UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
OR
For the transition period from __________ to __________
Commission File Number
(Exact Name of Registrant as Specified in Its Charter)
| (State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification Number) | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number, including
area code
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.
Indicate by check mark whether the registrant
has submitted electronically 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).
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. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer: | ☐ | 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. ☐
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Securities registered pursuant to Section 12(b) of the Act:
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As of August 10, 2022, there were
APPLIED ENERGETICS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
i
PART I – FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Assets | (Unaudited) | |||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable | ||||||||
| Other assets | ||||||||
| Total current assets | ||||||||
| Long-term assets | ||||||||
| Property and equipment - net | ||||||||
| Deferred compensation | ||||||||
| Right of use asset - operating | ||||||||
| Security deposit | ||||||||
| Total long-term assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Notes payable | ||||||||
| Notes payable CARES Act PPP Loan | ||||||||
| Due to related parties | ||||||||
| Operating lease liability - current | ||||||||
| Accrued expenses | ||||||||
| Accrued dividends | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Operating lease liability - non-current | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Equity | ||||||||
| Series A convertible preferred stock, $ |
||||||||
| Common stock, $ |
||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
1
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For The Three Months Ended June 30, | For The Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income/(expense) | ||||||||||||||||
| Other income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income/(expense) | ( | ) | ( | ) | ||||||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred stock dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to common stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
| Weighted average number of common shares outstanding | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
2
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(Unaudited)
| Preferred Stock | Common Stock | Additional Paid- | Accumulated | Total Stockholders’ (Deficit) |
||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | In Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| RSU restricted Stock | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Net loss for the quarter ended March 31, 2022 | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at March 31, 2022 | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Common stock issued on exercise of option | ||||||||||||||||||||||||||||
| Net loss for the quarter ended June 30, 2022 | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid- | Accumulated | Total Stockholders’ (Deficit) |
||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | In Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
| RSU restricted Stock | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Common stock issued on cashless exercise of options and warrant | ( |
) | ||||||||||||||||||||||||||
| Common stock issued on exercise of options and warrant | ||||||||||||||||||||||||||||
| Common stock issued on exercise of convertible note | ||||||||||||||||||||||||||||
| Sale of common stock | ||||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2021 | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at March 30, 2021 | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||
| Common stock issued on cashless exercise of options and warrant | ( |
) | ||||||||||||||||||||||||||
| Common stock issued on exercise of options and warrant | ||||||||||||||||||||||||||||
| Net loss for the three months ended June 30, 2021 | - | - | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
3
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| For the Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Noncash stock-based compensation expense | ||||||||
| Amortization of ROU assets | ||||||||
| Depreciation and amortization | ||||||||
| Loss on disposal of asset | ||||||||
| PPP loan forgiveness | ( | ) | ||||||
| Amortization of future compensation payable | ||||||||
| Amortization of prepaid assets | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other assets | ( | ) | ( | ) | ||||
| ROU liabilities | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued interest | ||||||||
| Accrued expenses and compensation | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows from Investing Activities | ||||||||
| Purchase of equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from sale of common stock | ||||||||
| Repayment on note payable | ( | ) | ( | ) | ||||
| Proceeds from note payable | ||||||||
| Repayment of SBA loan | ( | ) | ||||||
| Proceeds from the exercise of stock option | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of year | ||||||||
| Cash and cash equivalents, end of year | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Insurance financing for prepaid insurance | $ | $ | ||||||
| Implementation of ASC 842 | $ | $ | ||||||
| Forgiveness of PPP loan | $ | $ | ||||||
| Equipment investing in accounts payable | $ | $ | ||||||
| Common stock issued for repayment of convertible notes | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
4
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(Unaudited)
NOTE 1 – ORGANIZATION OF BUSINESS, GOING CONCERN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements include the accounts of Applied Energetics, Inc. and its wholly owned subsidiary North Star Power Engineering, Inc. (“North Star”) (collectively, “company,” “Applied Energetics,” “AERG,” “we,” “our” or “us”). All intercompany balances and transactions have been eliminated.
The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions for Form 10-Q and the rules and regulations of 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 consisting of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any future periods. The December 31, 2021, balance sheet information was derived from the 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.
