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 nine months
ended September 30, 2022.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the securities laws.
Forward-looking statements include all statements that do not relate solely to
the historical or current facts and can be identified by the use of
forward-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 Applied Energetics 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.
17
Applied Energetics 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 protected by one or more
of Applied Energetics' 26 issued patents and 11 Government Sensitive Patent
Applications ("GSPA"). These GSPA's are held under secrecy orders of the US
government, providing the company with greatly extended protection rights. The
company also has seven provisional patent applications, and we continue to file
patent applications as we deem appropriate.
Applied Energetics' Directed Energy technologies are vastly different from
conventional directed energy systems, i.e. HEL, and HPM. LGE uses Ultrashort
Pulse (USP™) laser technology to combine the speed and precision of lasers with
the overwhelming impact on targeted threats with high-voltage electricity. A key
element of LGE is its novel ability to offer selectable and tunable properties
that can help protect non-combatants and combat zone infrastructure. Applied
Energetics' proprietary fiber-based architecture is a key differentiator for our
most recent technology demonstrators. Compared with traditional continuous wave
technologies with their larger footprints, AE's architecture enables orders of
magnitude size-weight-power reductions on all deliverables, creating powerful,
dual-use and agile systems that can fit a host of platforms while delivering
very high intensity, ultrashort pulses of light to the required target. This
unique directed energy solution allows extremely high peak power and energy,
with target and effects tenability, and is effective against a wide variety of
potential targets.
Applied Energetics' unique optical fiber-based laser architectures enable
unmatched wavelength agility as well as pulse duration agility. Using innovative
and highly specialized frequency shifting techniques, wavelengths can be custom
tuned from the deep ultraviolet to the far infrared. In addition, temporal
outputs can be adjusted from continuous wave to sub-picoseconds. The technology
enables the customer to adjust the lasers' operating parameters, ultimately
creating more flexibility to change wavelength and pulse width. This feature
allows for optimization of laser performance for defense or commercial
applications.
Our proprietary USP laser technology provides a significantly more compact
solution than current continuous wave laser platforms while still delivering
high peak power. Continuous wave laser systems are typically used to heat a
target and, during continuous illumination, this heat transfer leads to melting
or charring of the material. Using continuous wave output powers that now exceed
100 kilowatts (1kW = 1000 watts), it can take anywhere from seconds to minutes
to impact a target. By contrast, Applied Energetics has delivered USP lasers to
national security users that exceed five terawatts (1 TW = 1 trillion watts) in
peak power, with the difference being that this peak power from a USP laser is
delivered in a pulse that is less than a trillionth of a second. During this
short pulse duration, and having such a high peak intensity, near-instantaneous
ablation of the surface of the threat takes place. The net results of our
innovative USP approaches are highly effective lasers with mountable footprints
that require only a fraction of the size and weight of other directed energy
technologies.
As Applied Energetics looks toward the future, our corporate strategic roadmap
builds upon the significant value of the company's USP capabilities and key
intellectual property, including LGE and LIPC, to offer our prospective
partners, co-developers and system integrators a variety of next-generation
ultrashort pulse and frequency-agile optical sources, from the ultraviolet to
the far infrared portion of the electromagnetic spectrum, to address numerous
challenges within the national security, medical device, and advanced
manufacturing market sectors.
Recent Developments
In May 2022, Applied Energetics was awarded a $3.89 million, two-year grant from
the Department of the Navy, Office of Naval Research (ONR), to develop an
optical system capable of defeating customer-specified threats for integration
onto U.S. Marine Corps (USMC) platforms. We were awarded this grant to
accelerate the development and testing of Infrared (IR) optical technology with
an ultrashort pulse laser (USPL) system. The overall objective is to advance and
ruggedize optical technologies that can be fielded on a variety of USMC
platforms and are able to operate in harsh conditions.
