The aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, computed by reference to the last reported sales price at which the stock was
sold on June 30, 2020 (the last day of the registrant’s most recently completed second quarter) was approximately $26,605,000
The number of outstanding shares of the registrant’s Common Stock,
$.001 par value, as of April 8, 2021 was 199,375,149.
PART
I
ITEM
1. BUSINESS
Cautionary
Note Concerning Forward-Looking Statements
Certain
statements in this Form 10-K constitute forward-looking statements within the meaning of the Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements that do not
relate solely to historical or current facts and can be identified by the use of forward-looking words such as “may”,
“believe”, “will”, “expect”, “project”, “anticipate”, “estimates”,
“plans”, “strategy”, “target”, “prospects” or “continue”, and words of similar
meaning. 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, performances or achievements to be materially different
from any future results, performances or achievements expressed or implied by such forward-looking statements. This Form 10-K
contains important information as to risk factors under Item 1A. 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.
Available
Information
Applied
Energetics, Inc. (“company,” “Applied Energetics,” “AERG,” “we,” “our” or
“us”). makes available free of charge on its website at www.aergs.com its Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after electronically filing or furnishing
such material to the Securities and Exchange Commission (“SEC”).
This
report may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549 or
at www.sec.gov. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
General
Applied
Energetics, Inc. is a corporation organized and existing under the laws of the State of Delaware. Our executive office is located
at 2480 W Ruthrauff Road, Suite 140 Q, Tucson, Arizona, 85705 and our telephone number is (520) 628-7415.
Applied
Energetics specializes in the development and manufacture of advanced high-performance lasers, high voltage electronics, advanced
optical systems, and integrated guided energy systems for defense, aerospace, industrial, and scientific markets worldwide.
Technology
and Patents
AERG has developed,
successfully demonstrated and holds all crucial intellectual property rights to a dynamic Directed Energy technology called Laser
Guided Energy (“LGETM”) and Laser Induced Plasma Channel (“LIPCTM”). LGE and LIPC
are technologies that can be used in a new generation of high-tech weapons. The Department of Defense (DOD) previously recognized
only two key types of Directed Energy Weapon (“DEW”) technologies, High Energy Lasers (“HEL”), and High-Power
Microwave (“HPM”). Neither the HEL nor the HPM intellectual property portfolio is owned by a single entity. The DOD
then designated a third DEW technology, LGE. Applied Energetics’ LGE and LIPC technologies are wholly owned by Applied Energetics
and patent protected with 26 current patents and an additional 11 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.
Applied
Energetics technology is vastly different from conventional directed energy weapons, i.e. HEL, and HPM. LGE uses Ultra-Short Pulse
(USP) laser technology to combine the speed and precision of lasers with the overwhelming impact on targeted threats with high-voltage
electricity. This unique directed energy solution allows extremely high peak power and energy, with target and effects tenability
and is effective against a wide variety of potential targets. A key element of LGE is its novel ability to offer selectable and
tunable properties that can help protect non-combatants and combat zone infrastructure.
As
Applied Energetics moves toward the future, our corporate strategic roadmap builds upon the significant value of the company’s
USP capabilities and key intellectual property, including LGE and LIPC, to offer our prospective partners, co-developers and system
integrators a variety of next-generation Ultra Short-Pulse and frequency-agile optical sources, from the ultraviolet to the far
infrared portion of the electromagnetic spectrum, to address numerous challenges within the military, medical device, and advanced
manufacturing market sectors.
Key
Relationships and Business Development
Gregory Quarles joined Applied
Energetics, to serve as its Chief Executive Officer and a member of the Board of Directors, effective May 6, 2019. He was elected President
of the company in January 2021. He leads the company in its development of next generation advanced defense technologies based on compact
ultra-short pulse optical systems and laser guided energy. Dr. Quarles is an experienced CEO, board member and renowned physicist with
over 30 years of experience driving cutting-edge laser, optics, and photonics technology development and operations within advanced industrial
companies. Additionally, Dr. Quarles is a globally recognized leader for his strategic partnerships with the Department of Defense and
his innovative work in the progression of global materials research, specifically developing new laser and integrated photonic devices
for a variety of military, medical, and industrial applications.
Pursuant
to a Consulting Agreement, dated as of May 24, 2019, with SWM Consulting, LLC, an entity owned by Stephen W. McCahon, Dr. McCahon
serves as our Chief Scientist. This relationship gives us the technical and industry knowhow to utilize the company’s intellectual
property in the development of a next generation of Ultra-Short Pulse Lasers. The Consulting Agreement provides for a combination
of cash and equity compensation, as we have previously disclosed, for which Dr. McCahon leads Applied Energetics’ scientific
efforts including: leading the scientific team, developing new intellectual property, assisting with business development, transferring
legacy knowledge to new team members, recruiting and training talent, working with executives on corporate strategy, assisting
in budget development for R&D, meeting with clients on technical concepts, attending conferences, and producing thought leadership
for the company. Dr. McCahon works closely with Dr. Quarles on the company’s research and development activities and in
the proposal and fulfilment of research and development contracts for branches of the Department of Defense, agencies of the federal
government and other defense contractors and in other internal research and development activities relating to lasers and advanced
optical sources.
Pursuant to our July 16, 2018,
Master Services Agreement, Westpark Advisors, LLC assists the company in its comprehensive sales and marketing strategy for the greater
Washington DC area and broader Department of Defense markets. Westpark Advisors focuses on the company’s next generation USP laser
technologies, along with LGE and the company’s other novel laser technologies and provides business development, program management
and strategy consulting services, including sales and marketing of the company’s product line. Westpark Advisors’ Managing
Director, Patrick Williams provides full-time support to the company under this agreement.
Under
our February 15, 2019, Consulting and Advisory Services Agreement, WCCventures, LLC provides advice and guidance to management
including business strategy, marketing and capital needs.
AERG
also retains corporate communications firm Cameron Associates (“CA”), to provide investor relations services on behalf
of the company including counselling, management on appropriate investor communications, preparing and distributing press releases
and other public documents, orchestrating conference calls and responding to investor inquiries.
Effective
April 29, 2019, AERG. established its Board of Advisors and appointed Christopher Donaghey as its first member. Chris Donaghey
currently serves as the senior vice president and head of corporate development for Science Applications International Corporation
(“SAIC”), a $7 billion revenue defense and government agency technology integrator. As an executive of SAIC, Donaghey
works closely with SAIC’s senior management to support the development and implementation of SAIC’s strategic plan
with an emphasis on M&A to complement organic growth strategies and value creation. In his role on Applied Energetics’
Board of Advisors, Mr. Donaghey has significant input into the strategic direction of the company and provides assistance in building
lasting relationships in our defense markets.
Recent
Developments
As of March 4, 2020, AERG
executed a contract having a value of $165,919.77 with the US Army under its STTR program for a 90-day Phase 1 research program to investigate
Standoff Electronic Denial systems using ultrashort pulse lasers. On October 20, 2020, it was
announced that the company had received notice from the Army that it was not selected for Phase II. While
we were disappointed, we continue to believe our advanced technologies can solve critical challenges faced by the U.S. military.
Applied Energetics has multiple proposals outstanding for a variety of applications and our team continues to vigorously pursue new opportunities
in an effort to leverage our significant intellectual property and core competencies in ultra-short pulse optical sources. The AERG team
has recently submitted several provisional patent applications to expand and protect our USP portion of the patent portfolio. We anticipate
that this intellectual property development will continue with other future submissions currently under development.
We submitted multiple proposals
to various government agencies in 2020. Due to the closures of multiple agencies and work-from-home orders across various regions of the
United States, we anticipate that reviews and funding decisions on these proposals might be delayed longer than anticipated as resources
are focused on other matters within the government. AERG has received multiple notices from government agencies stating that “the
vast number of proposals received, and the challenges posed by the COVID-19 pandemic have impacted the Government’s evaluation timelines.”
In addition to these review-based delays, the US federal budget for 2021 was not approved by Congress by the October 1, 2020 start
of the U.S. federal government fiscal year. The 2021 federal budget was signed into law on December 27, 2020 and the National Defense
Authorization Act for 2021 was enacted after a congressional override of the President’s veto
on January 1, 2021, a full three months after the official start of the 2021 fiscal year. This delay could also significantly impact
review of proposals and awards of near-term contracts in 2021. The 2021 National Defense Authorization Act has language actually calling
for funding and reports on strategies for “Development and fielding of high energy laser
capabilities”, which could be addressed with AERG USP optical sources.
Effective
March 15, 2021, AERG entered into a Lease Agreement with Campus Research Corporation, for approximately 13,000 rentable square
feet of office, laboratory and production space located at the UA Tech Park, a research and technology park owned and operated
by the University of Arizona. The company intends to consolidate its offices and expand its R&D capacity by leasing this space
which is outfitted with a Class 1000 (ISO Class 6) “clean room” and other turnkey laboratory and conference features.
The
lease term begins May 1, 2021 and ends on April 30, 2026. The base rent is $6.7626 per rentable square foot for year one, and
escalates to $9.2009 in year two, $11.4806 in year three, $13.1740 in year four and $14.9306 in year five, plus certain operating
expenses and taxes.
The
space is currently occupied by a global provider of lasers and laser-based technology which is vacating prior to the end of its
lease term. Thus we are benefiting from millions of dollars of capital investment made by the vacating tenant, and the vacating
tenant will continue to pay a portion of the full market rent, with the company paying the balance in the amounts set forth above.
