Applied Energetics, Inc.: Form 10-Q for the period ended Mar 31, 2026

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, 2025.

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, 2025. 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.

Overview

Applied Energetics, Inc. is a 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 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 potential commercial applications in both the biomedical and advanced manufacturing industries.

Our USP lasers are designed to provide:

• Frequency Agile Optical Sources from Ultraviolet (UV) to Far Infrared (IR)
• Pulse Duration Agility
• Size, Weight, and Power Optimization
• Advanced Fiber Applications
• Laser Guided Energy (LGE®)
• Laser Induced Plasma Channel (LIPC®)

Applied Energetics’ directed energy technologies are vastly different from conventional directed energy systems. Our 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, for 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’ optical fiber-based laser architectures also 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 tens of seconds 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 result of our innovative USP approaches is highly effective lasers capable of jamming, damaging, and destroying certain surveillance and reconnaissance sensors with mountable footprints that require only a fraction of the size, weight, and power requirements of other-directed energy technologies. We believe the combination of both low size and weight, along with power characteristics of wavelength and pulse duration agility will help us achieve our vision statement of “Directed Energy, Anywhere.”

AE owns and protects intellectual property that is integral and necessary for the development of Ultrashort Pulse (“USP™”) Lasers, Laser Guided Energy (“LGE®”) and Direct Discharge Electrical products for military and commercial applications. AE currently owns 26 patents and an additional nine Government Sensitive Patent Applications (“GSPA”). These GSPA’s are held under secrecy orders of the US government and allow the company greatly extended protection rights, including having no expiration date until such time as they are no longer classified after which they will have the normal 20-year patent protection. The company also has two pending patent applications and one provisional patent application which is undergoing conversion to its non-provisional form. We continue to file patent applications as we deem appropriate to protect our intellectual property and enhance our competitive advantage. We conduct research and development efforts under contracts and on an internal basis as we move toward product development and testing.

During the past several years, substantially all of our operating revenues were derived from contracts with DoW agencies and a major research university. Along with the performance of these contracts, we have conducted internal research and development efforts, building a team of scientists and engineers and establishing our testing facilities in the Battle Lab. We have also begun testing products in remote testing field locations, some of them private and some of them run by government agencies or universities. During the past year, our efforts in this area have been focused on preparing for and conducting these tests and preparing product demonstrations.

AE continues to expand its technical capabilities and administrative capacity with the addition of employees, consultants and contractors, and agreements with leading laser and optics universities in the country. AE also works with a team of contractors to strengthen our compliance, IT, technical staff, human resources and public relations.

Recent Developments and Trends

Effective May 17, 2025, the company received a requisition from the University of Rochester in the amount of $181,639. This is part of a contractual arrangement with the university in the approximate amount of $250,000 to support its Laboratory for Laser Energetics (LLE) for ongoing efforts to explore pulsed laser technologies. Work on the contract commenced on July 10, 2025 with a meeting at Applied Energetics headquarters in Tucson, AZ with Dr. Jon Zuegel, Laser Development and Engineering Division Director and a Senior Scientist at the LLE to discuss the research to be provided by the company. We completed work under the requisition and then worked with the University of Rochester to plan and commence work on the next phase. In April 2026, we were awarded a follow-on contract in excess of $240,000 to support Phase 1 of the program.

During the first half of 2025, we were continuing work on two contracts with the Office of Naval Research (ONR), but both contracts were subsequently closed. Also, through November 14, 2025, we were continuing work on a Phase II Small Business Technology Transfer (STTR) contract with the U.S. Army. In the fourth quarter of 2025, we completed work on this contract and received full payment from the customer.

During the three months ended March 31, 2025, we recognized revenues as we performed services under these contracts and recorded related costs under cost of revenues. During the three months ended March 31, 2026, on the other hand, the company was no longer performing services under these contracts so recorded no revenues or costs with respect to them. However, the company has continued working on related technologies as part of its ongoing internal research and development program.

