CORRESP 1 filename1.htm Unassociated Document
 
 
Phone:
(212) 885-5442
Fax:
(212) 885-5442
Email:
bshiffman@blankrome.com
 
January 30, 2009
 
BY FEDEX AND EDGAR
 
Jeffrey Jaramillo, Esq.
Division of Corporate Finance - Mail Stop 3561
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C.  20549
 
 
Re:
Applied Energetics, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2007
Form 10-Q for the Quarterly Period Ended September 30, 2008
File No. 001-1405                                 
 
 
Dear Sir and Madam:
 
On behalf of Applied Energetics, Inc. (“Company”), we hereby submit the following responses to the Staff’s comment letter dated January 23, 2009.
 
Form 10-Q for the Period ended September 30, 2008
 
Note 13. Subsequent Events
 
 
 
1.
We note your response to our prior comment 1, but continue to have concern that your planned accounting treatment for the exchange of Series A Convertible Preferred shares into the Company’s common shares may not appropriate.
 
 
In this regard, we note from your response that the planned business purpose of the exchange transaction was to significantly reduce the Company’s quarterly preferred dividend expense.  We also note from you response, that the conversion of Series A Preferred shares into common shares by certain shareholders in November of 2008, resulted primarily from discussions initiated by the Company in October 2008 with preferred shareholders with the largest positions in the Company’s Series A preferred tock and that other conversions which occurred resulted largely from other preferred shareholders learning of these shareholders planned conversions.  We further note from your response that at the time the Company negotiated these revised conversion terms, the Company did not set a time period by which the agreements had to be executed to complete the exchange transactions and the exchange offer was neither fixed for a limited period of time nor open for an unlimited period of time.  We additionally note that based on the copies of the exchange agreements provided in connection with your response, that all exchange agreements with the Series A Preferred shareholders were executed shortly after the negotiations were conducted with the Series A Preferred shareholders in October of 2008 as they are all dated during the period ranging from November 3, 2008 through November 10, 2008.
 
 
 
Jeffrey Jaramillo, Esq.
January 30, 2009
Page 2
 
 
 
 
Since all of the exchange transactions were executed within a very short period of time after the negotiations were conducted with the Series A Preferred shareholders in October of 2008, it would appear that the exchange offer was open for an completed within a very limited period.  Also, we note from your response that “the offer was neither fixed for a limited period of time nor open for an unlimited period of time”, which would appear to indicate that your intent was restrictive in keeping this preferred stock exchange offer open for only a finite or limited period of time.  In addition, we note that the revised conversion terms of the Series A Preferred shares appear to be significantly more favorable that the original conversion terms were negotiated in order to induce the Series A Preferred shareholders to convert their preferred shares into common shares.  Furthermore, your planned business purpose in reducing the quarterly dividend requirements is a factor in inducing conversion of this security.
 
 
Given the above factors, it appears that your proposed accounting treatment of recording a gain or benefit on the redemption of the Series A Preferred shares and a corresponding benefit to arrive at net income (loss) available to common shareholders may be inconsistent with the nature of the exchange transaction.  Based on the above, we continue to believe that this transaction may be more appropriately accounted for pursuant to the guidance in SFAS No. 84.  In this regard, we suggest you carefully consider our concerns in assessing your accounting treatment for the preferred stock exchange transactions.  Please note that we do not believe that because the exchange transactions were individually negotiated transactions with the Series A Preferred shareholders, as noted in your response, provides a basis or rationale for not accounting for the exchange transactions in accordance with the guidance in SFAS No. 84.  Please revise or advise accordingly.
 
The Company has reassessed its intended accounting treatment for the exchange of preferred stock and will account for the exchange in accordance with SFAS No. 84.  Accordingly, the Company will record the excess of the fair value of the common stock issued in the exchange over the fair value of the common stock issuable upon conversion of the preferred stock pursuant to the original terms of the preferred stock as a dividend and a charge to retained earnings, which will be added to net loss to arrive at net loss available to common stockholders in the calculation of net loss per share.
 
 
Copies of the exchange agreements are attached.
 
We thank you in advance for your assistance. If you have any questions, please do not hesitate to contact me.
 
Very truly yours,

/s/ Brad L. Shiffman

Brad L. Shiffman