ITEM 1.
|
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
2020
|
|
|
December 31, 2019
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
446,976
|
|
|
$
|
88,415
|
|
Other receivable
|
|
|
2,879
|
|
|
|
2,880
|
|
Other assets
|
|
|
159,101
|
|
|
|
52,686
|
|
Total current assets
|
|
|
608,956
|
|
|
|
143,981
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
Long-term receivable
|
|
|
582,377
|
|
|
|
582,377
|
|
Property and equipment - net
|
|
|
28,017
|
|
|
|
36,568
|
|
Deferred compensation
|
|
|
1,666,667
|
|
|
|
2,083,334
|
|
Total long-term assets
|
|
|
2,277,061
|
|
|
|
2,702,279
|
|
TOTAL ASSETS
|
|
$
|
2,886,017
|
|
|
$
|
2,846,260
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
422,015
|
|
|
$
|
472,868
|
|
Accrued officer compensation
|
|
|
206,000
|
|
|
|
206,000
|
|
Notes payable including accrued interest of $233,541 at June 30, 2020 and $119,218 at December 31, 2019
|
|
|
3,956,972
|
|
|
|
3,467,890
|
|
Due to related parties
|
|
|
50,000
|
|
|
|
50,000
|
|
Accrued expenses
|
|
|
55,526
|
|
|
|
23,588
|
|
Accrued dividends
|
|
|
48,079
|
|
|
|
48,079
|
|
Deferred revenues
|
|
|
66,368
|
|
|
|
-
|
|
Total current liabilities
|
|
|
4,804,960
|
|
|
|
4,268,425
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term notes payable
|
|
|
1,132,760
|
|
|
|
1,500,000
|
|
Total liabilities
|
|
|
5,937,720
|
|
|
|
5,768,425
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ (deficit)
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred Stock, $.001 par value, 2,000,000 shares authorized; 13,602 shares issued and outstanding at June 30, 2020 and at December 31, 2019
|
|
|
14
|
|
|
|
14
|
|
Common stock, $.001 par value, 500,000,000 shares authorized; 212,143,146 and 206,569,063 shares issued and outstanding at June 30, 2020 and at December 31, 2019, respectively
|
|
|
212,143
|
|
|
|
206,569
|
|
Additional paid-in capital
|
|
|
88,412,212
|
|
|
|
85,907,523
|
|
Accumulated deficit
|
|
|
(91,676,072
|
)
|
|
|
(89,036,271
|
)
|
Total stockholders’ (deficit)
|
|
|
(3,051,703
|
)
|
|
|
(2,922,165
|
)
|
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
|
|
$
|
2,886,017
|
|
|
$
|
2,846,260
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the three months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
General and administrative
|
|
$
|
1,128,324
|
|
|
$
|
610,446
|
|
Selling and marketing
|
|
|
71,840
|
|
|
|
53,999
|
|
Research and development
|
|
|
65,317
|
|
|
|
95,890
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,265,481
|
|
|
|
760,335
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,265,481
|
)
|
|
|
(760,335
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest (expense)
|
|
|
(109,229
|
)
|
|
|
(26,485
|
)
|
Total other (expense)
|
|
|
(109,229
|
)
|
|
|
(26,485
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,374,710
|
)
|
|
|
(786,820
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(8,501
|
)
|
|
|
(8,501
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(1,383,211
|
)
|
|
$
|
(795,321
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
212,319,137
|
|
|
|
203,814,063
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
10,000
|
|
|
$
|
-
|
|
Gross profit
|
|
|
10,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
2,218,744
|
|
|
|
1,067,165
|
|
Selling and marketing
|
|
|
153,526
|
|
|
|
106,333
|
|
Research and development
|
|
|
122,796
|
|
|
|
168,550
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,495,066
|
|
|
|
1,342,048
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(2,485,066
|
)
|
|
|
(1,342,048
|
)
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
15,833
|
|
|
|
-
|
|
Interest (expense)
|
|
|
(170,568
|
)
|
|
|
(30,925
|
)
|
Total other income
|
|
|
(154,735
|
)
|
|
|
(30,925
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(2,639,801
|
)
|
|
|
(1,372,973
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(17,003
|
)
|
|
|
(17,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(2,656,804
|
)
|
|
$
|
(1,389,976
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
208,765,721
|
|
|
|
204,006,788
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
DEFICIT
For the six months ended June 30, 2020
(Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance as of December 31, 2019
|
|
|
13,602
|
|
|
$
|
14
|
|
|
|
206,569,062
|
|
|
$
|
206,569
|
|
|
$
|
85,907,523
|
|
|
$
|
(89,036,271
|
)
|
|
$
|
(2,922,165
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
439,956
|
|
|
|
-
|
|
|
|
439,956
|
|
Common stock issued on exercise of stock option and warrant
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
25
|
|
|
|
1,725
|
|
|
|
-
|
|
|
|
1,750
|
|
Sale of common stock
|
|
|
|
|
|
|
|
|
|
|
3,710,000
|
|
|
|
3,710
|
|
|
|
1,109,290
|
|
|
|
|
|
|
|
1,113,000
|
|
Net loss for the quarter
ended March 31, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,265,091
|
)
|
|
|
(1,265,091
|
)
|
Balance as of March 31, 2020
|
|
|
13,602
|
|
|
$
|
14
|
|
|
|
210,304,062
|
|
|
$
|
210,304
|
|
|
$
|
87,458,494
|
|
|
$
|
(90,301,362
|
)
|
|
$
|
(2,632,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
344,430
|
|
|
|
-
|
|
|
|
344,430
|
|
RSA-based non-cash compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
18,750
|
|
|
|
19
|
|
|
|
6,508
|
|
|
|
-
|
|
|
|
6,527
|
|
Common stock issued on exercise of stock option and warrant
|
|
|
-
|
|
|
|
-
|
|
|
|
1,050,000
|
|
|
|
1,050
|
|
