ITEM 1A. RISK FACTORS
Future
results of operations of Applied Energetics involve a number of known and unknown risks and uncertainties. Factors that could affect
future operating results and cash flows and cause actual results to vary materially from historical results include, but are not limited
to those risks set forth below:
Risk Related to Our
Company
Our
independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern, which
may hinder our ability to obtain future financing.
In
their report accompanying our financial statements, our independent registered public accounting firm stated that our financial statements
for the year ended December 31, 2024 were prepared assuming that we would continue as a going concern, and that they have substantial
doubt as to our ability to continue as a going concern. Our auditors have noted that our recurring losses and negative cash flow from
operations and the concern that we may incur additional losses due to the reduction in government contract activity raise substantial
doubt about our ability to continue as a going concern.
10
Our
business has generated only limited revenues during the past two fiscal years and had a net operating loss during each period.
For
the fiscal years ended December 31, 2024 and 2023, we had revenues of $2,426,609 and $2,631,443, respectively, and we had net losses
of $9,174,958 and $7,350,435, respectively. We can give no assurances that our planned operations will generate revenues in the future
or whether any such revenues will result in profitability.
We
may need additional financing to fund our operations going forward. If we are unable to obtain additional financing on acceptable terms,
we may need to modify or curtail our development plans and operations.
As
of December 31, 2024, we had $164,812 available cash and cash equivalents and working deficit of $67,639. We periodically conduct private
bridge financings to cover certain short-term expenses, including raising approximately $6 million, in the aggregate, between January
and February 2025. We believe our cash position is sufficient for the next several months, but we will likely need to raise additional
capital in order to fund our operations beyond that. We must allocate funds toward SEC compliance as well as Defense Contract Audit Agency
(DCAA), International Traffic in Arms Regulations (ITAR) and other federal regulatory compliance. We also need funds for general and administrative
expenses, including salaries, benefits, supplies and equipment, lease expense on our headquarters, accounting, legal, and other professional
fees and other miscellaneous expenses. Failure to secure sufficient financing could render us unable to fund these necessary costs and
expenses. We also may require additional funding for research and development before we are able to commercialize our technology. We may
secure additional government contracts or sub-contracts with larger contractors to fund additional research and development. However,
we may need to raise additional capital to supplement these contracts even if we are able to secure them.
Our
operating plans and capital requirements are subject to change based on how we determine to proceed with respect to development programs
and if we pursue any strategic alternatives. We may seek to raise additional funds through the issuance of equity securities, but such
financing may not be available on terms acceptable to us if at all. Any equity financing would cause the percentage ownership by our
current stockholders to be diluted, and such dilution may be substantial. Also, any additional equity securities issued may have rights,
preferences or privileges senior to those of existing stockholders. If such financing is not available when required or is not available
on acceptable terms, we may be required to modify or curtail our operations, which could cause investors to lose the entire amount of
their investment.
Risk Related to Our
Industry and Business Activities
Economic,
geopolitical and other factors beyond our control can affect our business.
Our
business, operating results, financial condition and liquidity may be adversely affected by changes in global economic conditions and
geopolitical risks, including the inflationary environment in the United States and internationally, commodity prices, supply chain challenges,
exchange rates, potential changes in policy positions or priorities, levels of government spending and deficits, the availability and
cost of labor, the threat environment, trade policies, political conditions, national or international crises, including recurring global
health emergencies, tariffs, trade embargoes, and other challenges that could affect the global economy, the demand for our technology
and our ability to source materials and equipment. In recent years, inflationary pressures have increased labor and material costs at
a higher rate higher than in prior years. Due to the nature of our government business, and the customer and supplier contracts within
those businesses, we may not be able to increase our contract value or pricing to offset these cost increases, particularly with grants
or fixed price contracts. This could adversely affect our operating profits and margins particularly if the increased inflation continues.
Similarly, increases in interest rates from recent historical lows in the U.S. and internationally could negatively impact financial
markets and tighten the availability of, and increase our cost of, capital, which could have an adverse effect on our operating results,
financial condition and liquidity. Tightening credit in financial markets also could adversely affect the ability of our customers and
suppliers to obtain financing for significant purchases and operations. Similarly, such tightening credit may adversely affect our supplier
base and increase the potential for one or more of our suppliers to experience financial distress or bankruptcy. In addition, geopolitical
and security risks could affect government priorities, budgets and policies, which could impact sales of defense and other products and
services.
11
Changes
in US government spending could negatively affect our business.
Substantially
all of our current and planned near-term revenues are or may be from US government contracts and grants awarded under various programs,
primarily with the Department of Defense (DoD), and, possibly, with intelligence, national security and other departments and agencies.
Changes in US government spending for various reasons, including as a result of potential changes in policy positions or priorities,
could negatively impact our results of operations, financial condition and liquidity. Our programs are subject to US government policies,
budget decisions and appropriation processes which are driven by macroeconomic and geopolitical factors as well as Congress’s ability
to enact, and the administration’s willingness to execute, appropriations bills and other legislation. In recent years, the US
government has been unable to complete its budget process before the end of its fiscal year, resulting in government shutdowns and Continuing
Resolutions emergency funding only at prior-year levels. In addition, failure to raise the debt ceiling could cause the U.S. government
to default on debts which it has already incurred. U.S. government spending levels and available program funding are thus hard to estimate
in the medium- and long-term. Significant changes in U.S. government spending or changes in U.S. government priorities, policies and
requirements could have a material adverse effect on our results of operations, financial condition and liquidity.