Going Concern
The 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 six-months ended June 30, 2022, the company incurred a net loss of $
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 plan will be achievable. Such conditions raise substantial doubts about the company’s ability to continue as a going concern for one year from the date the financial statements are issued.
The company’s existence is dependent 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 the company’s efforts will be successful. No assurance can be given that management’s actions will result in profitable operations or enable it to overcome future liquidity concerns. The accompanying consolidated financial statements do not include any adjustments that might result should the company be unable to continue as a going concern. The ongoing COVID-19 pandemic contributes to this uncertainty.
Additionally, the military action commenced in February 2022 by the Russian Federation and Belarus in the country of 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 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 through discussions with investment bankers and private investors. There can be no assurance that the company will be successful in its effort to secure additional equity financing.
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.
Applied 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.
5
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(Unaudited)
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In addition, management considers the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. Significant estimates include 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 and valuation of debt discount related to beneficial conversion features.
Net Loss Attributable to Common Stockholders
Basic loss per common share
is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for 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 dilutive common stock equivalents. Contingently
issuable shares are included in the computation of basic loss per share when issuance of the shares is no longer contingent. The number
of warrants, options, restricted stock units and our Series A Convertible Preferred Stock, which were not included in the computation
of earnings per share because the effect was antidilutive, was
Significant Concentrations and Risks
We maintain cash balances
at a commercial bank and, at times, balances exceed FDIC limits. As of June 30, 2022, $
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 related to 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 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 has evaluated the impact of this new standard and notes the guidance will not have a material impact on our financial statements.
6
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(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. 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
On 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 $
Paycheck Protection Program
On April 28, 2020,
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 $
7
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 $
Notes Payable Reconciliation
The following reconciles notes payable as of June 30, 2022, and December 31, 2021:
| June 30, 2022 | December 31, 2021 | |||||||
| Beginning balance | $ | $ | ||||||
| Notes payable | ||||||||
| Accrued interest | ||||||||
| Payments on notes payable | ( | ) | ( | ) | ||||
| Extinguishment of debt | ( | ) | ||||||
| Converted into common stock | ( | ) | ||||||
| Total | ||||||||
| Less-Notes payable – current | ||||||||
| Notes payable – non-current | $ | - | $ | |||||
Future principal payments for the company’s Notes as of June 30, 2022, are as follows:
| 2022 | $ | |||
| 2023 | ||||
| Thereafter | ||||
| Total | $ |
The company’s
note payable balance of $
8
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(Unaudited)
NOTE 4 – DEFERRED COMPENSATION
On 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 $
NOTE 5 – DUE TO RELATED PARTIES
It has come to the board’s
attention that on July 31, 2018, our now deceased CEO deposited $
NOTE 6 – STOCKHOLDERS’ EQUITY
Authorized Capital Stock
During the three months ended
June 30, 2021, the company issued
During the six-months ended
June 30, 2021, the company issued
During the six-months ended
June 30, 2021, the company issued
During the six-months ended
June 30, 2021, the company issued
During the six-months ended
June 30, 2021, the company issued
During the six-months ended
June 30, 2022, the company issued
During the six-months ended
June 30, 2022, the company issued
During the six-months ended
June 30, 2022, the company recognized stock-based compensation in the amount of $
9
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(Unaudited)
Preferred Stock
As of June 30, 2022, and December
31, 2021, there were
Our Series A Preferred Stock
has a liquidation preference of $
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 $
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,
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 $
10
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(Unaudited)
Share-Based Payments
Effective 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
We 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 $
Additionally, stock-based
compensation for the year ended December 31, 2021, was comprised of
The $1,004,385 stock-based compensation for the six months ended June 30, 2022, was comprised of $781,385 option expense 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 June 30, 2022, the company
has $
The following table summarizes the activity of our stock options for the six-months ended June 30, 2022:
| Shares | Weighted Average Exercise Price |
Weighted Average Contractual Term Outstanding |
Intrinsic Value |
|||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | ( |
) | |||||||||||||
| Exercised | ( |
) | ( |
) | ( |
) | ||||||||||
| Forfeited or expired | ( |
) | ( |
) | ||||||||||||
| Outstanding at June 30, 2022 | $ | $ | ||||||||||||||
| Outstanding and exercisable at June 30, 2022 | $ | $ | ||||||||||||||
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:
| Six-Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Assumptions: | ||||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
| Expected volatility | % | % | ||||||
| Expected life (in years) | ||||||||
11
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(Unaudited)
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 six months ended June 30, 2022, was as follows:
| Restricted Stock Outstanding | ||||||||
| Shares | Weighted Average Fair Value per Share at Grant Date | |||||||
| Outstanding at December 31, 2021 | $ | |||||||
| Granted – restricted stock units and awards | ||||||||
| Granted – performance-based stock units | ||||||||
| Canceled | ||||||||
| Vested and converted to shares | ||||||||
| Outstanding at June 30, 2022 | $ | |||||||
As of June 30, 2022, and December
31, 2021, there was $
As of June 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 $334,000, respectively, was amortized for the six months ended June 30, 2022, and 2021.