|
|
72,450
|
|
|
|
-
|
|
|
|
73,500
|
|
Sale of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
1,770,334
|
|
|
|
1,770
|
|
|
|
529,330
|
|
|
|
-
|
|
|
|
531,100
|
|
Cancellation of common stock
|
|
|
|
|
|
|
|
|
|
|
(1,000,000
|
)
|
|
|
(1,000
|
)
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
Net loss for the quarter
ended June 30, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,374,710
|
)
|
|
|
(1,374,710
|
)
|
|
|
|
13,602
|
|
|
$
|
14
|
|
|
|
212,143,146
|
|
|
$
|
212,143
|
|
|
$
|
88,412,212
|
|
|
$
|
(91,676,072
|
)
|
|
$
|
(3,051,703
|
)
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
DEFICIT
For the six months ended June 30, 2019
(Unaudited)
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance as of December 31, 2018
|
|
|
13,602
|
|
|
$
|
14
|
|
|
|
201,697,396
|
|
|
$
|
201,697
|
|
|
$
|
82,637,749
|
|
|
$
|
(83,479,931
|
)
|
|
$
|
(640,471
|
)
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
122,950
|
|
|
|
-
|
|
|
|
122,950
|
|
Sale of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
2,500,000
|
|
|
|
2,500
|
|
|
|
147,500
|
|
|
|
-
|
|
|
|
150,000
|
|
Net loss for the quarter ended March 31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(586,155
|
)
|
|
|
(586,155
|
)
|
Balance as of March 31, 2019
|
|
|
13,602
|
|
|
$
|
14
|
|
|
|
204,197,396
|
|
|
$
|
204,197
|
|
|
$
|
82,908,199
|
|
|
$
|
(84,066,086
|
)
|
|
$
|
(953,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
386,318
|
|
|
|
-
|
|
|
|
386,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the quarter ended June 30, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(786,820
|
)
|
|
|
(786,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2019
|
|
|
13,602
|
|
|
$
|
14
|
|
|
|
204,197,396
|
|
|
$
|
204,197
|
|
|
$
|
83,294,517
|
|
|
$
|
(84,852,906
|
)
|
|
$
|
(1,354,178
|
)
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
For the six months ended
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net loss
|
|
|
(2,639,801
|
)
|
|
$
|
(1,372,974
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Noncash stock based compensation expense
|
|
|
790,913
|
|
|
|
509,268
|
|
Amortization of future compensation payable
|
|
|
416,667
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
8,551
|
|
|
|
6,481
|
|
Amortization of prepaid expenses
|
|
|
98,183
|
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
30,925
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
9,888
|
|
|
|
-
|
|
Other receivable
|
|
|
-
|
|
|
|
60,000
|
|
Customer deposits
|
|
|
66,368
|
|
|
|
-
|
|
Prepaids and deposits
|
|
|
(106,422
|
)
|
|
|
(17,871
|
)
|
Long term receivables - net
|
|
|
-
|
|
|
|
(141,182
|
)
|
Accounts payable
|
|
|
(57,097
|
)
|
|
|
(75,200
|
)
|
Accrued interest
|
|
|
120,568
|
|
|
|
-
|
|
Accrued expenses and compensation
|
|
|
31,939
|
|
|
|
(377,855
|
)
|
Net cash used in operating activities
|
|
|
(1,260,243
|
)
|
|
|
(1,378,408
|
)
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
132,760
|
|
|
|
1,150,000
|
|
Proceeds from issuance of common stock
|
|
|
1,644,100
|
|
|
|
150,000
|
|
Repayment on notes payable
|
|
|
(233,306
|
)
|
|
|
-
|
|
Proceeds from the exercise of stock options and warrants
|
|
|
75,250
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
1,618,804
|
|
|
|
1,300,000
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
358,561
|
|
|
|
(78,408
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
88,415
|
|
|
|
178,552
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
446,976
|
|
|
$
|
100,144
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
21,869
|
|
|
$
|
1,320
|
|
Cash paid for taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
See accompanying notes to condensed consolidated
financial statements (unaudited).
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
1.
|
BASIS OF PRESENTATION AND GOING CONCERN
|
The
accompanying interim unaudited condensed consolidated financial statements include the accounts of Applied Energetics, Inc. and
its wholly owned subsidiary North Star Power Engineering, Inc. as of June 30, 2020 (collectively, "company," "Applied
Energetics," "we," "our" or "us"). All intercompany balances and transactions have been eliminated.
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of
the results for the interim periods presented have been made. The results for the six-month period ended June 30, 2020, may not
be indicative of the results for the entire year. The interim unaudited condensed consolidated financial statements should be
read in conjunction with the company's audited consolidated financial statements contained in our Annual Report on Form 10-K.
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 six months ended June 30, 2020, the company incurred a net loss of approximately $2,640,000,
had negative cash flows from operations of $1,260,000 and may incur additional future losses due to the reduction in government
contract activity. Additionally, as of June 30, 2020, the company had a working capital deficit (current liabilities less current
assets) of $4,196,000. These matters raise substantial doubt as to the company’s ability to continue as a going concern.
The ongoing COVID-19 pandemic contributes to this uncertainty.
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 for one year from the date the financials are issued.
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.
