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. Certain
reclassifications have been made to prior period financial statement amounts to conform to the current presentation.
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, 2019, the company incurred a net
loss of approximately $5,556,000, had negative cash flows from operations of $3,250,000 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. 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 under the percentage of completion method of contract accounting, the valuation of inventory,
carrying amounts of long-lived assets, valuation assumptions for share-based payments and measurements of income tax assets and
liabilities, 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 35,246,757
and 27,793,924 for the years ended December 31, 2019 and 2018, 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. These money
market funds are invested in government and US treasury based securities.
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.
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. Substantially all of our accounts receivable
are with agents or departments of the US Federal Government which, although concentrated in one group of common entities, does
not expose us to significant credit risk.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 – NEW ACCOUNTING STANDARDS
In
June 2016, the FASB issued ASU 2016- 13, “Financial Instruments- Credit Losses (Topic 326), Measurement of Credit Losses
on Financial Instruments.” The standard modifies the measurement approach for credit losses on financial instruments, including
trade receivables, from an incurred loss method to a current expected credit loss method (“CECL”). The standard requires
the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions
and a forecast that is supportable. The standard is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years; early adoption is permitted. The standard must be adopted by applying a cumulative adjustment
to retained earnings. The Company anticipates adopting the standard in the first quarter of 2020, although it does not expect
a material impact to the Company’s Consolidated Financial Statements.
In
August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modified the disclosure requirements in Topic 820, “Fair
Value Measurement,” based on the FASB Concepts Statement, “Conceptual Framework for Financial Reporting - Chapter
8: Notes to Financial Statements,” including consideration of costs and benefits. The guidance is effective for fiscal years
beginning after December 15, 2019 and for interim periods within those fiscal years, with early adoption permitted. The company
is currently evaluating the potential effects of this guidance on its Consolidated Financial Statements.
In
August 2018, the FASB issued ASU No. 2018-14 “Disclosure Framework - Changes to the Disclosure Requirements for Defined
Benefit Plans,” which amends ASC 715-20, Compensation - Retirement Benefits - Defined Benefit Plans - General. The amended
guidance modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans
by removing and adding certain disclosures for these plans. The eliminated disclosures include (a) the amounts in OCI expected
to be recognized in net periodic benefit costs over the next fiscal year, and (b) the effects of a one percentage point change
in assumed health care cost trend rates on the net periodic benefit costs and the benefit obligation for post-retirement health
care benefits. Additional disclosures include descriptions of significant gains and losses affecting the benefit obligation for
the period. This guidance will be effective for financial statements issued for fiscal years ending after December 15, 2020. The
adoption of this guidance will modify our disclosures but will not have a material effect on the Company’s Consolidated
Financial Statements.
In
August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus
of the FASB Emerging Issues Task Force).” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred
in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop
or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance is effective
for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years, with early adoption permitted.
The Company is currently evaluating this guidance on its Consolidated Financial Statements.
In
December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes”
as part of its initiative to reduce complexity in the accounting standards. The guidance is effective for fiscal years beginning
after December 15, 2021 with early adoption permitted. The Company is currently evaluating this guidance on its Consolidated Financial
Statements, The Company does not expect material effect from the adoption of this guidance on the Company’s Consolidated
Financial Statements.
There
were other updates recently issued, most of which represented technical corrections to the accounting literature or application
to specific industries and are not expected to have a material impact on the company’s financial position, results of operations
or cash flows.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
3 – NOTES PAYABLE
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. In the first three months of 2020, two notes
with principal balances of $50,000 each were paid off for a total of $108,000.
On
September 15, 2017 the company borrowed $53,000 under a convertible note maturing June 20, 2018. The note bears interest of 12%
payable at maturity. Any amount of principal or interest on the note which is not paid when due shall bear interest at the rate
of twenty two percent (22%) per annum from the due date thereof until the same is paid. The note is convertible into shares of
the company’s $0.001 par value common stock after March 24, 2018 (the “Initial Conversion Date”). The conversion
rate is variable and will be 58% of the average of the lowest one-day trading price during the twenty trading days preceding the
holders notice of conversion. The number of shares issuable on conversion is limited to 4.99% of the company’s then issued
and outstanding common stock. The company at the request of the note holder has reserved 36,369,879 shares of its $0.001 common
stock for conversion. The note can be prepaid at the company’s option until the Initial Conversion Date. The company issued
the note holder warrants to purchase 1,320,598 shares of it’s $0.001 par value common stock at an exercise price of $0.0301,
The Warrants are exercisable at any time over a 7-year period commencing on the date of issuance. The company calculated a beneficial
conversion feature of $53,000 on this note against which approximately $53,000 has been amortized.
The
above transaction of a note for $53,000 and attached warrants of 1,320,598 shares were put in place by previous management. On
March 12, 2018, the company’s newly elected board of directors discussed its options concerning the above referenced loan
and attached warrant and agreed that it would be in the best interest of the company and its shareholders to pay in full the $53,000
convertible note funded on October 18, 2017, and additionally repurchase the warrant. On March 16, 2018, the company paid in full
the $53,000 convertible note and cancelled its associated warrant to purchase 1,320,598 shares of common stock in a negotiated
transaction. This note carried special early stock conversion rights at a material discount to market, and was considered to be
a dilutive derivative event that could harm the future abilities of the company to operate and raise money. The total cost to
the company to pay off this $53,000 note before the conversion date was $81,000. Additionally, the company cancelled the above
referenced attached warrant which allowed the loan holder to purchase 1,320,598 shares of common stock at a material discount
to the market. This warrant was given to the noteholder by previous management as an incentive to make the above referenced loan.
The cost to the company to cancel the warrant was $40,000. The total combined cost to the company to cancel the loan and warrant
was $121,000. The payment was comprised of $56,000 principal and accrued interest, prepayment premium of $25,000 and $40,000 to
buy back the warrant. The note was paid in full on March 16, 2018. The company borrowed the $121,000 used to pay off this loan
before the conversion date, via an interest free loan from two directors of the company.
On
October 18, 2017 the company borrowed $33,000 under a convertible note maturing July 20, 2018. The note bears interest of 12%
payable at maturity. Any amount of principal or interest on the note which is not paid when due shall bear interest at the rate
of twenty two percent (22%) per annum from the due date thereof until the same is paid. The note is convertible into shares of
the company’s $0.001 par value common stock after April 16, 2018 (the “Initial Conversion Date”). The conversion
rate is variable and will be 58% of the average of the lowest one-day trading price during the twenty trading days preceding the
holders notice of conversion. The number of shares issuable on conversion is limited to 4.99% of the company’s then issued
and outstanding common stock. The company at the request of the note holder has reserved 18,062,397 shares of its $0.001 common
stock for conversion. The note can be prepaid at the company’s option until the Initial Conversion Date. The company calculated
a beneficial conversion feature of approximately $24,000 on this note against which $14,000 has been amortized.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
The
above transaction of a note for $33,000 was put in place by previous management. On April 10, 2018, the company’s newly
elected board of directors discussed its options concerning the above referenced convertible loan funded on October 18, 2017 in
the amount of $33,000 and agreed that it would be in the best interest of the company and its shareholders to pay in full the
referenced note which was put in place by previous management. This note carried special early stock conversion rights at a material
discount to market and was considered by the company to be a dilutive derivative event that could harm the future abilities of
the company to operate and raise money. The cost to the company to pay off this $33,000 note before the conversion date was $51,000.