The
establishment of the Department of Government Efficiency (DOGE) whose mission is to sharply reduce federal spending, including to review
defense spending for possible waste, fraud and abuse could make securing government contracts challenging. The administration has also
indicated an interest in reducing spending on defense in general if Russia and China make similar commitments. The termination of government
employees responsible for payment of invoices can slow down payments under our contracts and disrupt our cash flows from operating activities
which, if prolonged, could cause the loss of our business. The current budgetary and deficit funding environment, continuing inflation,
tariffs and other ongoing supply chain disruptions, and DOGE, among other items, pose significant risks to the company.
We
face risks relating to performance of our US government contracts and our ability to secure additional contracts and/or grants.
Our
success depends on our ability to complete timely and satisfactory performance on our existing customer projects and to secure additional
grants and contracts. Performance delays, cost overruns, technology failures, materials or components shortages, or contract delays,
could negatively impact our business prospects, results of operations, financial condition and liquidity. U.S. government contracts generally
permit the government to terminate the contract, in whole or in part, without prior notice, at the U.S. government’s convenience
or for default based on performance. Correspondingly, subcontracts which we may seek to enter with prime government contractors, may
be terminable by the prime contractor upon government termination of the prime contract. We may be unable to secure additional contracts
to offset any revenues lost as a result of the termination of any such contracts.
Because
the funding of U.S. government programs is subject to congressional appropriations made on a fiscal year basis even for multi-year programs,
programs are often only partially funded initially and may not continue to be funded in future years. Appropriations bills may be delayed,
which may result in delays to funding, the collection of receivables and our contract performance due to lack of authorized funds to
procure related products and services. Under certain circumstances, we may use our own funds to meet our customers’ delivery dates
or other requirements, and we may not be reimbursed. If appropriations for programs are reduced or delayed, the U.S. government may terminate
any contract or subcontract under that program.
The
growth of our business depends on the development, application and manufacture of advanced technology and products aimed at achieving
challenging goals. New technologies may be untested or unproven and, in some instances, product requirements or specifications need to
be developed. This could result in performance difficulties, delays, cost overruns or failures which could require additional resources
to address. Any failure to execute timely and effectively on our current programs could hamper future contracting opportunities. We may
also need to invest in internal research and development projects in order to achieve certain grants or contracts, as our customers may
demand proven concepts and solutions. These expenditures may not pay off if we are not awarded the intended grants or contracts.
Under
certain types of government contracts, if we are unable to control costs or if our initial cost estimates are incorrect, our profitability
could be negatively affected, particularly under fixed-price development contracts. We may also experience cost underruns which would
reduce contract value and related expected revenues, and we may be unable to expand the contract scope or secure additional work to offset
the resulting lost revenues. Contracts for development programs with complex design and technical challenges may be cost reimbursable.
However, if they are firm fixed price or fixed price incentive contracts, such challenges and unexpected cost increases may impact our
results of operations. US government contracts also require compliance with extensive and evolving procurement and other rules and regulations
and subject us to potential audits, investigations, and disputes. We may also become involved in programs that are classified or otherwise
restricted by the US government, which place limits on our ability to discuss our performance on these programs, including any risks,
disputes and claims.
12
We
may be unable to protect our intellectual property rights adequately, which could affect our ability to sustain the value of such assets.
Protecting
our intellectual property rights is critical to our ability to maintain and protect the value of our intellectual property portfolio.
We hold a number of United States patents and patent applications, as well as trademarks, and registrations which are necessary and contribute
significantly to the preservation of our competitive position in the market. Any of these patents or future patent applications and other
intellectual property could be challenged, invalidated or circumvented by third parties. In some instances, we may seek to augment our
technology base by licensing the proprietary intellectual property of others, but we may be unable to obtain necessary licenses or to
secure them on commercially reasonable terms. We have entered into confidentiality and invention assignment agreements with employees
and consultants and nondisclosure agreements with suppliers, potential job candidates, and appropriate customers so as to limit access
to and disclosure of our proprietary information. These measures may not suffice to deter misappropriation or independent third-party
development of similar technologies. Based on our current financial condition, we may not have the funds available to enforce and protect
our intellectual properties. Certain of our patents are Government Sensitive Patent Applications, meaning they are held under secrecy
orders of the US government which limits our ability to develop technology under them although their expiration date is extended until
such time as they are no longer classified.
We
may face claims of infringement of proprietary rights.
There
is a risk that a third party may claim our products and technologies infringe on their proprietary rights. Whether or not our products
infringe on proprietary rights of third parties, infringement or invalidity claims may be asserted or prosecuted against us and we could
incur significant expense in defending them. If any claims or actions are asserted against us, we may not have the funds necessary to
defend against such claims. Our failure to do so could adversely affect the value of our intellectual property.
