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.
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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.
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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.
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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
The
preparation of consolidated financial statements in conformity with United States generally accepted accounting principles 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 inputs and 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 impact
the amounts reported and disclosed herein.
Share-Based
Payments
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 our 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 approximately 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.
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Results of Operations
Our
consolidated financial information for the years ending December 31, 2024 and 2023 is as follows:
Revenue
Revenue
decreased by approximately $205,000, or 7.8%, to approximately $2,427,000 for the year ended December 31, 2024, from $2,631,000 for the
year ended December 31, 2023. The decrease in revenue was primarily the result of a contract modification which resulted in a decrease
in a contract’s price and an increase in a contract’s term, offset by an additional one-year continuation for an existing
contract and a new contract during 2024.
Cost of Revenue
Cost
of revenue increased by approximately $842,000, or 132.10%, to approximately $1,480,000 for year ended December 31, 2024, from $638,000
during the year ended December 31, 2023. This increase was primarily attributable to an increase in the cost of materials, supplies and
direct labor cost incurred in connection with recent contract modifications.
General and Administrative
General
and administrative expenses increased approximately $738,000, or 8.4%, to $9,510,00 for the year ended December 31, 2024, compared to
approximately $8,772,000 for the year ended December 31, 2023, primarily due to an increase in salaries and employee benefits of approximately
$720,000 mainly due to non-cash compensation, an increase in software and licenses of approximately $40,000, an increase in depreciation
expense of approximately $70,000 and increase of rent of $204,000, partially offset by a decrease of approximately $377,000 in professional
and consulting expenses.
Selling and Marketing
Selling
and Marketing expenses decreased approximately $9,500, or 2.5%, to $375,000 for the year ended December 31, 2024, compared to approximately
$384,000 for the year ended December 31, 2023, primarily due to the continuation of business development activities through our Master
Services Agreement with Westpark Advisors as well as other consultants in this field.
Research and Development
Research
and development expenses increased approximately $5,300, or 2.3%, to $239,000 for the year ended December 31, 2024, compared to approximately
$234,000 for the year ended December 31, 2023, primarily due to an increase in labor and material cost associated with continued development.
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Other Income/(Expense)
Other
income decreased approximately $44,000, or 95.3%, to $2,000 for the year ended December 31, 2024, compared to other expenses of $46,000
for the year ended December 31, 2023, primarily due to unused funds in cash equivalents reclassed for development purposes.
Net Loss
Our
operations in 2024 resulted in a net loss of approximately $9,174,000, an increase of approximately $1,824,000, or 24.8%, compared to
the approximately $7,350,000 net loss for the year ended 2023, primarily due to increases in general and administrative and research
and development expense, partially offset by lower revenue and a decrease in selling and marketing expenses.
Trend Discussion
During
the year ended December 31, 2023, as we received our ONR contract and a Phase II STTR contract with the Army, we recognized revenues
as we performed these services and also recorded related costs. Costs under these contracts continue to be affected by ongoing supply
chain disruptions, and shortages of items like semiconductor chips, and related systemic issues, and general inflation although to a
lesser extent than in 2022. In particular, micro-electronic and semiconductor chip shortages are still impacting supply chains, and as
such, can impact our ability to execute and deliver technology to meet demands of our customers. Certain optical transmitting components
are also in short supply. These costs and supply issues also may affect any internal research and development programs, and we anticipate
that they will continue for at least the near term.
Our
costs and the timing of our performance under grants and contracts continue to be affected by trends in the US labor market, particularly,
recruiting of scientists and technicians. We had observed some limited availability in this market in 2022 with some improvement in 2023,
and we anticipate being able to locate and retain the necessary personnel for the foreseeable future.
The
new administration and related changes in the structure and operations of the federal government are introducing new challenges for our
operations and financial projections. It is difficult to forecast the effect that recently introduced tariffs will have on our ability
to source raw materials, supplies, and equipment needed to continue our operations both for the performance of our ongoing contractual
obligations and our internal research and development efforts. Moreover, the cut to funding and reductions in federal government personnel
can have a significant impact on our cash flows and ability to continue operating. Many of these cuts are proposed to the Departments
of Defense and Homeland Security budgets which are the focus of much of our business development efforts.