The payment was comprised of $35,000 principal and accrued interest, and prepayment premium of $16,000. The note was paid in full
on April 12, 2018.
On
November 16, 2017 the company borrowed $38,000 under a convertible note maturing August 20, 2018. The note bears interest of 12%
payable at maturity. Any amount of principal or interest on the note which is not paid when due shall bear interest at the rate
of twenty two percent (22%) per annum from the due date thereof until the same is paid. The note is convertible into shares of
the company’s $0.001 par value common stock after May 16, 2018 (the “Initial Conversion Date”). The conversion
rate is variable and will be 58% of the average of the lowest one-day trading price during the twenty trading days preceding the
holders notice of conversion. The number of shares issuable on conversion is limited to 4.99% of the company’s then issued
and outstanding common stock. The company at the request of the Note Holder has reserved 20,716,914 shares of its $0.001 common
stock for conversion. The note can be prepaid at the company’s option until the Initial Conversion Date. The company calculated
a beneficial conversion feature of approximately $28,000 on this note against which $13,000 has been amortized.
The
above transaction of a note for $38,000 was put in place by previous management. On May 4, 2018 the company’s newly elected
board of directors discussed its options concerning the above referenced convertible loan funded on November 16, 2017 in the amount
of $38,000 and agreed that it would be in the best interest of the company and its shareholders to pay in full the referenced
note which was put in place by previous management. This note carried special early stock conversion rights at a material discount
to market and was considered by the company to be a dilutive derivative event that could harm the future abilities of the company
to operate and raise money. The cost to the company to pay off this $38,000 note before the conversion date was $58,000. The payment
was comprised of $40,000 principal and accrued interest, and prepayment premium of $18,000. The note was paid in full on May 7,
2018.
On
December 27, 2017 the company borrowed $28,000 under a convertible note maturing September 20, 2018. The note bears interest of
12% payable at maturity. Any amount of principal or interest on the note which is not paid when due shall bear interest at the
rate of twenty two percent (22%) per annum from the due date thereof until the same is paid. The note is convertible into shares
of the company’s $0.001 par value common stock after April 16, 2018 (the “Initial Conversion Date”). The conversion
rate is variable and will be 58% of the average of the lowest one-day trading price during the twenty trading days preceding the
holders notice of conversion. The number of shares issuable on conversion is limited to 4.99% of the company’s then issued
and outstanding common stock. The company at the request of the note holder has reserved 17,164,750 shares of its $0.001 common
stock for conversion. The note can be prepaid at the company’s option until the Initial Conversion Date. The company calculated
a beneficial conversion feature of approximately $20,000 on this note against which $7,000 has been amortized.
The
above transaction of a note for $28,000 was put in place by previous management. On May 4, 2018 the company’s newly elected
board of directors discussed its options concerning the above referenced convertible loan funded on December 27, 2017 in the amount
of $28,000 and agreed that it would be in the best interest of the company and its shareholders to pay in full the referenced
note which was put in place by previous management. This note carried special early stock conversion rights at a material discount
to market and was considered by the company to be a dilutive derivative event that could harm the future abilities of the company
to operate and raise money. The cost to the company to pay off this $28,000 note before the conversion date was $41,000. The payment
was comprised of $29,000 principal and accrued interest, and prepayment premium of $12,000. The note was paid in full on May 18,
2018.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
On
January 8, 2018 the company borrowed $105,000 under a convertible note maturing August 28, 2018. The note bears interest of 12%
payable at maturity. Any amount of principal or interest on the note which is not paid when due shall bear interest at the rate
of twenty-four percent (24%) per annum from the due date thereof until the same is paid. The note is convertible into shares of
the company’s $0.001 par value common stock after April 27, 2018 (the “Initial Conversion Date”). The conversion
rate is variable and will be 55% of the lowest one-day trading price during the twenty trading days preceding the holders notice
of conversion. The number of shares issuable on any conversion is limited to 4.99% of the company’s then issued and outstanding
common stock. The note holder may increase the 4,99% limit to 9.99% on 61 days prior notice to the company. The company, at the
request of the note holder, has reserved 40 million shares of its $0.001 common stock for conversion. The note can be prepaid
at the company’s option until May 29, 2018. The company also entered into a security agreement pledging substantially all
of its assets except for those related to Laser Guided Energy as collateral for the note.
The
above transaction of a note for $105,000 was put in place by previous management. On April 25, 2018, the company’s newly
elected board of directors discussed its options concerning the above referenced convertible loan funded on January 08, 2017 in
the amount of $105,000, the board agreed that it would be in the best interest of the company and its shareholders to pay in full
the referenced note before its conversion date. The note carried special early stock conversion rights at a material discount
to market, in addition it pledged virtually all the assets of the company as collateral. The company’s board of directors
considered this to be a significant derivative event that was extremely dilutive to existing shareholders. Additionally, it was
the opinion of the company’s board of directors that this loan harmed the future abilities of the company to operate as
a going concern and would make it nearly impossible to raise money in the future. The cost to the company to pay off this $105,000
note before the conversion date was $163,000 The payment was executed as paid in full on April 27, 2018 and was comprised of $109,000
principal and accrued interest, and a prepayment premium of $54,000 for a total of $163,000.
On
March 8, 2018 the company borrowed $26,500 under a convertible note maturing December 15, 2018. The note bears interest of 12%
payable at maturity. Any amount of principal or interest on the note which is not paid when due shall bear interest at the rate
of twenty two percent (22%) per annum from the due date thereof until the same is paid. The note is convertible into shares of
the company’s $0.001 par value common stock after September 5, 2018 (the “Initial Conversion Date”). The conversion
rate is variable and will be 51% of the average of the lowest one day trading price during the thirty trading days preceding the
holders notice of conversion. The number of shares issuable on conversion is limited to 4.99% of the company’s then issued
and outstanding Common Stock. The company at the request of the Note Holder has reserved 11,008,640 shares of its $0.001 common
stock for conversion. The note can be prepaid at the company’s option until the Initial Conversion Date.