We also executed a Phase I Small Business Technology Transfer (STTR) contract
with the U.S. Army on June 2, 2022. The objective of the contract is the
delivery of an ultra-broadband infrared (IR) source. Under this contract,
Applied Energetics, will model novel approaches for the eye-safe delivery of
ultra-broadband infrared laser pulses to electro-optic sensors.
Electro-Optical/Infrared (EO/IR) sensors are imaging systems used for military
applications. The STTR program is a federally funded initiative to incorporate
small business technological innovation into government supported research and
development programs. STTRs require the small business to team with a university
or non-profit and are structured in three potential phases. Applied Energetics
proposed to partner with the James C. Wyant College of Optical Sciences at the
University of Arizona for Phase I.
We have begun work on each of these projects and anticipate producing all
deliverables required under them in a successful and timely manner.
18
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. Applied Energetics has applications
pending before the USPTO for the marks USPTM, USPLTM, AERGTM and AETM and
anticipates allowance and/or registration within the next six months. The
company 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%.
Ongoing Business Development Activities
Over the past several quarters, we have submitted multiple proposals to, and
attended briefings with, various defense and other various government agencies
and attended briefings with various defense and other government agencies who
have expressed an interest in our technology and applications. Due to the
closures of multiple agencies and work-from-home orders during the Coronavirus
pandemic, reviews and funding decisions on these proposals were delayed longer
than anticipated as resources were focused on other matters within the
government. We have received multiple notices from government agencies stating
that "the vast number of proposals received, and the challenges posed by the
COVID-19 pandemic, have impacted the government's evaluation timelines." Several
of the government agencies that have received and are reviewing our proposals
started to open their facilities to limited off-site briefings starting on June
1, 2021. and since that date, our team has been invited to, and completed,
multiple briefings focused on our capabilities and submissions. Over time, the
DOD has increased and reduced its facility occupancy limits and remote work
requirements depending upon the local infection rates, and we have continued to
make use of the time to submit proposals and attend briefings as and when
permitted. We intend to continue developing and submitting proposals and to be
available to attend on-site briefings to the extent possible.
19
In addition to these review-based delays, the US federal budget for 2022 was not
approved by Congress by the October 1, 2021, start of the U.S. federal
government fiscal year. The US government final fiscal year 2022 appropriations
bill was signed into law by President Biden on the night of March 11, 2022 and
includes increases in areas of particular interest to the company.
Two other significant pieces of legislation impacted Applied Energetics that
were signed by the President on September 30, 2022. The first piece, bill S.
4900, the "SBIR and STTR Extension Act of 2022," authorizes the Small Business
Innovation Research (SBIR), Small Business Technology Transfer (STTR), and six
related pilot programs through Fiscal Year 2025; requires agencies with an SBIR
or STTR program to establish a due diligence program to assess the potential
risk posed by program applicants' foreign ties; requires certain departments and
agencies to report on national security risks within their SBIR/STTR programs;
and establishes increased minimum performance standards for firms that have won
a certain number of awards during a specified period of time.
The other piece of legislation that we have seen multiple times in the past
decade is the Continuing Resolution (CR), HR 6833, which provides fiscal year
2023 appropriations to federal agencies through December 16, 2022, for
continuing projects and activities of the federal government and includes
supplemental appropriations to respond to the Russian military action in
Ukraine. This will provide for a continuation of funding for currently funded
programs through December 16, but no new contracts until the 2023 fiscal year
appropriations are approved by Congress. This CR allows for current Applied
Energetics programs to continue.
Strategic Plan and 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 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
Department of Defense, commercial, and medical applications. Although the
historical market for Applied Energetics' 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 Applied Energetics 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 the previous quarter, we believe the interest in our technology
and applications remains high, and we continue to submit proposals for all
appropriate opportunities and share our vision of the disruptive capabilities of
USP optical sources for both near- and far-term threats and dual-use commercial
applications.
Through our analysis of the market, and in discussions with potential customers,
we remain convinced that customers are becoming more receptive and interested in
directed energy technologies. According to the Department of Defense 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 Applied Energetics 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.