We believe that this new strategic
location will support the company’s anticipated future growth and provide greater capacity for research, product development and
production activities. The move, expected to take place starting May 1, 2021, will provide the Company with an ITAR and laser safety compliant
facility totaling approximately 13,000 square feet, of which approximately 4,800 square feet is dedicated to the cleanroom
On
April 28, 2020, AERG was awarded a loan for $132,760 through the Small Business Administration (SBA) Paycheck Protection Program (PPP).
The terms of this loan were twenty-four months with a 1% annual interest rate. These funds were issued to cover payroll costs over eight
weeks covering May and June 2020. Through the utilization of this PPP loan, AERG was able to keep all employees fully engaged during these
two months of the pandemic. We intend to follow the guidelines set forth by the SBA on the PPP program which will allow AERG to apply
for a waiver of the loan, because of this full employment retention, and have the loan convert to a grant.
Path
Forward
We believe that USP optical
sources, LGE and LIPC are the cornerstone to AERG’s future and remain the key areas of our R&D focus for the near term. We plan
to continue building our management team with highly qualified individuals. We intend to recruit additional personnel in the areas of
R&D, marketing and finance, and, possibly add members to our Board of Directors and our Board of Advisors. We have worked to align
key innovations with our roadmap to encourage and enable internal filing for a broad, strategic and robust intellectual property portfolio
of 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. Although the company has achieved its near-term capital raising goals, we continue
to explore any favorable equity financing opportunities.
Our goal with the AERG 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 medical applications. Although
the historical market for AERG’s 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 medical device and imaging markets, creating a substantially larger
market for our products to address. During 2020, the AERG 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.
The ongoing Coronavirus Disease
2019 (COVID-19) pandemic does present unique risks and uncertainties that may alter or otherwise affect our path forward. Our management
continues to monitor the possible effects of the COVID-19 on the execution of our plan of operations, our prospective contracts, and the
availability of financing to fund our strategic and operational plans going forward. Despite these challenges, we have continued to execute
our business development plans and to deliver on our government contracts as per the timeline commitments. During this fiscal year, we
submitted multiple proposals and have been engaged in meetings on a daily and weekly basis with various agencies and departments both
remotely and in person in Washington, DC and at various other government facilities. Dr. Quarles, our President and CEO, has traveled
to DC on multiple occasions during the pandemic in 2020 and remains very committed to pursuing this business even in these challenging
times. 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 would also conclude that customers are becoming more
receptive and interested in directed energy technologies. According to the Department of Defense fiscal 2019 budget, its directed
energy spending grew from approximately $500 million in 2017 to over $1 billion in 2019, an increase of 100%. The 2020 budget
reflected directed energy spending of $1.2 billion, an additional increase of 20% over 2019, and from 2017 through 2020, the directed
energy budget grew from approximately $500 million to approximately $1.2 billion, averaging approximately 40% per year. As a result,
we continue to be even more optimistic about our future and the growing opportunities in directed energy applications. The AERG
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 our USP and LGE marketplaces.
Market
for Our Technology
Directed
Energy Weapons
Directed
energy weapon system means military action involving the use of directed energy to incapacitate, damage, or destroy enemy equipment,
facilities, and assets. Previous to LGE, the only two viable directed energy weapon systems were High Energy Laser (HEL), which
uses heat to burn targets and High Power Radio Frequency (HP-RF), weapons that use electromagnetic energy at specific frequencies
to disable electronic systems.
HEL
and HP-RF directed energy technologies have been under development for decades with numerous DoD and other government contractors
participating. The unique attributes of directed energy weapon systems —the ability to create precise effects against multiple
targets near-instantaneously and at a very low cost per shot—have great potential to help the DoD in addressing future warfare
requirements. The DoD invests research and development dollars into directed energy solutions to fill gaps identified by warfighters.
For example, in future conflicts with capable enemies possessing large inventories of guided missiles, it may be operationally
risky and cost-prohibitive for the U.S. military to continue to rely exclusively on a limited number of kinetic missile interceptors.
Such a “missile competition” could allow an adversary to impose costs on U.S. forces by compelling them to intercept
each incoming missile with far more expensive kinetic munitions. The DoD has made significant leaps in both performance and maturity
as a result of many years of research with multiple threat-intercept technologies and is being directed by Congress to increase
funding and evaluation of pulsed laser technology in future Directed Energy platforms in FY2021.
Laser
Guided Energy
AERG’s
patented LGE weapon technology works via wireless electrical energy transmission through the atmosphere, to disable vehicles and
other threats to our security. AERG has developed the underlying technologies that allow a user to precisely control where the
directed energy goes in direction, range, and magnitude. AERG’s LGE technologies are combined to create “laser filaments”
as the laser passes through the atmosphere. The filaments in turn create Laser Induced Plasma Channels (“LIPC”) which
enable the transmission of electrical energy.
Our
development of LGE has led to a third directed energy technology creating a generational opportunity for a completely new weapon
system development. The Company uniquely owns the critical intellectual property for LGE. The unique properties and demonstrated
target effects of LGE allow for mission areas and applications that are not accessible to either HEL or RF directed energy. Therefore,
LGE fills numerous requirements in the urban and asymmetric warfare environment. There is a very broad range of targets and effects
that LGE addresses that are uniquely different from HEL and RF directed energy and therefore we do not compete directly within
those application spaces.
Competition
AERG’s
proprietary LIPC based LGE technology is a unique directed energy weapon, with products that can be integrated onto platforms
being developed for use by the U.S. Government. Over the past several years, a handful of major defense contractors have received
significant funding for DE systems development, manufacturing and integration. These contractors specialize in different directed
energy weapon system platforms to respond to a variety of threats. Although AERG competes against other weapon systems for funding,
the uniqueness of the LGE technology should continue to support its development into weapon platform programs. AERG, like many
other small defense contractors, was adversely affected by cutbacks in U.S. Government spending after 2011. AERG believes that
there is renewed U.S. Government interest in directed energy applications and believes that continued development of its USP capabilities,
including LGE and LIPC technologies, and growing interest from all branches of the U.S. armed forces and other government agencies
will lead to increases in government spending on directed energy weaponry in the coming years. Likewise, there are multiple new
threats that must be addressed with unique and emerging technologies, and AERG is working diligently to rapidly advance development,
demonstration, testing and engineering of the Advanced Ultrashort Pulse Lasers throughout the spectrum from the ultraviolet to
the far infrared. As a percentage of the federal budget, this has the possibility to rapidly accelerate and compare in magnitude
with the LGE/LIPC product lines over the next several years.
Furthermore,
AERG’s primary direct LGE and USP optical sources competition are corporations and contractors supported by foreign governments
who may be attempting to develop similar technologies. AERG believes that such foreign activity will create additional U.S. Government
funding for both USP sources and LGE in order to maintain our country’s lead in directed-energy weapons.
Some
of AERG’s biggest commercial competitors are Trumpf (German), Coherent (US), Thales (France) and IPG (US), all billion-dollar
market class companies that have substantially more resources than AERG.
Employees
As of March 20, 2021, we had
two employees, and we retain five full- and part-time consultants and interns.
ITEM
1A. RISK FACTORS
Future
results of operations of Applied Energetics involve a number of known and unknown risks and uncertainties. Factors that could
affect future operating results and cash flows and cause actual results to vary materially from historical results include, but
are not limited to those risks set forth below:
Risk
Related to Our Company
Our
independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.
In
their report accompanying our financial statements, our independent registered public accounting firm stated that our financial
statements for the year ended December 31, 2020 were prepared assuming that we would continue as a going concern, and that they
have substantial doubt as to our ability to continue as a going concern. Our auditors have noted that our recurring losses and
negative cash flow from operations and the concern that we may incur additional losses due to the reduction in government contract
activity raise substantial doubt about our ability to continue as a going concern.
Our
business has generated little or no revenues during the past two fiscal years and had a net operating loss during each period.
For
the fiscal years ended December 31, 2019 and 2020, we had revenues of $-0- and $175,920, and we had net losses of $5,563,339 and $3,230,494,
respectively. We can give no assurances that our planned operations will generate revenues in the future or whether any such revenues
will result in profitability.
We
may need additional financing to fund our operations going forward. If we are unable to obtain additional financing on acceptable
terms, we may need to modify or curtail our development plans and operations.
As of December 31,
2020, we had $3,323,290 of available cash and cash equivalents and working capital of $1,566,365 and in January and
February of 2021, we raised an additional $2,258,000. Our cash position is sufficient for the next several months, but we may need
to raise additional capital in order to fund our operations beyond that. We must allocate funds toward SEC compliance as well as
ITAR and other federal regulatory compliance. We also need funds for our general and administrative expenses include salaries,
accounting fees, other professional fees and other miscellaneous expenses. Our failure to secure sufficient financing could render
us unable to pay accounting and other fees required to continue to fulfill our SEC reporting obligations. Also, we have incurred
a five-year lease obligation for our new facility and will have moving, computer networking and other expenses related thereto.
We also may require additional funding for research and development before we are able to commercialize our technology. During
the fiscal year, we achieved our capital raising goal, and a portion of the funds for research and development may come from government
contracts or sub-contracts with larger contractors. However, we may need to raise additional funds to supplement these contracts
even if we are able to secure them.
Our operating plans
and capital requirements are subject to change based on how we determine to proceed with respect to development programs and if
we pursue any strategic alternatives. Additional funds may be raised through the issuance of equity securities, but such financing
may not be available on terms acceptable to us if at all. Any equity financing would cause the percentage ownership by our current
stockholders to be diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights, preferences
or privileges senior to those of existing stockholders. If such financing is not available when required or is not available on
acceptable terms, we may be required to modify or curtail our operations, which could cause investors to lose the entire amount
of their investment.