Certain
mitigating factors could blunt any potential impact of these changes on our industry. The DOD and others in the administration have indicated
that funding for innovation and novel technologies will continue to be a priority, and directed energy has been discussed as part of
this trend. Also, many of the cuts are being challenged in court and, in some cases, reversed either because of judicial rulings or policy
reversals. However, it is difficult to predict precisely where funds will be cut or allocated, and even a general reduction in force
can make administrative functions, such as finalizing contracts and government payment processing, challenging. These factors could severely
impact our cash flows and our ability to continue operating.
Liquidity and Capital
Resources
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. At December 31, 2024, the company had total current assets of $664,779 and total current
liabilities of $732,418, resulting in a working capital deficit of $67,639. At December 31, 2024, we had $164,812 cash and cash equivalents,
a decrease of $1,154,714 from $1,319,526 at December 31, 2023.
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During
the year ended December 31, 2024, the net cash outflow from operating activities was $5,092,690. This amount was comprised primarily
of our net loss of $9,174,958. This was offset by non-cash stock-based compensation expense of $3,768,819, amortization of prepaid
assets of $224,625, depreciation and amortization expense of $ 218,907, and the amortization of right of use assets of $214,690.
Additionally, net cash used from changes in assets and liabilities totaled $344,773. This included a decrease in accounts
receivable of $231,953 and accrued expenses and compensation of $22,643. This was offset by a decrease in deferred revenue of
$308,908, prepaid and deposits of $51,113, and a decrease in operating lease liabilities of $184,871 and a decrease in accounts
payable of $54,477.
During
the year ended December 31, 2024, the net cash outflow from investing activities was $98,847. This was for the purchase of equipment.
During
the year ended December 31, 2024, net cash provided by financing activities was $4,036,823, which consisted mainly of repayment of
our note payable of $141,977, payment of $82,300 to the IRS for tax withholding related to the share settlement of RSUs issued to
employees, offset by $4,171,601 in proceeds from sale of common stock and $89,499 in proceeds from the exercise of options.
Based
on the company’s current business plan, we believe our cash balance as of the date of this report, along with anticipated revenues
from our contract anticipated contract revenue, will be sufficient to meet the company’s anticipated cash requirements for the
near term. However, we cannot be certain that the current business plan will be achievable.
The
company’s existence depends upon management’s ability to develop profitable operations. Management is devoting a significant
portion of its efforts to developing additional business and raising capital, as needed, but cannot be certain that these efforts will
be successful. Management’s business development efforts may not result in profitable operations. To fund its research and development
and marketing efforts, the company’s management continues to explore possible financing opportunities through discussions with investment
bankers and private investors. The company may not be successful in its effort to secure additional financing on terms it considers favorable.
The accompanying consolidated financial statements do not include any adjustments that might result should the company be unable to continue
as a going concern. In January and February 2025, the
company raised approximately $6 million through the private placement of shares of its common stock, par value, $0.001 per share, some
of which were underlying pre-funded common stock purchase warrants, in a private sale to individual purchasers at a price of $0.75 per
share (or $0.749 per underlying share for pre-funded warrants), all to accredited, sophisticated investors
Additionally,
international, macroeconomic events, including the Russian military action in Ukraine and related economic sanctions around the globe
could impact the company’s ability to source necessary supplies and equipment which could materially and adversely affect our ability
to continue as a going concern. These events may also impair our ability to raise capital, including as a result of increased market
volatility, or decreased market liquidity, which also affects the company’s ability to continue as a going concern. Third-party
financing may become unavailable on terms acceptable to the company or at all. The impact of such events on the world economy and the
specific impact on the company’s financial position and results of operations are difficult to predict. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
Budgeting
for upcoming expenses and costs of supplies and equipment needed to perform our existing, and any future, grants or contracts requires
that we estimate factors such as inflation and geo-political events that affect such expenses and costs. Although inflation generally
moderated in 2023, the cost of labor continues to increase across certain sectors of the US and global economy which may drive up our
general and administrative expenses as well as the cost of personnel working directly and indirectly on our grants and contracts, particularly
given the highly skilled nature of this work. Inflation has also impacted the price of supplies and materials we must purchase in order
to perform grants and contracts, some of which may have been bid on based on cost structures which were submitted during periods of lower
inflation. In addition, geo-political events have further limited the number of countries from which we can source certain supplies and
equipment. These limitations can range from outright prohibitions to strong discouragement based on potentially sensitive information.
We continually monitor these events and the markets for needed supplies in order to make the best estimates possible, both in our internal
budgeting and in any bids or proposals we submit.