LIQUIDITY
AND MANAGEMENT’S PLAN
The
accompanying unaudited 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 six months ended June 30, 2020, the company incurred
a net loss of approximately $2,640,000, had negative cash flows from operations of approximately $1,260,000 and conducted financing
activities yielding $1,644,000 in proceeds from the issuance of common stock, proceeds from notes payable of $133,000, proceeds
from the exercise of options and warrants of $75,000, partially offset by payments on notes payable of $233,000 and expects to
incur additional future losses due to the reactivation of its business activities. These matters raise substantial doubt as to
the company’s ability to continue as a going concern unless the company is able to obtain additional financing for its continuing
operations. 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.
As
of June 30, 2020, the company had approximately $447,000 in cash and cash equivalents.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
USE
OF ESTIMATES
The
preparation of consolidated financial statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”)
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 estimates that it believes
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. In addition, management considers the basis and methodology
used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the
amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues
concerning accounting principles and financial statement presentation. Such estimates and assumptions could change in the future,
as more information becomes known which could materially impact the amounts reported and disclosed herein. Significant estimates
include measurements of income tax assets and liabilities.
Multiple
contract proposals have been submitted to various government agencies in 2019 and 2020. Due to the COVID-19-related 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.
REVENUE
RECOGNITION
A
majority of revenue under long-term government contracts is recorded under the percentage of completion method. Revenue, billable
monthly under cost-plus-fixed-fee contracts, is recorded as costs are incurred and includes estimated earned fees in the proportion
that costs incurred to date bear to total estimated costs. Costs include direct labor, direct materials, subcontractor costs and
manufacturing and administrative overhead allowable under the contract. General and administrative expenses allowable under the
terms of contracts are allocated per contract, depending on its direct labor and material proportion to total direct labor and
material of all contracts. As contracts can extend over one or more accounting periods, revisions in earnings estimated during
the course of work are reflected during the accounting period in which the facts become known. When the current contract estimate
indicates a loss, a provision is made for the total anticipated loss in the current period. We do not generally provide an allowance
for returns from our government customers because our customer agreements do not provide for a right of return.
Revenue
for other products and services is recognized when such products and services are delivered or performed and, in connection with
certain sales to government agencies, when the products and services are accepted, which is normally negotiated as part of the
initial contract. Revenue from commercial, non-governmental, customers is based on fixed price contracts where the sale is recognized
upon acceptance of the product or performance of the service and when payment is probable. Contract costs are deferred in the
same manner as inventory costs and are charged to operations as the related revenue from contracts is recognized. When a current
contract estimate indicates a loss, a provision is made for the total anticipated loss in the period in which such facts become
evident.
DEFERRED REVENUE
Deferred revenue represents customer deposits on a project
RECENT
ACCOUNTING PRONOUNCEMENTS
The
company has reviewed 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.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
2.
|
SHARE-BASED COMPENSATION
|
Share-Based
Compensation
For the six months
ended June 30, 2020 and 2019, share-based compensation expense totaled approximately $791,000 and $509,000, respectively. For the
three months ended June 30, 2020 and 2019, share-based compensation expense totaled approximately $351,000 and $272,000, respectively.
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:
|
|
six months ended June 30
|
|
|
2020
|
|
2019
|
|
Expected life (years)
|
|
N/A
|
|
|
5.50-6.75
|
|
Dividend yield
|
|
N/A
|
|
|
-
|
|
Expected volatility
|
|
N/A
|
|
|
232
|
%
|
Risk free interest rates
|
|
N/A
|
|
|
2.47
|
%
|
Weighted average fair value of options at grant date
|
|
N/A
|
|
$
|
0.35
|
|
For
the six months ended June 30, 2020, options to purchase 900,000 shares of common stock were exercised, no options to purchase
stock were granted, no options were forfeited or expired, and no restricted stock awards were granted; no restricted stock units
were granted, vested or forfeited. At June 30, 2020, options to purchase 30,500,000 shares of common stock were outstanding with
a weighted average exercise price of $0.147, a weighted average remaining contract term of approximately 6.1 years with an aggregate
intrinsic value of $4,484,000. At June 30, 2020, options to purchase 22,075,000 shares of common stock were exercisable.
As
of June 30, 2020, there was approximately $1,259,000 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 two years.
Basic
net loss per common share is computed by dividing net loss available to common shareholders by the weighted average number of
common shares outstanding during the period before giving effect to stock options, stock warrants, restricted stock agreements,
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 convertible preferred stock, stock options, warrants and restricted stock units. Contingently
issuable shares are included in the computation of basic loss per share when issuance of the shares is no longer contingent. Due
to the losses from continuing operations for the three months ended June 30, 2020 and 2019, basic and diluted loss per common
share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.
Potentially
dilutive securities not included in the diluted loss per share calculation, due to net losses from continuing operations, were
as follows:
|
|
Six months ended June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Options to purchase common shares
|
|
|
30,500,000
|
|
|
|
32,750,000
|
|
Warrants to purchase common shares
|
|
|
3,500,000
|
|
|
|
950,000
|
|
Unvested restricted stock agreements
|
|
|
31,250
|
|
|
|
68,750
|
|
Convertible preferred stock
|
|
|
48,174
|
|
|
|
44,632
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive securities
|
|
|
34,079,424
|
|
|
|
33,813,382
|
|
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
Dividends
on Preferred Stock are accrued when the amount and kind of dividend is determined and are payable quarterly on the first day of
February, May, August and November, in cash or shares of common stock. The holders of shares of Series A Convertible Preferred
Stock are entitled to receive dividends at the initial rate of 6.5% of the liquidation preference per share (the "Initial
Dividend Rate"), payable, at the option of the corporation, 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 or (iii) any combination of the
foregoing. If the company fails to pay dividends in the five business days following a dividend payment date (a "Payment
Default"), the dividend rate shall immediately and automatically increase to 7.5% of the liquidation preference per share
for as long as such Payment Default continues (or return to the Initial Dividend Rate at such time as such Payment Default no
longer continues), and 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.