Warrant stock activity for the six-month ended June 30, 2022, was as follows:
| Warrant Activity | ||||||||||||
| Shares | Weighted Average Exercise Price | Weighted Average remaining Contractual Term (years) | ||||||||||
| Outstanding at December 31, 2021 | $ | |||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited | ||||||||||||
| Outstanding and exercisable at June 30, 2022 | $ | |||||||||||
| 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 - $0.08 | $ | $ | ||||||||||||||||||
| $ | $ | |||||||||||||||||||
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:
| Six-months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Assumptions: | ||||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
| Expected volatility | % | % | ||||||
| Expected life (in years) | ||||||||
12
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 over the contract term at a fixed contract price.
Concentrations
During the three and six months
ended June 30, 2022, the company earned revenue from two separate customers. One customer accounted for $
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Operating Leases
In March 2021, the company
signed a five-year lease for a
The company incurred lease
expense for its operating leases of $
At June 30, 2022, we had approximately
$
| Operating Lease | ||||
| For the fiscal years ending December 31, 2022: | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted lease payments | ||||
| Present value discount, less interest | ||||
| Lease Liability | $ | |||
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APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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 June 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. The United States District Court has not ruled on the motion. 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. Thus, the case against these defendants can now move forward. 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.
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 an 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 the dismissal but have not filed their actual appeal.
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.
We may, from time to time, be involved in legal proceedings arising from the normal course of business.
NOTE 9 – SUBSEQUENT EVENTS
The company’s management has evaluated subsequent events occurring after June 30, 2022, the date of our most recent balance sheet, through the date our financial statements were issued.
On July 24, 2022, the company
made a $
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 $
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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, 2021, and Quarterly Report on Form 10-Q from the six months ended June 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-looking words such as “may,” “believe,” “will,” “would,” “could,” “should,” “expect,” “project,” “anticipate,” “estimates,” “possible,” “plan,” “strategy,” “target,” “prospect,” or “continue,” and other similar terms and phrases. These forward-looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results of operations and financial condition and may cause our actual results, performance or achievements to be materially different from any future results, performance 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, 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.
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 9070 S. Rita Road, Suite 1500, Tucson, Arizona 85747, (520) 628-7415. www.aergs.com
Applied Energetics, Inc., specializes in the development and manufacture of advanced high-performance lasers, advanced optical systems, and integrated 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 global 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 AERG scientific team is continuously innovating and expanding our patent portfolio to cover these technological breakthroughs and further enhance our suite of solutions for threat disruption for 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.
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AERG has developed, successfully demonstrated and holds all crucial intellectual property rights to a dynamic directed energy technology called Laser Guided Energy (“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 patent protected with 26 current patents and an additional 11 Government Sensitive Patent Applications (“GSPA”). These GSPA’s are held under secrecy orders of the US government and allow the company greatly extended protection rights. The company also has seven provisional patents, 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. 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. 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’ 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, AERG 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 military, medical device, and advanced manufacturing market sectors.
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Recent Developments
In May 2022, we were 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 aerospace 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. AERG has applications pending before the USPTO for USP, USPL, AERG and AE and anticipates allowance and/or registration within the next 12 months. The company also 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 amount of $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%.
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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. AERG has 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, AERG’s 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.