Costs under these firm fixed fee contracts were affected by supply chain disruptions, and shortages of items like semiconductor chips, and related systemic issues, and general inflation. These supply issues similarly affect any internal research and development programs, and we anticipate that they will continue for at least the near term. Micro-electronic and semiconductor chip shortages are still impacting supply chains, and as such, can impact our ability to develop our technology in a timely manner and to execute and deliver technology to meet demands of our prospective customers. Certain optical transmitting components are also in short supply. The ongoing conflict in the Middle East is also putting upward pressure on shipping expenses for all of these products. Expenditures associated with internal research and development, such as supplies, equipment, and components, are recorded as expenses rather than cost of revenues.

During the quarter ended March 31, 2026, the company has continued its work on the design and integration of USP technologies onto the Kord Firefly platform and has extended this work into the second quarter. With recent upgrades and advances to the FIREFLYTM system, the company looks to continue integration into the updated platform.

During the fourth quarter of 2025 and the first quarter of 2026, the company began conducting field tests of certain of its lasers. To do so, it has made arrangements to use existing testing facilities maintained by third parties, including a private entity and a research university. The costs and availability of these testing facilities vary, depending on prior reservations and the minimum length of time needed for each field test. To facilitate these testing outings and make the time spent in the field more efficient, the company purchased an ATC Command/Response Trailer which is outfitted with a ramp door for access to the laser being tested, air conditioning for climate control, a generator, and workstations to enable the team to make adjustments to the lasers being tested in real time in the field. Our team has conducted several such field tests, in one of which, we completely disabled the sensor on a drone at a range that meets specifications provided to us by prospective customers.

The current budgetary and deficit funding environment, continuing inflation, tariffs and other ongoing supply chain disruptions, the appropriations process, federal government shutdowns, and budget cuts, among other items, all continue to create significant short and long-term challenges and risks to the company and its business development endeavors. It is difficult to forecast the effect that any future tariffs will have on our ability to source raw materials, supplies, and equipment needed to continue our operations both for the performance of our ongoing contractual obligations and our internal research and development efforts. Moreover, the cuts to funding and reductions in federal government personnel can impact our cash flows and ability to continue operating. Many of these cuts are proposed to the Departments of War and Homeland Security budgets which are the focus of much of our business development efforts. However, we remain optimistic that the innovative nature of our technology and its novel approach to addressable threats position the company for development, growth, and market opportunities.

Certain mitigating factors could blunt any potential impact of these changes on our industry. The DoW and others in the administration have indicated that funding for innovation and novel technologies will continue to be a priority, and directed energy has been discussed as part of this trend. Also, many of the cuts are being challenged in court and, in some cases, reversed either because of judicial rulings or policy reversals. However, it is difficult to predict precisely where funds will be cut or allocated, and even a general reduction in force can make administrative functions, such as finalizing contracts and government payment processing, challenging. These factors could severely impact our cash flows and our ability to continue operating.

Geo-political events continue to affect our business. In particular, the ongoing military action in the Middle East has restricted the flow of oil and liquid natural gas worldwide and is driving up the price of goods and services which include supplies, materials and equipment which we need for our business. Also, certain economic events and policies, such as tariffs and embargoes, tend to be inflationary and contribute to drive up costs.

For fiscal year 2026, which started on October 1, 2025, the National Defense Authorization Act (NDAA) was delayed, but on December 18, 2025, the-president signed the 2026 NDAA into law (P.L.-119-60). The NDAA sets defense spending policies, while the separate appropriations bills comprising the federal budget fund government spending, including spending on defense and homeland security. This impacts all proposals under review by the DoW. The federal government experienced a funding gap beginning on October 1, 2025—the start of FY2026—and ending when the Continuing Appropriations, Agriculture, Legislative Branch, Military Construction and Veterans Affairs, and Extensions Act, 2026 (P.L. 119-37), was signed into law on November 12, 2025. On February 3, 2026, the president signed the Consolidated Appropriations Act, 2026 (P.L. 119-75). This bill included Defense Appropriations, and all previously unfunded agencies except for Homeland Security.