The
ongoing global pandemic has caused unpredictability in capital markets. If this uncertainty continues, it could make it more difficult
for companies, including ours, to access capital. It is currently difficult to estimate with any certainty how long the pandemic
and resulting curtailment of business will continue, and its effect on capital markets and our ability to raise funds in the future
is, accordingly, difficult to quantify.
Risk
Related to Our Business Activities
We
may be unable to adequately protect our intellectual property rights, which could affect our ability to sustain the value of such
assets.
Protecting
our intellectual property rights is critical to our ability to maintain the value of our intellectual property. We hold a number
of United States patents and patent applications, as well as trademarks, and registrations which are necessary and contribute
significantly to the preservation of our competitive position in the market. We can offer no assurance that any of these patents
or future patent applications and other intellectual property will not be challenged, invalidated or circumvented by third parties.
In some instances, we have augmented our technology base by licensing the proprietary intellectual property of others. In the
future, we may not be able to obtain necessary licenses on commercially reasonable terms. While we have entered into confidentiality
and invention assignment agreements with our consultants and entered into nondisclosure agreements with suppliers and appropriate
customers so as to limit access to and disclosure of our proprietary information. These measures may not suffice to deter misappropriation
or independent third-party development of similar technologies. Based on our current financial condition, we may not have the
funds available to enforce and protect our intellectual properties.
We
may face claims of infringement of proprietary rights.
There
is a risk that a third party may claim our products and technologies infringe on their proprietary rights. Whether or not our
products infringe on proprietary rights of third parties, infringement or invalidity claims may be asserted or prosecuted against
us, and we could incur significant expense in defending them. If any claims or actions are asserted against us, we may not have
the funds necessary to defend against such claims. Our failure to do so could adversely affect the value of our intellectual property.
Management
has broad discretion over the selection of our prospective business and business opportunities
Any
person who invests in our securities will do so without an opportunity to evaluate the specific merits or risks of our prospective
business and business opportunities. As a result, investors will be entirely dependent on the broad discretion and judgment of
management in connection with the selection of a prospective business. The business decisions made by our management may not be
successful.
We
depend on the recruitment and retention of qualified personnel, and failure to attract and retain such personnel could seriously
harm our business.
Due
to the specialized nature of our businesses, our future performance is highly dependent upon the continued services of our key
engineering and scientific personnel. To the extent we obtain Government contracts or significant commercial contracts our prospects
depend upon our ability to attract and retain qualified engineering, scientific and manufacturing personnel for our operations.
Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel. Our failure
to compete for these personnel could seriously harm our business, results of operations and financial condition. Additionally,
since the majority of our business involves technologies that are classified due to national security reasons, we must hire U.S.
Citizens who have the ability to obtain a security clearance. This further reduces our potential labor pool.
Our
future success will depend on our ability to develop and commercialize technologies and applications that address the needs of
our markets.
Both
our defense and commercial markets are characterized by rapidly changing technologies and evolving industry standards. Accordingly,
our future performance depends on a number of factors, including our ability to:
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identify
emerging technological trends in our target markets;
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develop
and maintain competitive products;
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enhance
our products by improving performance and adding innovative features that differentiate our products from those of our competitors;
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develop
and manufacture and bring products to market quickly at cost-effective prices;
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obtain
commercial scale production orders from our government and other customers;
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meet
scheduled timetables and enter into suitable arrangements for the development, certification and delivery of new products;
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enter
into suitable arrangements for volume production of mature products.
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We
believe that, in order to be competitive in the future, we will need to continue to develop and commercialize technologies and
products, which will require the investment of financial and engineering resources. Due to the design complexity of our products,
we may in the future experience delays in completing development and introduction on a commercial scale of new products. Any delays
could result in increased costs of development, deflect resources from other projects or incur loss of contracts.
In
addition, there can be no assurance that the market for our technologies and products will develop or continue to expand as we
currently anticipate. The failure of our technology to gain market acceptance could significantly reduce any ability to generate
revenue and harm our business. Furthermore, we cannot be sure that our competitors will not develop competing or differing technologies
which gain market acceptance in advance of our products. The possibility that our competitors might develop new technology or
products might cause our existing technology and products to become obsolete or create significant price competition. If we fail
in our new product development and commercialization efforts or our products fail to achieve market acceptance more rapidly than
our competitors, our revenue will decline and our business, financial condition and results of operations will be negatively affected.
We
heavily depend on key personnel, for the successful execution of our business plan. The loss of one or more key members of our
management team could have a material adverse effect on our business prospects.
We
are highly dependent upon Gregory J. Quarles, our President and Chief Executive Officer, and Stephen McCahon, our Chief Scientist.
We depend on Drs. Quarles’s and McCahon’s decades of expertise for the development of our technology. We also
depend upon their global visibility and outreach as well as our directors’ networks of contacts and experience to recruit key
talent to the Company. We do not have key-man insurance on any of these individuals. Loss of the services of these key members of
our management team, or of our Board of Directors’ ability to identify and hire key talent, could have a material adverse
effect on our business prospects, financial condition and results of operations.
If
we are unable to hire additional qualified personnel, our business prospects may suffer.
Our
success and achievement of our business plans depend upon our ability to recruit, hire, train and retain additional highly qualified
technical and managerial personnel. Competition for qualified employees among high technology companies is intense, and any inability
to attract, retain and motivate additional highly skilled employees required for the implementation of our business plans and
activities could strongly impact our business. Our inability to attract and retain the necessary technical and managerial personnel
and scientific, regulatory and other consultants and advisors could materially damage our business prospects, financial condition
and results of operations.
The
market for our technology has a limited number of potential customers.
Given
the highly specialized nature of our technology, the potential market for our products is limited to a relative few potential
customers who tend to allocate significant budgeted amounts to selected projects. Currently, we are marketing our technology and
focusing our research and development on the defense sector, in which demand is ultimately determined primarily by the US federal
defense budget and the needs and priorities of the Department of Defense and its various agencies. The potential customers in
this area are defense agencies for direct contacts and major defense contractors for subcontracts. Thus the demand for our products
depends on their needs for our technology and selecting us for research and development. Although we intend to diversify into
other applications for our technology and markets, we cannot be certain that opportunities in those markets will present themselves
when we are ready, or that we will otherwise be able, to do so.
Risks
Related to Our Securities
We
are subject to the penny stock rules adopted by the Securities and Exchange Commission that require brokers to provide extensive
disclosure to their customers prior to executing trades in penny stocks. These disclosure requirements, coupled with our status
as a former shell company, may cause a reduction in the trading activity of our common stock, and make it difficult for our stockholders
to sell their securities.
Rule
3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a “penny stock,” for purposes relevant
to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than
$5.00 per share, subject to a limited number of exceptions which are not available to us. This classification would severely and
adversely affect any market liquidity for our common stock.
For
any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s
account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction
setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives
of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that
that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions
in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating
to the penny stock market, which, in highlight form, sets forth:
|
●
|
The
basis on which the broker or dealer made the suitability determination; and
|
|
●
|
That
the broker or dealer received a signed, written agreement from the investor prior to
the transaction
|
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission
payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and
remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because
of these regulations and restrictions, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures
and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling
stockholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading
activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common
stock. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common
stock. Our common stock, in all probability, will be subject to such penny stock rules and other restrictions for the foreseeable
future and our stockholders will, in all likelihood, find it difficult to sell their shares of common stock.
Because
we are a former shell company, our stockholders face restrictions on their reliance on Rule 144 to sell their shares.
Historically,
the SEC staff has taken the position that Rule 144 under the Securities Act of 1933, as amended, is not available for the resale of securities
initially issued by companies that are, or previously were, blank check companies, like us. The SEC has codified and expanded this position
in the amendments discussed above by prohibiting the use of Rule 144 for resale of securities issued by any shell companies (other than
business combination related shell companies) or any issuer that has been at any time previously a shell company. The SEC has provided
an important exception to this prohibition, however, if the following conditions are met:
|
●
|
The
issuer of the securities that was formerly a shell company has ceased to be a shell company;
|
|
●
|
The
issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act of 1934;
|
|
●
|
The
issuer of the securities has filed all applicable reports and material required to be filed, as Exchange Act of 1934, during the preceding
12 months (or such shorter period that the issuer was required to file such reports and materials), other than Current Reports on Form
8-K; and
|
|
●
|
At
least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its status as
an entity that is not a shell company.
|
We
expect that we will be able to meet all of these requirements in the future, but unknown future events and circumstances could change
that outcome. As a result, pursuant to Rule 144, stockholders who receive our restricted securities in a private placement or a business
combination may not be able to sell our shares without registration for up to one year after we have completed the private placement or
business combination.
A
large number of shares of our common stock could be sold in the market in the near future, which could depress our stock price.
As of April 8, 2021, we had outstanding approximately 199,375,000 shares
of common stock. Approximately 100 million of our shares are currently freely trading without restriction under the Securities Act of
1933, as amended. The remaining shares have been held by their holders for over one year and are thus eligible for sale under rule 144(k)
under the Securities Act. Sale of these shares into the market could depress our stock price.
Provisions
of our corporate charter documents could delay or prevent change of control.
