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
ended
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
31, 2021
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.
corporation organized and existing under the laws of the
executive office is located at
85747, (520) 628-7415. www.aergs.com
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
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.
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
our patent portfolio to cover these technological breakthroughs and further
enhance our suite of solutions for threat disruption for the
Defense
applications with optical sources operating from the deep ultraviolet to the far
infrared portions of the electromagnetic spectrum.
17
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
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
designated a third DEW technology, LGE.
technologies are wholly owned by
of
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.
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.
Energetics’
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.
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,
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
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
the
optical system capable of defeating customer-specified threats for integration
onto
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
delivery of an ultra-broadband infrared (IR) source. Under this contract,
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.
proposed to partner with the
We have begun work on each of these projects and anticipate producing all
deliverables required under them in a successful and timely manner.
18
Effective
age 50, to serve as Chief Financial and Chief Operating Officer. The company and
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
benefits and eligibility for a bonus at the discretion of the board. The company
has also granted
shares of its common stock under its 2018 Incentive Stock Plan, which vest over
four years and have an exercise price of
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
which he had previously received for service on the company’s
delivering profitable growth, including extensive experience within the defense
industry. He joins
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.
Donaghey
Defense Group
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
Intelligence, Cyber and Counterterrorism Communities, where he guided the
overall corporate strategy, M&A, and capital markets activities.
Capital Markets
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.
technical analysis of missile guidance and control systems and advanced
electronics for the Short-Range Ballistic Missile group at the
Intelligence Agency’s
bachelor’s degree in mechanical engineering from
served as an officer in the
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
respectively, in the principal register.
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 also has seven provisional patents, and we continue to file patent
applications as we deem appropriate.
In
Program loan, which we took out in 2020. The original loan was in the amount of
Administration
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
1, 2021
multiple briefings focused on our capabilities and submissions. Over time, the
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.
19
In addition to these review-based delays, the US federal budget for 2022 was not
approved by
government fiscal year. The US government final fiscal year 2022 appropriations
bill was signed into law by
includes increases in areas of particular interest to the company.
Two other significant pieces of legislation impacted
were signed by the President on
4900, the “SBIR and STTR Extension Act of 2022,” authorizes the
Innovation Research
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
continuing projects and activities of the federal government and includes
supplemental appropriations to respond to the Russian military action in
programs through
appropriations are approved by
Energetics
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
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 Applied Energetics 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
historical market for
Government
commercial additive and subtractive manufacturing and medical device and imaging
markets, creating a substantially larger market for our products to address.
Since 2020, the
teaming arrangements with the three leading laser and optics institutes in
United States
Florida
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
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
budget, its directed energy spending grew from approximately
2017 to over
directed energy spending of
2019, and from 2017 through 2020, the directed energy budget grew from
approximately
approximately 40% per year. The government has allocated
various directed energy programs in 2021, and market analysis and projections
have estimated that this directed energy sector is anticipated to exceed
billion
flat between 2021 and 2022, approaching
we continue to be optimistic about our future and the growing opportunities in
directed energy applications. The
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.
20
Results of Operations
Comparison of Operations for the three months ended
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
a contract and grant that the company commenced in
Cost of revenue
The cost of revenue increased by approximately
30, 2021
that the company commenced in
General and Administrative
General and administrative expenses decreased approximately
approximately
to approximately
primarily due to the decrease of
salaries and employee benefits of approximately
approximately
Selling and Marketing
Selling and marketing expenses decreased
the three months ended
the three months ended
in expenses related to marketing consultant services.
Research and Development
Research and development expenses increased approximately
approximately
approximately
Other Income
Other income increased approximately
three months ended
2022
Interest Expense
Interest expense decreased approximately
ended
ended
payable.
Net Loss
Our operations for the three months ended
loss of approximately
the approximately
2021
administrative, selling and marketing expenses, partially offset by higher
research and development expenses.
21
Comparison of Operations for the nine months ended
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
nine months ended
period. Revenues for the 2022 period were from a contract and a grant that we
received and commenced performing in
Cost of revenue
The cost of revenue increased by approximately
and therefore no costs of revenue during the 2021 period.
This is due to the costs directly associated with contract and grant that the
company commenced in
General and Administrative
General and administrative expenses increased approximately
approximately
to approximately
primarily due to an increase of approximately
an increase in salaries and employee benefits of approximately
costs of approximately
Selling and Marketing
Selling and marketing expenses decreased approximately
continuation of business development activities through our Master Services
Agreement with
Research and Development
Research and development expenses increased approximately
approximately
approximately
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
loan.
Interest Expense
Interest expense decreased approximately
ended
30, 2021
company had outstanding as of
2021
Net Loss
Our operations for the nine months ended
loss of approximately
to the approximately
2021
development expenses partially offset by higher revenue and decrease in selling
and marketing.
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 nine
months ended
approximately
approximately
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
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.
22
At
total current liabilities of
a decrease of
During the first nine months of 2022, the net cash outflow from operating
activities was
of
amortization of right of use assets of
changes in asset and liabilities totaled
accounts receivable
increase in accrued expenses and compensation of
accounts payable of
lease liabilities of
During the first nine months of 2022, the net cash outflow from investing
activities was
acquisition of equipment.
During the first nine months of 2022, the net cash flows from financing
activities was
payable for insurance premium financing,
and
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 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 Russian military action in
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. 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
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.
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