As
of June 30, 2020, we had 13,602 shares of our 6.5% Series A Convertible Preferred Stock outstanding. The company has not paid
the dividends commencing with the quarterly dividend due August 1, 2013. Dividend arrearages as of June 30, 2020 was approximately
$238,000. 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.
Other
assets primarily represents prepaid assets for insurance premiums and deposits with attorneys as well as the current portion of
deferred compensation.
In
our litigation, the company was required to place a bond with a surety. The company does not have access to these funds and it
is out of our control to use them (refer note 11).
Deferred
compensation represents the remaining amortization of the note payable issued in the acquisition of Applied Optical Sciences.
During
the six months ended June 30, 2020, the company entered into a premium financing agreement to finance its director and officer
insurance policy. The principal is approximately $108,000, with nine monthly payments of $12,498 and an interest rate of 9.7%.
The balance at June 30, 2020 is $60,000 included in current notes payable.
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 six months
of interest deferred. Principal and interest are payable monthly commencing six 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.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
Following the end of
the quarter, in July and August, 2020, we received $4,049,000 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.
During
the six months ended June 30, 2019, the company received $1,150,000 from eight non-affiliated individuals based on 10% promissory
notes. The notes mature September 1, 2019. The notes are accompanied by a Common Stock Purchase Warrant entitling the holder to
purchase one share of the company’s common stock, par value $0.001 per share, for each $2.00 of Note principle, at an exercise
price of $0.07 per share, for two years from the date of issuance.
The
following reconciles notes payable as of June 30, 2020 and December 31, 2019:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Notes payable
|
|
$
|
5,175,154
|
|
|
$
|
4,934,329
|
|
Accrued interest
|
|
|
233,541
|
|
|
|
119,218
|
|
Payments on notes payable
|
|
|
(318,963
|
)
|
|
|
(85,657
|
)
|
Total
|
|
|
5,089,732
|
|
|
|
4,967,890
|
|
Less-Notes payable - current
|
|
|
(3,956,972
|
)
|
|
|
(3,467,890
|
)
|
Notes payable - non-current
|
|
$
|
1,132,760
|
|
|
$
|
1,500,000
|
|
Of the notes payable
at June 30, 2020, $1,099,000 were due September 1, 2019, $1,297,000 were due December 1, 2019, $60,000, payable monthly over eight
monthly payments, is due December 12, 2020, $133,000 were due April 28, 2022 and $2,500,000 is payable in $500,000 semi-annual
payments is due May 24, 2022. The notes due on September 1, 2019 and December 31, 2019 have an interest rate of 10%, the note due
on December 12, 2020 has an interest rate of 9.7%, the note due on April 28, 2022 has an interest rate of 1.0% and the note due
on May 24, 2022 has interest rate of 0%. All notes are unsecured and not convertible. Interest expense on these notes was $55,000
for the quarter ended June 30, 2020 and $19,000 for the quarter ended June 30, 2019. Interest expense on these notes was $121,000
for the six months ended June 30, 2020 and $31,000 for the six months ended June 30, 2019. Interest expense includes a $50,000
penalty interest for not making the first $500,000 payment on the note payable for the AOS acquisition.
9.
|
DUE TO RELATED PARTIES
|
It came 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 parties as reported on the balance sheet.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
On
January 13, 2020, the company received $45,000 from an individual based on a subscription agreement with the company for which
the company issued 150,000 shares of its common stock.
On
January 13, 2020, the company received $60,000 from two individuals based on a subscription agreement with the company for which
the company issued 200,000 shares of its common stock.
On
January 15, 2020, the company received $30,000 from two individuals based on a subscription agreement with the company for which
the company issued 100,000 shares of its common stock
On
January 22, 2020, the company received $204,000 from an individual based on a subscription agreement with the company for which
the company issued 680,000 shares of its common stock.
On
January 23, 2020, the company received $204,000 from an individual based on a subscription agreement with the company for which
the company issued 680,000 shares of its common stock.
On
January 24, 2020, the company received $60,000 from an individual based on a subscription agreement with the company for which
the company issued 200,000 shares of its common stock.
On
January 30, 2020, the company received $1,750 from an individual based on the exercise of a warrant for which the company issued
25,000 shares of its common stock.
On
February 19, 2020, the company received $510,000 from an individual based on a subscription agreement with the company for which
the company issued 1,700,000 shares of its common stock.
Series A Convertible
Preferred Stock, $0.001 par value, 2,000,000 shares authorized; 13,602 shares issued and outstanding at June 30, 2020 and at December
31, 2019.
The $351,000 stock-based
compensation for the quarter ended June 30, 2020 was comprised of $177,000 option expense and $167,000 was the amortization of
5,000,000 shares of stock valued at $0.4014 over three years for the acquisition of Applied Optical Sciences as well as the recognition
of $7,000 for the restricted stock agreements, partially offset by a reversal of $1,000 for the cancellation of 1,000,000 shares.
On
April 8, 2020, the company received $11,000 from an individual based on a warrant exercise for which the company issued 150,000
shares of its common stock.
On
April 8, 2020, the company received $63,000 from an individual based on an option exercise for which the company issued 900,000
shares of its common stock.
On
April 8, 2020, the company received $60,000 from an individual based on a subscription agreement with the company for which the
company issued 200,000 shares of its common stock.
On
April 23, 2020, the company received $71,000 from an individual based on a subscription agreement with the company for which the
company issued 237,000 shares of its common stock.