The
above transaction of a note for $26,500 was put in place by previous management. On May 4, 2018 the company’s newly elected
board of directors discussed its options concerning the above referenced convertible loan funded on December 27, 2017 in the amount
of $26,500 and agreed that it would be in the best interest of the company and its shareholders to pay in full the referenced
note which was put in place by previous management. This note carried special early stock conversion rights at a material discount
to market and was considered by the company to be a dilutive derivative event that could harm the future abilities of the company
to operate and raise money. The cost to the company to pay off this $26,500 note before the conversion date was $37,000. The payment
was comprised of $27,000 principal and accrued interest, and prepayment premium of $10,000. The note was paid in full on May 18,
2018.
The
following reconciles notes payable as of December 31, 2019 and December 31, 2018:
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Convertible notes payable
|
|
$
|
-
|
|
|
$
|
(98,903
|
)
|
Notes payable
|
|
|
4,880,000
|
|
|
|
-
|
|
Accrued interest
|
|
|
119,218
|
|
|
|
(13,250
|
)
|
Payments on notes payable
|
|
|
(85,657
|
)
|
|
|
-
|
|
Financing costs
|
|
|
-
|
|
|
|
(3,317
|
)
|
Transfer from prepaid
|
|
|
54,329
|
|
|
|
-
|
|
Amortization of financing costs
|
|
|
-
|
|
|
|
22,721
|
|
Beneficial conversion factor
|
|
|
-
|
|
|
|
(111,370
|
)
|
Amortization of beneficial conversion factor
|
|
|
-
|
|
|
|
204,119
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,967,890
|
|
|
$
|
-
|
|
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Of
the $4,967,890 loan balance, $3,467,890 are short term and $1,500,000 are long term $2,467,890 are payable immediately and of
the remaining $2,500,000 is payable in equal semi-annual installments, the first payment being due on May 24, 2020 and subsequent
payments being due on the last day of each six-month period thereafter, the final such payment being due on May 24, 2022.
NOTE
4 – DUE TO RELATED PARTIES
During
the six months ended June 30, 2018, the company, under its new management, has borrowed a total of $132,000 from Mr. Bradford
T Adamczyk, the company’s PEO and director, and Jonathan Barcklow, the company’s Vice President and Secretary and
director. These loans are interest free and are payable on demand. On May 1, 2018, both directors submitted subscription agreements
for $60,000 for 1,000,000 shares of company common stock, each to be settled with the company’s debt. On July 23, 2018,
the remaining balance of $12,000 was paid back to one director.
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
5 – 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.
On
December 4, 2017 previous management entered into a financial services agreement with BMA Securities for which, on January 26,
2018, it issued 5,000,000 shares of stock valued at $150,000.
On
January 24, 2018, we issued 1,242,710 shares of common stock in settlement of invoices valued at $38,524.26 with a vendor. This
transaction was consummated by previous management to pay its attorney fees.
On
April 12, 2018 the company received $120,000 from an individual based on a subscription agreement with the company for which the
company issued 2,000,000 shares of its common stock.
On
April 16, 2018 the company received $30,000 from an individual based on a subscription agreement with the company for which the
company issued 500,000 shares of its common stock.
On
April 17, 2018 the company received $100,000 from an individual based on a subscription agreement with the company for which the
company issued 1,666,667 shares of its common stock.
On
April 26, 2018 the company received $90,000 from an individual based on a subscription agreement with the company for which the
company issued 1,500,000 shares of its common stock.
On
May 4, 2018 the company received $30,000 from an individual based on a subscription agreement with the company for which the company
issued 500,000 shares of its common stock.
On
May 8, 2018 the company received $120,000 from an individual based on a subscription agreement with the company for which the
company issued 2,000,000 shares of its common stock.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
On
May 14, 2018 the company received $30,000 from an individual based on a subscription agreement with the company for which the
company issued 500,000 shares of its common stock.
On
May 14, 2018 the company received $200,000 from an individual based on a subscription agreement with the company for which the
company issued 3,333,333 shares of its common stock.
On
May 15, 2018 the company received $30,000 from an individual based on a subscription agreement with the company for which the
company issued 500,000 shares of its common stock.
On
May 16, 2018 the company received $20,000 from an individual based on a subscription agreement with the company for which the
company issued 333,333 shares of its common stock.
On
May 25, 2018 the company received $600,000 from an individual based on a subscription agreement with the company for which the
company issued 10,000,000 shares of its common stock.
On
June 13, 2018 the company received $140,000 from an individual based on a subscription agreement with the company for which the
company issued 2,333,333 shares of its common stock.
On
September 20, 2018 the company received $120,000 from an individual based on a subscription agreement with the company for which
the company issued 2,000,000 shares of its common stock.
On
September 25, 2018 the company received a total of $60,000 from two individuals based on subscription agreements with the company
for which the company issued 1,000,000 shares of its common stock.
On
October 3, 2018 the company received $90,000 from an individual based on a subscription agreement with the company for which the
company issued 1,500,000 shares of its common stock.
Effective
October 19, 2018 the company received $20,000 and a note for $100,000 from an individual based on a subscription agreement with
the company for which the company issued 2,000,000 shares of its common stock. The note is non-interest bearing and is to be paid
in five monthly payments of $20,000 starting November 20, 2018 The balance of the note receivable at December 31, 2018 was $60,000.
In the first three months of 2019, the remaining $60,000 was received.
On
October 22, 2018 the company received $30,000 from an individual based on a subscription agreement with the company for which
the company issued 500,000 shares of its common stock.
Effective
October 30, 2018, AERG entered into a Mutual Release and Hold Harmless Agreement (“Agreement”) with Gregory Fettig
and Mr. Fettig’s former law firm, Duff Bornsen and Fettig, LLP (collectively, the “Fettig Parties”). The Agreement
resolves claims concerning the issuance of 5,000,000 shares of AERG common stock, par value $.001 per share, to the Fettig Parties
as authorized by prior company director George Farley as compensation for legal services rendered to the company by the Fettig
Parties valued at $5,000. The Agreement also resolves claims concerning unpaid invoices to AERG for legal services performed by
the Fettig Parties. Pursuant to the Agreement, AERG paid the Fettig Parties an aggregate of $12,000, representing full satisfaction
of fees for legal services of $9,825 plus additional consideration of $2,175. The Fettig Parties agreed to surrender to AERG the
stock certificate representing the 5,000,000 shares. The Agreement also contains standard representations and warranties and mutual
releases and indemnification provisions.
On
November 1, 2018 the company received $120,000 from an individual based on a subscription agreement with the company for which
the company issued 2,000,000 shares of its common stock.
On
December 7, 2018 the company received $60,000 from an individual based on a subscription agreement with the company for which
the company issued 1,000,000 shares of its common stock.
On
December 21, 2018 the company received $60,000 from an individual based on a subscription agreement with the company for which
the company issued 1,000,000 shares of its common stock.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
On
December 31, 2018 the company received $60,000 from an individual based on a subscription agreement with the company for which
the company issued 1,000,000 shares of its 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 $904,000 from four non-affiliated individuals based on subscription agreements
with the company for which the company issued 3,038,332 shares of its common stock.