20
Results of Operations
Comparison of Operations for the three months ended September 30, 2022 and 2021:
2022 2021
Revenue $ 572,766 $ -
Cost of revenue 127,668 -
General and administrative (1,249,132 ) (1,304,875 )
Selling and marketing (56,416 ) (83,173 )
Research and development (65,364 ) (61,968 )
Other income 637 -
Interest (expense) (1,227 ) (1,794 )
Net loss $ (926,404 ) $ (1,451,810 )
Revenue
Revenues increased by approximately $573,000 to approximately $573,000 as of
September 30, 2022. We had no revenues as of September 30, 2021. This is due to
a contract and grant that the company commenced in June 2022.
Cost of revenue
The cost of revenue increased by approximately $128,000 to approximately
$128,000 as of September 30, 2022. We had no cost of revenues as of September
30, 2021. This is due to the costs directly associated with contract and grant
that the company commenced in June 2022.
General and Administrative
General and administrative expenses decreased approximately $56,000 to
approximately $1,249,000 for the three months ended September 30, 2022, compared
to approximately $1,305,000 for the three months ended September 30, 2021,
primarily due to the decrease of $246,000 of consulting services, an increase in
salaries and employee benefits of approximately $123,000, in building costs of
approximately $13,000, and in supplies and insurance of $25,000.
Selling and Marketing
Selling and marketing expenses decreased $27,000, to approximately $56,000, for
the three months ended September 30, 2022, compared to approximately $83,000 for
the three months ended September 30, 2021, primarily due to the $27,000 decrease
in expenses related to marketing consultant services.
Research and Development
Research and development expenses increased approximately $3,000 to
approximately $65,000 for the three months ended September 30, 2022, compared to
approximately $62,000 for the three months ended September 30, 2021.
Other Income
Other income increased approximately $1,000, to approximately $1,000 for the
three months ended September 30, 2022, compared to $0 for the three months ended
September 30, 2021. The other income for the three months ended September 30,
2022 was primarily due to the forgiveness of the company's PPP loan.
Interest Expense
Interest expense decreased approximately $1,000 to $1,000 for the three months
ended September 30, 2022 compared to approximately $2,000 for the three months
ended September 30, 2021 primarily due the decrease in interest bearing notes
payable.
Net Loss
Our operations for the three months ended September 30, 2022 resulted in a net
loss of approximately $926,000, a decrease of approximately $526,000 compared to
the approximately $1,452,000 net loss for the three months ended September 30,
2021, primarily due to the increase in revenue and decrease in general and
administrative, selling and marketing expenses, partially offset by higher
research and development expenses.
21
Comparison of Operations for the nine months ended September 30, 2022 and 2021:
2022 2021
Revenue $ 763,688 $ -
Cost of revenue 142,835 -
General and administrative (4,365,823 ) (3,412,603 )
Selling and marketing (231,528 ) (235,897 )
Research and development (286,365 ) (192,783 )
Other income 637 81,218
Interest (expense) (2,910 ) (3,542 )
Net loss $ (4,265,136 ) $ (3,763,607 )
Revenue
Revenues increased by approximately $764,000 to approximately $764,000 for the
nine months ended September 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.
Cost of revenue
The cost of revenue increased by approximately $143,000 to approximately
$143,000 for the nine months ended September 30, 2022, as we had no revenues,
and therefore no costs of revenue during the 2021 period. September 30, 2022.
This is due to the costs directly associated with contract and grant that the
company commenced in June 2022.
General and Administrative
General and administrative expenses increased approximately $953,000 to
approximately $4,366,000 for the nine months ended September 30, 2022, compared
to approximately $3,413,000 for the nine months ended September 30, 2021,
primarily due to an increase of approximately $403,000 in professional expenses,
an increase in salaries and employee benefits of approximately $336,000, in IT
costs of approximately $87,000, and in insurance of $42,000.
