Applied Energetics, Inc. (AERG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. The meeting will now please come to order. I welcome all of you to the 2025 Annual Meeting of Stockholders of Applied Energetics, Inc. I am Christopher Donaghey, President, Chief Executive Officer and a Director of the company and will be presiding at this meeting. Also present at the meeting today are our Board of Directors: myself, Brad Adamczyk, Executive Chairman; Greg Quarles, John Schultz, Mike Alber, Scott Andrews and Mary O'Hara; and Stephen McCahon, who is our Chief Science Officer. Mary O'Hara is also our General Counsel, Chief Legal Officer and Secretary. Henry Farrell of Continental Stock Transfer, our transfer agent, has been appointed to act as Inspector of Election and is on the line. Also on the line is Frank Parrish, representing RBSM LLP, our registered independent accounting firm. On the meeting web page, you will find the agenda and rules of conduct for this meeting. In addition, the proposals we are presenting and voting on are listed as well. You may use click here to vote your proxy, if you wish to vote or change your prior vote during this meeting. Also, if you log in using the control number from your proxy card, you will then be able to submit questions. We will address questions after the close of the business portion of this meeting. We will begin the formal business of the meeting shortly, which will include tabulating the voting for all matters set forth in the proxy statement, which was mailed to stockholders in August. Following the adjournment of the formal business of the meeting, I will give a brief presentation and address any questions that are relevant to the meeting. Continental Stock Transfer has delivered an affidavit of mailing establishing that notice of this meeting was duly given. A copy of the notice of meeting and the affidavit of mailing will be incorporated into the minutes of this meeting. All stockholders of record at the close of business on July 1, 2025, are entitled to vote at this meeting. Our first order of business at this meeting is to determine whether the shares represented at the meeting, either in person or by proxy, are sufficient to constitute a quorum for the purpose of transacting business. Madam Secretary, would you please provide us with a report regarding the calling of the meeting and whether a quorum is present to transact business.

I have been informed that a majority of the shares entitled to vote at this meeting are either represented in person via live audio-only webcast or by proxy. And accordingly, a quorum is present. Just before the meeting was convened, the Inspector of Election, Henry Farrell, took and signed an oath to faithfully execute the duties of inspector with strict impartiality and according to the best of his ability. Mr. Farrell has also provided a certificate as to the number of shares of Applied Energetics common stock present in person via the webcast or represented by proxy at the meeting.

Thank you, Mary. A quorum being present, this meeting is duly convened for purposes of transacting such business as may properly come before it. We now turn to the proposals submitted for voting. The next order of business is a description of the matters to be voted on at today's meeting. Proposal 1, election of directors. The first proposal before stockholders of the company is the election of directors by plurality vote, to serve for the term indicated in the proxy statement and agenda or until their successors are duly elected and qualified. The management of the company recommends the election of the following persons as directors of the company. Brad Adamczyk, Executive Chairman; myself, Greg Quarles, Don Schultz, Mike Alber, Scott Andrews and Mary O'Hara. Proposal 2, advisory vote to approve executive compensation. The say-on-pay proposal is to approve by majority vote of all shares present and entitled to vote either in person or by proxy, on a nonbinding advisory basis, the compensation paid to the named executive officers and directors as described in the proxy materials. The Board recommends a vote for Proposal 2. Proposal 3, advisory vote to approve frequency of vote on executive compensation. The say-on-frequency proposal is to approve by a majority vote of all shares present and entitled to vote either in person or by proxy on a nonbinding advisory basis, the frequency with which the stockholders should vote on the compensation paid to the named executive officers and directors as described in the proxy materials. The Board recommends a vote for approval every 3 years. Proposal 4, approval of 2025 executive -- equity incentive plan. This proposal is to approve the 2025 equity incentive plan by majority vote of all shares present and entitled to vote either in person or by proxy. The Board recommends a vote for approval of the plan. Proposal 5, approval of RBSM LLP as independent registered public accounting firm for the fiscal year ending December 31, 2025. This proposal is to ratify by majority vote of all shares present and entitled to vote either in person or by proxy, the appointment of RBSM LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2025. The Board recommends a vote for approval of RBSM LLP. Let's now proceed to the voting. The polls are now open for voting on all proposals. The time is now 10:06 a.m. Mountain Standard Time and 1:06 p.m. Eastern Time. All holders of common stock at the close of business on July 21, 2025, may vote virtually or by proxy. Those of you who have already voted on the Internet or by returning your proxy card, do not need to do anything more unless you wish to change your vote, in which case you may do so now by completing an online ballot. Anyone who has not voted by proxy and wishes to vote or change their vote via the live webcast may likewise do so now. We will now pause for 30 seconds to allow investors to vote. [Voting]

We now seem to have all the ballots. And since all those desiring to vote by ballot have done so, I hereby declare the polls closed as of 10:07 a.m. Mountain Standard Time 1:07 p.m. Eastern Time. The ballots and proxies will be held in the possession of the Inspector of Election. The Inspector of Election will tabulate the votes. Will the secretary please report the results of the voting.