Security breaches, cyber-attacks,
or other disruptions or incidents could expose us to liability and severely damage our operations and business development efforts.
We depend heavily on information
technology systems and infrastructure for our business. We, our collaborators and our service providers collect, store, and transmit
sensitive information including intellectual property, proprietary business information, and research results and related data, in connection
with our business operations. The secure maintenance of this information is critical to our operations and business strategy. Some of
this information could be an attractive target of criminal attacks by third parties with a wide range of motives and expertise, including
organized criminal groups, “hacktivists,” disgruntled current or former employees, terrorist organizations, nation-state
and nation-state supported actors, and others. The level of sophistication of cyber threats continues to grow over time.
We have cybersecurity systems
in place to protect our and our customers’ proprietary information and sensitive data against the risk of inappropriate and unauthorized
external use and disclosure and other types of compromise. However, these measures may prove inadequate to detect, prevent or mitigate
security breaches and other incidents and we may be subject to data breaches through cyber-attacks, including ransomware, malicious code
(such as viruses and worms), phishing schemes, social engineering schemes, and theft or misuse of data from inside the company. Any such
breach could compromise our networks and the information stored there could be accessed, modified, destroyed, publicly disclosed, lost
or stolen. If our systems become compromised, we may be unable to discover the intrusion promptly enough to mitigate any damage.
A cybersecurity breach or
other incident could cause our credibility to suffer with customers. Any investigation, response, or remediation of such a breach, would
result in costs in addition to possibly significant legal claims or proceedings, and possibly liability under our customer contracts.
Any one of these events could cause material harm to our business, results of operations and financial condition.
13
Management
has broad discretion over the selection of our business and prospective business opportunities.
Any
person who invests in our securities will do so without an opportunity to evaluate the specific merits or risks of our prospective business
and business opportunities. As a result, investors will be entirely dependent on the broad discretion and judgment of management in connection
with the selection of a prospective business. The business decisions made by our management may not be successful.
We
depend on the recruitment and retention of qualified personnel, and failure to attract and retain such personnel could seriously harm
our business.
Due
to the specialized nature of our businesses, our future performance is highly dependent upon the continued services of our key engineering
and scientific personnel. Our prospects for obtaining government contracts or significant commercial contracts depend upon our ability
to attract and retain qualified engineering, scientific and manufacturing personnel for our operations. Given intense competition, we
may not be successful in attracting or retaining qualified personnel. Our failure to compete for these personnel could seriously harm
our business, results of operations and financial condition. Additionally, since much of our business involves technologies that are
or may be classified or otherwise restricted for national security reasons, we must hire U.S. citizens who have the ability to obtain
a security clearance. This further reduces our potential labor pool.
Our
future success will depend on our ability to develop and commercialize technologies and applications that address the needs of our markets.
Both
our defense and commercial markets are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our
future performance depends on a number of factors, including our ability to identify emerging technological trends in our target markets;
develop and maintain competitive products; enhance our products by improving performance and adding innovative features that differentiate
our products from those of our competitors; develop and manufacture and bring products to market on-time and on-budget; and enter into
suitable arrangements for volume production of mature products.
We
believe that, to be competitive in the future, we will need to continue to develop and commercialize technologies and products, which
will require the investment of financial and engineering resources. Due to the design complexity of our products, we may in the future
experience delays in completing development and introduction on a commercial scale of new products. Any delays could result in increased
costs of development, deflection of resources from other projects or loss of contracts.
In
addition, the market for our technologies and products may not develop or expand as we currently anticipate. The failure of our technology
to gain market acceptance could significantly reduce any ability to generate revenue and harm our business. Furthermore, we cannot be
sure that our competitors will not develop competing or differing technologies which gain market acceptance in advance of our products.
The possibility that our competitors might develop new technology or products might cause our existing technology and products to become
obsolete or create significant price competition. If we fail in our new product development and commercialization efforts, or our products
fail to achieve market acceptance more rapidly than our competitors, our revenue will decline and our business, financial condition and
results of operations will be negatively affected.
We
heavily depend on key personnel, for the successful execution of our business plan. The loss of one or more key members of our management
team could have a material adverse effect on our business prospects.
We
are highly dependent upon Christopher Donaghey, our President and Chief Executive Officer (and Principal Accounting and Financial Officer)
and Stephen McCahon, our Chief Science Officer. We depend on Dr. McCahon’s decades of expertise for the marketing and development
of our technology. We also depend upon their global visibility and outreach as well as Mr. Donaghey’s and our directors’
networks of contacts and experience to recruit key talent to the company. We do not have key-person insurance on any of these individuals.
Loss of the services of any of these key members of our management team, or of our Board of Directors’ ability to identify and
hire key talent, could have a material adverse effect on our business prospects, financial condition and results of operations. Although
a key component of our growth strategy is succession planning and hiring additional key personnel, we may be unable to achieve this in
the near term given constraints in the labor market and our interest in recruiting highly qualified professionals.
14
If
we are unable to hire additional qualified personnel, our business prospects may suffer.