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 received issued 25,000 shares in response to a non-affiliated warrant holder exercising a warrant.
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.
Preferred
Stock
As
of December 31, 2019 and 2018 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, 2018 including previously accrued dividends included in our balance
sheet are approximately $221,000. 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.
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.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
In
the fourth quarter of 2015, the company purchased 93,570 shares of its Series A Convertible Preferred Stock for approximately
$58,000. The company cancelled the shares and returned them to unissued status. The company also reversed approximately $331,000
of accrued dividends payable.
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 $2,549,000 and $381,000 for the years
ended December 31, 2019 and 2018, respectively, which was charged to general and administrative expense.
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, 2019
|
|
|
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
|
|
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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,
|
|
|
|
2019
|
|
|
2018
|
|
Expected life (years)
|
|
|
5.5 - 6.75
|
|
|
|
5.2 - 10
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
232
|
%
|
|
|
80% - 275
|
%
|
Risk free interest rates
|
|
|
2.47
|
%
|
|
|
3.1% - 3.33
|
%
|
Weighted average fair value of options at grant
date
|
|
$
|
0.3400
|
|
|
$
|
0.0597
|
|
For
the year ended December 31, 2019, 6,650,000 options to purchase stock were granted, 3,000,000 options to purchase stock were forfeited,
additionally, no options to purchase stock were exercised or expired; no restricted stock purchase offers were granted, vested
or forfeited. At December 31, 2019, options to purchase 31,400,000 shares of common stock were outstanding with a weighted average
exercise price of $0.15 with a weighted average remaining contract term of approximately 6.6 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 $4,731,000. At December 31, 2019 options for 19,085,000 shares were exercisable. There was no activity
of our restricted stock units and restricted stock grants for the years ended December 31, 2019 and 2018.
As
of December 31, 2019, there was approximately $1,709,000 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.
During
the year ended December 31, 2019, the company received $2,150,000 in proceeds from the issuance of promissory notes payable (“Notes”)
with which the company also issued warrants to purchase 1,075,000 shares of the company’s common stock, par value $0.001
per share at an exercise price of $0.07 per share for two years from the date of issuance. $1,150,000 of the Notes mature September
1, 2019 and $1,000,000 of the notes mature December 1, 2019. The notes bear interest of 10% payable at maturity. On maturity date,
the company may elect to convert $850,000 of the balance of principal and interest due into shares of common stock at the conversion
price of $0.10 a share.
Under
an Asset Purchase Agreement, dated as of May 24, 2019, by and between the company and Applied Optical Sciences, Inc., an Arizona
corporation which is majority owned by the holder of in excess of 10% of the company’s common stock, we issued warrants
to purchase 2,500,000 shares of the company’s common stock, par value $0.001 per share at an exercise price of $0.06 per
share for ten years from the date of issuance.
In
the last quarter of the year ended December 31, 2019, we issued warrants to purchase 225,000 shares of the company’s common
stock, par value $0.001 per share at an exercise price of $0.07 per share for two years from the date of issuance.
We
have entered into an Executive Employment Agreement (“Agreement”) with Dr. Gregory J Quarles setting forth the terms
of his service as Chief Executive Officer. The agreement calls for an option for 5,000,000 shares of our common stock at an exercise
price of $0.35 per share. These options vest immediately with respect to 500,000 shares and in semi-annual installments with respect
to the remaining 4,500,000 shares. The agreement also provides for Quarles to retain 2,000,000 options previously granted to him
under a Consultant Stock Option Agreement in 2017, for his services on the Scientific Advisory Board, which are subject to vesting
based on achievement of performance milestones. The agreement also provides for Dr. Quarles to forfeit 1,500,000 performance options
previously granted to him under a Consultant Stock Option Agreement in 2017, for his services on the Scientific Advisory Board.
Under the agreement, In the event of a termination of the agreement by Quarles with Good Reason, or by us without cause, any unvested
options will vest upon such termination.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
In
April 2019, 150,000 options were grated with an exercise price of $0.35 and a vesting schedule of 25% on the six-month anniversary
of the issuance of the option and 25% each of the following six-month anniversaries. Also 1,500,000 options were granted with
an exercise price of $0.369 and a vesting schedule of 1/3 on each of the three succeeding anniversary of the issuance of the option.
1,500,000 performance options previously granted to under a Consultant Stock Option Agreement in 2017, for services on the Scientific
Advisory Board were forfeited.
For
the year ended December 31, 2018, 13,750,000 options to purchase stock were granted, additionally, no options to purchase stock
were exercised, expired or forfeited; no restricted stock purchase offers were granted, vested or forfeited. At December 31, 2018,
options to purchase 27,750,000 shares of common stock were outstanding with a weighted average exercise price of $0.1037 with
a weighted average remaining contract term of approximately 6.5 years with an aggregate intrinsic value of $-0-. At December 31,
2018 options for 9,712,500 shares were exercisable.
As
of December 31, 2018, there was approximately $536,000 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 and a half years.
On
November 1, 2018, a non-plan option for 250,000 shares was granted to a vendor with an exercise price of $0.13 with 62,500 vested
on the date of option and an additional 62,500 vesting on the last day of each 90-day period following the date of option.
On
November 12, 2018 13,500,000 options were grated with an exercise price of $0.07 and a vesting schedule of 36% on grant date and
4% each month to February 2020. Of the 13,500,000 options granted, 5,000,000 each were granted to Messrs. Bradford T. Adamczyk
and Jonathan R. Barcklow, an option for 2,500,000 was granted to Mr. John E. Schultz Jr, and an option for 1,000,000 was granted
to an independent consultant.
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.
The
following table summarizes the activity of our stock options for the years ended December 31, 2019, and 2018:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at December 31, 2017
|
|
|
14,000,000
|
|
|
$
|
0.1357
|
|
Granted
|
|
|
13,750,000
|
|
|
$
|
0.0711
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding at December 31, 2018
|
|
|
27,750,000
|
|
|
$
|
0.1037
|
|
Granted
|
|
|
6,650,000
|
|
|
$
|
0.3543
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited or expired
|
|
|
(3,000,000
|
)
|
|
$
|
0.2500
|
|
Outstanding at December 31, 2019
|
|
|
31,400,000
|
|
|
$
|
0.1428
|
|
Exercisable at December 31, 2019
|
|
|
19,085,000
|
|
|
$
|
0.0616
|
|
As
of December 31, 2019 and December 31, 2018 there was no unrecognized stock-based compensation related to unvested restricted stock,
net of estimated forfeitures.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 – 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 $30,000 and $4,000 for 2019 and 2018, respectively.
At
December 31, 2019, we had approximately $4,066 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, 2019 and 2018.
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 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.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
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, recently the judge presiding in the case, Vice Chancellor Montgomery-Reeves, was appointed
and confirmed to the Delaware Supreme Court. Though no formal order has yet issued, the company expects the trial date to be postponed
to mid-2020.
