# Applied Energetics, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Applied Energetics, Inc.](/companies/aerg.md) (CIK 879911)
- Form: 10-Q
- Filed: 2023-11-13
- Accepted by EDGAR: Nov 13, 2023, 16:22 ET
- Period: 2023-09-30
- Accession: 0001213900-23-086147
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/879911/000121390023086147/f10q0923_appliedenerg.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/879911/000121390023086147/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $712.8k | us-gaap:Revenues |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $1.8m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $174.4k | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $492.9k | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $538.4k | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $1.3m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $54.2k | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $167.0k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$1.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$5.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $1.9k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $3.8k | us-gaap:InterestExpense |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$1.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$5.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.01 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.03 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.01 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.03 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$2.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $177.9k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Current assets | at 2023-09-30 | $3.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $4.4m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $953.0k | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $2.0m | us-gaap:Liabilities |
| Long-term debt | at 2023-09-30 | $51.8k | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-09-30 | $2.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,494 characters.

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, 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, 2022. 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. Our website is at www.appliedenergetics.com.

Applied Energetics, Inc. specializes in the development and manufacture of advanced high-performance lasers and 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, biomedical and space applications with optical sources operating from the deep ultraviolet to the far infrared portions of the electromagnetic spectrum.

Applied Energetics has developed, successfully demonstrated and holds all crucial intellectual property rights to a dynamic directed energy technology called Laser Guided Energy (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. 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 extended protection rights. The company also has nine pending patent applications. We continue to file patent applications as we deem appropriate to protect our intellectual property and enhance our competitive advantage.

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 our approach 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 laser 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 tunability, 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 laser 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, biomedical, and advanced manufacturing market sectors.

### Recent Developments

Effective August 23, 2023, Applied Energetics executed a contract with the Department of the Navy, Office of Naval Research with an aggregate contract price of $1.99 million payable over two years as the company performs its obligations under the contract. The objective of the contract is to develop a high-peak and high-average power USP optical system. The system is expected to demonstrate effects compatible with multiple Navy platforms and missions with an attractive size, weight, and power-cooling footprint. The company’s continuing development efforts in collaboration with ONR signify the importance of sustained development and maturation of USP-based directed energy systems to support the Navy’s technological priorities.

Effective May 15, 2023, Applied Energetics executed a Phase II Small Business Technology Transfer (STTR) contract with the U.S. Army at an aggregate contract price of $1.148 million payable over two years as the company performs its obligations thereunder, with the first year currently funded. The objective of this Phase II award is to further the development and testing of an IR system utilizing technologies that were investigated under the US Army Phase I STTR contract which the company was awarded in May 2022. This Phase II contract award follows a successful Phase I which established a computational concept with physical modeling and simulation to establish the feasibility of an IR system. Phase I was performed in collaboration with the James C. Wyant College of Optical Sciences at the University of Arizona. The company has continued its work under the contract, and provided all required reports, since its execution.

In May 2022, the Department of the Navy, Office of Naval Research (ONR) awarded Applied Energetics a $3.89 million, two-year grant, 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. The research on this grant continues with all progress reported to the program manager as on-time and on-budget. The AE team is actively engaged with the customer and providing regular briefings.

Effective June 7, 2023, the company entered into the First Amendment to Lease Agreement, which amended its existing Lease Agreement over its headquarters at the University of Arizona Tech Park. The amendment has expanded the Lease to add new 8,374 usable square-foot suite of offices, conference rooms and cubicle areas directly across an atrium from the company’s current headquarters so that the company will occupy the entire first floor of the building. This has enabled the company to separate its public-facing facilities from its restricted access space easily. The amendment also extended the Lease over the company’s existing headquarters through July 31, 2028 and grants the company an option over 5,520 usable square feet of manufacturing space. The company moved its administrative offices into the new space in August 2023.

During the first nine months of 2023, Applied Energetics has continued to add new members to our scientific and engineering team, including two Laser and Optics Research and Development Technicians and an Engineering Project Manager. We also retained a Senior Growth and Product Development Advisor, and in the summer of 2023, added a new Senior Scientist with more than ten years’ experience in high-power and high-energy lasers. We have worked to integrate these new members into our team and optimize the contribution that each brings to our research and development efforts.

Effective May 1, 2023, Stephen W. McCahon entered into an Executive Employment Agreement with the company to serve as Chief Science Officer (CSO). Dr. McCahon was an original co-founder of Applied Energetics, and in May of 2019, he returned to the company to serve as its Chief Scientist in a consulting role. Since that time, he has provided strategic direction to the company’s research and development activities in the areas of advanced optical technologies and USPL Directed Energy solutions. His salary as CSO is commensurate with his compensation under his Consulting Agreement for service as Chief Scientist.