Critical Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its assumptions on historical experiences and on various other inputs and estimates that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In addition, management considers the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein.

Share-Based Payments

Stock-based compensation cost is measured at grant date, based on the fair value of the award and is recognized as an expense over the requisite service period.

The fair value of each option grant is estimated at the date of grant using the Black-Scholes-Merton option valuation model. We make the following assumptions relative to this model: (i) the annual dividend yield is zero as we do not pay dividends on our common stock, (ii) the weighted-average expected life is based on a midpoint scenario, where the expected life is determined to be half of the time from grant to expiration, after taking into account the vesting period, (iii) the risk free interest rate is based on the U.S. Treasury security rate for the expected life, and (iv) the volatility is based on the level of fluctuations in our historical share price for a period approximately equal to the weighted-average expected life.

Results of Operations

Comparison of Operations for the Three Months Ended March 31, 2026 and 2025:

19

Revenue

Revenue decreased by approximately $210,000 to $0 for the three months ended March 31, 2026.from the three months ended March 31, 2025. In April 2025, the company was notified by a customer that two of its active contracts were currently unfunded and remain unfunded, resulting in a decrease in revenue for the period. Although the contracts remain open, the company suspended all work until funding is secured in the future. Despite the suspension, the company continues to advance the underlying technology through its internal research and development efforts. Both the customer and the company are actively seeking alternative sources of funding, including from within the original contracting agency and other departments of the U.S. Department of War.

Cost of Revenue

Cost of revenue decreased by approximately $64,000 to $0 for the three months ended March 31, 2026 from the three months ended March 31, 2025. This decrease was attributable to the unavailability of federal funds. The cost of material, supplies and direct labor incurred were expensed to R&D while our programs and work remain active and in place.

General and Administrative

General and administrative expenses increased by approximately $673,000 to approximately $3,283,000 for the three months ended March 31, 2026, compared to approximately $2,610,000 for the three months ended March 31, 2025, primarily due to an increase in salaries and employee benefits of approximately $320,000, as well as an increase in stock based compensation of approximately $356,000.

Selling and Marketing

Selling and marketing expenses decreased by approximately $147,000 to approximately $172,000 for the three months ended March 31, 2026, compared to approximately $319,000 for the three months ended March 31, 2025, due to a decrease of approximately $122,000 in professional fees and a decrease in payroll and related expenses of approximately $36,000 offset by an increase in marketing expenses of approximately $12,000.

Research and Development

Research and development expenses increased by approximately $52,000 to approximately $375,000 for the three months ended March 31, 2026, compared to approximately $323,000 for the three months ended March 31, 2025, primarily due to an increase in labor costs of $135,000 offset by a decrease in material costs of approximately $83,000 associated with continued development of our USP laser technologies.

Net Loss

Our operations for the three months ended March 31, 2026, resulted in a net loss of approximately $3,808,000 an increase of approximately $702,000 compared to a net loss of approximately $3,106,000 for the three months ended March 31, 2025, primarily due to an increase in general and administrative expense and research and development expenses partially offset by a decrease in selling and marketing expenses.

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 three months ended March 31, 2026, the company incurred a net loss of approximately $3,808,000, had negative cash flows from operations of approximately $2,296,000 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, 2025, 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 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 March 31, 2026, the company had total current assets of approximately $4,649,000 and total current liabilities of approximately $937,000 resulting in working capital of approximately $3,712,000. At March 31, 2026, we had approximately $4,064,000 of cash and cash equivalents, a decrease of approximately $2,372,000 from approximately $6,436,000 at December 31, 2025.