Strategic Plan and Analysis
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 simulation, marketing and finance, 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 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 AERG Strategic Plan is to increase the energy, peak power and frequency agility of USP optical sources while decreasing the size, weight, and cost of these systems. We are in the process of developing this breadth of very high peak power USP lasers and additional optical sources that have a very broad range of applicability for threat disruption for the Department of Defense, commercial, and medical applications. Although the historical market for AERG’s LGE and USP technology is the U.S. Government, the USP technologies are expected to provide numerous platforms for commercial additive and subtractive manufacturing and medical device and imaging markets, creating a substantially larger market for our products to address. Since 2020, the AERG team was able to develop partnership and teaming arrangements with the three leading laser and optics institutes in the United States, namely, the University of Arizona, the University of Central Florida, and the University of Rochester Laboratory for Laser Energetics. Our desire is to work on programs jointly where the strengths of each organization can assist in escalating knowledge and delivery of systems to the government sponsors, and to train the next generation of scientists and engineers to work in the directed energy fields.
Despite the challenges posed by COVID-19, we have continued to execute our business development plans, further our research and development program and submit filings for intellectual 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 this 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 fiscal 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 directed 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 market 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 directed energy applications. The AERG team anticipates a continuation of strong funding for the directed 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 marketplaces.
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Results of Operations
Comparison of Operations for the three months ended June 30, 2022 and 2021:
| 2022 | 2021 | |||||||
| Revenue | $ | 190,922 | $ | — | ||||
| Cost of revenue | 15,167 | — | ||||||
| General and administrative | (1,488,202 | ) | (1,164,109 | ) | ||||
| Selling and marketing | (98,442 | ) | (58,397 | ) | ||||
| Research and development | (145,014 | ) | (83,007 | ) | ||||
| Other income | — | 81,218 | ||||||
| Interest (expense) | (1,639 | ) | (1,065 | ) | ||||
| Net loss | $ | (1,557,542 | ) | $ | (1,225,360 | ) | ||
Revenue
Revenues increased by $190,922 to $190,922 as of June 30, 2022. We had no revenues as of June 30, 2021. This is due to a contract and grant that the company commenced in June 2022.
General and Administrative
General and administrative expenses increased approximately $324,000 to approximately $1,488,000 for the three months ended June 30, 2022 compared to approximately $1,164,000 for the three months ended June 30, 2021 primarily due to the increases of $153,000 of consulting services, an increase in salaries and employee benefits of approximately $107,000, in building costs of approximately $46,000, and in supplies and insurance of $18,000.
Selling and Marketing
Selling and marketing expenses increased $40,000 to approximately $98,000 for the three months ended June 30, 2022 compared to approximately $58,000 for the three months ended June 30, 2021 primarily due to the $39,000 increase in expenses related to marketing consultant services.
Research and Development
Research and development expenses increased approximately $62,000 to approximately $145,000 for the three months ended June 30, 2022 compared to approximately $83,000 for the three months ended June 30, 2021 primarily due to the increases in direct labor costs of $103,000; offset by a $47,000 decrease in expenses due to contract labor.
Other Income
Other income decreased approximately $81,000 to approximately $0 for the three months ended June 30, 2022 compared to other income $81,000 for the three months ended June 30, 2021. The other income for the three months ended June 31, 2021 was primarily due to the forgiveness of the company’s PPP loan.
Interest Expense
Interest expense increased approximately $600 to $1,600 for the three months ended June 30, 2022 compared to approximately $1,000 for the three months ended June 30, 2021 primarily due the increase in interest bearing notes payable.
Net Loss
Our operations for the three months ended June 30, 2022 resulted in a net loss of approximately $1,558,000, an increase of approximately $332,000 compared to the approximately $1,225,000 net loss for the three months ended June 30, 2021 primarily due to an increase in general and administrative, selling and marketing, and research and development expenses.