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
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.
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. The United States District Court has not yet
ruled on the motion.
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.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
On
September 24, 2019, the company filed a complaint in the Court of Common Pleas in the County of Beaufort, South Carolina, to prevent
the sale of certain property located there (or in the alternative, to require payment of proceeds from any sale of the property
into the registry of the court until a final decision is entered in the matter), in order to protect the company from having property
disposed of. Effective January 8, 2020, this complaint was dismissed.
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.
NOTE
7 – INCOME TAXES
An
analysis of the difference between the expected federal income tax for the years ended December 31, 2019 and 2018, and the effective
income tax rate is as follows:
|
|
2019
|
|
|
|
|
|
2018
|
|
|
|
|
Taxes calculated at federal rate
|
|
$
|
(1,166,831
|
)
|
|
|
21.0
|
%
|
|
$
|
(631,627
|
)
|
|
|
21.0
|
%
|
State income tax, net of federal benefit
|
|
|
(38,304
|
)
|
|
|
0.7
|
%
|
|
|
(35,215
|
)
|
|
|
1.2
|
%
|
Change in Valuation Allowance
|
|
|
1,203,231
|
|
|
|
-21.7
|
%
|
|
|
712,113
|
|
|
|
-23.7
|
%
|
Prior period adjustment
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
(88,626
|
)
|
|
|
2.9
|
%
|
Permenant items
|
|
|
1,904
|
|
|
|
0.0
|
%
|
|
|
43,355
|
|
|
|
-1.4
|
%
|
Provision (benefit) for taxes
|
|
$
|
-
|
|
|
|
0
|
%
|
|
$
|
-
|
|
|
|
0
|
%
|
Tax
effects of temporary differences at December 31, 2019 and December 31, 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Noncurrent deferred tax assets (liabilities):
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
740,442
|
|
|
$
|
88,789
|
|
Fixed assets
|
|
|
(9,095
|
)
|
|
|
-
|
|
Net Operating Loss Carryforwards and Credits
|
|
|
14,494,408
|
|
|
|
13,933,735
|
|
Total Deferred Tax Assets
|
|
$
|
15,225,755
|
|
|
$
|
14,022,524
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(15,225,755
|
)
|
|
|
(14,022,524
|
)
|
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, 2019, the deferred tax assets and the
valuation allowance increased by $1,203,000 primarily as a result of current year tax loss.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2019, we have cumulative federal and Arizona net operating loss carryforwards of approximately $65.1 million and
$6.5 million, respectively, which can be used to offset future income subject to taxes. Of the $65.1 million, of Federal net operating
loss carryforwards, $59.3 begin to expire in 2020. The remaining balance of $5.8 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, 2019, 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, 2019, 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.
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, 2016
|
|
$
|
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, 2017
|
|
$
|
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, 2018
|
|
$
|
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, 2019, for federal tax purposes the tax
years 2014, 2015, 2016 and 2017, 2018 for Arizona the tax years 2014 through 2019 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, 2019, and 2018,
we had no accrued interest or penalties related to our unrecognized tax benefits.
APPLIED
ENERGETICS, INC.
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 – SUBSEQUENT EVENT
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 in response to a non-affiliated warrant holder exercising a warrant.
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.
During
the year ended December 31, 2019, the company received $2,350,000 from eleven non-affiliated individuals based on 10% Promissory
Notes (“Notes”). In the first three months of 2020, two notes with principal balances of $50,000 each were paid off
for a total of $108,000.
Effective
March 4, 2020, Applied Energetics, Inc. entered into the Phase I Small Business Technology Transfer (STTR) contract referred to
in its prior Current Report on Form 8-K filed on January 6, 2020 with the United States Army. The contract is for the development
of Standoff Electronic Denial systems. Phase I is to be completed within the first 90 days. The company will collaborate with
the Laser Plasma Laboratory (LPL) at the University of Central Florida (UCF) in performing its research under the contract. The
total contract amount for Phase I is $165,920.
Multiple
contract proposals were 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.
The
company’s management has evaluated subsequent events occurring after December 31, 2019, the date of our most recent balance
sheet, through the date our financial statements were issued.
APPLIED
ENERGETICS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,391,208
|
|
|
$
|
88,415
|
|
Other receivable
|
|
|
599,110
|
|
|
|
2,880
|
|
Other assets
|
|
|
102,190
|
|
|
|
52,686
|
|
Total current assets
|
|
|
3,092,508
|
|
|
|
143,981
|
|
|
|
|
|
|
|
|
|
|
Long-term assets
|
|
|
|
|
|
|
|
|
Long-term receivable
|
|
|
-
|
|
|
|
582,377
|
|
Property and equipment - net
|
|
|
23,741
|
|
|
|
36,568
|
|
Deferred compensation
|
|
|
1,458,333
|
|
|
|
2,083,334
|
|
Total long-term assets
|
|
|
1,482,074
|
|
|
|
2,702,279
|
|
TOTAL ASSETS
|
|
$
|
4,574,582
|
|
|
$
|
2,846,260
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
330,039
|
|
|
$
|
472,868
|
|
Accrued officer compensation
|
|
|
206,000
|
|
|
|
206,000
|
|
Notes payable including accrued interest of $356,446 at September 30, 2020 and $119,218 at December 31, 2019
|
|
|
7,515,018
|
|
|
|
3,467,890
|
|
Due to related parties
|
|
|
50,000
|
|
|
|
50,000
|
|
Accrued expenses
|
|
|
591,713
|
|
|
|
23,588
|
|
Accrued dividends
|
|
|
48,079
|
|
|
|
48,079
|
|
Total current liabilities
|
|
|
8,740,849
|
|
|
|
4,268,425
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
|
|
|
Long-term notes payable net of unamortized debt discount
|
|
|
1,133,324
|
|
|
|
1,500,000
|
|
Total liabilities
|
|
|
9,874,173
|
|
|
|
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 September 30, 2020 and at December 31, 2019
|
|
|
14
|
|
|
|
14
|
|
Common stock, $.001 par value, 500,000,000 shares authorized; 207,143,146 and 206,569,063 shares issued and outstanding at September 30, 2020 and at December 31, 2019, respectively
|
|
|
207,143
|
|
|
|
206,569
|
|
Additional paid-in capital
|
|
|
87,672,578
|
|
|
|
85,907,523
|
|
Accumulated deficit
|
|
|
(93,179,326
|
)
|
|
|
(89,036,271
|
)
|
Total stockholders’ (deficit)
|
|
|
(5,299,591
|
)
|
|
|
(2,922,165
|
)
|
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
|
|
$
|
4,574,582
|
|
|
$
|
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
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
$
|
165,920
|
|
|
$
|
-
|
|
Cost of revenue
|
|
|
153,629
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,291
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
1,133,536
|
|
|
|
2,467,328
|
|
Selling and marketing
|
|
|
72,335
|
|
|
|
52,562
|
|
Research and development
|
|
|
84,465
|
|
|
|
67,670
|
|
Total operating expenses
|
|
|
1,290,336
|
|
|
|
2,587,560
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,278,045
|
)
|
|
|
(2,587,560
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest (expense)
|
|
|
(225,210
|
)
|
|
|
(46,783
|
)
|
Total other (expense)
|
|
|
(225,210
|
)
|
|
|
(46,783
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,503,255
|
)
|
|
|
(2,634,343
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(8,501
|
)
|
|
|
(8,501
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(1,511,756
|
)
|
|
$
|
(2,642,844
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
210,458,363
|
|
|
|
204,197,396
|
|
See
accompanying notes to condensed consolidated financial statements (unaudited).