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Contractual Obligations:
The following table summarize
our contractual obligations and other commercial commitments as of December 31, 2024:
Payment by Period
Total Less than 1 Year 1 to 5 Years
The
above table does not include the dividends on our Series A Preferred Stock. Assuming that there is no conversion of the outstanding shares
of Series A Preferred Stock into shares of common stock, the dividends are approximately $34,000 each year (approximately $9,000 each
quarter).
Leases
In
March 2021, the company signed a five-year lease for an 11,000 usable square foot (13,000 rentable square foot) laboratory/office space
in Tucson. The lease term commences May 1, 2021 and ends on April 30, 2026. The base rent is $6.7626 per rentable square foot for year
one, and escalates to $9.2009 in year two, $11.4806 in year three, $13.1740 in year four and $14.9306 in year five, plus certain operating
expenses and taxes.
On
June 7, 2023, the company entered into an amendment to extend the term of the original lease from April 26, 2026 to July 31, 2028. Included
in the lease amendment is extension space commencing on August 1, 2023. As of August 1, 2023, the company has secured additional square
footage in the amount of 9,805 square feet. The initial base rent for the expansion space was $9.10 per rentable square foot for year
one, and escalated to $10.20 in year two, $11.30 in year three, $12.40 in year four and $13.50 in year five, plus certain operating expenses
and taxes.
The
amendment also 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 this expansion, the company
now occupies, in the aggregate, approximately 26,000 sq. ft. of space. 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.
Preferred Stock
The
Series A Preferred Stock has a liquidation preference of $25.00 per share. The Series A Preferred Stock bears dividends at an initial
rate of 6.5% of the liquidation preference per share per annum, which accrues from the date of issuance, and is payable quarterly. We
have not paid 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 is cured. Dividends due as of December 31, 2024, and March 26, 2025, were
approximately $397,000 and $408,000, respectively.
The
holders of the Series A Preferred Stock have a right to put the stock to the company for an aggregate amount equal to the
liquidation preference approximately $340,000 plus unpaid dividends of $397,000 as of December 31, 2024, in the event of a change in
control. Dividends are payable 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. As of December 31, 2024, there
were 13,602 shares of Series A Preferred Stock outstanding.
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Recent Accounting
Pronouncements:
Refer
to Note 3 of Notes to Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.
Off-Balance Sheet
Arrangement:
As
of December 31, 2024, we had no significant off-balance sheet arrangements.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In
the normal course of business, our financial position is subject to a variety of risks, such as the ability to collect our accounts receivable
and the recoverability of the carrying values of our long-term assets. We do not presently enter into any transactions involving derivative
financial instruments for risk management or other purposes.
Our
available cash balances are deposited in bank demand deposit accounts and money market funds. Substantially all of our cash flows are
derived from our operations within the United States and today we are not subject to market risk associated with changes in foreign exchange
rates.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Our
Consolidated Financial Statements, the related notes and the Report of Independent Registered Public Accounting Firms thereon, are included
in Applied Energetics’ 2024 Consolidated Financial Statements and are filed as a part of this report on page F-1 following the
signatures.
ITEM 9. CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
Conclusion Regarding
the Effectiveness of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer (and Principal Financial Officer), has evaluated the effectiveness
of our disclosure controls and procedures as of December 31, 2024. The term “disclosure controls and procedures,” as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other
procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its chief executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure. Management recognizes that any controls and procedures, no matter how well-designed and operated, can
provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on that evaluation our Chief Executive Officer (and Principal Financial Officer)
concluded that our disclosure controls and procedures were not effective as of December 31, 2024.
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Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined
in Rules 13a-15(f) or 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under
the supervision of, our chief executive and principal financial officers and effected by our Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes
those policies and procedures that:
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Our
management, including our Chief Executive Officer (and Principal Financial Officer) (“CFO”), has conducted an assessment
of the effectiveness of our internal control over financial reporting as of December 31, 2024, based on the framework established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
Framework). This assessment included an evaluation of the design of our internal control over financial reporting and testing of the
operational effectiveness of those controls. This assessment also took into consideration a material weakness cited by our auditors.
In particular, our auditors noted lack of segregation of duties and written policies and procedures with the accounting functions and
evidence of control review in that we have not designed such policies and procedures at a sufficient level to support the operating effectiveness
of controls to prevent and detect potential error. To mitigate this weakness, our auditors suggested that the company continue to maintain
sufficient accounting personnel to ensure segregation of duties and accurate accounting records, noting that we use an outside consultant
to perform day-to-day review function and that we create, document and maintain policies and procedures. Our management intends to take
this guidance into consideration as we work to resolve this weakness. Based on our assessment under the criteria described above, the
CFO has concluded that our internal control over financial reporting was not effective as of December 31, 2024.