Our Certificate of Incorporation
authorizes our Board of Directors to issue up to 2,000,000 shares of “blank check” preferred stock without stockholder approval,
in one or more series and to fix the dividend rights, terms, conversion rights, voting rights, redemption rights and terms, liquidation
preferences, and any other rights, preferences, privileges, and restrictions applicable to each new series of preferred stock. In addition,
our Certificate of Incorporation divides our Board of Directors into three classes, serving staggered three-year terms. At least two annual
meetings, instead of one, will be required to effect a change in a majority of our Board of Directors. The designation of preferred stock
in the future and the classification of our Board of Directors, could make it difficult for third parties to gain control of our company,
prevent or substantially delay a change in control, discourage bids for our common stock at a premium, or otherwise adversely affect the
market price of our common stock. Moreover, the holders of our outstanding Series A Preferred Stock have a right to put their shares to
the company for an amount equal to the liquidation preference of approximately $340,000 plus unpaid dividends (approximately $261,000
as of December 31, 2020), in the event of a change of control. Such right could hinder our ability to sell our assets or merge with another
company.
The
redemption and dividend provisions of our outstanding preferred stock are onerous due to our current financial condition.
The company has redeemed substantially
all of its outstanding preferred stock. At December 31, 2020, 13,602 shares were outstanding with a liquidation preference of approximately
$340,000 and unpaid dividends of $261,000. As of April 8, 2021, the liquidation preference of our outstanding preferred stock plus unpaid
dividends thereon was approximately $610,000. If an event occurs that would require us to redeem the preferred stock, we may not have
the required cash to do so.
In addition, our annual dividend
payment on the preferred stock is approximately $34,000, which will further deplete our cash. We have not paid the dividends commencing
with the quarterly dividend due August 1, 2013 and, as a result, the dividend rate has increased to 10% per annum and will remain at
that level until such failure no longer continues. These terms may also make it more difficult for us to sell equity securities or complete
an acquisition.
The
global pandemic COVID-19, otherwise referred to as the Coronavirus, is slowing the process of applying for and awarding government
contracts and could impair our ability to expand our research and development capacity or raise additional funding if needed.
The
ongoing global pandemic has caused disruption in certain government contracting processes and procedures and made travel and other
necessities for securing such contracts more difficult. In addition, to the extent that any of our personnel or consultants are
affected by the virus, this could cause delays or disruption in our research and development program and affect our ability to
execute our plan of operations. The pandemic has also caused unpredictability in capital markets. If this uncertainty continues,
it could make it more difficult for companies, including ours, to access capital. It is currently difficult to estimate with any
certainty how long the pandemic and resulting will continue, and its effect on capital markets and our ability to raise funds
in the future is, accordingly, difficult to quantify.
Any
issuance of additional securities in conjunction with a business or financing opportunity which will result in a dilution of present
stockholders’ ownership
Our
certificate of incorporation authorizes the issuance of 500,000,000 shares of common stock. As of March 26, 2021, we have approximately
198,875,000 shares issued and outstanding. If funding opportunities present themselves on favorable terms, we may issue additional shares
to fund our business or in connection with our pursuit of new business opportunities and new business operations. To the extent that additional
shares of common stock are issued, our stockholders would experience dilution of their respective ownership interests. If we issue shares
of common stock in connection with our intent to pursue new business opportunities, a change in control of our company could occur. The
issuance of additional shares of common stock may also adversely affect the market price of our common stock, particularly given the historically
low trading volume in the market for our common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
As of March 2021, we
have month-to-month agreements to lease approximately 190 square feet of office space as well as to lease approximately 4,270 square
feet of office and laboratory space in Tucson, Arizona.
Our
aggregate rent expense, including common area maintenance costs, was approximately $49,000 and $30,000 for 2020 and 2019, respectively.
Effective
March 15, 2021, we entered into a Lease Agreement with Campus Research Corporation, for approximately 13,000 rentable square feet
of office, laboratory and production space located at the University of Arizona Science and Technology Park at 9070 South Rita
Road, Tucson, AZ. The company intends to consolidate its offices and expand its R&D capacity by leasing this space which is
outfitted with a Class 1000 (ISO Class 6) “clean room” and other turnkey laboratory and conference features.
The
lease term begins May 1, 2021 and ends on April 30, 2026. The base rent is $6.7626 per rentable square foot for year one, and
escalates to $9.2009 in year two, $11.4806 in year three, $13.1740 in year four and $14.9306 in year five, plus certain operating
expenses and taxes.
We
believe these new facilities will be adequate for our currently expected level of operations.
See Note 7 to our 2020 Consolidated
Financial Statements, which is incorporated herein by reference for information with respect to our lease commitments on December 31,
2020.
ITEM
3. LEGAL PROCEEDINGS
As previously reported, on
July 3, 2018, we commenced a lawsuit in the Court of Chancery of the State of Delaware against the company’s former director and
principal executive officer George Farley (“Farley”) and AnneMarieCo LLC (“AMC”). The parties settled the lawsuit
via a written settlement agreement dated September 24, 2020. Under the agreement, 20,000,000 of the 25,000,000 shares originally issued
to Farley (20,000,000 of which were transferred to AMC) were invalidated, the remaining 5,000,000 shares being deemed valid under Section
205 of the Delaware General Corporation Law. The agreement calls for the company to repurchase the remaining 5,000,000 shares at a price
of $0.30 per share for an aggregate purchase price of $1,500,000. The agreement also provided for the release and return to the company
of funds in the amount of $582,377.26, plus interest, securing the bond posted by the company in connection with the preliminary injunction
issued in the litigation. The agreement also contains standard mutual general release and confidentiality provisions. Approximately,
$206,000 accrued compensation was forgone as per settlement agreement was shown as gain on settlement.
In a related matter,
on February 8, 2019, the company filed a complaint against Stein Riso Mantel McDonough, LLP (“Stein Riso”), its former
counsel, in the United States District Court for the Southern District of New York. The parties settled the lawsuit via a written
settlement agreement dated October 2, 2020. Pursuant to the agreement, Stein Riso paid the company three million dollars ($3,000,000)
and returned to the company ten million (10,000,000) shares of the company’s common stock, par value $0.001 per share. Stein
Riso entered into the Settlement Agreement without any admission of liability. The parties filed a Stipulation of Dismissal with
Prejudice as to all claims asserted or which could have been asserted in the lawsuit. The agreement also contains standard mutual
general release and confidentiality provisions.
On July 3, 2019, Gusrae,
Kaplan & Nusbaum and its partner, Ryan Whalen, counsel for defendants, George Farley and AnneMarieCo LLC, in the aforesaid
Delaware litigation, filed a claim in the District Court for the Southern District of New York against the company, its directors,
officers, attorneys and a consultant. The action alleges libel, securities fraud and related claims. The company believes that this
suit lacks merit and intends to dispute these allegations. The company filed a motion to dismiss the complaint on October 24, 2019.
On December 13, 2019, Gusrae Kaplan and Mr. Whalen filed an opposition to the Company’s motion. On January 10, 2020, the
company filed a reply brief. The United States District Court has not yet ruled on the motion.
On
June 15, 2020, Grace A.C. Dearmin, as the Administrator of the Estate of Thomas Carr Dearmin, filed a cross-complaint against
the company and company directors Jonathan Barcklow and Bradford Adamczyk, alleging causes of action against them for Breach of
Contract and Conversion. The causes of action against the company allege that the company’s Board of Directors voted to
compensate its former CEO and director, Thomas Dearmin, as reflected in board meeting minutes dated May 11, 2018, and June 25,
2018, but failed to pay compensation owed to Mr. Dearmin. These causes of action further allege that, if incentive milestones
of the company’s stock price were reached, Mr. Dearmin’s estate is owed up to 5 million shares of company common stock,
or the current monetary value of that stock. On November 17, 2020, the company, Mr. Barcklow and Mr. Adamczyk filed motions to
dismiss the cross-complaint against them on substantive and jurisdictional grounds. On February 8, 2021, the court granted the
motion to dismiss on personal jurisdiction grounds as to the company, Mr. Barcklow and Mr. Adamczyk.
On
January 15, 2021, the company filed a complaint in the United States District Court, Southern District of New York, against Gusrae,
Kaplan & Nusbaum and Ryan Whalen for malpractice and breach of New York Rules of Professional Conduct by both parties as former
counsel to the company. Gusrae, Kaplan & Nusbaum and Ryan Whalen have not yet responded to the complaint.
As
with any litigation, the company cannot predict the outcome with certainty, but the company expects to provide further updates
on the status of the litigation as circumstances warrant.
We
may, from time to time, be involved in legal proceedings arising from the normal course of business.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF
BUSINESS, GOING CONCERN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial
statements include the accounts of Applied Energetics, Inc. and its wholly owned subsidiary North Star Power Engineering, Inc. (“North
Star”) (collectively, “company,” “Applied Energetics,” “AERG”, “we,” “our”
or “us”). All intercompany balances and transactions have been eliminated.
Going Concern
The accompanying 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 year ended December 31, 2020, the company incurred a net loss of approximately $3,230,000, had
negative cash flows from operations of approximately $160,000 and may incur additional future losses due to the reduction in Government
contract activity. At December 31, 2020, the Company had total current assets of approximately $3,400,000 and total current liabilities
of approximately $1,800,000 resulting in working capital of approximately $1,600,000. At December 31, 2020, the Company had cash of $3,323,290.
On February 2, 2021 and February 8, 2021, the Company completed the
issuance of 7,056,250 total shares of its common stock at a price of $0.32 per share, or $2,258,000 in the aggregate. As of March
31, 2021, the Company had cash of approximately $4,300,000. Based on the Company’s current business plan, it believes its cash balance
as of the date of this filing will be sufficient to meet its anticipated cash requirements for the next twelve months. However, there
can be no assurance that the current business plan will be achievable. Such conditions raise substantial doubts about the Company’s
ability to continue as a going concern for one year from the date the financial statements are issued.
