SEC Company Response from APPLIED ENERGETICS, INC. (AERG, AERGP) (CIK 0000879911) (AERG) — Oct 6, 2008
APPLIED ENERGETICS, INC. (AERG, AERGP) (CIK 0000879911)
Date: Oct. 6, 2008 · CIK: 0000879911 · Accession: 0001144204-08-056290
AI Filing Summary & Sentiment
Reasoning
Referenced dates: September 25, 2008
Letter
Ms. Linda Cvrkel Branch Chief Securities and Exchange Commission Washington, D.C 20549-0402
Dear Ms. Cvrkel,
This letter sets forth the responses of Applied Energetics, Inc. (we, us or the “Company”) to the comments of the staff (the “Staff”) of the Securities and Exchange Commission with regard to the Form 10-K for the fiscal year ended December 31, 2007 and the Form 10-Q for the quarterly period ended June 30, 2008. The Staff’s comments were provided to the Company in a letter dated September 25, 2008. For the convenience of the Staff, the text of the comments is reproduced in its entirety followed by our responses.
Form 10-K for the fiscal year ended December 31, 2007
Note 6. Property and Equipment, page F-16
1. COMMENT:
We noted that you have reported significant net operating losses and negative cash flows from operations since 2005. Also, we noted that no impairment charges have been recorded for property and equipment during any of the periods in the three years ended December 31, 2007. Based on your history of losses and negative cash flows from operations, it appears that pursuant to paragraph 8(e) of SFAS No. 144 an impairment test should have been performed for property and equipment during the year ended December 31, 2007. In this regard, please advise us of the date of your property and equipment impairment test for the fiscal year ended December 31, 2007. If no impairment test was completed during this period, please explain why this was not performed pursuant to paragraph 8(e) of SFAS 144. Furthermore, provide us with a summary of material relevant facts, assumptions, and estimates you considered in the impairment analysis on an individual asset group basis, and for those long lived assets, for which no impairment charges were taken, further explain to us why you concluded that no impairment of those long-lived assets was necessary for the year ended December 31, 2007.
RESPONSE:
At each quarter-end we evaluate general impairment of assets. As an element of our annual business planning process conducted in October and November of each year we consider expected revenues and resulting cash flow from operations. Revenue planning is based upon actual and expected contract awards as the majority of our revenues are sourced from Government contracts. During this process we evaluate the current carrying values of all long-lived assets on our books. We compare these values against business plans to determine if carrying values are recoverable. In accordance with such testing at the end of the third quarter in 2007 this analysis resulted in the write-down of unusable building, equipment and leasehold improvements at the Stennis, Mississippi operating facility. All useful assets at Stennis were transferred either to our Tucson or St. Louis locations and the remainder were either sold or disposed of with gain or loss to carrying values booked at quarter-end.
Our annual impairment test was performed on March 2, 2008 where we determined that as of December 31, 2007 the net book values of long-lived assets were recoverable through expected undiscounted business cash flows based on anticipated and actual future revenue bookings and backlog. We will continue to evaluate the carrying values in the future. We evaluate impairments as such circumstances warrant.
Note 9. Stockholders Equity, page F-17
2. COMMENT:
We noted that you issued Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”), which appears to have a redemption date other than that described in page F-18. In this regard, please tell us if the Series A Preferred Stock is redeemable (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the holder, or (3) upon the occurrence of an event that is not solely within the control of the Company. If so, please explain how you consider EITF D-98 in assessing your balance sheet classification of the Series A Preferred Stock.
RESPONSE:
The Series A Preferred Stock is not redeemable (1) at a fixed or determinable price on a fixed or determinable date, (2) at the option of the holder, or (3) upon the occurrence of an event that is not solely within the control of the Company. The Series A Preferred Stock is redeemable upon a change of control, which solely is within the control of the Company.
Form 10-Q for the quarterly period ended June 30, 2008
Note 4- Securities Available for Sale, page 7
3. COMMENT:
In light of your recent history of operating losses and negative cash flows from operations, please revise future filings to expand your discussion regarding your auction rate securities to explain why you believe you have the ability to hold these investments on a long-term basis.