This
Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal controls
over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant
to the SEC rules that permit smaller reporting companies to provide only management’s attestation in an Annual Report on Form 10-K.
Changes in Internal
Control Over Financial Reporting
There
has been no change in Applied Energetics’ internal control over financial reporting for the quarter ended December 31, 2024, that
materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
29
ITEM 9B. OTHER INFORMATION
Rule 10b5-1 Trading Arrangements
During the three months ended December 31, 2024, no director or officer
adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities of the Company pursuant to Rule
10b5-1(c) or any non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K).
ITEM 9C. DISCLOSURE
REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
None
30
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following is information with respect to our executive officer and directors:
Name Age Principal Position Director Term Expiring in Director Since
Bradford T. Adamcyzk 56 Director and Executive Chairman 2.5 years March 2018
Gregory J. Quarles 63 Director 1.5 years May 2019
Michael J. Alber 67 Director 1.5 years April 2024
John E. Schultz Jr. 71 Director Less than one year November 2018
Stephen W. McCahon 65 Chief Science Officer N/A N/A
Bradford
T. Adamczyk: Mr. Adamczyk was elected as the company’s Chairman in May 2019 and Executive Chairman in November 2021.
He served as the company’s Principal Executive Officer from August 6, 2018, until becoming Chairman and was elected as a
company director on March 8, 2018. Mr. Adamczyk has over 25 years of experience in investments and financial analysis. He founded
MoriahStone Investment Management in 2013. MoriahStone Investment Management specializes in both public equities and small-cap
private companies. He has also served on the board of advisors of BroVo Spirits, LLC since 2014, becoming its Chairman in 2018.
Prior to founding MoriahStone, he was a senior securities analyst at Columbus Circle Investors in Stamford, CT, where he focused on
technology investments. Mr. Adamczyk started his financial career at Morgan Stanley. Additionally, Mr. Adamczyk helped drive the
initial recapitalization efforts of Applied Energetics in 2018. He was part of the team that led the 2018 proxy of AE, establishing
a new company board and management team and recapitalizing the company to pursue the development of its technology and IP portfolio.
He received his undergraduate degree from Western Michigan University, graduating Magna Cum Laude, and his MBA from the University
of Michigan.
Gregory
J. Quarles: Dr. Quarles currently serves at the CEO Emeritus and jointly as the Executive
for Government and Institutional Relations, effective November 25, 2024. Prior to this transition, he was elected as the Company’s
Chief Executive Officer and as a Company director effective May 4, 2019. In January 2021, the Board of Directors also elected him as President
of the Company. Prior to May 2019, he had served on the Company’s Scientific Advisory Board since March 18, 2017. Before joining
Applied Energetics, Dr. Quarles spent eight years with Optica (formerly, The Optical Society of America) in Washington D.C., both as a
member of the Board and the Executive Committee (three years) and more recently as the Chief Scientific Officer (five years). His responsibilities
at Optica encompassed a broad range of scientific, technical and engineering infrastructure, and included content development for the
Optica meetings portfolio, along with many other related projects, highlighted by his reports to Congress. Moreover, Dr. Quarles had been
personally involved through Optica in the establishment of many crucial partnerships involving major R&D laboratories and global agencies
worldwide. This involvement included being a long-standing member of the U.S. Department of Commerce, Bureau of Industry and Security,
and Sensors and Instrumentation Technical Advisory Committee. In addition to his executive leadership, Dr. Quarles is a well-respected
member of the laser development community globally with over 35 years of experience since the award of his Ph.D. from Oklahoma State University.
He has served on the board of directors of Nanocerox, Inc., a private company, since 2011, and on the Physics Department Advisory Board
of Oklahoma State University, and the LLE Advisory Board of the University of Rochester, since 2017 and 2021, respectively. He is a Fellow
in both the SPIE and Optica, a Senior Member of the IEEE and received the Memorial D.S. Rozhdestvensky Medal from the Russian Optical
Society (2015). In 2016, he joined the Oklahoma State University CAS Hall of Fame, and in 1996 received the R&D 100 Award for the
Ce:LiSAF Laser System.