Our
success and achievement of our business plans depend upon our ability to recruit, hire, train and retain additional highly qualified
technical and managerial personnel. Competition for qualified employees among high technology companies is intense, and any inability
to attract, retain and motivate additional highly skilled employees required for the implementation of our business plans and activities
could strongly impact our business. Our inability to attract and retain the necessary technical and managerial personnel and scientific,
regulatory and other consultants and advisors could materially damage our business prospects, financial condition and results of operations.
The
market for our technology has a limited number of potential customers.
Given
the highly specialized nature of our technology, the potential market for our products is limited to a relative few potential customers
who tend to allocate significant budgeted amounts to selected projects. Currently, we are marketing our technology and focusing our research
and development on the defense sector, in which demand is ultimately determined primarily by the US federal defense budget and the needs
and priorities of the Department of Defense and its various agencies. The potential customers in this area are defense agencies for direct
contracts and major defense contractors for subcontracts. Thus, the demand for our products depends on their needs for our technology
and selecting us for research and development. Although we intend to diversify into other applications for our technology and markets,
we cannot be certain that opportunities in those markets will present themselves when we are ready, or that we will otherwise be able,
to do so.
We
currently maintain significant cash balances at a commercial bank which could exceed the FDIC insurance limits and do not always earn
a significant return.
We
maintain a large percentage of our cash balances with Western Alliance Bank. At times, our bank balances exceed FDIC limits. As of December
31, 2024, $0 of our cash balance was uninsured. Significant portions of our cash balance earn little, if any, interest. We continue to
monitor our banking arrangement and have taken measures to diversify our cash holdings into interest bearing cash equivalents and auxiliary
cash accounts to maximize our insurance coverage.
Risks Related to
Our Securities
We
are subject to the penny stock rules adopted by the Securities and Exchange Commission that require brokers to provide extensive disclosure
to their customers prior to executing trades in penny stocks. These disclosure requirements, coupled with our status as a former shell
company, may cause a reduction in the trading activity of our common stock, and make it difficult for our stockholders to sell their
securities.
Rule
3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a “penny stock,” for purposes relevant to us,
as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to a limited number of exceptions which are not available to us. This classification would severely and adversely affect any
market liquidity for our common stock.
For
any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s
account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting
forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in
penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make
a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge
and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to
the penny stock market, which, in highlight form, sets forth:
15
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission payable
to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available
to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information
for the penny stock held in the account and information on the limited market in penny stocks.
Because
of these regulations and restrictions, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures
and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling stockholders
or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary
market. These additional sales practice and disclosure requirements could impede the sale of our common stock. In addition, the liquidity
for our common stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock, in all probability,
will be subject to such penny stock rules and other restrictions for the foreseeable future and our stockholders will, in all likelihood,
find it difficult to sell their shares of common stock.
Because
we are a former shell company, our stockholders face restrictions on their reliance on rule 144 to sell their shares.
Historically,
the SEC staff has taken the position that Rule 144 under the Securities Act is not available for the resale of securities initially issued
by companies that are, or previously were, shell companies, like AE. The SEC has codified and expanded this position in certain amendments
to Rule 144 by prohibiting the use of Rule 144 for resale of securities issued by any shell companies (other than business combination
related shell companies) or any issuer that has been at any time previously a shell company. The SEC has provided an important exception
to this prohibition, however, if the following conditions are met:
We
expect that we will be able to meet all of these requirements in the future, but unknown future events and circumstances could change
that outcome. As a result, pursuant to Rule 144, stockholders who receive our restricted securities in a private placement or a business
combination may not be able to sell our shares without registration for up to one year after we have completed the private placement
or business combination.
A
large number of shares of our common stock could be sold in the market in the near future, which could depress our stock price, particularly in light of the limited trading volume and volatility
in the market for our common stock which can make it illiquid.
As
of March 25, 2025, we had outstanding 218,242,805 shares of common stock. Approximately 100 million of our shares are currently freely
trading without restriction under the Securities Act of 1933, as amended. Most of the remaining shares have been held by their holders
for over one year and are thus eligible for sale under Rule 144(k) of the Securities Act. Sale of these shares into the market could depress
our stock price. This is particularly true in an illiquid market characterized by limited trading volume. The market for shares of our
common stock is subject to a limited trading volume and at times is volatile. The thinly traded nature of our common stock could make
it difficult to sell shares at or near ask prices, if at all, particularly as additional shares enter the market for sale.
16
Provisions
of our corporate charter documents could delay or prevent change of control.
Our
Certificate of Incorporation authorizes our Board of Directors to issue up to 2,000,000 shares of “blank check” preferred
stock without stockholder approval, in one or more series and to fix the dividend rights, terms, conversion rights, voting rights, redemption
rights and terms, liquidation preferences, and any other rights, preferences, privileges, and restrictions applicable to each new series
of preferred stock. In addition, our Certificate of Incorporation divides our board of directors into three classes, serving staggered
three-year terms. At least two annual meetings, instead of one, will be required to effect a change in a majority of our board of directors.
