal Year 2025; requires agencies with an SBIR or STTR program to establish a due diligence program to assess the potential risk posed by program applicants’ foreign ties; requires certain departments and agencies to report on national security risks within their SBIR/STTR programs; and establishes increased minimum performance standards for firms that have won a certain number of awards during a specified period of time.
The other piece of legislation that we have seen multiple times in the past decade is the Continuing Resolution (CR), HR 6833, which provides fiscal year 2023 appropriations to federal agencies through December 16, 2022, for continuing projects and activities of the federal government and includes supplemental appropriations to respond to the Russian military action in Ukraine. This will provide for a continuation of funding for currently funded programs through December 16, but no new contracts until the 2023 fiscal year appropriations are approved by Congress. This CR allows for current Applied Energetics programs to continue.
Strategic Plan and commercial applicationsAnalysis
We plan to continue building our management team with highly qualified individuals. We intend to recruit additional personnel in the areas of R&D, science and Advanced Ultra Short Pulse laserssimulation, marketing and high voltage lasersfinance, and, possibly add members to our Board of Directors and our Board of Advisors. We have worked to align key innovations with our roadmap to encourage and enable internal filing for commercial applications. a broad, strategic and robust intellectual property portfolio and continue surveying the literature for acquisitions of parallel intellectual property to that end. We also intend to pursue strategic corporate acquisitions in related fields and technology. We continue to explore any favorable equity financing opportunities.
Our goal with the Applied Energetics Strategic Plan is to increase the energy, peak power and powerfrequency agility of USP optical sources while decreasing the size, weight, and cost of AUSP lasers.these systems. We expect to developare in the process of developing this breadth of very high energypeak power USP lasers and power scaled AUSP lasersadditional optical sources that have a very broad range of applicability for threat disruption for the Department of Defense, commercial, and medical applications. Although the currenthistorical market for AERG’sApplied Energetics’ LGE and USP technology is the U.S. Government, the AUSPUSP technologies willare expected to provide numerous platforms for commercial additive and subtractive manufacturing and medical device and imaging markets, creating a substantially larger product market.
- 9 -
The Company owns intellectual property that is integralmarket for our products to address. Since 2020, the Applied Energetics team was able to develop partnership and necessary forteaming arrangements with the developmentthree leading laser and optics institutes in the United States, namely, the University of Laser Guided Energy and Direct Discharge Electrical products for military and commercial usesArizona, the University of Central Florida, and the Consultants haveUniversity of Rochester Laboratory for Laser Energetics. Our desire is to work on programs jointly where the facilitiesstrengths of each organization can assist in escalating knowledge and technical knowhowdelivery of systems to utilize the Company’s intellectual property ingovernment sponsors, and to train the development of a next generation of Advanced Ultra-Short Pulse Lasers. The Parties have also agreedscientists and engineers to cooperatework in the proposal and fulfillment ofdirected energy fields.
Despite the challenges posed by COVID-19, we have continued to execute our business development plans, further our research and development contractsprogram and submit filings for branchesintellectual property and proposals for grants and contracts. During the past two fiscal years, we submitted multiple proposals and have been engaged in meetings on a daily and weekly basis with various agencies and departments both remotely and in person in Washington, DC and at various other government facilities. Having received a significant research grant and an STTR contract during the previous quarter, we believe the interest in our technology and applications remains high, and we continue to submit proposals for all appropriate opportunities and share our vision of the disruptive capabilities of USP optical sources for both near- and far-term threats and dual-use commercial applications.