31
Christopher
Donaghey: Mr. Donaghey has served as the company’s President and Chief Executive
Officer (and Principal Financial Officer) since November 25, 2024. Prior to that date, he served as the company’s Chief Operating
and Financial Officer from July 2022. He continues to function as the company principal financial officer. Mr. Donaghey is an experienced
financial executive with extensive experience in the defense industry. Mr. Donaghey most recently served as senior vice president and
head of corporate development for Science Applications International Corporation (SAIC), a defense and government agency technology integrator,
where he was responsible for executing the company’s mergers and acquisitions (M&A) and strategic ventures strategy. He joined
SAIC in 2017, as senior vice president of finance for SAIC’s operations. Mr. Donaghey is also a Founder and Executive Board member
of the Silicon Valley Defense Group, a non-profit organization whose mission is to create the nexus of pioneering ideas, people, and capital
that will unlock new sources of innovation for national security and power the digital evolution of the defense industrial base. Prior
to joining SAIC, Donaghey was Vice President of Corporate Strategy and Development for KeyW Corporation, a national security solutions
provider for the intelligence, cyber and counterterrorism communities, where he guided the overall corporate strategy, M&A, and capital
markets activities. Mr. Donaghey was also a senior research analyst for SunTrust Robinson Humphrey Capital Markets during which time,
he was ranked the number one defense analyst and number two analyst overall for stock selection by Forbes/Starmine in 2005 and was named
in the Wall Street Journal Best on the Street survey in 2005, 2008, and 2009. Mr. Donaghey served in the U.S. Navy Reserve where he provided
scientific and technical analysis of missile guidance and control systems and advanced electronics for the Short-Range Ballistic Missile
group at the Defense Intelligence Agency’s Missile and Space Intelligence Center. Donaghey earned his bachelor’s degree in
mechanical engineering from Texas Tech University and served as an officer in the U.S. Navy. Mr. Donaghey served on Applied Energetics’
Board of Advisors from April 30, 2019 until becoming Chief Operating and Financial Officer.
John
E. Schultz Jr.: Mr. Schultz has had a long affiliation with Wall Street, having founded CSG Spectra, Inc., a risk analytics
firm, in 1984. He also founded Oak Tree Asset Management Ltd. in 2000, where he actively trades securities in managed LLC’s. Mr.
Schultz’s strong networks have emphasized outside-the-box investment opportunities and early-stage new frontier private equity
investment deals. Mr. Schultz has an intimate knowledge of Applied Energetics, including its history and financials and has in the past
served as a consultant to the company. Additionally, Mr. Schultz helped drive the initial recapitalization efforts of Applied Energetics
in 2018. He was part of the team that led the 2018 proxy of Applied Energetics, establishing a new company board and management team
and recapitalizing the Company to pursue the development of its technology and IP portfolio. Mr. Schultz is a graduate of California
State University at Long Beach.
Mary
P. O’Hara: Ms. O’Hara was appointed General Counsel and Chief Legal Officer in January 2022 and Secretary in September
2022. She has been in private law practice for over thirty years and has broad experience in all facets of securities, corporate and
commercial law. Prior to her joining the Company full time, she was affiliated with the law firm of Masur, Griffitts, Avidor, LLP (now
known as Griffitts LLP) and had represented the Company for several years. Previously, she was a partner at Hodgson Russ LLP and an associate
at Fulbright & Jaworski LLP (now known as Norton Rose Fulbright) and Mayer Brown & Platt, LLP (now known as Mayer Brown LLP).
Ms. O’Hara has a J.D. from New York University School of Law and a B.A. in Economics, magna cum laude, from the University of New
Mexico.