We have been informed by the inspector of election that the ballots have been counted and that the nominees for election to the Board of Directors have been duly elected, and all other matters voted upon pursuant to the agenda have been approved.

Based on this information, I hereby declare that all candidates for Board of Directors have been duly elected, and all proposals have passed. Thank you for attending today's meeting. The meeting is adjourned. I will now spend a few minutes to give you an update on this year's activities and what we have planned for the rest of the year. In the beginning of the year, I made our highest priority for the first half of the year getting multiple lasers into the Applied Energetics Battle Lab to be able to do on-demand demonstrations of our ultrashort pulse laser capability to defeat drone sensors. By the middle of the year, we had 2 lasers operational: one, a 1 billion-watt peak power ultrashort pulse laser operating in the near infrared and two, a novel Doppler LiDAR capable of picking out the signatures of spinning drone rotors. As of this week, the billion-watt peak power laser will be able to fire not only in the near infrared spectrum, but also in the visible spectrum. The LiDAR continues to improve from a capability perspective and is in a smaller form factor, and we now have a low-power laser operating through the Kord FIREFLY gimbal. A second key priority was to begin the shift from research and development activities into engineering. This priority took center stage after the success of the Ukrainian drone rate called Operation Spider Web on Russian air bases on June 1 of this year. Two key points of progress on this. One, we started hiring engineers to begin the productization of our lasers. And two, we pressed the accelerator on early prototype development of our stand-alone post-laser air defense system, or PLAD. The early version of PLAD includes an even smaller form factor of the laser source and an early-stage software system in gimbal for firing the laser down range. We are now using that gimbal to hit multiple static targets at the far end of the battle lab. We have continued to build our IP portfolio with the award of 3 new patents this year, one, covering a unique application of an ultraviolet ultrashort pulse laser to identify and kill viruses on surface. And two, covering new amplification technologies for ultrashort pulse lasers. We also began a new contracted program to support the University of Rochester, Laboratory for Laser Energetics or LLE. LLE has been awarded a significant new laser development program from a U.S. government customer, and we were selected by LLE to build that laser for that program. We are in the process of concluding Phase 0 of this program and expect to move into Phase 1 later this year. We anticipate that this will be a multiyear program. And frankly, the final version of that laser is extremely powerful and borders on frightening. It has not been all good news this year, however. In the first few months of the year, we were notified by one of our customers that funding was discontinued for 2 of our programs, likely as a result of those reprioritization. It's important to note that these contracts were small in size and funding for those contracts was from the earlier stage applied research portion of the DoD's research, development, test and evaluation budget also referred to as the 6.2 budget or 6.2. The 6.2 budget only accounts for about 3.5% of the proposed FY '26 research budget. And since FY '24, the 6.2 portion of the budget has decreased more than 20% when comparing the actual FY '24 budget and the proposed FY '26 budget, yet the total research budget is up almost 20% from FY '24 to proposed FY '26. So what does this mean? It means the current administration has shifted the priorities of the research budget towards later stages of the development process. These later stages account for roughly 90% of the total research budget. And while early stage is down 20%, the later-stage budget categories are up 26%. In order to tap into these later stages, we need to demonstrate that our technology is at a technology readiness level 5 or TRL 5. So now let's talk about the activities for the remainder of the year. Hopefully, it's clear by this point that the highest priority is demonstrating our technology is at TRL 5. And to do that, we need to demonstrate our technology in a relevant environment. That means outdoor testing. Our primary objective for the remainder of the year is to do our first outdoor testing of the system in Q4 of this year with the smaller form factor of the laser source and the early prototype beam director we have built in-house. After completion of this test, we expect to see acceleration in our customer and strategic partner engagement. A second priority is selecting and establishing a relationship with a third-party developer for a production-ready beam director. The next priority is to begin the build-out of the productization team, starting with the hiring of a Chief Product Officer and launching the systems integration facility in the same location as our data lab. The last priority is to complete the development of a new multi-wave link ultrashort pulse laser that operates in the short wave infrared and long-wave infrared as well as maturing certain aspects of our vertical integration strategy to build our own components to alleviate supply chain pressures for the longer wavelength versions of our lasers. I would like to thank you all for your support of Applied Energetics, and I look forward to providing updates as we move out to execute on our strategy. I'll now open the call to questions. But please note questions should be germane to the meeting. Questions not related to the meeting will be addressed by our Investor Relations team following the meeting. I see no questions in the queue. And so with that, we will conclude the meeting.

The meeting will go on air at a scheduled time on the meeting web page.