Through our analysis of the market, and in discussions with potential customers, we remain convinced that customers are becoming more receptive and interested in directed energy technologies. According to the Department of Defense agenciesfiscal 2019 budget, its directed energy spending grew from approximately $500 million in 2017 to over $1 billion in 2019, an increase of 100%. The 2020 budget reflected directed energy spending of $1.2 billion, an additional increase of 20% over 2019, and from 2017 through 2020, the Federal Governmentdirected energy budget grew from approximately $500 million to approximately $1.2 billion, averaging approximately 40% per year. The government has allocated $1.4 billion for various directed energy programs in 2021, and other Defense contractorsmarket analysis and projections have estimated that this directed energy sector is anticipated to exceed $10.1 billion globally by 2026. The DOD budget for directed energy was essentially flat between 2021 and 2022, approaching $1.2 billion for each year. As a result, we continue to be optimistic about our future and the growing opportunities in other research and development activities relating to lasers. We are preparingdirected energy applications. The Applied Energetics team anticipates a continuation of strong funding for the next stagedirected energy community. With our existing patent portfolio, and through further advancements of our technologies, we believe we have the substantial building blocks needed to become a significant and successful developer in our USP and LGE development that involves the development of Advanced USP Laser Technologies. These lasers will allow for LGE weapon systems to be mounted on mobile platforms for multiple Anti-Terrorist missions including Counter Optical Measures, Counter-Improvised Explosive Devices (“C-IED”), Vehicle Stopping, and many others.marketplaces.
We expect to team with a major Defense Contractor for co-development and manufacture
Results of military products. We also intend to team with a leading commercial laser technology manufacturer for co-developmentOperations
Comparison of commercial products resulting from our research and development efforts.
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016:
2017 | 2016 | |||||||
General and administrative | $ | (180,353 | ) | $ | (145,439 | ) | ||
Other income/(expense): | ||||||||
Interest income | — | 3 | ||||||
Interest (expense) | (451 | ) | — | |||||
Net loss | $ | (180,804 | ) | $ | (145,436 | ) |
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased approximately $35,000 to $180,000Operations for the three months ended September 30, 2017 compared2022 and 2021:
2022 | 2021 | |||||||
Revenue | $ | 572,766 | $ | — | ||||
Cost of revenue | 127,668 | — | ||||||
General and administrative | (1,249,132 | ) | (1,304,875 | ) | ||||
Selling and marketing | (56,416 | ) | (83,173 | ) | ||||
Research and development | (65,364 | ) | (61,968 | ) | ||||
Other income | 637 | — | ||||||
Interest (expense) | (1,227 | ) | (1,794 | ) | ||||
Net loss | $ | (926,404 | ) | $ | (1,451,810 | ) |
Revenue
Revenues increased by approximately $573,000 to $145,000approximately $573,000 as of September 30, 2022. We had no revenues as of September 30, 2021. This is due to a contract and grant that the company commenced in June 2022.
Cost of revenue
The cost of revenue increased by approximately $128,000 to approximately $128,000 as of September 30, 2022. We had no cost of revenues as of September 30, 2021. This is due to the costs directly associated with contract and grant that the company commenced in June 2022.
General and Administrative
General and administrative expenses decreased approximately $56,000 to approximately $1,249,000 for the three months ended September 30, 20162022, compared to approximately $1,305,000 for the three months ended September 30, 2021, primarily due to the decrease of $246,000 of consulting services, an increase in salaries and employee benefits of professionalapproximately $123,000, in building costs of approximately $13,000, and in supplies and insurance of $25,000.
Selling and Marketing
Selling and marketing expenses of $39,000 partially offset by adecreased $27,000, to approximately $56,000, for the three months ended September 30, 2022, compared to approximately $83,000 for the three months ended September 30, 2021, primarily due to the $27,000 decrease in supplies, insuranceexpenses related to marketing consultant services.
Research and miscellaneous feesDevelopment
Research and development expenses increased approximately $3,000 to approximately $65,000 for the three months ended September 30, 2022, compared to approximately $62,000 for the three months ended September 30, 2021.
Other Income
Other income increased approximately $1,000, to approximately $1,000 for the three months ended September 30, 2022, compared to $0 for the three months ended September 30, 2021. The other income for the three months ended September 30, 2022 was primarily due to the forgiveness of $4,000.the company’s PPP loan.
NET LOSSInterest Expense
Interest expense decreased approximately $1,000 to $1,000 for the three months ended September 30, 2022 compared to approximately $2,000 for the three months ended September 30, 2021 primarily due the decrease in interest bearing notes payable.
Net Loss
Our operations for the three months ended September 30, 20172022 resulted in a net loss of approximately $181,000, an increase$926,000, a decrease of approximately $36,000$526,000 compared to the $145,000approximately $1,452,000 net loss for the three months ended September 30, 2016.2021, primarily due to the increase in revenue and decrease in general and administrative, selling and marketing expenses, partially offset by higher research and development expenses.