Dr. McCahon was a Member of the Research Staff in the Optical Physics Department at the Hughes Research Laboratory in Malibu, California from 1986 to 1996 performing basic research in the area of optical physics and non-linear optical materials. In 1996, Dr. McCahon moved to Raytheon (Hughes) Missile Systems Co, in Tucson, AZ, during which time he was significantly responsible for the successful creation and development of the Directed Energy Weapons Product Line and served as its Chief Scientist. He left Raytheon in 2002 to co-found Applied Energetics Inc. in Tucson, AZ to develop Directed Energy Weapons for the Defense Department including very high energy and average power ultrashort pulse laser sources and Laser Guided Energy (LGE®) technologies. In April 2010, Dr. McCahon left Applied Energetics to form Applied Optical Sciences where he developed technologies related to the application of optical physics to a broad range of areas, including photonics and ultrashort pulse laser development. Dr. McCahon is a graduate of the University of Southern California (BSEE, MSEE), holds a Ph.D., Photonics, Inter-disciplinary Physics and Electrical Engineering from the University of Iowa.

Dr. McCahon beneficially owns approximately 4% of the company’s issued and outstanding shares of common stock.

Applied Energetics has nine pending patent applications. We expect to continue to file patent applications as we deem appropriate to protect our intellectual property and enhance our competitive advantage.

### Ongoing Business Development Activities

Over the past few years, we have submitted multiple proposals to, and attended briefings with, various defense and other government agencies who have expressed an interest in our technology and applications. We believe that our efforts in this area of development have begun to produce results. In addition to the grant and contracts which we have been awarded, our team has been invited to, and completed, multiple briefings focused on our capabilities and submissions. We intend to continue developing and submitting proposals and to be available to attend on-site briefings.

Applied Energetics has recently been involved with the Tulsa Innovation Labs (TIL) and Oklahoma State University (OSU) in defining opportunities to participate in the US Department of Commerce, Economic Development Administration (EDA) Tech Hubs program request for proposals. Tech Hubs was authorized by the bipartisan CHIPS and Science Act, a key part of President Biden’s Investing in America agenda, which he signed into law in August 2022. In August of 2023, Applied Energetics was a founding consortium member of the Tech Hub proposal submitted under the title of Tulsa Hub for Equitable and Trustworthy Autonomy (THETA). On October 23, 2023, the US EDA named the THETA Tech Hub as part of the historic $500 million investment in economic competitiveness and national security. This designation makes the THETA consortium eligible for $75 million or more in federal funding to accelerate the advanced development of autonomous technologies. In the submitted papers, it specifically calls out that THETA will emphasize the development of UAS and counter-UAS (CUAS), artificial intelligence (AI), and cybersecurity technologies. As such, Applied Energetics will be working closely with the Unmanned Systems Research Institute (USRI) and the Oklahoma Aerospace Institute for Research and Education (OAIRE), both at Oklahoma State University to partner on the UAS and counter-UAS technology research supporting the THETA TechHub. Through February 2024, the Tech Hubs designees will now compete for Phase 2 of the funding for implementation projects to help propel the region into a self-sustaining, globally competitive Tech Hub.

Two 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). For fiscal year 2024, which started on October 1, 2023, neither the National Defense Authorization Act (NDAA) nor the Defense Appropriations bill have been approved. On September 30, 2023, President Biden signed a CR, HR 5860, which extends the government operations through November 17, 2023. If the appropriation budgets are not passed, or if another CR is not implemented prior to November 17th, a partial government shutdown will commence. The NDAA sets defense spending policies and is typically passed prior to the appropriations bills. Since neither has passed, all new starts on funding of government contracts in the defense sector are on hold. This impacts any and all proposals under review by the Department of Defense.

### Strategic Plan and Analysis

The core of our strategy has been to continue growing our management and science teams with highly qualified individuals. This has driven our recruitment efforts in the areas of R&D, science, modeling and simulation, marketing and finance. We are also contemplating adding members to our Board of Directors and our Board of Advisors. Our board and leadership team 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. The company’s management continues 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 biomedical applications, such as biophotonic illumination and imaging. 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 biomedical 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.

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 three years, we continued to submit proposals and have been engaged in meetings on a continuous 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 several contracts since the second quarter of 2022, 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 US Department of Defense fiscal budgets from 2017 through 2023, its directed energy spending grew from approximately $500 million in 2017 to over $1.695 billion in 2023, an increase of nearly 240%. Market analysis and projections have estimated that this directed energy sector is anticipated to reach $17.8 billion globally by 2028. We continue to be optimistic about our future and the growing opportunities in directed energy applications, especially since this growth to nearly $1.7 B annually is being accomplished without a recognized Program of Record (POR) for directed energy platforms. Once these technologies are funded in production for a POR, these DOD budgets for DE will grow exponentially larger to support the technology insertion. 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 the USP marketplace.