On
April 29, 2020, the company received $400,000 from an individual based on a subscription agreement with the company for which
the company issued 1,333,333 shares of its common stock.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
We have 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.
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 a share.
During
January 2019, the company received $150,000 from three individuals based on subscription agreements with the company for which
the company issued 2,500,000 shares of its common stock.
11.
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 and AnneMarieCo LLC (“AMC”).
The
lawsuit alleges to the following six causes of action:
|
1.
|
Breach of
Fiduciary Duty of Loyalty against George Farley
|
|
2.
|
Breach of
Fiduciary Duty of Care against George Farley
|
|
3.
|
Aiding and
Abetting Breach of Fiduciary Duty against AMC
|
|
4.
|
Conversion
against George Farley
|
|
5.
|
Fraudulent
Transfer against George Farley and AMC
|
|
6.
|
Injunctive
Relief against George Farley and AMC
|
This
report provides an update on the progress of the litigation.
In
connection with the lawsuit, the company requested a temporary restraining order prohibiting Mr. Farley and AMC from selling their
25 million shares of the company’s common stock which the company alleges were improperly issued. On July 20, 2018, the
Delaware Court of Chancery, Vice Chancellor Tamika Montgomery-Reeves presiding, entered a “status quo” order upon
the stipulation of the parties, whereby Mr. Farley and AMC agreed not to transfer, alienate or sell any of their shares pending
a ruling on the company’s motion for a preliminary injunction.
On
July 26, 2018, the Delaware Court of Chancery entered a scheduling order setting dates and deadlines for, among other matters,
a hearing and briefing schedule on the amount of the bond the company would be required to post to maintain the “status
quo” order through the preliminary injunction hearing, a hearing and briefing schedule on the motion for a preliminary injunction,
and a discovery schedule.
Also,
in connection with the lawsuit, on August 8, 2018, the company filed a motion to disqualify Mr. Farley’s attorney, Ryan
Whalen, who had previously represented the company.
On
August 14, 2018, the Delaware Court of Chancery issued an order requiring the company to post a bond in the total amount of $200,446.52.
On August 21, 2018, the company posted the bond via Atlantic Specialty Insurance company acting as surety. Pursuant to the contract
between the company and Atlantic Specialty Insurance company, the company deposited $200,446.52 in cash as collateral for the
surety agreement.
On
August 23, 2018, the Delaware Court of Chancery court extended the hearing date on the company’s motion for a preliminary
injunction to October 23, 2018, and simultaneously ordered an increase in the bond amount of $55,446.52. On August 30, 2018, the
company posted the increased bond amount, again with Atlantic Specialty Insurance Company acting as surety, and deposited the
additional $55,446.52 in cash with the surety.
On
September 7, 2018, the Delaware Court of Chancery entered an order setting a briefing schedule on the company’s motion to
disqualify Mr. Whalen.
On
September 10, 2018, the Delaware Court of Chancery entered an order governing the production and exchange of confidential documents
and information among the parties in discovery.
In
another Current Report on Form 8-K filed September 13, 2018, the company updated the status of the litigation to include events
that occurred up to that date. This report further updates the progress of the litigation.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
On
October 16, 2018, the Delaware Court of Chancery entered a scheduling order continuing the hearing date on the company’s
motion for a preliminary injunction against defendants George Farley and AMC to December 14, 2018.
The
October 16, 2018 order also required the company to increase its bond amount by an additional $185,301.86 ($80,301.86 for AMC
and $105,000.00 for Mr. Farley) to account for the continued hearing date. On October 24, 2018, the company posted the additional
bond amount of $185,301.86.
On
October 16, 2018, the Delaware Court of Chancery issued an order denying the company’s motion to disqualify Mr. Whalen.
On
January 23, 2019, the Delaware Court of Chancery issued a Memorandum Opinion, granting a preliminary injunction prohibiting Mr.
Farley and AMC from selling their 25 million shares of the company’s common stock, which the company alleges were improperly
issued. On January 24, 2019, the Delaware Court of Chancery issued a revised Memorandum Opinion correcting calculations regarding
the increased bond amount.
In
granting the preliminary injunction, the Court found that the company met “its considerable burden” of demonstrating
it was likely to win its lawsuit against Mr. Farley and AMC. Specifically, the Court found it was “reasonably probable”
Mr. Farley had unlawfully issued the 25 million shares without proper authorization, Mr. Farley had breached his duty of loyalty
to the company, Mr. Farley was unlikely to prove the stock issuance was procedurally or substantively “fair” to the
company, and Mr. Farley had fraudulently transferred 20 million of the shares to AMC. Finally, the Court ruled because Farley
and AMC’s 25 million shares represented approximately one eighth of the company’s outstanding ownership, the injunction
was necessary to protect the company’s capital structure, ability to attract new investors, ability to raise new capital
and continue deployment of its plans now underway to revitalize its business.
In
its Memorandum Opinion, the Court also required that the company post additional bond money, bringing the total cash collateral
for the surety agreement to $582,377.26. The company posted the additional bond amount, and deposited the additional cash amount
with the surety, on January 29, 2019.
On
March 4, 2019, the company filed an amended complaint adding claims against Mr. Farley concerning loans Mr. Farley caused the
company take from PowerUp Lending Group Ltd. and Auctus Fund LLC from September 2017 through March 2018. Mr. Farley responded
to the amended complaint by filing a motion to dismiss the lawsuit based on Delaware Court of Chancery Rules 12(b)(3) and 12(b)(7).
On September 28, 2019, the Delaware Chancery Court denied this motion.