Selling and Marketing
Selling and marketing expenses decreased approximately $4,000, to approximately
$232,000 for the nine months ended September 30, 2022, compared to approximately
$236,000 for the nine months ended September 30, 2021, primarily due to the
continuation of business development activities through our Master Services
Agreement with Westpark Advisors as well as other consultants in this field.
Research and Development
Research and development expenses increased approximately $94,000, to
approximately $286,000 for the nine months ended September 30, 2022, compared to
approximately $193,000 for the nine months ended September 30, 2021 primarily
assets that were placed into service during the quarter that are actively being
used to generate work in progress research and development of the company core
technologies.
Other Income
Other income decreased approximately $81,000 to $1,000 for the nine months ended
September 30, 2022 compared to approximately $81,000 for the nine months ended
September 30, 2021 primarily due to the partial forgiveness of the company's PPP
loan.
Interest Expense
Interest expense decreased approximately $1,000 to $3,000 for the nine months
ended September 30, 2022, compared to $4,000 for the nine months ended September
30, 2021, primarily due to a decrease in the aggregate outstanding debt the
company had outstanding as of September 30, 2022, relative to September 30,
2021.
Net Loss
Our operations for the nine months ended September 30, 2022, resulted in a net
loss of approximately $4,265,000, an increase of approximately $501,000 compared
to the approximately $3,764,000 net loss for the nine months ended September 30,
2021, primarily due to increases in general and administrative and research and
development expenses partially offset by higher revenue and decrease in selling
and marketing.
Liquidity and Capital 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 September 30, 2022, the company incurred a net loss of
approximately $4,265,000, had negative cash flows from operations of
approximately $2,743,000 and may incur additional future losses due to the
possible reduction in 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.
22
At September 30, 2022, the company had total current assets of $1,492,695 and
total current liabilities of $1,786,868 resulting in negative working capital of
$294,173. At September 30, 2022, we had $1,155,349 of cash and cash equivalents,
a decrease of $ 2,507,266 from $3,662,615 at December 31, 2021.
During the first nine months of 2022, the net cash outflow from operating
activities was $2,742,953. This amount was comprised primarily of our net loss
of $4,265,136. This was offset by noncash stock-based compensation expense of
$1,261,626, amortization of future compensation payable of $416,666, and the
amortization of right of use assets of $83,965. Additionally, net cash used the
changes in asset and liabilities totaled $409,283. This included an increase in
accounts receivable $219,618, increase in prepaid and deposits of $178,506,
increase in accrued expenses and compensation of $11,063, and an increase in
accounts payable of $53,863. This is offset by the net decrease in operating
lease liabilities of $53,959.
During the first nine months of 2022, the net cash outflow from investing
activities was $78,996. This was comprised of a $78,996 decrease from the
acquisition of equipment.
During the first nine months of 2022, the net cash flows from financing
activities was $314,685. This amount consisted of $175,435 in proceeds on a note
payable for insurance premium financing, $14,250 from the exercise of options,
and $585,000 of proceeds from subscription payable offset by $460,000 in
conjunction with the monthly repayment of the note for the company's insurance
premium financing and AOS note. The proceeds from a subscription payable
represent funding received as part of a pending private placement of equity.
Based on the company's current business plan, we believe our cash balance as of
the date of this report, along with anticipated revenues from our recently
received ONR grant and STTR agreement, will be sufficient to 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 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. This
aspect of inflation is particularly difficult given the highly skilled nature of
this work. Inflation is also likely to impact the price of supplies and
materials we must purchase in order to perform grants and contracts, some of
which may have been bid on based on cost structures which were submitted during
periods of lower inflation. In addition, the war in Ukraine and other related
geo-political events have further limited the number of countries from which we
can source certain supplies and equipment. These limitations can range from
outright prohibitions to strong discouragement based on potentially sensitive
information. We continually monitor these events and the markets for needed
supplies in order to make the best estimates possible, both in our internal
budgeting and in any bids or proposals we submit.
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