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 and there can be no assurance that the company’s efforts will
be successful. No assurance can be given that management’s actions will result in profitable operations or the resolution of its
liquidity problems. The accompanying consolidated financial statements do not include any adjustments that might result should the company
be unable to continue as a going concern. The ongoing COVID-19 pandemic contributes to this uncertainty.
In
order to improve the company’s liquidity, the company’s management is actively pursuing additional equity financing through
discussions with investment bankers and private investors. There can be no assurance that the company will be successful in its effort
to secure additional equity financing.
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.
Applied Energetics,
Inc. is a corporation organized and existing under the laws of the State of Delaware. Our executive office is located at 2480 West
Ruthrauff Road, Suite 140 Q, Tucson, Arizona, 85705, we have office and laboratory space at 4595 S Palo Verde Rd, Suite 517, Tucson,
AZ 85714 and our telephone number is (520) 628-7415.
Use of Estimates
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America 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 assumptions 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. Significant estimates include revenue
recognition, carrying amounts of long-lived assets, valuation assumptions for share-based payments, evaluation of debt modification accounting,
effective borrowing rate determinations, analysis of fair value transferred upon debt extinguishment, valuation and calculation of measurements
of income tax assets and liabilities and valuation of debt discount related to beneficial conversion features.
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Net Loss Attributable to Common Stockholders
Basic loss per common share
is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding for the
period before giving effect to stock options, stock warrants, restricted stock units and convertible securities outstanding, which are
considered to be dilutive common stock equivalents. Diluted net loss per common share is calculated based on the weighted average number
of common and potentially dilutive shares outstanding during the period after giving effect to dilutive common stock equivalents. Contingently
issuable shares are included in the computation of basic loss per share when issuance of the shares is no longer contingent. The number
of warrants, options, restricted stock units and our Series A Convertible Preferred Stock, which were not included in the computation
of earnings per share because the effect was antidilutive, was 35,612,091 and 35,246,757 for the years ended December 31, 2020 and 2019,
respectively.
Fair Value of Current Assets and Liabilities
The carrying amount
of accounts payable approximate fair value due to the short maturity of these instruments.
Cash and Cash Equivalents
Cash equivalents are investments
in money market funds or securities with an initial maturity of three months or less.
Income Taxes
Deferred tax assets
and liabilities are recognized currently for the future tax consequences attributable to the temporary differences between the
financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities
are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or
settled. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not
that such assets will not be realized. Our valuation allowance is currently 100% of our assets.
We consider all available
evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed
for some portion or all of a net deferred tax asset. Judgment is used in considering the relative impact of negative and positive
evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate
with the extent to which it can be objectively verified. We record a valuation allowance to reduce our deferred tax assets and
review the amount of such allowance annually. When we determine certain deferred tax assets are more likely than not to be utilized,
we will reduce our valuation allowance accordingly.
Revenue Recognition
The Company recognizes
revenue in accordance with ASC Topic 606 – Revenue from Contracts with Customers (“ASC 606”) to depict
the transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects to be entitled.
The Company determines revenue recognition through the following steps:
|
i.
|
Identification of the contract, or contracts, with a customer
|
|
ii.
|
Identification of the performance obligations in the contract
|
|
iii.
|
Determination of the transaction price
|
|
iv.
|
Allocation of the transaction price to the performance obligations in the contract
|
|
v.
|
Recognition of revenue, when, or as, the Company satisfied the performance obligation
|
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
Company generated revenue from its customer by preparing a technical report. The Company’s single performance obligation was to
deliver the final technical report detailing the findings of the Company’s investigations. The fee for the report was fixed. During
the year ending December 31, 2020, the Company recognized $175,920 related to the delivery of the final report.
Share-Based Payments
Employee 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 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, regardless of vesting, (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 equal to the weighted-average expected life. We estimate forfeitures when recognizing compensation expense and
adjust this estimate over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated
forfeitures are recognized through a cumulative adjustment, which is recognized in the period of change and which impacts the amount
of unamortized compensation expense to be recognized in future periods.
Significant Concentrations and Risks
We maintain cash balances
at a commercial bank and, at times, balances exceed FDIC limits. As of December 31, 2020 approximately $3,073,000 was uninsured.
NOTE 2 – NEW ACCOUNTING STANDARDS
The company has reviewed all issued accounting
pronouncements and plans to adopt those that are applicable to it. The company does not expect the adoption of any other pronouncements
to have an impact on its results of operations or financial position.
In December 2019, the FASB
issued amended guidance in the form of ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.”
This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general
principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12
is effective for annual periods beginning after December 15, 2020 and interim periods within those annual periods, with early adoption
permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments within this ASU are
required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.
The Company is in the initial stage of evaluating the impact of this new standard however it does not believe the guidance will have a
material impact on our financial statements.
On August 5, 2020, the FASB
issued ASU No. 2020-06 which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity,
including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 simplifies the guidance in U.S. GAAP on the
issuer’s accounting for convertible debt instruments. Such guidance includes multiple disparate sets of classification, measurement,
and derecognition requirements whose interactions are complex. ASU 2020-06 is effective for annual periods beginning after December 15,
2021 and interim periods within those annual periods, with early adoption permitted. An entity that elects early adoption must adopt all
the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective basis, while certain amendments
must be applied on a retrospective or modified retrospective basis. The Company is in the initial stage of evaluating the impact of this
new standard however it does not believe the guidance will have a material impact on our financial statements.
NOTE 3 – NOTES PAYABLE
On
May 24, 2019, the Company entered into an Asset Purchase Agreement (the “APA”) with Applied Optical Sciences, LLC (“AOS”)
to acquire certain assets. As consideration for the APA, the Company entered into a promissory note issued to the shareholders of AOS
for $2,500,000. The note is non-interest bearing and shall be repaid in equal installments, the first payment is due on February 10, 2021
and subsequent payments being due May, 24, 2021 and the remainder on the last day of each six-month period thereafter, the final such
payment being due on November 24, 2022. The Promissory Note may be prepaid at any time (in whole or in part). Upon inception, the Company
recorded a debt discount in the amount of $2,500,000 in relation to the transaction which is being amortized over the life of the loan
as compensation expense. As of December 31, 2020 and 2019, the note is not in default.
During the year ended December
31, 2019, the company received $2,350,000 from eleven non-affiliated individuals based on 10% Promissory Notes (“Notes”).
$1,150,000 of the Notes mature September 1, 2019 and $1,200,000 of the notes mature December 1, 2019. The Notes are accompanied by a Common
Stock Purchase Warrant (a “Warrant”) entitling the holder to purchase one share of the company’s common stock, par value
$0.001 per share (the “Common Shares”), for each $2.00 of Note principle, at an exercise price of $0.07 per share, for two
years from the date of issuance. During the year ended December 31, 2020, the Company cash settled $1,525,490 of principal and interest
and exchanged $1,087,699 of principal and interest for convertible notes (the Exchange Notes”). The Exchange Notes are convertible
into shares of our common stock at a conversion price of $0.30 per share. The Company evaluated the Exchange Notes for modification
accounting in accordance with ASC 470-50 and concluded that the modification qualified for debt extinguishment as the debt is substantially
different because a substantive conversion option was added. Company recorded $210,966 as additional paid-in capital in relation to the
beneficial conversion feature entered into upon exchange. During the year ended December 31, 2020, the Company converted the principal
and interest of $1,108,590 into 3,695,301 shares of common stock. During the period ending December 31, 2020, the Company amortized the
$210,966 as interest expense in the consolidated statements of operations upon conversion. As of December 31, 2020, these notes were not
outstanding.
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During
the year ended December 31, 2020, the Company received $4,324,000 in bridge funding pursuant to 10% Convertible Promissory Notes. These
notes are convertible into shares of our common stock at a conversion price of $0.30 per share, as negotiated with the holders based on
the prevailing market price of the common stock leading up to the issuance of the notes. At any time after October 15, 2020 until July
15, 2021, the date of maturity, (i) each investor may elect to convert these notes into shares of our common stock, at a conversion price
of $0.30 per share and (ii) the company may elect to prepay, either in cash or in shares of common stock at a price of $0.30 per share,
at the option of the holder, the amount of principal and interest then outstanding under each note. In the event we elect to prepay the
notes, we will notify the holders, each of whom will then have five business days to notify the company if they prefer to receive such
prepayment in cash or stock. These notes are payable in full at maturity. In lieu of repayment of the principal and interest on the notes
at maturity, the Company may elect to convert the amounts due into shares of Common Stock at a price of $0.15 per share. In November of
2020, the Company converted the total principal and interest of $4,407,262 into 14,690,873 shares of common stock. The Company recorded
a debt discount in the amount of $708,034 in relation to the conversion feature which was fully amortized to interest expense in the consolidated
statements of operations during the year ended December 31, 2020.
On April 28, 2020, the Company entered into a loan agreement with Alliance
Bank of Arizona, N.A. for a loan in the amount of $133,000 pursuant to the Paycheck Protection Program (the “PPP”) under the
Coronavirus Aid, Relief, and Economic Security Act enacted on March 27, 2020 (the “CARES Act”). This loan is evidenced by
a promissory note dated April 27, 2020 and matures two years from the disbursement date. This loan bears interest at a rate of 1.00% per
annum, with the first nine months of interest deferred. Principal and interest are payable monthly commencing nine months after the disbursement
date and may be prepaid by the Company at any time prior to maturity with no prepayment penalties. This loan contains customary events
of default relating to, among other things, payment defaults or breaches of the terms of the loan. Upon the occurrence of an event of
default, the lender may require immediate repayment of all amounts outstanding under the note.