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Comparison of Operations for the six months ended June 30, 2022 and 2021:
| 2022 | 2021 | |||||||
| Revenue | $ | 190,922 | $ | — | ||||
| Cost of revenue | 15,167 | — | ||||||
| General and administrative | (3,116,691 | ) | (2,107,728 | ) | ||||
| Selling and marketing | (175,112 | ) | (152,725 | ) | ||||
| Research and development | (221,001 | ) | (130,815 | ) | ||||
| Interest (expense) | (1,683 | ) | (1,748 | ) | ||||
| Net loss | $ | (3,338,732 | ) | $ | (1,086,438 | ) | ||
Revenue
Revenues increased by $190,922 to $190,922 for the six months ended June 30, 2022, as we had no revenues during the 2021 period. Revenues for the 2022 period were from a contract and a grant that we received and commenced performing in June 2022.
General and Administrative
General and administrative expenses increased approximately $1,009,000 to $3,117,000 for the six months ended June 30, 2022, compared to approximately $2,108,000 for the six months ended June 30, 2021, primarily due to an increase of approximately $645,000 in professional expenses, an increase in salaries and employee benefits of approximately $211,000, in building costs of approximately $126,000, and in supplies and insurance of $27,000.
Selling and Marketing
Selling and marketing expenses increased approximately $22,000 to approximately $175,000 for the six months ended June 30, 2022, compared to approximately $153,000 for the six months ended June 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 $90,000 to approximately $221,000 for the six months ended June 30, 2022, compared to approximately $131,000 for the six months ended June 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.
Interest Expense
Interest expense decreased approximately $65 to $1,683 for the six months ended June 30, 2022, compared to $1,748 for the six months ended June 30, 2021, primarily due to a decrease in the aggregate outstanding debt the company had outstanding as of June 30, 2022, relative to June 30, 2021.
Net Loss
Our operations for the six months ended June 30, 2022, resulted in a net loss of approximately $3,339,000, an increase of approximately $1,027,000 compared to the approximately $2,312,000 net loss for the six months ended June 30, 2021, primarily due to a decrease in selling and marketing partially offset by increases in general and administrative and research and development.
Liquidity and Capital Resources
The 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 six months ended June 30, 2022, the company incurred a net loss of approximately $3,338,732, had negative cash flows from operations of approximately $2,213,347 and may incur additional future losses due to the possible reduction in government contract activity and the expenses discussed under Results of Operations. In their report accompanying our financial statements for the year ended December 31, 2021, 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 do 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.
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At June 30, 2022, the company had total current assets of $1,842,364 and total current liabilities of $1,451,323 resulting in working capital of $391,041. At June 30, 2022, we had $1,495,197 of cash and cash equivalents, a decrease of $2,167,418 from $3,662,615 at December 31, 2021.
During the first six months of 2022, the net cash outflow from operating activities was $2,213,347. This amount was comprised primarily of our net loss of $3,338,732. This was offset by noncash stock-based compensation expense of $1,004,385, amortization of future compensation payable of $416,666, $42,290 from the loss on the disposal of equipment and the amortization of right of use assets of $55,675. Additionally, net cash used the changes in asset and liabilities totaled $497,008. This included an increase in accounts receivable $190,922, increase in prepaid and deposits of $217,023, and the increase in accrued expenses and compensation of $42,290, This was off set by a decrease in accounts payable of $99,304 and the net decrease in operating lease liabilities of $32,049.
During the first six months of 2022, the net cash outflow from investing activities was $40,982. This was comprised of a $40,982 decrease from the acquisition of equipment.
During the first six months of 2022, the net cash inflow from financing activities was $86,911. This amount was compromised of $175,435 and $13,000 of proceeds from note payable and the exercise of options offset by $23,553 repayment on note payable, as well as $77,971 in conjunction with the monthly repayment of the company’s insurance premiums.
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 meet 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 military action commenced in February 2022 by the Russian Federation and Belarus in the country of 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.
Budgeting 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. 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.
ITEM 4. Controls and Procedures
Evaluation 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 June 30, 2022. Based on that evaluation, our Principal Executive Officer has concluded that our disclosure controls and procedures as of June 30, 2022, 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.
Changes in Internal Controls Over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or 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. The United States District Court has not ruled on the motion. 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. Thus, the case against these defendants can now move forward. 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.
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.
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.
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ITEM 6. EXHIBITS
| EXHIBIT NUMBER |
DESCRIPTION | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a). | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a). | |
| 32.1 | Principal Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | 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 Document. | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document. | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |
| 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. | ||
| 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: August 10, 2022
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