APPLIED
ENERGETICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
$
|
175,920
|
|
|
$
|
-
|
|
Cost of revenue
|
|
|
153,630
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
22,290
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,352,280
|
|
|
|
3,534,493
|
|
Selling and marketing
|
|
|
225,861
|
|
|
|
158,895
|
|
Research and development
|
|
|
207,261
|
|
|
|
236,221
|
|
Total operating expenses
|
|
|
3,785,402
|
|
|
|
3,929,609
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,763,112
|
)
|
|
|
(3,929,609
|
)
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
Other income
|
|
|
15,833
|
|
|
|
-
|
|
Interest (expense)
|
|
|
(395,776
|
)
|
|
|
(77,708
|
)
|
Total other income
|
|
|
(379,943
|
)
|
|
|
(77,708
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,143,055
|
)
|
|
|
(4,007,317
|
)
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(25,504
|
)
|
|
|
(25,504
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4,168,559
|
)
|
|
$
|
(4,032,821
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share – basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding, basic and diluted
|
|
|
208,341,063
|
|
|
|
204,006,788
|
|
See
accompanying notes to condensed consolidated financial statements (unaudited).
APPLIED ENERGETICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For
the nine months ended September 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
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,374,709
|
)
|
|
|
(1,374,709
|
)
|
Balance as of June 30, 2020
|
|
|
13,602
|
|
|
$
|
14
|
|
|
|
212,143,146
|
|
|
$
|
212,143
|
|
|
$
|
88,412,212
|
|
|
$
|
(91,676,071
|
)
|
|
$
|
(3,051,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
344,033
|
|
|
|
-
|
|
|
|
344,033
|
|
RSA-based non-cash compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,299
|
|
|
|
-
|
|
|
|
3,299
|
|
Recognize beneficial conversion feature
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
708,034
|
|
|
|
-
|
|
|
|
708,034
|
|
Accrual of payment in anticipation of settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,500,000
|
)
|
|
|
-
|
|
|
|
(1,500,000
|
)
|
Purchase and cancellation of common stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,000,000
|
)
|
|
|
(5,000
|
)
|
|
|
(295,000
|
)
|
|
|
|
|
|
|
(300,000
|
)
|
Net loss for the quarter ended September 30, 2020
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,503,255
|
)
|
|
|
(1,503,255
|
)
|
Balance as of September 30, 2020
|
|
|
13,602
|
|
|
$
|
14
|
|
|
|
207,143,146
|
|
|
$
|
207,143
|
|
|
$
|
87,672,578
|
|
|
$
|
(93,179,326
|
)
|
|
$
|
(5,299,591
|
)
|
See
accompanying notes to condensed consolidated financial statements (unaudited)
APPLIED
ENERGETICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For
the nine months ended September 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,428,095
|
|
|
|
-
|
|
|
|
1,428,095
|
|
Net loss for the quarter ended September 30, 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,634,343
|
)
|
|
|
(2,634,343
|
)
|
Balance as of September 30, 2019
|
|
|
13,602
|
|
|
$
|
14
|
|
|
|
204,197,396
|
|
|
$
|
204,197
|
|
|
$
|
84,722,612
|
|
|
$
|
(87,487,249
|
)
|
|
$
|
(2,560,426
|
)
|
See
accompanying notes to condensed consolidated financial statements (unaudited)
APPLIED
ENERGETICS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the nine months ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,143,055
|
)
|
|
$
|
(4,007,317
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Noncash stock based compensation expense
|
|
|
1,138,244
|
|
|
|
1,931,790
|
|
Shares issued for services
|
|
|
-
|
|
|
|
5,573
|
|
Amortization of beneficial conversion feature’
|
|
|
114,684
|
|
|
|
-
|
|
Depreciation and amortization
|
|
|
12,827
|
|
|
|
9,722
|
|
Amortization of future compensation payable
|
|
|
625,000
|
|
|
|
203,333
|
|
Amortization of prepaid expenses
|
|
|
184,164
|
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
77,708
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
9,888
|
|
|
|
57,445
|
|
Other receivable
|
|
|
-
|
|
|
|
-
|
|
Inventory
|
|
|
5,930
|
|
|
|
(5,930
|
)
|
Prepaids and deposits
|
|
|
(141,421
|
)
|
|
|
5,433
|
|
Long term receivables - net
|
|
|
-
|
|
|
|
(141,182
|
)
|
Accounts payable
|
|
|
(150,604
|
)
|
|
|
(48,155
|
)
|
Accrued interest
|
|
|
231,152
|
|
|
|
-
|
|
Accrued expenses and compensation
|
|
|
68,125
|
|
|
|
(381,833
|
)
|
Net cash used in operating activities
|
|
|
(2,045,066
|
)
|
|
|
(2,293,413
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
-
|
|
|
|
(4,410
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(4,410
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from notes payable
|
|
|
4,456,760
|
|
|
|
2,150,000
|
|
Proceeds from issuance of common stock
|
|
|
1,644,100
|
|
|
|
150,000
|
|
Repayment on notes payable
|
|
|
(528,251
|
)
|
|
|
(31,576
|
)
|
Cancellation of Stock
|
|
|
(1,300,000
|
)
|
|
|
-
|
|
Proceeds from the exercise of stock options and warrants
|
|
|
75,250
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
4,347,859
|
|
|
|
2,268,424
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
2,302,793
|
|
|
|
(29,399
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
88,415
|
|
|
|
178,552
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,391,208
|
|
|
$
|
149,153
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
53,976
|
|
|
$
|
2,117
|
|
Cash paid for taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Schedule of Non-Cash Information
|
|
|
|
|
|
|
|
|
Discount on note payable on purchase of Applied Optical Sciences
|
|
$
|
-
|
|
|
$
|
2,500,000
|
|
Amortization of discount on note payable
|
|
$
|
-
|
|
|
$
|
(28,333
|
)
|
Note payable on purchase of Applied Optical Sciences
|
|
$
|
-
|
|
|
$
|
(2,500,000
|
)
|
Beneficial conversion feature on notes payable
|
|
$
|
708,034
|
|
|
$
|
-
|
|
Non-cash accrual for payment on settlement
|
|
$
|
500,000
|
|
|
$
|
-
|
|
See
accompanying notes to condensed consolidated financial statements (unaudited).