The following reconciles notes payable
as of December 31, 2020 and December 31, 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Beginning balance
|
|
$
|
4,967,890
|
|
|
$
|
-
|
|
Notes payable
|
|
|
4,456,760
|
|
|
|
4,880,000
|
|
Accrued interest
|
|
|
297,849
|
|
|
|
119,218
|
|
Transfer from prepaid
|
|
|
108,064
|
|
|
|
54,329
|
|
Initial beneficial conversion feature
|
|
|
(919,000
|
)
|
|
|
-
|
|
Amortize beneficial conversion feature
|
|
|
919,000
|
|
|
|
-
|
|
Payments on notes payable
|
|
|
(1,480,951
|
)
|
|
|
(85,657
|
)
|
Repayment of interest
|
|
|
(152,603
|
)
|
|
|
-
|
|
Converted into common stock
|
|
|
(5,515,852
|
)
|
|
|
-
|
|
Total
|
|
|
2,681,157
|
|
|
|
4,967,890
|
|
Less-Notes payable - current
|
|
|
(1,547,695
|
)
|
|
|
(3,467,890
|
)
|
Notes payable - non-current
|
|
$
|
1,133,462
|
|
|
$
|
1,500,000
|
|
Future principal payments for the Company’s Notes as of December
31, 2020 are as follows:
2021
|
|
$
|
1,547,695
|
|
2022
|
|
|
1,133,462
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
2,681,157
|
|
Of the $2,681,000 note payable
balance, $1,548,000 are short term of which $1,500,000 are payments on the note to acquire Applied Optical Sciences and $1,133,000
are long term, of which $1,000,000 are payments on the note to acquire Applied Optical Sciences. Of the note to acquire Applied
Optical Sciences, the first payment is due on February 10, 2021 and subsequent payments being due May, 24, 2021 and the remainder
on the last day of each six-month period thereafter, the final such payment being due on November 24, 2022.
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – DEFERRED COMPENSATION
On May 24, 2019, the company
entered into the APA with AOS to acquire certain assets. As consideration for the APA, the company entered into a promissory note issued
to the shareholders of AOS for $2,500,000. The company also recorded a debt discount, which is reported on the balance sheet as deferred
compensation, in the amount of $2,500,000 in relation to the transaction which is being amortized over the life of the loan as compensation
expense. The amortization of deferred compensation for the year ended December 31, 2020 was $833,000 and for the year ended December 31,
2019 was $417,000.
NOTE 5 – DUE TO RELATED PARTIES
It has come to the board’s
attention that on July 31, 2018, our now deceased CEO deposited $50,000 into the company’s account. Although it has been suggested
that the funds may have been intended for use toward Mr. Dearmin’s healthcare, the board does not know for certain what the purpose
of the funds were or the nature of any intended investment. Accordingly, the board is investigating the appropriate disposition of the
funds which will likely be to the estate of Mr. Dearmin. Until such a determination is made, the board does not intend to use these funds
for any corporate purpose. For reporting purposes, the company has treated the deposit as a due to related party.
NOTE 6 – STOCKHOLDERS’ DEFICIT
Authorized Capital Stock
Our authorized capital
stock consists of 500,000,000 shares of common stock at a par value of $.001 per share and 2,000,000 shares of preferred stock
at a par value of $.001 per share.
A certificate of amendment
to increase our authorize common stock from 125,000,000 to 500,000,000 shares was filed and accepted and recorded by the Secretary
of State of the State of Delaware on March 3, 2016.
In January 2020, the
company received $603,000 from five non-affiliated individuals based on subscription agreements with the company for which the
company issued 2,010,000 shares of its common stock.
In January 2020, the company
issued 25,000 shares upon exercise of a warrant by a non-affiliated warrant holder at an exercise price of $0.07 per share.
In February 2020, the company
received $510,000 from a non-affiliated individual based on a subscription agreement with the company for which the company issued 1,700,000
shares of its common stock.
In April, 2020, the company
received $73,500 from an individual based on warrant and option exercises for which the company issued 1,050,000 shares of its common
stock.
In April, 2020, the company
received $532,000 from individuals based on subscription agreements with the company for which the company issued 1,770,334 shares of
its common stock.
June 2020, we entered into
a Mutual Release and Hold Harmless Agreement with a stockholder resolving claims related to the issuance of 1,000,000 shares of our common
stock, par value $0.001 per share, to that stockholder, as directed by prior company CEO George Farley, as compensation for valuation
services. The shares have been returned and cancelled recorded at $0.001 par, for $1,000.
In June 2020, we issued 18,750
shares of common stock based on a restricted stock agreement with a contractor. The closing price of our common stock on grant date was
$0.35 per share.
In August 2020, pursuant
to a consulting agreement with Stephen W McCahon, the company repurchased 5,000,000 shares of the company’s common stock
from Mr. McCahon for $300,000. The shares were removed from outstanding status and were cancelled.
Due to a September
24, 2020 settlement with George Farley and AnneMarieCo, the company paid $1,000,000 to Mr. Farley’s attorney. Additionally,
the company directed that $500,000 of its deposited bond also be paid to Mr. Farley’s attorney. According to the settlement,
25,000,000 shares of the company’s common shares belonging to Mr. Farley and AnneMarieCo were removed from outstanding status
and were cancelled.
Due to an October 2, 2020 settlement with Stein Riso Mantel McDonough,
LLP, 10,000,000 shares of the company’s common shares belonging to Stein Riso Mantel McDonough, LLP were removed from outstanding
status and were cancelled. The cancellation was recorded at $0.001 par or $10,000.00. As a part of the settlement, the company received
$3,000,000 which is shown as gain on settlement under the Statement of Operations.
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2020, the Company issued 18,386,174
shares of common stock upon the conversion of $5,515,852 of convertible note and accrued interest (see Note 3),
In March, 2021, notes
containing a principal balance of approximately $45,000 with a maturity date of September 1, 2019 converted into approximately
158,000 shares of common stock.
In January 2019, the company
received $150,000 from 3 non-affiliated individuals based on subscription agreements with the company for which the company issued 2,500,000
shares of its common stock.
During the fourth quarter
of 2019, the company received $704,000 from four non-affiliated individuals based on subscription agreements with the company for which
the company issued 2,346,666 shares of its common stock.
In April 2019, the company
granted 75,000 shares under a restricted stock agreement valued at $26,250 of which $8,882 was recognized in 2019 and $13,125 was recognized
in 2020. The shares to vest semi-annually over two years with the first installment six months from the agreement; provided, however,
if either party terminates the agreement at any time prior to the last date of it ending, then the shares will vest, pro rata, for each
month served since the most recent prior semi-annual vesting date.
Preferred Stock
As of December 31,
2020 and 2019 there were 13,602 and 13,602 shares of Series A Redeemable Convertible Preferred Stock (the “Series A Preferred
Stock”) outstanding, respectively. The company has not paid the dividends commencing with the quarterly dividend due August
1, 2013. Dividend arrearages as of December 31, 2020 including previously accrued dividends included in our balance sheet are approximately
$255,000. Our Board of Directors suspended the declaration of the dividend, commencing with the dividend payable as of February
1, 2015 since we did not have a surplus (as such term is defined in the Delaware general corporation Law) as of December 31, 2014,
until such time as we have a surplus or net profits for a fiscal year.
Our Series A Preferred
Stock has a liquidation preference of $25.00 per Share. The Series A Preferred Stock bears dividends at the rate of 6.5% of the
liquidation preference per share per annum, which accrues from the date of issuance, and is payable quarterly. Dividends may be
paid in: (i) cash, (ii) shares of our common stock (valued for such purpose at 95% of the weighted average of the last sales prices
of our common stock for each of the trading days in the ten trading day period ending on the third trading day prior to the applicable
dividend payment date), provided that the issuance and/or resale of all such shares of our common stock are then covered by an
effective registration statement and the company’s common stock is listed on a U.S. national securities exchange or the Nasdaq
Stock Market at the time of issuance or (iii) any combination of the foregoing. If the company fails to make a dividend payment
within five business days following a dividend payment date, the dividend rate shall immediately and automatically increase by
1% from 6.5% of the liquidation preference per offered share of Series A preferred stock to 7.5% of such liquidation preference.
If a payment default shall occur on two consecutive dividend payment dates, the dividend rate shall immediately and automatically
increase to 10% of the liquidation preference for as long as such payment default continues and shall immediately and automatically
return to the Initial dividend rate at such time as the payment default is no longer continuing.
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Each share of Series
A Preferred Stock is convertible at any time at the option of the holder into a number of shares of common stock equal to the liquidation
preference (plus any unpaid dividends for periods prior to the dividend payment date immediately preceding the date of conversion
by the holder) divided by the conversion price (initially $12.00 per share, subject to adjustment in the event of a stock dividend
or split, reorganization, recapitalization or similar event.) If the closing sale price of the common stock is greater than 140%
of the conversion price on 20 out of 30 trading days, the company may redeem the Series A Preferred Stock in whole or in part at
any time through October 31, 2010, upon at least 30 days’ notice, at a redemption price, payable in cash, equal to 100% of the
liquidation preference of the shares to be redeemed, plus unpaid dividends thereon to, but excluding, the redemption date, subject
to certain conditions. In addition, beginning November 1, 2010, the company may redeem the Series A Preferred Stock in whole or
in part, upon at least 30 days’ notice, at a redemption price, payable in cash, equal to 100% of the liquidation preference of
the Series A Preferred Stock to be redeemed, plus unpaid dividends thereon to, but excluding, the redemption date, under certain
conditions.
