                                      COURT OF CHANCERY
                                             OF THE
                                      STATE OF DELAWARE

TAMIKA R. MONTGOMERY-REEVES                                         Leonard Williams Justice Center
       VICE CHANCELLOR                                               500 N. King Street, Suite 11400
                                                                    Wilmington, Delaware 19801-3734



                               Date Submitted: August 10, 2018
                                Date Decided: August 14, 2018



      Jason C. Jowers, Esquire                 Kathleen M. Miller, Esquire
      Meghan A. Adams, Esquire                 Clarissa R. Chenoweth, Esquire
      Morris James LLP                         Smith, Katzenstein & Jenkins LLP
      500 Delaware Avenue, Suite 1500          1000 West Street, Suite 1501
      Wilmington, DE 19801                     Wilmington, DE 19801

            RE:     Applied Energetics, Inc. v. George Farley and AnneMarieCo., LLC
                    Civil Action No. 2018-0489-TMR

     Dear Counsel:

            This letter opinion addresses the amount of the bond Plaintiff must post in

     connection with the Stipulation and Status Quo Order entered on July 20, 2018.

            Court of Chancery Rule 65(c) provides that “[n]o restraining order or

     preliminary injunction shall issue except upon the giving of security by the applicant,

     in such sum as the Court deems proper, for the payment of such costs and damages

     as may be incurred or suffered by any party who is found to have been wrongfully

     enjoined or restrained.” “The security, usually a bond, fixes the maximum amount

     that an enjoined party may recover. . . . Because actual damages are uncertain, and

     because a wrongfully enjoined party has no recourse other than the security, the court
Applied Energetics, Inc. v. Farley et al.
C.A. No. 2018-0489-TMR
August 14, 2018
Page 2 of 6

should ‘err on the high side’ in setting the bond.” Guzzetta v. Serv. Corp. of

Westover Hills, 7 A.3d 467, 470 (Del. 2010). The party seeking the bond, however,

must support its application with “facts of record or . . . some realistic as opposed to

a yet-unproven legal theory from which damages could flow to the party enjoined.”

Id. (quoting Petty v. Penntech Papers, Inc., 1975 WL 7481, at *1 (Del. Ch. Sept. 24,

1975)). “[T]he amount of a bond is a matter of discretion,” but there must be a

“credible basis for the estimated damages.” Id. at 471.

       Defendants George Farley (“Farley”) and AnneMarieCo., LLC (“AMC”)

argue that they will suffer damages if the price of Applied Energetics stock drops

between the date they could have sold the 25,000,000 shares at issue in this

litigation 1 and the date they actually sell those shares. Stated differently, Defendants

will incur damages if they could have and would have sold the shares at a higher

price but for the injunction. Defendants seek a bond representing 50% of the value

of the 25,000,000 shares on July 5, 2018, or $1,750,000. This amount is equivalent

to a per-share price of $0.07. Defendants use this $0.07 price because it is near the

stock’s August 6 intraday low price of $0.058.


1
       Defendants estimate damages using the share price on July 5, 2018, the date of the
       injunction. The earliest date Farley could have sold his 5,000,000 shares, however,
       is July 6, 2018, when trading restrictions on the 5,000,000 shares allegedly would
       be lifted. For both dates, the share price is $0.14.
Applied Energetics, Inc. v. Farley et al.
C.A. No. 2018-0489-TMR
August 14, 2018
Page 3 of 6

       Defendants provide no convincing explanation for why 50% of the total value

of their 25,000,000 shares on July 5, 2018, provides a credible basis for their

estimated damages. Defendants merely assume that they will incur losses at a rate

of $0.07 per share. But since the date of the injunction, Applied Energetics stock

has traded at an average price of $0.11-0.12.2 On only one day, August 6, was the

price of the stock less than $0.07. On that date, Applied Energetics, Inc. issued a

press release announcing the recent death of its President and Acting Chief

Executive Officer. The lowest price of Applied Energetics stock that day was

$0.058, but the stock closed at $0.09. Additionally, Defendants’ estimated damages

ignore trading restrictions that seemingly apply to a large majority of their shares, as

explained more fully below. 3 Defendants, therefore, do not provide a credible basis

for estimated damages of $1,750,000.