The designation of preferred stock in the future and the classification of our Board of Directors, could make it difficult for third
parties to gain control of our company, prevent or substantially delay a change in control, discourage bids for our common stock at a
premium, or otherwise adversely affect the market price of our common stock. Moreover, the holders of our outstanding Series A Preferred
Stock have a right to put their shares to the company for an amount equal to the liquidation preference of approximately $340,000 plus
unpaid dividends (approximately $397,000 as of December 31, 2024), in the event of a change of control. Such right could hinder our ability
to sell our assets or merge with another company.
The
redemption and dividend provisions of our outstanding preferred stock are onerous due to our current financial condition.
The
company has redeemed substantially all of its outstanding preferred stock. At December 31, 2024, 13,602 shares were outstanding with
a liquidation preference of approximately $340,000 and unpaid dividends of approximately $397,000. As of March 26, 2025, the liquidation
preference of our outstanding preferred stock plus unpaid dividends thereon was approximately $408,000. If an event occurs that would
require us to redeem the preferred stock, we may not have the required cash to do so.
In
addition, our annual dividend payment on the preferred stock is approximately $34,000, which will further deplete our cash. We have not
paid the dividends commencing with the quarterly dividend due August 1, 2013, and, as a result, the dividend rate has increased to 10%
per annum and will remain at that level until such failure no longer continues. These terms may also make it more difficult for us to
sell equity securities or complete an acquisition.
Any
issuance of additional securities in conjunction with a business or financing opportunity which will result in a dilution of present
stockholders’ ownership.
Our
certificate of incorporation authorizes the issuance of 500,000,000 shares of common stock. As of March 25, 2025, we had approximately
218,242,805 shares of common stock issued and outstanding. If funding opportunities present themselves on favorable terms, we may issue
additional shares to fund our business or in connection with our pursuit of new business opportunities and new business operations. To
the extent that additional shares of common stock are issued, our stockholders would experience dilution of their respective ownership
interests. If we issue shares of common stock in connection with our intent to pursue new business opportunities, a change in control
of our company could occur. The issuance of additional shares of common stock may also adversely affect the market price of our common
stock, particularly given the historically low trading volume in the market for our common stock.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
As
a company in general, and particularly, as a government contractor, we understand the critical need to maintain all data and information
systems in the safest, most secure manner. Accordingly, our approach to cybersecurity is multi-tiered and comprehensive. Our board of
directors ultimately oversees our processes for assessing, identifying and managing material risks from cybersecurity threats. Our management,
together with third party contractors, makes these assessments and periodically provides the board with a report and evaluation, including
risk mitigation strategies. This report would also include any cybersecurity-related incidents which would give rise to a reporting requirement
for the company. Although we consider our program for mitigating cybersecurity risks to be part of an overall risk mitigation strategy,
we consider it a separate set of processes because of the unique concerns with keeping our and our customers’ data secure.
17
Our
Chief Executive Officer works with our information technology consultants (IT) to assess any reasonably foreseeable internal and external
risks to our information systems, including the likelihood of malware, ransomware, cyber espionage, and any other cybersecurity threats.
Through these risk assessments, management seeks to determine the likelihood of, and potential damage that could result from, such risks,
and the sufficiency of existing systems and safeguards in place to manage them. Our IT continually monitors our systems for any attempted
unauthorized entries or breaches and reports this information to management on a regular basis. Information gathered from these processes
enable our IT to make any necessary adjustments to our systems and address any identified gaps in existing safeguards.
Our
IT also provides guidance and support with respect to protecting our information systems from these various threats. This includes advising
both management and other personnel on the best practices for keeping these systems safe and a training program that includes random
testing for weaknesses.
Certain
customer contracts require that we maintain a heightened level of information security and set out specific protocols to which we must
adhere to safeguard covered data and other information. Our CEO, who has expertise in government contracting and related data and information
controls, assesses these requirements on behalf of the company in consultation with our IT to determine the necessary network architecture
and infrastructure for all of these requirements and ensures that proper protocols are implemented and that our personnel adhere to them.
This includes special, additional training for personnel on handling of various levels of customer information.
We
have not encountered cybersecurity threats or incidents that have materially affected our business strategy, financial condition, or
operations. For additional information regarding risks from cybersecurity threats, please refer to Item 1A, “Risk Factors,”
in this annual report on Form 10-K.
ITEM 2. PROPERTIES
Effective
March 15, 2021, we entered into a Lease Agreement with Campus Research Corporation, for approximately 13,000 rentable square feet of
office, laboratory and production space located at the University of Arizona Science and Technology Park at 9070 South Rita Road, Suite
1500, Tucson, AZ. This space is outfitted with a Class 1000 (ISO Class 6) “clean room” and laboratory, office and conference
facilities. The lease term began May 1, 2021, and was to end on April 30, 2026. The base rent is currently $9.2009 per rentable square
foot and is set to escalate to $11.4806 in year three, $13.1740 in year four and $14.9306 in year five, plus certain operating expenses
and taxes.