If a change of control
occurs, each holder of shares of Series A Convertible Preferred Stock that are outstanding immediately prior to the change of control
shall have the right to require the corporation to purchase, out of legally available funds, any outstanding shares of Series A
Convertible Preferred Stock at the defined purchase price. The purchase price is defined as: per share of Preferred Stock, 101%
of the liquidation preference thereof, plus all unpaid and accumulated dividends, if any, to the date of purchase thereof. The
purchase price is payable, at the corporation’s option, (x) in cash, (y) in shares of the common stock at a discount of 5% from
the fair market value of Common Stock on the Purchase Date (i.e. valued at a 95% discount of the Common Stock on the Purchase Date),
or (z) any combination thereof.
If the Corporation
pays all or a portion of the Purchase Price in Common Stock, no fractional shares of Common Stock will be issued; instead, the
company will round the applicable number of shares of Common Stock up to the nearest whole number of shares; provided that the
Corporation may pay the Purchase Price (or a portion thereof), whether in cash or in shares of Common Stock, only if the Corporation
has funds legally available for such payment and may pay the Purchase Price (or a portion thereof) in shares of its Common Stock
only if (i) the Common Stock is listed on a U.S. national securities exchange or the Nasdaq Stock Market at the time of issuance
and (ii) a shelf registration statement covering the issuance by the Corporation and/or resales of the Common Stock issuable as
payment of the Purchase Price is effective on the Payment Date unless such shares are eligible for immediate resale in the public
market by non-affiliates of the Corporation.
Dividends on our Preferred
Stock are payable quarterly on the first day of February, May, August and November, in cash or shares of Common Stock, at our discretion.
Share-Based Payments
Effective November
12, 2018, the Board of Directors of Applied Energetics, Inc. adopted the 2018 Incentive Stock Plan. The plan provides for the allocation
and issuance of stock, restricted stock purchase offers and options (both incentive stock options and non-qualified stock options)
to officers, directors, employees and consultants of the company. The board reserved a total of 50,000,000 for possible issuance
under the plan.
We have, from time
to time, also granted non-plan options to certain officers, directors, employees and consultants. Total stock-based compensation
expense for grants to officers, employees and consultants was approximately $1,501,000 and $2,157,000 for the years ended December
31, 2020 and 2019, respectively, which was charged to general and administrative expense.
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
There was no related
income tax benefit recognized because our deferred tax assets are fully offset by a valuation allowance.
The following table
sets forth information regarding awards under our 2018 Incentive Stock Plan:
As of December 31, 2020
|
|
|
Share
Grants
Approved
|
|
|
Options
Outstanding
|
|
|
Shares
Available for
Award
|
|
2018 Incentive Stock Plan
|
|
|
50,000,000
|
|
|
|
20,150,000
|
|
|
|
29,850,000
|
|
Total
|
|
|
50,000,000
|
|
|
|
20,150,000
|
|
|
|
29,850,000
|
|
We determine the fair
value of option grant share-based awards at their grant date, using a Black-Scholes- Merton Option-Pricing Model applying the assumptions
in the following table:
|
|
For the year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected life (years)
|
|
|
N/A
|
|
|
|
5.5 - 6.75
|
|
Dividend yield
|
|
|
N/A
|
|
|
|
0
|
%
|
Expected volatility
|
|
|
N/A
|
|
|
|
232
|
%
|
Risk free interest rates
|
|
|
N/A
|
|
|
|
2.47
|
%
|
Weighted average fair value of options at grant date
|
|
|
N/A
|
|
|
$
|
0.3400
|
|
For the year ended
December 31, 2020, no options to purchase stock were granted, no options to purchase stock were forfeited, additionally, 900,000
options to purchase stock were exercised with a weighted average exercise price of $0.07 per share, no options expired; no restricted
stock purchase offers were granted, vested or forfeited. At December 31, 2020, options to purchase 32,000,000 shares of common
stock were outstanding with a weighted average exercise price of $0.1419 with a weighted average remaining contract term of approximately
5.6 years with an aggregate intrinsic value (amount by which Applied Energetics’ closing stock price on the last trading
day of the year exceeds the exercise price of the option) of $6,054,000. At December 31, 2020 options for 24,363,000 shares were
exercisable. There was no activity of our restricted stock units and restricted stock grants for the years ended December 31, 2020
and 2019.
As of December 31,
2020, there was approximately $913,000 of unrecognized compensation cost related to unvested stock options granted and outstanding,
net of estimated forfeitures. The cost is expected to be recognized on a weighted average basis over a period of approximately
one year.
The fair value of restricted stock and
restricted stock units was estimated using the closing price of our common stock on the date of award and fully recognized upon
vesting.
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity
of our stock options for the years ended December 31, 2020, and 2019:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
29,250,000
|
|
|
$
|
0.1025
|
|
Granted
|
|
|
6,650,000
|
|
|
$
|
0.3545
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited or expired
|
|
|
(3,000,000
|
)
|
|
$
|
0.2500
|
|
Outstanding at December 31, 2019
|
|
|
32,900,000
|
|
|
$
|
0.1400
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
(900,000
|
)
|
|
$
|
0.0700
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at December 31, 2020
|
|
|
32,000,000
|
|
|
$
|
0.1419
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
|
|
24,362,500
|
|
|
$
|
0.1037
|
|
As of December 31,
2020 and December 31, 2019 there was no unrecognized stock-based compensation related to unvested restricted stock, net of estimated
forfeitures.
As
of December 31, 2020 and December 31, 2019 there was $892,000 and $1,561,000, respectively, in unrecognized stock-based compensation related
to a lockup agreement on 5,000,000 shares of common stock in the acquisition of AOS valued
at $0.4014 a share as that was the closing price on the date of the contract and is amortized over 36 months. $669,000 and $446,000 was
amortized for the years ended December 31, 2020 and December 31, 2019, respectively
We determine the fair value of warrant grant share-based awards at
their grant date, using a Black-Scholes- Merton Option-Pricing Model applying the assumptions in the following table:
|
|
For the year ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Expected life (years)
|
|
|
1.0
|
|
|
|
1.0
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
125.19
|
%
|
|
|
249%-149
|
%
|
Risk free interest rates
|
|
|
0.14
|
%
|
|
|
2.4-1.54
|
%
|
Weighted average fair value of options at grant date
|
|
$
|
.308
|
|
|
$
|
0.0632
|
|
|
|
Warrant Activity
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Outstanding at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Issued
|
|
|
3,675,000
|
|
|
$
|
0.0632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
3,675,000
|
|
|
$
|
0.0632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Issued
|
|
|
50,000
|
|
|
$
|
0.0500
|
|
|
|
|
|
Warrants exercised
|
|
|
(175,000
|
)
|
|
$
|
0.0700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2020
|
|
|
3,550,000
|
|
|
$
|
0.0627
|
|
|
|
6.17
|
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Contractual
|
|
|
Weighted Avg.
|
|
|
Shares
|
|
|
Weighted Avg.
|
|
Range of Exercise Prices
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05 - $0.08
|
|
|
3,550,000
|
|
|
|
0.0627
|
|
|
$
|
6.17
|
|
|
|
3,550,000
|
|
|
$
|
6.17
|
|
|
|
|
3,550,000
|
|
|
|
0.0627
|
|
|
$
|
6.17
|
|
|
|
3,550,000
|
|
|
$
|
6.17
|
|
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Operating Leases
In May 2016, we moved
and entered into a month-to-month lease agreement to lease office space in Tucson, Arizona. In May 2019, we acquired Applied Optical
Sciences and assumed the month-to-month lease for office and laboratory space also in Tucson, Arizona.
Rent expense was approximately
$49,000 and $30,000 for 2020 and 2019, respectively.
In March 2021, we
signed a five-year lease for a 13,000 square foot laboratory/office space here in Tucson. The lease term begins May 1, 2021 and
ends on April 30, 2026. The base rent is $6.7626 per rentable square foot for year one, and escalates to $9.2009 in year two, $11.4806
in year three, $13.1740 in year four and $14.9306 in year five, plus certain operating expenses and taxes.
At December 31, 2020,
we had approximately $4,209 in future minimum lease payments due in less than a year.
Guarantees
We agree to indemnify
our officers and directors for certain events or occurrences arising as a result of the officers or directors serving in such capacity.
The maximum amount of future payments that we could be required to make under these indemnification agreements is unlimited. However,
we maintain a director’s and officer’s liability insurance policy that limits our exposure and enables us to recover a portion
of any future amounts paid. As a result, we believe the estimated fair value of these indemnification agreements is minimal because
of our insurance coverage and we have not recognized any liabilities for these agreements as of December 31, 2020 and 2019.
Litigation
As previously reported, on July 3, 2018, we commenced a lawsuit in
the Court of Chancery of the State of Delaware against the company’s former director and principal executive officer George Farley
(“Farley”) and AnneMarieCo LLC (“AMC”). The parties settled the lawsuit via a written settlement agreement dated
September 24, 2020. Under the agreement, 20,000,000 of the 25,000,000 shares originally issued to Farley (20,000,000 of which were transferred
to AMC) were invalidated, the remaining 5,000,000 shares being deemed valid under Section 205 of the Delaware General Corporation Law.