       Plaintiff argues that the Court should award a nominal bond because

Defendants face little risk of damages due to the strength of Plaintiff’s claims.

Plaintiff adds that even if the Court awards more than nominal damages, Defendants’



2
       This range is based on the averages for each of the open, high, low, and closing
       prices of Applied Energetics stock for the period July 5, 2018, through August 10,
       2018. See Defs.’ Aug. 10, 2018 Letter, Ex. A.
3
       See Adams Decl. in Supp. of Mot. for TRO, Ex. 20, at 4.
Applied Energetics, Inc. v. Farley et al.
C.A. No. 2018-0489-TMR
August 14, 2018
Page 4 of 6

alleged damages are speculative and exaggerated. Plaintiff asserts that Defendants

could not legally or practically sell all of their 25,000,000 shares before the

preliminary injunction hearing.

       In particular, Plaintiff argues that SEC Rule 144 limits the number of shares

Defendants can sell to one percent of Applied Energetics’ issued and outstanding

shares every quarter.      Applied Energetics has 191,194,896 shares issued and

outstanding. One percent of the outstanding shares is 1,911,949 shares. Plaintiff

argues that even if the price dropped to $0, Defendants’ maximum damages would

be $162,515.67 (1,911,949 shares multiplied by $0.085, the market price of the stock

on August 10, 2018).

       Plaintiff’s method of estimating damages also has problems. Plaintiff applies

the trading restrictions of SEC Rule 144 to the shares of both Farley and AMC.

AMC acknowledges that the trading restrictions of SEC Rule 144 apply to its

20,000,000 shares. 4 Farley, however, alleges that these trading restrictions would

no longer apply to his 5,000,000 shares on and after July 6, 2018.

       The appropriate measure of damages for both sets of shares is the difference

between (1) the price of Applied Energetics stock on the date Defendants could have



4
       Adams Decl. in Supp. of Mot. for TRO, Ex. 20, at 4.
Applied Energetics, Inc. v. Farley et al.
C.A. No. 2018-0489-TMR
August 14, 2018
Page 5 of 6

and would have sold their shares at a higher price but for the injunction, which

Defendants assert is $0.14, 5 and (2) the as-yet-unknown price of Applied Energetics

stock on the date Defendants sell the shares, if that price is less than $0.14. To

estimate this unknown price, I analyze the historical prices of Applied Energetics

stock since the date the injunction was issued. To “err on the high side,” I calculate

the average of the daily intraday low prices of the stock from July 5, 2018, through

August 10, 2018. This calculation yields an average intraday low price of $0.111

per share.6 The per-share damages estimate is the difference between $0.14 and

$0.111, or $0.029.

       Because trading restrictions apply to AMC’s 20,000,000 shares, AMC cannot

sell more than 1,911,949 shares per quarter. Therefore, estimated damages can be

applied to only 1,911,949 of AMC’s 20,000,000 shares. AMC’s estimated damages

are $55,446.52, or 1,911,949 multiplied by $0.029.




5
       Based on Defendants’ submitted papers, I assume that AMC would have sold its
       shares on July 5, 2018, when the injunction was issued, and that Farley would have
       sold his shares on July 6, 2018, when trading restrictions on his shares were lifted.
       The share price is $0.14 on both dates. I do not address the practical effect a sale of
       1,911,949 shares on July 5, 2018, could have on the stock price or the sale of
       5,000,000 shares on July 6, 2018.
6
       Calculated using data provided in Defs.’ Aug. 10, 2018 Letter, Ex. A.
Applied Energetics, Inc. v. Farley et al.
C.A. No. 2018-0489-TMR
August 14, 2018
Page 6 of 6

       The trading restrictions of SEC Rule 144 likely would not apply to Farley’s

5,000,000 shares. I therefore apply the same per-share damages estimate of $0.029

to all 5,000,000 shares. This calculation yields $145,000. I therefore set a bond of

$200,446.52—$55,446.52 for AMC and $145,000 for Farley.

       For the foregoing reasons, Plaintiff shall post a bond in the amount of

$200,446.52 within five days after entry of this Order. The August 16, 2018 hearing

is cancelled.

       IT IS SO ORDERED.

                                             Sincerely,

                                             /s/Tamika Montgomery-Reeves

                                             Vice Chancellor

TMR/jp