RESPONSE:
We will in future filings expand our discussion regarding these auction rate securities including providing a discussion of our cash needs beyond a short-term basis. Please note in July 2008 we sold $100,000 of our ARS at par.
We believed as of June 30, 2008, according to our business plans, we had sufficient cash, accounts receivable, business backlog and other short-term assets available to provide liquidity to operate our business in the normal course without selling these long-term assets through calendar 2009. Additionally we have obtained the ability to leverage (borrow against) such long-term assets using standard margin agreements should cash needs deviate from current plans.
4. COMMENT:
We note that you refer to engaging a third party expert valuation firm in note 4 on page 7. In future filings please delete the reference to the “3rd party expert valuation firm” or provide a consent from that valuation firm as an exhibit to your periodic filings.
RESPONSE:
In future filings we will either include such consent as an exhibit or delete such reference.
Note 5. Property and Equipment, page 7
5. COMMENT:
We noted the disclosure included in Note 5 indicating that the Company purchased its principal office, manufacturing, storage, and primary research and development facility from Columbia Tucson, LLC at a purchase price of $2.2 million. We also note that Columbia Tucson, LLC is owned by certain of the Company’s current and former executive officers and by certain of the Company’s principal shareholders. Please tell us how the purchase price paid by the Company for this property compared to its estimated fair value at the date it was purchased. Also, if the purchase price paid for this property was estimated to be its estimated fair value, please explain in further detail how this fair value estimate was determined. We may have further comments upon receipt of your response.
RESPONSE:
During the fall of 2007 the Company expressed a desire to purchase its primary research facility from its landlord, Columbia Tucson, LLC (a related party). Initial discussions were held and expressions of interest communicated by both parties in completing a fair and equitable arms-length transaction.
The Company obtained two independent expert real estate valuations to determine the value of the target property (one paid for by the Company and one provided by the seller). Both firms utilized similar methods of valuation to arrive at an indicated range of value for the property: The Cost Approach (estimating the cost to replace the land and building); the Income Approach (estimating an annual net income based on rental income); and Market Approach (sales comparison). The range of value estimated by these two firms was from $2.4 million to $2.8 million.
After negotiations the parties determined that an equitable price for the transaction, which approximated fair value would be $2.2 million as these appraised values are inclusive of $304,000 in leasehold improvements net of depreciation made by the Company during the lease period, which are not included in the purchase price. Based upon these factors the parties entered into the buy/sell agreement.
In our filing we disclosed the relationship of the parties (three previous officers and two current officers of the Company). One of the previous officers owned greater than 10% of the Company. The fair value of the real estate purchased was reasonably and objectively determined, the real estate had been held by Columbia Tucson, LLC for a period of more than five years and was of the type that could be expected to appreciate in value. Columbia Tucson, LLC has no continuing involvement or ownership in the real estate after the sale.
Exhibit 99.1
6. COMMENT:
We note the disclosure of the non-GAAP measure “EBITDA.” Please revise future filings to include the disclosure required by Item 10(e)(i) C and D of Regulation S-K. These disclosures should include a discussion as to why management believed presentation of the non-GAAP measure is useful to investors and how the measure is used by the Company’s management.
RESPONSE:
The Company will provide the disclosure required by Item 10(e)(i) C and D of Regulation S-K in its future filings in which it elects to present non-GAAP information, including a discussion as to why management believes presentation of the non-GAAP measure is useful to investors and how the measurement is used by the Company’s management.
In accordance with your letter and comments we acknowledge the Company is responsible for the adequacy and accuracy of the disclosure in the filing, Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filing; and the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Sincerely,
Kenneth
Wallace
Show Raw Text
CORRESP
1
filename1.htm
Unassociated Document
October
6, 2008
Ms.
Linda
Cvrkel
Branch
Chief
Securities
and Exchange Commission
Washington,
D.C 20549-0402
Dear
Ms.