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COMPARISON OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016:
2017 | 2016 | |||||||
General and administrative | $ | (463,834 | ) | $ | (396,410 | ) | ||
Other income/(expense): | ||||||||
Other income | — | 2,542 | ||||||
Interest income | — | 32 | ||||||
Interest (expense) | (451 | ) | — | |||||
Net loss | $ | (464,285 | ) | $ | (393,836 | ) |
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased approximately $68,000 to $464,000Comparison of Operations for the nine months ended September 30, 2017 compared2022 and 2021:
2022 | 2021 | |||||||
Revenue | $ | 763,688 | $ | — | ||||
Cost of revenue | 142,835 | — | ||||||
General and administrative | (4,365,823 | ) | (3,412,603 | ) | ||||
Selling and marketing | (231,528 | ) | (235,897 | ) | ||||
Research and development | (286,365 | ) | (192,783 | ) | ||||
Other income | 637 | 81,218 | ||||||
Interest (expense) | (2,910 | ) | (3,542 | ) | ||||
Net loss | $ | (4,265,136 | ) | $ | (3,763,607 | ) |
Revenue
Revenues increased by approximately $764,000 to $396,000approximately $764,000 for the nine months ended September 30, 2016 primarily due to an increase in professional expenses of $84,000 partially offset by2022, as we had no revenues during the 2021 period. Revenues for the 2022 period were from a $15,000 reduction of supplies, insurance and miscellaneous fees,contract and a $2,000 reductiongrant that we received and commenced performing in building costs.June 2022.
OTHER INCOMECost of revenue
Other incomeThe cost of revenue increased by approximately $143,000 to approximately $143,000 for the nine months ended September 30, 2017 reduced $3,000 from2022, as we had no revenues, and therefore no costs of revenue during the 2021 period. September 30, 2022. This is due to the costs directly associated with contract and grant that the company commenced in June 2022.
General and Administrative
General and administrative expenses increased approximately $953,000 to approximately $4,366,000 for the nine months ended September 30, 20162022, compared to approximately $3,413,000 for the nine months ended September 30, 2021, primarily due to our reduced interest bearing balances.an increase of approximately $403,000 in professional expenses, an increase in salaries and employee benefits of approximately $336,000, in IT costs of approximately $87,000, and in insurance of $42,000.
NET LOSSSelling and Marketing
Selling and marketing expenses decreased approximately $4,000, to approximately $232,000 for the nine months ended September 30, 2022, compared to approximately $236,000 for the nine months ended September 30, 2021, primarily due to the continuation of business development activities through our Master Services Agreement with Westpark Advisors as well as other consultants in this field.
Research and Development
Research and development expenses increased approximately $94,000, to approximately $286,000 for the nine months ended September 30, 2022, compared to approximately $193,000 for the nine months ended September 30, 2021 primarily assets that were placed into service during the quarter that are actively being used to generate work in progress research and development of the company core technologies.
Other Income
Other income decreased approximately $81,000 to $1,000 for the nine months ended September 30, 2022 compared to approximately $81,000 for the nine months ended September 30, 2021 primarily due to the partial forgiveness of the company’s PPP loan.
Interest Expense
Interest expense decreased approximately $1,000 to $3,000 for the nine months ended September 30, 2022, compared to $4,000 for the nine months ended September 30, 2021, primarily due to a decrease in the aggregate outstanding debt the company had outstanding as of September 30, 2022, relative to September 30, 2021.
Net Loss
Our operations for the nine months ended September 30, 20172022, resulted in a net loss of approximately $464,000,$4,265,000, an increase of approximately $70,000$501,000 compared to the $394,000approximately $3,764,000 net loss for the nine months ended September 30, 2016.2021, primarily due to increases in general and administrative and research and development expenses partially offset by higher revenue and decrease in selling and marketing.
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
AtThe accompanying condensed consolidated 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, 2017, we had approximately $15,000 of cash and cash equivalents, an increase of approximately $14,000 from December 31, 2016. During2022, the first nine months of 2017 the net cash outflow from operating activities was approximately $99,000. This amount was comprised primarily of ourcompany incurred a net loss of $464,000 partially offset by an increaseapproximately $4,265,000, had negative cash flows from operations of approximately $2,743,000 and may incur additional future losses due to the possible reduction in our accrued expenses and deposits of $235,000, noncash stock based compensation of $65,000, warrant expense of $41,000 and accounts payable of $24,000, investing activities had nogovernment contract activity and financing activities reflected $63,000 proceeds from the saleexpenses discussed under Results of common stock and $50,000 proceeds from a note payable, resulting in net cash inflow of approximately $14,000.