On
July 7, 2019, the company filed a motion to reduce or eliminate the cash bond requirement. As previously reported, the cash bond
was required by the Delaware Chancery Court. On September 30, 2019, the Delaware Chancery Court denied the motion.
On
July 19, 2019, Mr. Farley and AMC filed answers and amended counter claims in response to the Company’s amended complaint.
The amended counter claims add claims under Delaware General Corporate Law section 205, seeking to validate the stock issuances
at issue in the litigation.
On
July 29, 2019, the Delaware Chancery Court entered a scheduling order which, among other deadlines, rescheduled the trial date
to begin on January 21, 2020. However, the judge presiding in the case, Vice Chancellor Montgomery-Reeves, was subsequently appointed
and confirmed to the Delaware Supreme Court.
The
case was reassigned to Vice Chancellor J. Travis Laster. On January 14, 2020, Vice Chancellor Laster held a scheduling conference.
On January 29, 2020, the Delaware Chancery Court entered a scheduling order setting the trial date for July 20, 2020. On June
2, 2020, the Delaware Chancery Court issued a scheduling order setting dates for pre-trial motion practice, hearings and conferences
leading up to a trial date of September 21-24, 2020.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
On
September 26, 2019, the company filed a motion for partial summary judgment concerning the issuance of company stock to Mr. Farley
without having been authorized by a quorum of the board of directors. The previous hearing date of November 20, 2019, was postponed
while the case awaited a new judge assignment. The motion was heard on July 23, 2020, by Vice Chancellor Laster.
On
August 3, 2020, in our ongoing litigation against George Farley, the company’s former CEO, and AnneMarieCo., LLC, the Chancery
Court of the State of Delaware issued an Opinion granting in part and denying in part the company’s Motion for Partial Summary
Judgment. The Court granted the company’s motion in the following respect: “Farley could not validly take action as
the sole remaining director between February 10, 2016, and March 9, 2018. The stock that he issued to himself is invalid, as is
the compensation that he attempted to grant to himself. The shares that he gifted to AnneMarieCo remain invalid, notwithstanding
their transfer to AnneMarieCo.” The court denied the motion in all other respects, rejecting the company’s argument
that Section 205 of the Delaware General Corporation Law is unavailable for the defendants to petition the court cure the invalidity
of the stock and compensation, leaving open the possibility for the court to reinstate the shares and/or compensation in whole
or in part under Section 205. The trial is now scheduled for September 21-23, 2020.
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 alleging the following:
|
1.
|
breach of fiduciary duty;
|
|
3.
|
aiding and abetting a breach of fiduciary duty;
|
|
4.
|
voidance of fees under New York Rules of Professional
Conduct 1.8;
|
|
5.
|
violation of New York Rule of Professional Conduct 1.5;
|
|
7.
|
breach of contract; and
|
The
complaint against Stein Riso followed the issuance, on January 23, 2019, of a Memorandum Opinion granting the company’s
motion for a preliminary injunction by the Delaware Court of Chancery in the case against George Farley and AMC. Stein Riso has
responded to the complaint by filing a motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). The
company amended its complaint in response. On July 31, 2019, Stein Riso responded to the company’s amended complaint by
filing another motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). The company filed an opposition to this
motion on August 14, 2019. Stein Riso filed a reply brief on September 13, 2019.
On
May 31, 2020, the United States District Court issued an opinion and order denying in part and granting in part the motion of
Stein Riso to dismiss the company’s complaint. The court rejected Stein Riso’s arguments that the allegations in the
company’s complaint did not adequately allege Stein Riso committed malpractice and aided and abetted breaches of fiduciary
duties by George Farley, the company’s former CEO and the defendant in a related action in the Delaware Chancery Court.
The court dismissed a separate cause of action which the company had pled for “rescission and restitution” for Stein
Riso’s alleged violations of the New York Rules of Professional Conduct, finding it was “duplicative” of our
professional malpractice cause of action. The court also dismissed the company’s cause of action against Stein Riso for
securities fraud.
On
June 25, 2020, the United States District Court issued a civil case management plan and scheduling order. On July 24, 2020, the
company filed a motion to amend its complaint to add Dennis Stein and Ivan Dreyer, individual attorneys at Stein Riso, as defendants.
The United States District Court has ordered the parties to appear at a mediation on August 13, 2020.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2020
(Unaudited)
On
July 3, 2019, Gusrae, Kaplan & Nusbaum and its partner, Ryan Whalen, counsel for defendants, George Farley and AnneMarie Co.
LLC, in the litigation brought by the company and pending in Delaware, 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.
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.
Following the end of
the quarter, in July and August, 2020, we received $4,049,000 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.
The
company’s management has evaluated subsequent events occurring after June 30, 2020, the date of our most recent balance
sheet, through the date our financial statements were issued.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Our
discussion and analysis of the financial condition and results of operations should be read in conjunction with the unaudited
condensed consolidated financial statements and the related disclosures included elsewhere herein and in the Management’s
Discussion and Analysis of Financial Condition and Results of Operations included as part of our Annual Report on Form 10-K for
the year ended December 31, 2019 and Quarterly Report on Form 10-Q for the three months ended March 31, 2020.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the securities laws.
Forward-looking statements include all statements that do not relate solely to the historical or current facts and can be identified
by the use of forward-looking words such as "may", "believe", "will", “would”, “could”,
“should”, "expect", "project", "anticipate", “estimates", “possible”,
"plan", "strategy", "target", "prospect" or "continue" and other similar terms
and phrases. These forward-looking statements are based on the current plans and expectations of our management and are subject
to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results
of operations and financial condition and may cause our actual results, performance or achievements to be materially different
from any future results, performance or achievements expressed or implied by such forward-looking statements. Important factors
that could cause our actual results to differ materially from our expectations are described in Item 1A (Risk Factors) of our
Annual Report on Form 10-K, for the year ended December 31, 2019. 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.