Cvrkel,
This
letter sets forth the responses of Applied Energetics, Inc. (we, us or the
“Company”) to the comments of the staff (the “Staff”) of the Securities and
Exchange Commission with regard to the Form 10-K for the fiscal year ended
December 31, 2007 and the Form 10-Q for the quarterly period ended June 30,
2008. The Staff’s comments were provided to the Company in a letter dated
September 25, 2008. For the convenience of the Staff, the text of the comments
is reproduced in its entirety followed by our responses.
Form
10-K for the fiscal year ended December 31, 2007
Note
6. Property and Equipment, page F-16
1.
COMMENT:
We
noted that you have reported significant net operating losses and
negative
cash flows from operations since 2005. Also, we noted that no impairment
charges have been recorded for property and equipment during any
of the
periods in the three years ended December 31, 2007. Based on your
history
of losses and negative cash flows from operations, it appears that
pursuant to paragraph 8(e) of SFAS No. 144 an impairment test should
have
been performed for property and equipment during the year ended
December
31, 2007. In this regard, please advise us of the date of your
property
and equipment impairment test for the fiscal year ended December
31, 2007.
If no impairment test was completed during this period, please
explain why
this was not performed pursuant to paragraph 8(e) of SFAS 144.
Furthermore, provide us with a summary of material relevant facts,
assumptions, and estimates you considered in the impairment analysis
on an
individual asset group basis, and for those long lived assets,
for which
no impairment charges were taken, further explain to us why you
concluded
that no impairment of those long-lived assets was necessary for
the year
ended December 31, 2007.
RESPONSE:
At
each quarter-end we evaluate general impairment of assets. As an
element of our annual business planning process conducted in October
and
November of each year we consider expected revenues and resulting
cash
flow from operations. Revenue planning is based upon actual and
expected
contract awards as the majority of our revenues are sourced from
Government contracts. During this process we evaluate the current
carrying
values of all long-lived assets on our books. We compare these
values against business plans to determine if carrying values are
recoverable. In accordance with such testing at the end of the
third
quarter in 2007 this analysis resulted in the write-down of unusable
building, equipment and leasehold improvements at the Stennis,
Mississippi
operating facility. All useful assets at Stennis were transferred
either
to our Tucson or St. Louis locations and the remainder were either
sold or
disposed of with gain or loss to carrying values booked at quarter-end.
Our
annual impairment test was performed on March 2, 2008 where we
determined
that as of December 31, 2007 the net book values of long-lived
assets were
recoverable through expected undiscounted business cash flows based
on
anticipated and actual future revenue bookings and backlog. We
will
continue to evaluate the carrying values in the future. We evaluate
impairments as such circumstances warrant.
Note
9. Stockholders Equity, page F-17
2.
COMMENT:
We
noted that you issued Redeemable Convertible Preferred Stock (the
“Series
A Preferred Stock”), which appears to have a redemption date other than
that described in page F-18. In this regard, please tell us if
the Series
A Preferred Stock is redeemable (1) at a fixed or determinable
price on a
fixed or determinable date, (2) at the option of the holder, or
(3) upon
the occurrence of an event that is not solely within the control
of the
Company. If so, please explain how you consider EITF D-98 in assessing
your balance sheet classification of the Series A Preferred
Stock.
RESPONSE:
The
Series
A Preferred Stock is
not redeemable (1) at a fixed or determinable price on a fixed
or
determinable date, (2) at the option of the holder, or (3) upon
the
occurrence of an event that is not solely within the control of
the
Company. The Series A Preferred Stock is redeemable upon a change
of
control, which solely is within the control of the Company.
Form
10-Q for the quarterly period ended June 30, 2008
Note
4- Securities Available for Sale, page 7
3.
COMMENT:
In
light of your recent history of operating losses and negative cash
flows
from operations, please revise future filings to expand your discussion
regarding your auction rate securities to explain why you believe
you have
the ability to hold these investments on a long-term
basis.
RESPONSE:
We
will in future filings expand our discussion regarding these auction
rate
securities including providing a discussion of our cash needs beyond
a
short-term basis. Please note in July 2008 we sold $100,000 of
our ARS at
par.