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
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 September 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 nine-month period ended
September 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 unaudited condensed consolidated 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 nine months ended September
30, 2020, the company incurred a net loss of approximately $4,143,000, had negative cash flows from operations of $3,045,000 and
may incur additional future losses due to the reduction in government contract activity. Additionally, as of September 30, 2020,
the company had a working capital deficit (current liabilities less current assets) of $5,149,000. 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.
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
unaudited condensed consolidated 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 condensed consolidated 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 nine months ended September
30, 2020, the company incurred a net loss of approximately $4,143,000, had negative cash flows from operations of approximately
$2,045,000 and conducted financing activities yielding $1,644,000 in proceeds from the issuance of common stock, proceeds from
notes payable of $4,457,000, proceeds from the exercise of options and warrants of $75,000, partially offset by payments on notes
payable of $528,000, cancellation of common stock of $1,300,000 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.
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.
As
of September 30, 2020, the company had approximately $2,391,000 in cash and cash equivalents
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
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. The Company anticipates
a majority of revenue to come from long-term government contracts 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
September
30, 2020
(Unaudited)
CORRECTIONS
OF IMMATERIAL ERROR TO PREVIOUSLY ISSUED UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Subsequent
to the filing of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, the Company identified
prior period misstatements in the June 30, 2019 financial statements included therein related to stock compensation expense. The
misstatements resulted in the understatement statement of general and administrative expense in the Company’s consolidated
statements of operations. The Company assessed the materiality of these misstatements both quantitatively and qualitatively and
determined the correction of these errors to be immaterial to the prior consolidated financial statements taken. As a result,
the Company has corrected the misstatements in the accompanying financial statements. The misstatements had no impact basic and
diluted earnings per share or on the net cash flows from operating, investing, or financing activities. The misstatements did
not impact assets or liabilities
The
following tables summarize the impact of the correction to the prior financial statements
|
|
Three months
ended
June 30,
2019
(as previously
reported)
|
|
|
Adjustments
|
|
|
Three months
ended
June 30,
2019
(as corrected)
|
|
General and administrative
|
|
$
|
610,446
|
|
|
$
|
37,511
|
|
|
$
|
647,957
|
|
Total operating expenses
|
|
|
760,335
|
|
|
|
37,511
|
|
|
|
797,846
|
|
Operating loss
|
|
|
(760,335
|
)
|
|
|
(37,511
|
)
|
|
|
(797,846
|
)
|
Net loss
|
|
|
(786,820
|
)
|
|
|
(37,511
|
)
|
|
|
(824,331
|
)
|
Net loss attributable to common stockholders
|
|
|
(795,321
|
)
|
|
|
(37,511
|
)
|
|
|
(832,832
|
)
|
Net loss per common share - basic and diluted
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
Six months
ended
June 30,
2019
(as previously
reported)
|
|
|
Adjustments
|
|
|
Six months
ended
June 30,
2019
(as corrected)
|
|
General and administrative
|
|
$
|
1,067,165
|
|
|
$
|
37,511
|
|
|
$
|
1,104,676
|
|
Total operating expenses
|
|
|
1,342,048
|
|
|
|
37,511
|
|
|
|
1,379,559
|
|
Operating loss
|
|
|
(1,342,048
|
)
|
|
|
(37,511
|
)
|
|
|
(1,379,559
|
)
|
Net loss
|
|
|
(1,372,973
|
)
|
|
|
(37,511
|
)
|
|
|
(1,410,484
|
)
|
Net loss attributable to common stockholders
|
|
|
(1,389,976
|
)
|
|
|
(37,511
|
)
|
|
|
(1,427,487
|
)
|
Net loss per common share - basic and diluted
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
June 30,
2019
(as previously
reported)
|
|
|
Adjustments
|
|
|
June 30,
2019
(as corrected)
|
|
Common Stock
|
|
$
|
204,157
|
|
|
|
|
|
|
$
|
204,157
|
|
Additional paid-in capital
|
|
|
83,294,517
|
|
|
|
(37,511
|
)
|
|
|
83,257,006
|
|
Accumulated deficit
|
|
|
(84,852,906
|
)
|
|
|
(37,511
|
)
|
|
|
(84,890,417
|
)
|
Total stockholder’ (deficit)
|
|
|
(1,354,232
|
)
|
|
|
(75,022
|
)
|
|
|
(1,429,254
|
)
|
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2020
(Unaudited)
2. SHARE-BASED COMPENSATION
Share-Based
Compensation
For
the nine months ended September 30, 2020 and 2019, share-based compensation expense totaled approximately $1,138,000 and $1,937,000,
respectively. For the three months ended September 30, 2020 and 2019, share-based compensation expense totaled approximately $347,000
and $1,428,000, 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:
|
|
Nine months ended September 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
|
|
|
$
|
0.34
|
|
For
the nine months ended September 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, 18,750 shares of restricted stock awards were vested, and no restricted
stock awards were granted or forfeited; no restricted stock units were granted, vested or forfeited. At September 30, 2020, options
to purchase 32,000,000 shares of common stock were outstanding with a weighted average exercise price of $0.1419, a weighted average
remaining contract term of approximately 5.93 years with an aggregate intrinsic value of $6,079,225. At September 30, 2020, options
to purchase 23,575,000 shares of common stock were exercisable.
As
of September 30, 2020, there was approximately $1,090,000 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.
3. NET
LOSS PER SHARE
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 and nine months ended September 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.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2020
(Unaudited)
Potentially
dilutive securities not included in the diluted loss per share calculation, due to net losses from continuing operations, were
as follows:
|
|
Nine months ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Options to purchase common shares
|
|
|
32,000,000
|
|
|
|
32,900,000
|
|
Convertible notes
|
|
|
18,171,912
|
|
|
|
-
|
|
Warrants to purchase common shares
|
|
|
3,500,000
|
|
|
|
3,575,000
|
|
Unvested restricted stock agreements
|
|
|
21,875
|
|
|
|
-
|
|
Convertible preferred stock
|
|
|
48,883
|
|
|
|
46,049
|
|
|
|
|
|
|
|
|
|
|
Total potentially dilutive securities
|
|
|
53,742,670
|
|
|
|
36,521,049
|
|
4. DIVIDENDS
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 September 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 September 30, 2020 was
approximately $247,000. 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.
5. OTHER
RECEIVABLE
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). Based on a September 24, 2020, Settlement Agreement with George P. Farley,
its former CEO, and AnneMarieCo, LLC, on October 2, 2020, all the bond funds, plus $13,852 earned interest income, were distributed
for the benefit of the company. $500,000 was paid to opposing counsel in anticipation of settlement of purchase of shares from
Plaintiff, and the remainder was paid to company counsel for the reduction in company legal fees.