Applied
Energetics, Inc., (the “Company”) 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; (520) 628-7415. www.aergs.com
Applied
Energetics, Inc., 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 customers 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 two key types of Directed Energy Weapon (“DEW”) technologies, High Energy Lasers (“HEL”), and
High-Power Microwave (“HPM”). Neither HEL nor HPM is owned by a single entity. The DOD then designated a third DEW
technology, LGE. Applied Energetics’s 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 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.
We have also reorganized
the company’s Scientific Advisory Board and, effective April 30, 2019, AERG entered into a Scientific Advisory Board Agreement
with Charles Hale. This agreement provides for Mr. Hale’s service on the Scientific Advisory Board for compensation consisting
of a non-qualified stock option to purchase 1,500,000 shares of Company’s common stock at an exercise price equal to $0.369
per share. The option is subject to vesting annually over three years with the first installment twelve months from the date of
the agreement. The option expires ten (10) years from the date of the Agreement. Prior to entering into the agreement, Applied
Energetics and Mr. Hale agreed that he would forfeit options to purchase 1,500,000 shares at an exercise price of $0.25 per share
which had been granted under his prior Consulting Agreement.
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 Laser Guided Energy and the company’s other novel laser technologies and is
to provide 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 $6.5 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 agreement having a value of $165,919.77 with the US Army under their STTR program for a 90-day Phase 1
research program to investigate Standoff Electronic Denial systems using ultrashort pulse lasers. The Army anticipates funding
one (1) STTR Phase II for each of seven (7) “special topics” and Phase II contracts are limited to a maximum of $1,100,000
over a period between 6 and 18 months. Sequential/Subsequent Phase II funding, as well as non-SBIR/STTR funding, may also be available.
The final report for this Phase I contract was submitted on July 3, 2020 and the US Army subsequently accepted the Phase I Final
Report and invited AERG to participate in the Phase II process through the submission of a Phase II proposal no later than August
11, 2020. The Applied Energetics Phase II STTR proposal was submitted and accepted on August 10, 2020, and we await the review
of this proposed technological advance for the US Army Standoff Electronic Denial topic.
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 8 weeks of 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. Our strategy is 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.
Multiple
proposals have been submitted to various government agencies in 2019 and 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.
On
August 3, 2020, in our ongoing litigation against George Farley, the company’s former CEO, and AnneMarieCo., LLC, the Chancery
Court of the State of Delaware issued an Opinion granting in part and denying in part the company’s Motion for Partial Summary
Judgment. The Court granted the company’s motion in the following respect: “Farley could not validly take action as
the sole remaining director between February 10, 2016, and March 9, 2018. The stock that he issued to himself is invalid, as is
the compensation that he attempted to grant to himself. The shares that he gifted to AnneMarieCo remain invalid, notwithstanding
their transfer to AnneMarieCo.” The court denied the motion in all other respects, rejecting the company’s argument
that Section 205 of the Delaware General Corporation Law is unavailable for the defendants to petition the court cure the invalidity
of the stock and compensation, leaving open the possibility for the court to reinstate the shares and/or compensation in whole
or in part under Section 205. Following assignment of a new vice chancellor in the case, we were awaiting a July 20, 2020 trial
date based on the Delaware Chancery’s January 29, 2020 scheduling order. However, because of delays due to the Coronavirus,
the trial is now scheduled for September 21-23, 2020. We cannot be certain whether the Coronavirus will further affect the timing
of the trial. For a more detailed discussion of this litigation, see “Legal Proceedings” elsewhere in this Form 10-Q.
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, including possibly an additional
director. We also intend to recruit additional personnel, including in the areas of R&D, marketing and finance. We have worked
to align key innovations with our roadmap to encourage and enable internal filing for a broad, strategic and robust portfolio of
IP and continue surveying the literature for acquisitions of parallel IP to that end. We also intend to pursue strategic corporate
acquisitions in related fields and technology. We continue our active pursuit of additional debt and equity financing through discussions
with investment bankers and private investors.
Our goal on 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.
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 the quarter, 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 CEO, has traveled to DC on multiple occasions during the quarter, 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.
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. As the US Congress finalizes
their Appropriations process for the 2021 budget, 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 marketplace.
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.
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.
Results
of Operations
Comparison
of Operations for the Three Months Ended June 30, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
General and administrative
|
|
$
|
(1,128,324
|
)
|
|
$
|
(610,446
|
)
|
Selling and marketing
|
|
|
(71,840
|
)
|
|
|
(53,999
|
)
|
Research and development
|
|
|
(65,317
|
)
|
|
|
(95,890
|
)
|
Interest (expense)
|
|
|
(109,229
|
)
|
|
|
(26,485
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,374,710
|
)
|
|
$
|
(786,820
|
)
|
General
and Administrative
General
and administrative expenses increased approximately $518,000 to $1,128,000 for the three months ended June 30, 2020 compared to
$610,000 for the three months ended June 30, 2019 primarily due to the increase of $475,000 of professional expenses, an increase
in building costs of $28,000 and an increase in salaries and employee benefits of $15,000.
Selling
and Marketing
Selling
and marketing expenses increased approximately $18,000 to $72,000 for the three months ended June 30, 2020 compared to $54,000
for the three months ended June 30, 2019 primarily due to the continuation of business development activities through our Master
Services Agreement with Westpark Advisors as well as the addition of other consultants in this field.