Effective
June 7, 2023, we executed the First Amendment to Lease Agreement, which amended the existing Lease Agreement to add one new 9,805 usable
square-foot suite of offices, conference rooms and cubicle areas directly across an atrium from the initial leased space so that the
company now occupies the entire first floor of the building. This has enabled us to separate AE’s public facing facilities from
the restricted access space. The amendment also extended the term of the original lease through July 31, 2028 and granted the company
an option (the “Option”) over 6,458 rentable square feet (5,520 usable square feet) of manufacturing space. The
option was effective, at a price of $2,690.83 per month, from August 1, 2023 through February 1, 2024 but was extended to July 31, 2024
. The term of occupancy in the new office space and the option both began August 1, 2023.
On
July 3, 2024, we exercised the Option to support the company’s investment in a new Battle Lab, with laser manufacturing capacity
to ensure it has the critical infrastructure in place to fulfill both current, and possible future, priority U.S. military programs.
With this expansion, the company now occupies, in the aggregate, approximately 26,000 sq. ft. of space at the Arizona Tech Park. The
Battle Lab is intended to support laser system testing against relevant targets and emerging threats. The Battle Lab is expected to enable
technology maturation and be the venue for customer and partner demonstrations under realistic and controlled conditions. The facility,
as planned, will also provide the capability to manufacture, integrate, and test advanced lasers as Applied Energetics makes its anticipated
transition of its technology to the next stage of its lifecycle.
18
Our
aggregate rent expense, including common area maintenance costs, was approximately $318,000 and $212,000 for 2024 and 2023, respectively.
This included the cost of the option until it was exercised and the rent on the Battle Lab space thereafter. These facilities are adequate
for our current and expected level of operations.
See
Note 7 to our 2024 Consolidated Financial Statements, which is incorporated herein by reference for information with respect to our lease
commitments as of December 31, 2024.
ITEM 3. LEGAL PROCEEDINGS
On
January 15, 2021, the company filed a complaint in the United States District Court, Southern District of New York, against Gusrae, Kaplan
& Nusbaum and Ryan Whalen for malpractice and breach of New York Rules of Professional Conduct by both parties as former counsel
to the company. On May 28, 2021, Gusrae, Kaplan & Nusbaum and Mr. Whalen filed a motion to dismiss the complaint. On June 25, 2021,
the company filed an opposition to the motion. On July 13, 2021, Gusrae Kaplan & Nusbaum and Mr. Whalen filed their reply brief.
On March 30, 2022, United States Magistrate Judge Debra Freeman signed an order denying the motion of GKN and Mr. Whalen to dismiss the
company’s claim for malpractice and for rescission of the shares-for-fees agreement under which GKN and Whalen received 1,242,710
shares of the company’s common stock. The motion was partially granted as to the separate claim for violation of NYRPC 1.7 and
1.8 because the court found that it was duplicative of the malpractice claim. The parties are currently engaged in discovery. No trial
date has been set.
On
July 26, 2023, the company filed a complaint in the Superior Court of the State of Delaware against Gusrae Kaplan Nusbaum PLLC and Ryan
Whalen, for malicious prosecution in connection with the July 2019 suit brought in the Southern District of New York. On September 11,
2023, Gusrae, Kaplan & Nusbaum and Mr. Whalen filed a motion to dismiss the complaint. On April 16, 2024, the court granted the motion
on the grounds of lack of personal jurisdiction over the defendants. The company filed a Notice of Appeal with the Supreme Court of the
State of Delaware on May 2, 2024. The Delaware Supreme Court upheld the dismissal on December 18, 2024.
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.
The
company may, from time to time, be involved in legal proceedings arising from the normal course of business.
ITEM 4. Mine
Safety Disclosure
None.
19
PART II
ITEM 5. MARKET FOR
REGISTANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
Market Information and Holders
Our
common stock is currently quoted for trading on the OTCQB Market, trading under the symbol “AERG”. On March 25, 2025, the
closing price of our common stock on the OTCQB Market was $0.77. Over-the-counter market quotations, such as on the OTCQB, reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
As
of March 25, 2025, there were approximately 388 holders of record of Applied Energetics’ common stock.
Unregistered Sale of Securities and Use
of Proceeds
The
company has reported all information pertaining to issuances of equity securities during the period covered by this Annual Report on
Form 10-K in previously filed report on Forms 10-Q and 8-K.
Dividends
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.
We paid dividends via the issuance shares of Common Stock on our 6.5% Series A Convertible Preferred Stock in 2011. We paid cash dividends
on our 6.5% Series A Convertible Preferred Stock in 2012 and February and May 2013. The company has not paid the dividends commencing
with the quarterly dividend due August 1, 2013. Dividends due as of December 31, 2024 and March 26, 2025 were approximately $396,630
and $408,060, respectively. Our Board of Directors suspended the declaration of the dividend, commencing with the dividend payable as
of February 1, 2015, because we did not have a surplus (as such term is defined in the Delaware General Corporation Law) as of December
31, 2014. The Board anticipates continuing such suspension until such time as we have a surplus, or net profit, for a fiscal year.
Equity Compensation
Plan Information
See
Item 12.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis together with the risk factors set forth in Item 1A and with our audited Consolidated
Financial Statements and Notes thereto included elsewhere herein.