6. OTHER
ASSETS
Other
assets primarily represents prepaid assets for insurance premiums and deposits with attorneys as well as the current portion of
deferred compensation.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2020
(Unaudited)
7. DEFERRED
COMPENSATION
Deferred
compensation represents the remaining amortization of the deferred compensation recognized in the acquisition of Applied Optical
Sciences.
8. NOTES
PAYABLE
During
the quarter ended September 30, 2020, we received $4,324,000 in bridge funding pursuant to 10% Convertible Promissory Notes. Also,
during the quarter, notes containing a principal balance of $410,000 with a maturity date of September 1, 2019 and a principal
balance of $620,000 with a maturity date of December 1, 2019 were exchanged into this portfolio of notes payable. 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 quarter ended March 31, 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 September 30, 2020 is $24,000 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 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.
During
the nine months ended September 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. During the quarter ended September 30, 2020, a note with the
principal balance of $230,000 plus accrued interest was paid off.
The
following reconciles notes payable as of September 30, 2020 and December 31, 2019:
|
|
September 30,
2020
|
|
|
December 31,
2019
|
|
Beginning balance
|
|
$
|
4,967,890
|
|
|
$
|
-
|
|
Notes payable
|
|
|
4,456,760
|
|
|
|
4,934,329
|
|
Transfer from prepaid
|
|
|
108,064
|
|
|
|
-
|
|
Accrued interest
|
|
|
237,229
|
|
|
|
119,218
|
|
Establish beneficial conversion feature
|
|
|
(708,034
|
)
|
|
|
-
|
|
Amortize beneficial conversion feature
|
|
|
114,684
|
|
|
|
-
|
|
Payments on notes payable
|
|
|
(528,251
|
)
|
|
|
(85,657
|
)
|
Total
|
|
|
8,648,342
|
|
|
|
4,967,890
|
|
Less-Notes payable - current
|
|
|
(7,515,018
|
)
|
|
|
(3,467,890
|
)
|
Notes payable - non-current
|
|
$
|
1,133,324
|
|
|
$
|
1,500,000
|
|
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2020
(Unaudited)
Of
the notes payable at September 30, 2020, $830,000 were due September 1, 2019, $1,100,000 were due December 1, 2019, $4,574,000
were due July 15, 2021, $24,000, payable monthly over two 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, December
31, 2019 and July 15, 2021 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.
The
notes due September 1, 2019, December 1, 2019, December 12, 2020, April 28, 2022 and May 24, 2022 are not convertible. The notes
due July 15, 2021 are convertible. Interest expense on these notes was $239,000 for the quarter ended September 30, 2020 and $47,000
for the quarter ended September 30, 2019. Interest expense on these notes was $409,000 for the nine months ended September 30,
2020 and $78,000 for the nine months ended September 30, 2019. Interest expense for the nine months ended September 30, 2020 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.
10.
ACCRUED EXPENSES
Effective
September 24, 2020, Applied Energetics, Inc. entered into a Settlement Agreement with George P. Farley, its former CEO, and AnneMarieCo,
LLC (“AMC”) as to which a Stipulation and Final Judgment was entered by the Delaware Court of Chancery on September
28, 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 of which $1,000,000 was paid on September 29, 2020. The $500,000 was added as an accrual in accrued
expenses. The agreement also provides for the release of funds in the amount of $582,377.26 securing the bond posted by the company
in favor of Farley and AMC in connection with the litigation as previously disclosed. The bond, plus accrued interest of $13,852
was released and returned in October, 2020. The agreement also contains standard mutual general release and confidentiality provisions.
11. STOCKHOLDERS
DEFICIT
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.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2020
(Unaudited)
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.
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.
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.
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.
During
the quarter ended September 30, 2020, we received $4,324,000 in bridge funding pursuant to 10% Convertible Promissory Notes. Also,
during the quarter, notes containing a principal balance of $410,000 with a maturity date of September 1, 2019 and a principal
balance of $620,000 with a maturity date of December 1, 2019 were exchanged into this portfolio of notes payable. 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. All the notes payable were convertible to common stock at a price less than the
closing market price of the company’s common stock, thus creating approximately $708,000 in beneficial conversion feature
value, to be amortized over the life of the notes.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2020
(Unaudited)
Series
A Convertible Preferred Stock, $0.001 par value, 2,000,000 shares authorized; 13,602 shares issued and outstanding at September
30, 2020 and at December 31, 2019.
The
$344,000 stock-based compensation for the quarter ended September 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 $3,000 for the restricted stock agreements.
12. 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.
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 will be 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 AnneMarie Co.
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, Mr. Barcklow and company director, 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. The company’s deadline to respond to the cross-complaint is November 17, 2020.
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2020
(Unaudited)
13. SUBSEQUENT
EVENTS
Effective
October 2, 2020, Applied Energetics, Inc. entered into a Confidential Settlement Agreement and Release in the litigation involving
Stein Riso Mantel McDonough, LLP, (now known as Mantel McDonough Riso, LLP) (“Stein Riso”). Pursuant to the agreement,
Stein Riso is to pay the company three million dollars ($3,000,000), and return to the company ten million (10,000,000) shares
of the company’s common stock, par value $0.001 per share both of which occurred in October, 2020. Stein Riso entered into
the Settlement Agreement without any admission of liability. The parties will be filing 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.
Effective
September 24, 2020, Applied Energetics, Inc. entered into a Settlement Agreement with George P. Farley, its former CEO, and AnneMarieCo,
LLC (“AMC”) as to which a Stipulation and Final Judgment was entered by the Delaware Court of Chancery on September
28, 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 of which $1,000,000 was paid on September 29, 2020. The agreement also provides for the release of
funds in the amount of $582,377.26 securing the bond posted by the company in favor of Farley and AMC in connection with the litigation
as previously disclosed. The bond, plus accrued interest of $13,852 was released and returned in October, 2020. The agreement
also contains standard mutual general release and confidentiality provisions.
In
the first two weeks of October, 2020, we paid off three notes payable with total principal balance of $650,000.
Effective
November 5, 2020, the company and the holders agreed to convert all outstanding principal and interest outstanding on its 2020
10% Promissory Notes into shares of the company’s common stock. The notes were converted at a price per share of $0.30,
resulting in the issuance to the noteholders of 18,386,174 shares in the aggregate. All of these converting noteholders are accredited,
sophisticated investors, and neither the issuance of the notes nor their conversion were in connection with any public offering,
pursuant to Section 4(a)(2) of the Securities Act of 1933.
Additionally,
as of November 5, 2020, the company repaid all principal of $390,000, plus interest thereon, of the remaining outstanding on its
10% Promissory Notes from 2019.
The
company’s management has evaluated subsequent events occurring after September 30, 2020, the date of our most recent balance
sheet, through the date our financial statements were issued.