Research
and Development
Research
and development expenses decreased approximately $31,000 to $65,000 for the three months ended June 30, 2020 compared to $96,000
for the three months ended June 30, 2019 primarily due to the allocation of part of management’s pay from research and development
to consulting expense.
Interest
Expense
Interest
expense increased approximately $83,000 to $109,000 for the three months ended June 30, 2020 compared to $26,000 for the three
months ended June 30, 2019 primarily due to increased levels of debt as well as the $50,000 penalty interest on the note payable
for the AOS acquisition.
Net
Loss
Our
operations for the three months ended June 30, 2020 resulted in a net loss of approximately $1,375,000, an increase of approximately
$588,000 compared to the approximately $787,000 net loss for the three months ended June 30, 2019 primarily due to an increase
in professional fees, an increase in building costs, an increase in salaries and employee benefits, an increase in selling and
marketing and an increase in interest expense offset by a decrease in research and development costs.
Comparison
of Operations for the Six Months Ended June 30, 2020 and 2019:
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
$
|
10,000
|
|
|
$
|
-
|
|
General and administrative
|
|
$
|
(2,218,744
|
)
|
|
$
|
(1,067,165
|
)
|
Selling and marketing
|
|
|
(153,526
|
)
|
|
|
(106,333
|
)
|
Research and development
|
|
|
(122,796
|
)
|
|
|
(168,550
|
)
|
Other income
|
|
|
15,833
|
|
|
|
-
|
|
Interest (expense)
|
|
|
(170,568
|
)
|
|
|
(30,925
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,639,801
|
)
|
|
$
|
(1,372,973
|
)
|
Revenue
Revenue
increased $10,000 to $10,000 for the six months ended June 30, 2020 compared to $-0- for the six months ended June 30, 2019 based
on a contract we acquired in the purchase of Applied Optical Sciences.
General
and Administrative
General
and administrative expenses increased approximately $1,152,000 to $2,219,000 for the six months ended June 30, 2020 compared to
$1,067,000 for the six months ended June 30, 2019 primarily due to the increase of $979,000 of professional expenses, an increase
in salaries and employee benefits of $94,000, an increase in building costs of $42,000, an increase in travel expense of $18,000
and an increase in supplies and insurance expense of $14,000.
Selling
and Marketing
Selling
and marketing expenses increased approximately $47,000 to $154,000 for the six months ended June 30, 2020 compared to $106,000
for the six months ended June 30, 2019 primarily due to the continuation of business development activities through our Master
Services Agreement with Westpark Advisors as well as the addition of other consultants in this field.
Research
and Development
Research
and development expenses decreased approximately $46,000 to $123,000 for the six months ended June 30, 2020 compared to $169,000
for the six months ended June 30, 2019 primarily due to the allocation of part of management’s pay from research and development
to consulting expense.
Other
Income
Other
income increased approximately $16,000 to $16,000 for the six months ended June 30, 2020 compared to $-0- for the six months ended
June 30, 2019 to reflect the income from time and effort expenses on the subcontract to the Missile Defense Agency (thru AlionSciences)
as a subject matter expert on a series of program reviews.
Interest
Expense
Interest
expense increased approximately $140,000 to $171,000 for the six months ended June 30, 2020 compared to $31,000 for the six months
ended June 30, 2019 primarily due to increased levels of debt as well as the $50,000 penalty interest on the note payable for
the AOS acquisition.
Net
Loss
Our
operations for the six months ended June 30, 2020 resulted in a net loss of approximately $2,640,000, an increase of approximately
$1,267,000 compared to the approximately $1,373,000 net loss for the six months ended June 30, 2019 primarily due to an increase
in professional fees, an increase in salaries and employee benefits, an increase in selling and marketing, an increase in supplies
and insurance expense and an increase in interest expense offset by a decrease in research and development costs and an increase
in other income.
Liquidity
and Capital Resources
At June 30, 2020, we
had approximately $447,000 of cash and cash equivalents, an increase of approximately $359,000 from December 31, 2019. During the
first six months of 2020, the net cash outflow from operating activities was approximately $1,260,000. This amount was comprised
primarily of our net loss of $2,640,000, an increase in prepaid expenses and deposits of $106,000, a decrease in accounts payable
of $57,000, partially offset by noncash stock based compensation of $791,000, amortization of future compensation payable of $417,000,
an increase in accrued interest of $121,000, amortization of prepaid expenses of $98,000, an increase in customer deposits of $66,000,
an increase in accrued expenses and compensation of $32,000, a decrease in accounts receivable of $10,000 and depreciation and
amortization of $9,000. Financing activities reflected $1,644,000 in proceeds from issuance of common stock, $133,000 in proceeds
from notes payable and proceeds from the exercise of warrants and options of $75,000, partially offset by the repayment on notes
payable of $233,000 resulting in net cash inflow of approximately $359,000.
Following the end of
the quarter, in July and August, 2020, we received $4,049,000 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.
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 six-months ended June 30, 2020, the company incurred a net
loss of approximately $2,640,000, had negative cash flows from operations of $1,260,000 and may incur additional future losses
due to the reduction in Government contract activity. These matters raise substantial doubt as to the company’s ability
to continue as a going concern.
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.
In
order to improve the company’s liquidity, the company’s management is actively pursuing additional debt and 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 debt and 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.
In
their report accompanying our financial statements, our independent auditors stated that our financial statements for the year
ended December 31, 2019 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 from operations and
need to raise additional capital to sustain operations raise substantial doubt about our ability to continue as a going concern.
Backlog
of Orders
At
May 12, 2020, we had a backlog (workload remaining on signed contracts) of approximately $166,000, to be completed within the
next twelve months.