Operations. In their report accompanying our financial statements, our independent auditors stated that our financial statements for the year ended December 31, 20162021, our independent auditors stated that our financial statements 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 thatdo so based on our recurring losses from operations and need to raise additional capital. 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.
At September 30, 2022, the company had total current assets of $1,492,695 and total current liabilities of $1,786,868 resulting in negative working capital of $294,173. At September 30, 2022, we had $1,155,349 of cash and cash equivalents, a decrease of $ 2,507,266 from $3,662,615 at December 31, 2021.
During the first nine months of 2022, the net cash outflow from operating activities was $2,742,953. This amount was comprised primarily of our net loss of $4,265,136. This was offset by noncash stock-based compensation expense of $1,261,626, amortization of future compensation payable of $416,666, and the amortization of right of use assets of $83,965. Additionally, net cash used the changes in asset and liabilities totaled $409,283. This included an increase in accounts receivable $219,618, increase in prepaid and deposits of $178,506, increase in accrued expenses and compensation of $11,063, and an increase in accounts payable of $53,863. This is offset by the net decrease in operating lease liabilities of $53,959.
During the first nine months of 2022, the net cash outflow from investing activities was $78,996. This was comprised of a $78,996 decrease from the acquisition of equipment.
During the first nine months of 2022, the net cash flows from financing activities was $314,685. This amount consisted of $175,435 in proceeds on a note payable for insurance premium financing, $14,250 from the exercise of options, and $585,000 of proceeds from subscription payable offset by $460,000 in conjunction with the monthly repayment of the note for the company’s insurance premium financing and AOS note. The proceeds from a subscription payable represent funding received as part of a pending private placement of equity.
Based on the company’s current business plan, we believe our cash balance as of the date of this report, along with anticipated revenues from our recently received ONR grant and STTR agreement, will be sufficient to sustain operations raise substantial doubt about ourmeet the company’s anticipated cash requirements for the near term. However, there can be no assurance that the current business plan will be achievable.
The company’s existence is dependent upon management’s ability to develop profitable operations. Management is devoting a significant portion of its efforts to developing additional business and raising capital, as needed, but cannot be certain that these efforts will be successful. Management’s business development efforts may not result in profitable operations. To fund its research and development and marketing efforts, the company’s management continues to explore possible financing opportunities through discussions with investment bankers and private investors. The company may not be successful in its effort to secure additional financing on terms it considers favorable. The accompanying consolidated financial statements do not include any adjustments that might result should the company be unable to continue as a going concern.
Additionally, the Russian military action in Ukraine and related economic sanctions around the globe could impact the company’s ability to source necessary supplies and equipment which could materially and adversely affect its ability to continue as a going concern. In addition, the company’s ability to continue as a going concern may depend on its ability to raise capital which may be impacted by these events, including as a result of increased market volatility, or decreased market liquidity. This may result in third-party financing being unavailable on terms acceptable to the company or at all. The impact of this action and related sanctions on the world economy and the specific impact on the company’s financial position and results of operations are not yet determinable. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
BACKLOG OF ORDERSBudgeting for upcoming expenses and costs of supplies and equipment needed to perform our ONR grant, our STTR contract, both of which are described under “Recent Developments” above, and any other contracts or grants we receive in the future, requires that we estimate factors such as inflation and geo-political events that affect such expenses and costs. The cost of labor continues to increase across many sectors of the US and global economy which is likely to drive up our general and administrative expenses as well as the cost of personnel working directly and indirectly on our grants and contracts. This aspect of inflation is particularly difficult given the highly skilled nature of this work. Inflation is also likely to impact the price of supplies and materials we must purchase in order to perform grants and contracts, some of which may have been bid on based on cost structures which were submitted during periods of lower inflation. In addition, the war in Ukraine and other related geo-political events have further limited the number of countries from which we can source certain supplies and equipment. These limitations can range from outright prohibitions to strong discouragement based on potentially sensitive information. We continually monitor these events and the markets for needed supplies in order to make the best estimates possible, both in our internal budgeting and in any bids or proposals we submit.