We
believed as of June 30, 2008, according to our business plans,
we had
sufficient cash, accounts receivable, business backlog and other
short-term assets available to provide liquidity to operate our
business
in the normal course without selling these long-term assets through
calendar 2009. Additionally we have obtained the ability to leverage
(borrow against) such long-term assets using standard margin agreements
should cash needs deviate from current plans.
4.
COMMENT:
We
note that you refer to engaging a third party expert valuation
firm in
note 4 on page 7. In future filings please delete the reference
to the
“3rd
party expert valuation firm” or provide a consent from that valuation firm
as an exhibit to your periodic filings.
RESPONSE:
In
future filings we will either include such consent as an exhibit
or delete
such reference.
Note
5. Property and Equipment, page 7
5.
COMMENT:
We
noted the disclosure included in Note 5 indicating that the Company
purchased its principal office, manufacturing, storage, and primary
research and development facility from Columbia Tucson, LLC at
a purchase
price of $2.2 million. We also note that Columbia Tucson, LLC is
owned by
certain of the Company’s current and former executive officers and by
certain of the Company’s principal shareholders. Please tell us how the
purchase price paid by the Company for this property compared to
its
estimated fair value at the date it was purchased. Also, if the
purchase
price paid for this property was estimated to be its estimated
fair value,
please explain in further detail how this fair value estimate was
determined. We may have further comments upon receipt of your
response.
RESPONSE:
During
the fall of 2007 the Company expressed a desire to purchase its
primary
research facility from its landlord, Columbia Tucson, LLC (a related
party). Initial discussions were held and expressions of interest
communicated by both parties in completing a fair and equitable
arms-length transaction.
The
Company obtained two independent expert real estate valuations
to
determine the value of the target property (one paid for by the
Company
and one provided by the seller). Both firms utilized similar methods
of
valuation to arrive at an indicated range of value for the property:
The
Cost Approach (estimating the cost to replace the land and building);
the
Income Approach (estimating an annual net income based on rental
income);
and Market Approach (sales comparison). The range of value estimated
by
these two firms was from $2.4 million to $2.8 million.
After
negotiations the parties determined that an equitable price for
the
transaction, which approximated fair value would be $2.2 million
as these
appraised values are inclusive of $304,000 in leasehold improvements
net
of depreciation made by the Company during the lease period, which
are not
included in the purchase price. Based upon these factors the parties
entered into the buy/sell
agreement.
In
our filing we disclosed the relationship of the parties (three
previous
officers and two current officers of the Company). One of the previous
officers owned greater than 10% of the Company. The
fair value of the real estate purchased was reasonably and objectively
determined, the real estate had been held by Columbia Tucson, LLC
for a
period of more than five years and was of the type that could be
expected
to appreciate in value. Columbia Tucson, LLC has no continuing
involvement
or ownership in the real estate after the sale.
Exhibit
99.1
6.
COMMENT:
We
note the disclosure of the non-GAAP measure “EBITDA.” Please revise future
filings to include the disclosure required by Item 10(e)(i) C and
D of
Regulation S-K. These disclosures should include a discussion as
to why
management believed presentation of the non-GAAP measure is useful
to
investors and how the measure is used by the Company’s
management.
RESPONSE:
The
Company will provide the disclosure required by Item 10(e)(i) C
and D of
Regulation S-K in its future filings in which it elects to present
non-GAAP information, including a discussion as to why management
believes
presentation of the non-GAAP measure is useful to investors and
how the
measurement is used by the Company’s management.
In
accordance with your letter and comments we acknowledge the Company is
responsible for the adequacy and accuracy of the disclosure in the filing,
Staff
comments or changes to disclosure in response to Staff comments do not foreclose
the Commission from taking any action with respect to the filing; and the
Company may not assert Staff comments as a defense in any proceeding initiated
by the Commission or any person under the federal securities laws of the United
States.
Sincerely,
Kenneth
Wallace
Chief
Financial Officer
Applied
Energetics, Inc.