The agreement calls for the company to repurchase the remaining 5,000,000 shares at a price of $0.30 per share for an aggregate purchase
price of $1,500,000. The agreement also provided for the release and return to the company of funds in the amount of $582,377.26, plus
interest, securing the bond posted by the company in connection with the preliminary injunction issued in the litigation. The agreement
also contains standard mutual general release and confidentiality provisions. Approximately, $206,000 accrued compensation was forgone
as per settlement agreement was shown as gain on settlement.
In a related matter, on February
8, 2019, the company filed a complaint against Stein Riso Mantel McDonough, LLP (“Stein Riso”), its former counsel, in the
United States District Court for the Southern District of New York. The parties settled the lawsuit via a written settlement agreement
dated October 2, 2020. Pursuant to the agreement, Stein Riso paid the company three million dollars ($3,000,000) and returned to the company
ten million (10,000,000) shares of the company’s common stock, par value $0.001 per share. Stein Riso entered into the Settlement
Agreement without any admission of liability. The parties filed a Stipulation of Dismissal with Prejudice as to all claims asserted or
which could have been asserted in the lawsuit. The agreement also contains standard mutual general release and confidentiality provisions.
On July 3, 2019, Gusrae,
Kaplan & Nusbaum and its partner, Ryan Whalen, counsel for defendants, George Farley and AnneMarieCo LLC, in the aforesaid Delaware
litigation, filed a claim in the District Court for the Southern District of New York against the company, its directors, officers, attorneys
and a consultant. The action alleges libel, securities fraud and related claims. The company believes that this suit lacks merit and intends
to dispute these allegations. The company filed a motion to dismiss the complaint on October 24, 2019. On December 13, 2019, Gusrae Kaplan
and Mr. Whalen filed an opposition to the Company’s motion. On January 10, 2020, the company filed a reply brief. The United States
District Court has not yet ruled on the motion.
On June 15, 2020,
Grace A.C. Dearmin, as the Administrator of the Estate of Thomas Carr Dearmin, filed a cross-complaint against the company and
company directors Jonathan Barcklow and Bradford Adamczyk, alleging causes of action against them for Breach of Contract and Conversion.
The causes of action against the company allege that the company’s Board of Directors voted to compensate its former CEO
and director, Thomas Dearmin, as reflected in board meeting minutes dated May 11, 2018, and June 25, 2018, but failed to pay compensation
owed to Mr. Dearmin. These causes of action further allege that, if incentive milestones of the company’s stock price were
reached, Mr. Dearmin’s estate is owed up to 5 million shares of company common stock, or the current monetary value of that
stock. On November 17, 2020, the company, Mr. Barcklow and Mr. Adamczyk filed motions to dismiss the cross-complaint against them
on substantive and jurisdictional grounds. On February 8, 2021, the court granted the motion to dismiss on personal jurisdiction
grounds as to the company, Mr. Barcklow and Mr. Adamczyk.
On January 15, 2021,
the company filed a complaint in the United States District Court, Southern District of New York, against Gusrae, Kaplan &
Nusbaum and Ryan Whalen for malpractice and breach of New York Rules of Professional Conduct by both parties as former counsel
to the company. Gusrae, Kaplan & Nusbaum and Ryan Whalen have not yet responded to the complaint.
As with any litigation,
the company cannot predict the outcome with certainty, but the company expects to provide further updates on the status of the
litigation as circumstances warrant.
We may, from time to time,
be involved in legal proceedings arising from the normal course of business.
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 – INCOME TAXES
An analysis of the
difference between the expected federal income tax for the years ended December 31, 2020 and 2019, and the effective income tax
rate is as follows::
|
|
2020
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes calculated at federal rate
|
|
$
|
(634,101
|
)
|
|
|
21.0
|
%
|
|
$
|
(1,166,831
|
)
|
|
|
21.0
|
%
|
State income tax, net of federal benefit
|
|
|
(90,903
|
)
|
|
|
3.0
|
%
|
|
|
(213,340
|
)
|
|
|
3.8
|
%
|
Change in Valuation Allowance
|
|
|
463,091
|
|
|
|
-15.3
|
%
|
|
|
1,203,231
|
|
|
|
-21.7
|
%
|
Expiration of tax attributes
|
|
|
161,254
|
|
|
|
-5.3
|
%
|
|
|
175,036
|
|
|
|
-3.1
|
%
|
Prior period adjustment
|
|
|
(49,105
|
)
|
|
|
-1.6
|
%
|
|
|
-
|
|
|
|
0.0
|
%
|
Permenant items
|
|
|
149,764
|
|
|
|
-5.0
|
%
|
|
|
1,904
|
|
|
|
0.0
|
%
|
Provision (benefit) for taxes
|
|
$
|
-
|
|
|
|
0
|
%
|
|
$
|
-
|
|
|
|
0
|
%
|
Tax effects of temporary
differences at December 31, 2020 and December 31, 2019 are as follows:
|
|
2020
|
|
|
2019
|
|
Noncurrent deferred tax assets (liabilities):
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
1,380,955
|
|
|
$
|
740,442
|
|
Fixed assets
|
|
|
(70,474
|
)
|
|
|
(9,095
|
)
|
Net Operating Loss Carryforwards and Credits
|
|
|
14,378,365
|
|
|
|
14,494,408
|
|
Total Deferred Tax Assets
|
|
$
|
15,561,529
|
|
|
$
|
15,225,755
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(15,688,846
|
)
|
|
|
(15,225,755
|
)
|
Net deferred tax / (liabilities)
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred tax assets and liabilities are computed by applying the federal
and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss
carry-forwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that
some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the period in which these deductible temporary differences reverse. During the year ended December 31,
2020, the deferred tax assets and the valuation allowance increased by $463,091 mainly as a result of current year tax loss.
As of December 31, 2020, we have cumulative federal and Arizona net
operating loss carryforwards of approximately $64.5 million and $7.0 million, respectively, which can be used to offset future income
subject to taxes. Of the $64.5 million, of Federal net operating loss carryforwards, $58.5 begin to expire in 2020. The remaining balance
of $6.0 million is limited in annual usage of 80% of current years taxable income but do not have an expiration. Arizona net operating
loss carryforwards begin to expire in 2020. In addition there are federal net operating loss carryforwards is approximately $27.0 million
from USHG related to pre-merger losses. We also have pre-merger federal capital loss carryforwards of approximately $520,000.
As of December 31,
2020, we had cumulative unused research and development tax credits of approximately $239,000 and $340,000, which can be used to
reduce future federal and Arizona income taxes, respectively. As of December 31, 2020, we have cumulative unused federal minimum
tax credit carryforwards from USHG of approximately $244,000. The federal minimum tax credit carryforwards are not subject to expiration
under current federal tax law.
Utilization of our
USHG pre-merger net operating loss carryforwards and tax credits is subject to substantial annual limitations due to the ownership
change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in
the expiration of the net operating loss carryforwards and tax credit carryforwards before utilization.
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
We have unrecognized
tax benefits attributable to losses and minimum tax credit carryforwards that were incurred by USHG prior to the merger in March
2004 as follows:
Balance at December 31, 2018
|
|
$
|
9,635,824
|
|
Additions related to prior year tax positions
|
|
|
-
|
|
Additions related to current year tax positions
|
|
|
-
|
|
Reductions related to prior year tax positions and settlements
|
|
|
|
|
Balance at December 31, 2019
|
|
$
|
9,635,824
|
|
Additions related to prior year tax positions
|
|
|
-
|
|
Additions related to current year tax positions
|
|
|
-
|
|
Reductions related to prior year tax positions and settlements
|
|
|
-
|
|
Balance at December 31, 2020
|
|
$
|
9,635,824
|
|
These benefits are
not recognized as a result of uncertainty regarding the utilization of the loss carryforwards and minimum tax credits. If in the
future we utilize the attributes and resolve the uncertainty in our favor, the full amount will favorably impact our effective
income tax rate.
The company considers
the U.S. and Arizona to be major tax jurisdictions. As of December 31, 2020, for federal tax purposes the tax years 2015, 2016
and 2017, 2018 and 2019 for Arizona the tax years 2015 through 2020 remain open to examination. The company currently does not
expect any material changes to unrecognized tax positions within the next twelve months.
We recognize interest
and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2020, and 2019, we had no accrued
interest or penalties related to our unrecognized tax benefits.
NOTE 9 – SUBSEQUENT EVENT
During the months
of January and February 2021, the Company issued an aggregate of 7,056,250 shares of its common stock, par value $.001 per share,
at an issue price of $0.32 per share.
In February, 2021, the company
made a $500,000 payment on the $2,500,000 note to acquire Applied Optical Sciences.
In March 2021, we signed a
five-year lease for a 13,000 square foot laboratory/office space here Tucson, Arizona. The lease term begins May 1, 2021 and ends on April
30, 2026. The base rent is $6.7626 per rentable square foot for year one, and escalates to $9.2009 in year two, $11.4806 in year three,
$13.1740 in year four and $14.9306 in year five, plus certain operating expenses and taxes.
In March, 2021, a note containing
a principal balance of approximately $45,000 with a maturity date of September 1, 2019 converted into approximately 158,000 shares of
common stock.
In the first quarter of 2021,
the company issued 500,000 shares in response to three non-affiliated warrant holders exercising warrants at an exercise price of $0.07
a share.
In the first quarter
of 2021, the company issued 75,000 shares to a non-affiliated holder of a restricted Stock agreement.
In the first quarter of 2021,
the company issued 1,000,000 shares in response to a non-affiliated option holder exercising options at an exercise price of $0.05 a share.
The company’s
management has evaluated subsequent events occurring after December 31, 2020, the date of our most recent balance sheet, through
the date our financial statements were issued.
F-18