At November 9, 2017, we had a backlog (workload remaining on signed contracts) of $0, to be completed within the next twelve months.
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ITEM 4. CONTROLS AND PROCEDURESControls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and Procedures
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.2022. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer has concluded that our disclosure controls and procedures as of September 30, 20172022, are not 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 September 30, 2017, thereChanges in Internal Controls Over Financial Reporting
There was no significant change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or which is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 3, 2019, Gusrae, Kaplan & Nusbaum and its partner, Ryan Whalen filed a complaint in the United States District Court for the Southern District of New York against the company, its directors, officers, attorneys and a consultant. The action alleged libel, securities fraud and related claims. The company filed a motion to dismiss the complaint on October 24, 2019. On December 13, 2019, Gusrae Kaplan and Mr. Whalen filed an opposition to the company’s motion. On January 10, 2020, the company filed a reply brief. On August 5, 2021, the plaintiffs filed a Notice of Voluntary Dismissal of the action without prejudice.
On January 15, 2021, the company filed a complaint in the United States District Court, Southern District of New York, against Gusrae, Kaplan & Nusbaum and Ryan Whalen for malpractice and breach of New York Rules of Professional Conduct by both parties as former counsel to the company. On May 28, 2021, Gusrae, Kaplan & Nusbaum and Mr. Whalen filed a motion to dismiss the complaint. On June 25, 2021, the company filed an opposition to the motion. On July 13, 2021, Gusrae Kaplan & Nusbaum and Mr. Whalen filed their reply brief. On March 30, 2022, United States Magistrate Judge Debra Freeman signed an order denying the motion of GKN and Mr. Whalen to dismiss the company’s claim for malpractice and for rescission of the shares-for-fees agreement under which GKN and Whalen received shares of the company’s common stock. The motion was partially granted as to the separate claim for violation of NYRPC 1.7 and 1.8 because the court found that it was duplicative of the malpractice claim. The parties are currently engaged in discovery. No trial date has been set.
On September 7, 2021, Gusrae Kaplan & Nusbaum and its partner Ryan Whalen filed a complaint in the New York Supreme Court against the company, its directors, officers, attorneys and a consultant, alleging a single claim for defamation per se based on the same conduct underlying their claim of libel in their voluntarily dismissed federal court action. The company filed a motion to dismiss the complaint on October 29, 2021, to which Gusrae Kaplan & Nusbaum and Mr. Whalen filed their opposition on January 13, 2022, and the company filed its reply brief on February 17, 2022.
On May 23, 2022, the New York Supreme Court held a hearing on the motion to dismiss, and Judge Hagler ruled from the bench, granting all defendants’, including Applied Energetics’, motions to dismiss the claim, in its entirety, with prejudice. While he noted that defendants’ arguments regarding the claim being time-barred and the court lacking personal jurisdiction over certain defendants may have merit, he elected not to rule on those issues as he believed it appropriate to reach the merits. The judge declined to award sanctions requested by the defendants in this claim. The plaintiffs have filed a notice of intent to appeal this dismissal but have not yet filed their actual appeal brief, which is due on December 21, 2022.
As with any litigation, the company cannot predict the outcome with certainty, but the company expects to provide further updates on the status of the litigation as circumstances warrant.
The company may, from time to time, be involved in legal proceedings arising from the normal course of business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The company has reported all information pertaining to issuances of equity securities sold during the period covered by this Quarterly Report on Form 10-Q in previously filed reports on Forms 10-K, 10-Q and 8-K.
ITEM 6. EXHIBITS
EXHIBIT NUMBER |
Certification of | ||
31.2 | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a). | |
Principal Executive Officer | ||
32.2 | Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS | Inline XBRL Instance | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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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.
APPLIED ENERGETICS, INC. | |||
By: | /s/ | Gregory J. Quarles | |
| Gregory J. Quarles, President and | ||
| Chief Executive Officer |
By: | /s/ Christopher Donaghey | |
Christopher Donaghey, Chief Financial Officer and Chief Operating Officer |
Date: November 14, 20172022
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