Our research and development programs depend on our ability to procure the necessary optical and fabricated materials, components, electronics and other supplies. A significant, prolonged increase in inflation could negatively impact the cost of materials and components, which could be a particular problem with respect to our fixed fee contracts. Within the current geopolitical context, there are ongoing embargos of exports from some global suppliers of various materials that are used in electronics and some diode and laser materials, which can have negative effects on technology supply chains. We continuously monitor potential supply chain issues and supplier liquidity and work with our supply base to ensure adequate sources of materials at reasonable costs. In some instances, we depend upon a single source of supply, but we are developing multiple sources where possible to mitigate the risk. In some cases, we must comply with specific procurement requirements, which can limit the suppliers and subcontractors we may utilize.

### Results of Operations

### Comparison of Operations for the Three Months Ended September 30, 2023 and 2022:

|  | 2023 | 2022 |
| --- | ---: | ---: |
| Revenue | $712,810 | $572,766 |
| Cost of Revenue | (174,412) | (127,668) |
| General and administrative | (2,219,641) | (1,249,132) |
| Selling and marketing | (94,092) | (56,416) |
| Research and development | (54,222) | (65,364) |
| Other income | 20,287 | 637 |
| Interest (expense) | (1,908) | (1,227) |
| Net loss | $(1,811,178) | $(926,404) |

19

### Revenue

Revenue increased by approximately $140,000 to approximately $713,000, for the three months ended September 30, 2023, from approximately $573,000 for the three months ended September 30, 2022. Revenues for the 2022 period were from a contract and a grant that we received and commenced performing in June 2022. Revenues for the 2023 period were from continued work under the grant as well as two new contracts which the company signed in May 2023and August 2023.

### Cost of Revenue

Cost of revenue increased by approximately $47,000, or 37%, to approximately $174,000, for the three months ended September 30, 2023, from approximately $128,000 for the three months ended September 30, 2022. This increase was primarily attributable to an increase in the cost of materials, supplies and direct labor cost incurred in connection with the increased revenues.

### General and Administrative

General and administrative expenses increased approximately $970,000, or 78%, to approximately $2,220,000 for the three months ended September 30, 2023, compared to approximately $1,249,000 for the three months ended September 30, 2022, primarily attributable to increased employee labor expenses due to an increased company headcount to support growth. Additionally, an increase in rent expense in the quarter due to the company expanding its current lease agreement, effective August 1, 2023, an increase in stock-based compensation expense of approximately $646,000 due to an increase in equity activity in the quarter, and an increase in depreciation expense of approximately $14,000 due to $178,000 of lab and computer equipment, software, and furniture and fixtures being purchased and placed into service during the year all attributed to the overall growth in general and administrative expenses in the quarter.

### Selling and Marketing

Selling and marketing expenses increased approximately $38,000, or 67%, to approximately $94,000 for the three months ended September 30, 2023, compared to approximately $56,000 for the three months ended September 30, 2022, primarily due to an increase in consulting and travel expense to support the growth in revenue.

### Research and Development

Research and development expenses decreased approximately $11,000, or 17%, to approximately $54,000 for the three months ended September 30, 2023, compared to approximately $65,000 for the three months ended September 30, 2022, primarily due to a decrease in labor cost incurred during R&D activities which shifted to direct labor charges as part of the Cost of Revenue.

### Net Loss

As a result of the foregoing factors, our operations for the three months ended September 30, 2023, resulted in a net loss of approximately $1,811,000, an increase of approximately $885,000, or 96%, compared to the net loss of approximately $926,000 for the three months ended September 30, 2022.

### Comparison of Operations for the nine months ended September 30, 2023 and 2022:

|  | 2023 | 2022 |
| --- | ---: | ---: |
| Revenue | $1,759,433 | $763,688 |
| Cost of revenue | (492,852) | (142,835) |
| General and administrative | (6,401,550) | (4,365,823) |
| Selling and marketing | (297,447) | (231,528) |
| Research and development | (166,958) | (286,365) |
| Other income | 35,769 | 637 |
| Interest (expense) | (3,817) | (2,910) |
| Net loss | $(5,567,422) | $(4,265,136) |

20

### Revenue

Revenues increased by approximately $996,000, or 130%, to approximately $1,759,000 for the nine months ended September 30, 2023, compared to approximately $764,000 for the nine months ended September 30, 2022. Revenues for the 2022 period were from a contract and a grant that we received and commenced performing in June 2022. Revenues for the 2023 period were from continued work under the grants as well as two contracts which the company signed in May and August 2023.