Overview
Applied
Energetics, Inc. specializes in the development and manufacture of advanced high-performance lasers and optical systems, and integrated
guided energy systems, for prospective defense, national security, industrial, biomedical, and scientific customers worldwide.
Christopher
Donaghey serves as our President and Chief Executive Officer (and as our Principal Accounting and Financial Officer), and Dr.
Stephen W. McCahon serves as our Chief Science Officer. AE has continued to expand its technical capabilities with the addition of
employees, consultants and contractors, and agreements with several of the leading laser and optics universities in the country. AE
also works with a team of world-class contractors to strengthen our compliance, IT, technical staff, human resources and public
relations, supporting the research and development in the laboratory.
20
AE
owns and protects intellectual property that is integral and necessary for the development of Ultrashort Pulse (“USPTM”)
Lasers, Laser Guided Energy (“LGE®”) and Direct Discharge Electrical products for military and commercial
applications. AE currently owns 26 patents and an additional 11 Government Sensitive Patent Applications (“GSPA”). These
GSPA’s are held under secrecy orders of the US government and allow the company greatly extended protection rights, including having
no expiration date until such time as they are no longer classified after which they will have the normal 20-year patent protection.
The company also has eight pending patent applications and one provisional patent application which is undergoing conversion to its non-provisional
form. We continue to file patent applications as we deem appropriate to protect our intellectual property and enhance our competitive
advantage.
In
March 2025, the company moved to the next phase of its strategic collaboration with Kord Technologies, Inc., a wholly owned subsidiary
of KBR, to explore the potential development and integration of an advanced pulsed laser system with Kord’s FIREFLYTM High Energy
Laser Weapon System (HELWS). This phase is to begin with the purchase of a specially modified Firefly HELWS unit from Kord which the company
can use to work on the development and integration of its proprietary Ultrashort Pulse technology in its newly opened Battle Lab, with
the assistance of Kord personnel under a related services agreement.
Applied
Energetics had previously entered into a Memorandum of Understand (MOU) with Kord, effective October 28, 2024, to further the development
and deployment of Applied Energetics’ ultrashort pulsed laser (USPL) technology for defense and national security applications.
The MOU outlines key areas of cooperation, including joint research and development, integration of Applied Energetics’ USPL technologies
into an existing high-energy laser directed energy platform, and the exploration of new opportunities to enhance both companies’
product portfolios.
In
February 2025, we announced the opening of our new Battle Lab, which is also expected to provide the capacity to manufacture and integrate
advanced lasers as Applied Energetics makes the anticipated technology transition to the next stage of its lifecycle. Over the coming
months, the company intends to install and demonstrate multiple ultrashort pulse lasers with varying wavelengths against relevant target
packages. In July 2024, the company exercised its option to lease more than 5,000 square feet of additional space at the University of
Arizona Tech Park to create the Battle Lab. The company took the option to lease this additional space under the June 7, 2023, amendment
(the “2023 Amendment”) to its Lease Agreement with Campus Research Corporation, as Landlord. With this expansion, the company
now occupies, in the aggregate, approximately 26,000 sq. ft. of space at the Arizona Tech Park.
Effective
March 12, 2024, a grant previously awarded to Applied Energetics, Inc. from the Department of the Navy, Office of Naval Research was transitioned
into a contract. The original grant from May 2022 had a two-year period of performance. The new contract supersedes the grant and carries
a ceiling value of $1,217,535 under a base period of performance through November 11, 2024 and a 12-month unfunded option period that
ends November 11, 2025. On September 4, 2024, the company received a funding increase on this contract of $237,647 bringing the total
funding on the contract to $1,455,182.
Effective
August 23, 2023, Applied Energetics executed a contract with the Department of the Navy, Office of Naval Research with an aggregate contract
price of $1.99 million payable over two years as the company performs its obligations under the contract. The objective of the contract
is to develop a high-peak and high-average power USP optical system. The system is expected to demonstrate effects compatible with multiple
Navy platforms and missions with an attractive size, weight, and power-cooling footprint. The company’s continuing development efforts
in collaboration with ONR signify the importance of sustained development and maturation of USP-based directed energy systems to support
the Navy’s technological priorities. Work on this contract is ongoing.
Effective
May 15, 2023, Applied Energetics executed a Phase II Small Business Technology Transfer (STTR) contract with the U.S. Army at an aggregate
contract price of $1.148 million payable over two years as the company performs its obligations thereunder, with the first year currently
funded. The objective of this Phase II award is to further the development and testing of an IR system utilizing technologies that were
investigated under the US Army Phase I STTR contract which the company was awarded in May 2022. This Phase II contract award followed
a successful Phase I which established a computational concept with physical modeling and simulation to establish the feasibility of an
IR system. Phase I was performed in collaboration with the James C. Wyant College of Optical Sciences at the University of Arizona. The
company has continued its work under the contract, and provided all required reports, since its execution.
AE’s
team continues to be invited to, and complete, multiple briefings focused on our capabilities and our submissions and to submit contract
proposals.