During the first three months of 2026, the net cash outflow from operating activities was approximately $2,296,000. This amount was comprised primarily of our net loss of approximately $3,808,000, offset by non-cash stock-based compensation expense of approximately $1,348,000, amortization of ROU assets of approximately $70,000, depreciation and amortization of approximately $88,000, and amortization of prepaid assets of approximately $51,000 as well as cash used from changes in assets and liabilities of approximately $46,000 due to a decrease in other assets of approximately $102,000, a decrease in the ROU liability of approximately $75,000 and offset by an increase in accounts payable and accrued liabilities of approximately $131,000.

During the first three months of 2026, the net cash outflow from investing activities was approximately $43,000. This was for the purchase of equipment.

During the first three months of 2026, the net cash outflow from financing activities was approximately $32,000. This amount consisted of approximately $20,000 received from the exercise of options and warrants offset by approximately $4,700 tax withholdings related to the share settlement of RSUs and approximately $48,000 of repayment of an insurance premium loan.

Based on the company’s current business plan, we believe our cash balance as of the date of this report will be sufficient to meet the company’s anticipated cash requirements for the near term. However, we cannot be certain that the current business plan will be achievable.

The company’s existence depends upon management’s ability to develop profitable operations. Management is devoting significant time and effort 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 consolidated financial statements do not include any adjustments that might result should the company be unable to continue as a going concern.

Additionally, international, macroeconomic events, including the military action in the Middle East, 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 our ability to continue as a going concern. These events may also impair our ability to raise capital, including as a result of increased market volatility, or decreased market liquidity, which also affects the company’s ability to continue as a going concern. Third-party financing may become unavailable on terms acceptable to the company or at all. The impact of such events on the world economy and the specific impact on the company’s financial position and results of operations are difficult to predict. 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 existing, and any future, grants or contracts requires that we estimate factors such as inflation and geo-political events that affect such expenses and costs. Although inflation generally moderated in 2024 and 2025, recent events in the Middle East appeared to be driving it back up during the first quarter of 2026 through the current date. In addition, the cost of labor continues to increase across certain sectors of the US and global economy which may drive up our general and administrative expenses as well as the cost of personnel, particularly given the highly skilled nature of this work. Inflation has also impacted the price of supplies and materials we must purchase. In addition, 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.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2026. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its chief executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2026 primarily as a result of weaknesses in our internal control over financial reporting as described below. In response to this conclusion and in conjunction with our ongoing assessment and remediation of such internal control over financial reporting as described below, we are in process of strengthening the company’s disclosure controls and procedures.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our chief executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company’s assets;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of the management and directors of the company; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

With the assistance of independent consultants, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our internal control over financial reporting as of March 31, 2026, based on the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). This assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. This assessment also took into consideration a material weakness cited by our auditors. In particular, our auditors noted lack of segregation of duties and written policies and procedures within the accounting functions and evidence of control review in that we have not designed such policies and procedures at a sufficient level to support the operating effectiveness of controls to prevent and detect potential error. To mitigate this weakness, in 2025, the company retained the services of an independent consulting firm to conduct an assessment of our internal controls, gap analysis, and remediation recommendations. Based on our assessment under the criteria described above, the Chief Executive Officer and Chief Financial Officer have concluded that our internal control over financial reporting was not effective as of March 31, 2026.

Remediation of Material Weakness

The company is committed to addressing the material weakness described above and has retained an independent consultant which has conducted a comprehensive assessment of the company’s internal controls and provided a gap analysis and recommendations for remedial measures. Management has begun to implement changes in processes designed to improve its internal control over financial reporting in accordance with some of these preliminary recommendations. Remediation will not be complete until there has been sufficient time to conclude through testing that the controls operate effectively.

Changes in Internal Controls Over Financial Reporting

Other than work on remedial measures set forth above under Management’s Report on Internal Control over Financial Reporting, there has been no change in Applied Energetics’ internal control over financial reporting for the quarter ended March 31, 2026, that materially affected or is reasonably likely to materially affect our internal control over financial reporting.