### Cost of Revenue

Cost of revenue increased by approximately $350,000, or 245%, to approximately $493,000, for the nine months ended September 30, 2023, from approximately $143,000 for the nine months ended September 30, 2022. This increase was primarily attributable to an increase in the cost of materials, supplies and direct labor cost incurred in connection with the increase revenues.

### General and Administrative

General and administrative expenses increased approximately $2,036,000, or 47%, to approximately $6,402,000 for the nine months ended September 30, 2023, compared to approximately $4,366,000 for the nine months ended September 30, 2022, primarily attributable to increased employee labor expenses due to an increased company headcount to support growth. Additionally, an increase in rent expense in the year due to the company expanding its current lease agreement, effective August 1, 2023, an increase in stock-based compensation expense of approximately $1,267,000 due to an increase in equity activity in the quarter, and an increase in depreciation expense of approximately $40,000 due to $178,000 of lab and computer equipment, software, and furniture and fixtures being purchased and placed into service during the year all attributed to the overall growth in general and administrative expenses in the quarter.

### Selling and Marketing

Selling and marketing expenses increased approximately $66,000, or 28%, to approximately $297,000 for the nine months ended September 30, 2023, compared to approximately $232,000 for the nine months ended September 30, 2022, primarily due to the continuation of business development activities as well as other consultants in this field.

### Research and Development

Research and development expenses decreased approximately $119,000, or 42%, to approximately $167,000 for the nine months ended September 30, 2023, compared to approximately $286,000 for the nine months ended September 30, 2022, primarily due to a decrease in labor cost incurred during R&D activities which shifted to direct labor charges as part of the Cost of Revenue.

### Net Loss

As a result of the foregoing, our operations for the nine months ended September 30, 2023, resulted in a net loss of approximately $5,567,000 an increase of approximately $1,302,000 compared to the net loss of approximately $4,265,000 for the nine months ended September 30, 2022.

### Liquidity and Capital Resources

The accompanying unaudited 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, 2023, the company incurred a net loss of approximately $5,567,000, had negative cash flows from operations of approximately $2,578,000 and may incur additional future losses as it works to secure government contracts and continues to incur the expenses discussed under Results of Operations. In their report accompanying our financial statements for the year ended December 31, 2022, 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 for one year from the date the financial statements are issued based on our recurring losses from operations and possible need to raise additional capital. The financial statements do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities that might be necessary should the company be unable to continue as a going concern.

At September 30, 2023, the company had total current assets of $3,016,652 and total current liabilities of $953,001, resulting in working capital of $2,063,651. At September 30, 2023, we had $2,418,714 of cash and cash equivalents, a decrease of $3,221,594 from $5,640,308 at December 31, 2022.

During the first nine months of 2023, the net cash outflow from operating activities was $2,577,616. This amount was comprised primarily of our net loss of $5,567,422, offset by non-cash stock-based compensation expense of $2,528,293, depreciation and amortization of $90,564, amortization of ROU assets of $97,245, amortization of prepaid assets of $153,366, and cash used from changes in assets and liabilities of $120,338. The changes in assets and liabilities included an increase in accounts receivable of $50,902, a decrease in prepaid and deposits of $254,479, a decrease in ROU liabilities of $77,286, an increase in deferred revenue of $366,006, an increase in accounts payable of $115,130, and an increase in accrued expenses and compensation of $21,869.

During the first nine months of 2023, the investing activities reflected $177,904 for the acquisition of equipment.

During the first nine months of 2023, the net cash outflow from financing activities was $466,075. This amount consisted of $136,672 of tax withholdings related to the share settlement of RSUs, $503,694 in repayment of notes related to the asset purchase agreement and the directors and officer insurance financing, offset by proceeds related to a note in the amount of $155,541 in connection with renewal of the directors and officer insurance and proceeds from the exercise of stock options in the amount of $18,750.

Based on the company’s current business plan, we believe our cash balance as of the date of this report, along with revenue from our ONR grant and existing contract, 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 substantially all of its efforts to developing its business and raising capital, as needed, and 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 unaudited consolidated financial statements do not include any adjustments that might result should the company be unable to continue as a going concern.

## Controls and procedures

As filed, 994 characters.

### 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 September 30, 2023. Based on that evaluation, our Principal Executive Officer has concluded that our disclosure controls and procedures as of September 30, 2023, 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.

Filed Nov 13, 2023.
Source: SEC EDGAR, the filing index for accession 0001213900-23-086147. Last ingested by Listed: Nov 5, 2026, 16:50 ET. No prices; not investment advice.