Neither
of the US federal budgets for fiscal 2024 or 2023 were approved by Congress by the start of the corresponding U.S. federal government
fiscal year, which is October 1 of the preceding year. In both 2024 and 2023, Congress passed, and the president signed, continuing resolutions
(“CRs”), to extend federal government funding. specified dates. The final Defense Appropriations Bill for fiscal 2023 was
signed into law on December 29, 2022 and included increases in areas of particular interest to the company.
21
For
fiscal year 2025, which started on October 1, 2024, the National Defense Authorization Act (NDAA) was delayed, but on December 23,
2024, then-President Biden signed the 2025 NDAA into law. The NDAA sets defense spending policies, while the separate appropriations
bills comprising the federal budget fund government spending, including spending on defense and homeland security. This impacts all
proposals under review by the Department of Defense. On September 26, 2024, in the absence of an enacted federal budget,
then-President Biden signed a Continuing Resolution (CR), HR 9747, which extended government operations through December 20, 2024.
He then signed a second CR for FY25 on December 21, 2024, extending funding for the federal government through March 14, 2025. A
full year Continuing Resolution, H.H. 1968, was passed and signed into law by President Trump on March 15, 2025, and extends through
September 30, 2025.
Strategic Plan and
Analysis
The
core of our strategy has been to continue growing our management and science teams with highly qualified individuals. This has driven
our recruitment efforts in the areas of R&D, science, modeling and simulation, marketing and finance. We are also contemplating adding
members to our Board of Directors and our Board of Advisors. Our board and leadership team have worked to align key innovations with
our roadmap to encourage and enable internal filing for a broad, strategic, and robust intellectual property portfolio and continue surveying
the literature for acquisitions of parallel intellectual property to that end. We also intend to pursue strategic corporate acquisitions
in related fields and technology. The company’s management continues to explore any favorable equity financing opportunities.
Our
goal with the Applied Energetics Strategic Plan is to increase the energy, peak power and frequency agility of USP optical sources while
decreasing the size, weight, and cost of these systems. We are in the process of developing this breadth of very high peak power USP
lasers and additional optical sources that have a very broad range of applicability for threat disruption for the Department of Defense,
commercial, and biomedical applications, such as biophotonic illumination and imaging. Although the historical market for Applied Energetics’
LGE and USP technology is the U.S. Government, the USP technologies are expected to provide numerous platforms for commercial additive
and subtractive manufacturing and biomedical and imaging markets, creating a substantially larger market for our products to address.
Since 2020, the Applied Energetics team has been able to develop partnership and teaming arrangements with the three leading laser and
optics institutes in the United States, namely, the University of Arizona, the University of Central Florida, and the University of Rochester
Laboratory for Laser Energetics. Our desire is to work on programs jointly where the strengths of each organization can assist in escalating
knowledge and delivery of systems to the government sponsors and to train the next generation of scientists and engineers to work in
the directed energy fields.
We
have continued to execute our business development plans, further our research and development program and submit filings for intellectual
property and proposals for grants and contracts. During the past several years, we continued to submit proposals and have been engaged
in meetings on a continuous basis with various agencies and departments both remotely and in person in Washington, DC and at various
other government facilities. Having received a significant research grant and several contracts since the second quarter of 2022, we
believe the interest in our technology and applications remains high, and we continue to submit proposals for all appropriate opportunities
and share our vision of the disruptive capabilities of USP optical sources for both near- and far-term threats and dual-use commercial
applications.
22
Through
our analysis of the market, and in discussions with potential customers, we remain convinced that customers are becoming more receptive
and interested in directed energy technologies. According to the US Department of Defense fiscal budgets from 2017 through 2023, its
directed energy spending grew from approximately $500 million in 2017 to over $1.695 billion in 2023, an increase of nearly 240%. Market
analysis and projections have estimated that this directed energy sector is anticipated to reach $17.8 billion globally by 2028. We continue
to be optimistic about our future and the growing opportunities in directed energy applications, especially since this growth to nearly
$1.7 B annually is being accomplished without a recognized Program of Record (POR) for directed energy platforms. We believe that once
these technologies are funded in production for a POR, these DOD budgets for directed energy will grow exponentially larger to support
the technology insertion. The Applied Energetics team anticipates a continuation of strong funding for the directed energy community.
With our existing patent portfolio, and through further advancements of our technologies, we believe we have the substantial building
blocks needed to become a significant and successful developer in the USP marketplace.
Our
research and development programs depend on our ability to procure the necessary optical and fabricated materials, components, electronics
and other supplies. A significant, prolonged increase in inflation could negatively impact the cost of materials and components, which
could be a particular problem with respect to our fixed fee contracts. Within the current geopolitical context, there are ongoing embargos
of exports from some global suppliers of various materials that are used in electronics and some diode and laser materials, which can
have negative effects on technology supply chains. We continuously monitor potential supply chain issues and supplier liquidity and work
with our supply base to ensure adequate sources of materials at reasonable costs. In some instances, we depend upon a single source of
supply, but we are developing multiple sources where possible to mitigate the risk. In some cases, we must comply with specific procurement
requirements, which can limit the suppliers and subcontractors we may utilize.
Critical Accounting
Policies
Use
of Estimates