Stephen
W. McCahon: Dr. Stephen McCahon has served as the Company’s Chief Science Officer since May 1, 2023. Dr. McCahon has been a
scientific researcher, technology developer, and entrepreneur for over 30 years. He has co-authored more than 50 scientific publications
and has more than 30 patents issued, patents pending, or invention disclosures in preparation for patent submission. He was an original
founder of Applied Energetics, Inc. and then returned to the Company to serve as our Chief Scientist, pursuant to a Consulting Agreement,
dated as of May 24, 2019, providing input into the strategic direction of the Company and assistance in building relationships in the
defense markets. Dr. McCahon was a Member of the Research Staff in the Optical Physics Department at the Hughes Research Laboratory in
Malibu, California from 1986 to 1996 performing basic research in the area of optical physics and non-linear optical materials. In 1996,
Dr. McCahon moved to Raytheon (Hughes) Missile Systems Co, in Tucson, AZ during which time he was significantly responsible for the successful
creation and development of the Directed Energy Weapons Product Line and served as its Chief Scientist. He left Raytheon in 2002 to co-found
Applied Energetics Inc. in Tucson, AZ to develop Directed Energy Weapons for the Defense Department including very high energy and average
power ultrashort pulse (USP) laser sources and Laser Guided Energy (LGE®) technologies. In April 2010, he left Applied Energetics
to form Applied Optical Sciences where he developed technologies related to the application of optical physics to a broad range of areas,
including photonics and USP laser development. From February 2016 through May 2019, he served as a consultant to the Company. In 2019,
Applied Energetics purchased substantially all of the assets of Applied Optical Sciences, integrating it into Applied Energetics, and
retained him as Chief Scientist through the above-mentioned Consulting Agreement. He served as Chief Scientist under this Consulting
Agreement until the board appointed him Chief Science Officer on May 1, 2023. Dr. McCahon is a graduate of the University of Southern
California (BSEE, MSEE) and holds a Ph.D., Photonics, Inter-disciplinary Physics and Electrical Engineering, from the University of Iowa.
32
Michael
J. Alber Mr. Alber has an extensive career spanning over 35 years in corporate finance, capital markets, treasury, risk allocation
and mergers and acquisition experience. From April 2021, he was the Chief Financial Officer and Founder of First Light Acquisition Group
(NYSE: FLAG), a special purpose acquisition company. He previously served on the SSA (Special Security Agreement) of AceInfo Tech (subsidiary
of Dovel Technologies) and advisory board of Sincerus Global Solutions. From June 2016, he was the Chief Financial Officer and Executive
Vice President of KeyW (NASDAQ: KEYW), until its sale to Jacobs (NYSE: J) in June 2019. During this period, he led several capital market
transactions along with two strategically important M&A transactions, one that resulted in a record setting sale multiple and change
in control. Mr. Alber served as a Principal with Growth Strategy Leaders, a business and financial consulting firm (specializing in M&A
and due diligence support), from April 2015 to May 2016, and as Chief Financial Officer and SVP at Engility Corporation (NYSE: EGL) a
$2.5 billion technology services and solutions provider to both U.S. Government and International customers from May 2012 to March 2015.
During this period, he supported the company’s spin-out from L3 Technologies as a stand-alone publicly traded company. Prior to
Engility, Mr. Alber held the position of Chief Financial Officer and Treasurer at Alion Science and Technology from 2007 to 2012. He
has also held senior executive positions at SAIC (NYSE: SAIC) for 18 years, where he served as a Senior Vice President and Group CFO,
and prior to that was Director of Finance at Network Solutions, Inc. He has served on the board of directors of Sincerus Global Solutions,
a private company, since October 2022. Mr. Alber received his Bachelor of Science degree from George Mason University in Business Administration
with a concentration in finance and subsequently completed an Advanced Management Program (AMP) at Georgetown University’s McDonough
School of Business.
Directors Qualifications,
Experience and Skills
Our
directors bring to our Board a wealth of executive leadership experience and technical knowledge derived from their service, respectively,
as senior executives, founders of industry and legal or financial professionals. Our board members have demonstrated strong business
acumen and an ability to exercise sound judgment and have a reputation for integrity, honesty and adherence to ethical standards. When
considering whether directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the
Board of Directors to satisfy its oversight responsibilities effectively in light of the company’s business and structure, the
Board of Directors focuses primarily on the information discussed in each of the Directors’ individual biographies set forth above
and the specific individual qualifications, experience and skills as described below:
33
Section 16(A) Beneficial
Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires certain officers and directors of Applied Energetics, and any persons who own more
than ten percent of the common stock outstanding to file forms reporting their initial beneficial ownership of shares and subsequent
changes in that ownership with the SEC. Officers and directors of Applied Energetics, and greater than ten percent beneficial owners
are also required to furnish us with copies of all such Section 16(a) forms they file. Based on a review of these filings, two reports
on Form 4 for the company’s President and CEO (then COO and CFO) reporting a change in beneficial ownership were filed after their
respective deadlines. The company does not believe any other officers or directors failed to timely file any required forms under Section
16(a) during the year ended December 31, 2024.
Code of Ethics
Applied
Energetics has adopted a Code of Business Conduct and Ethics that applies to all of Applied Energetics’ employees and directors,
including its Chief Executive Officer and Chief Financial Officer (and principal accounting officer). Applied Energetics’ Code
of Business Conduct and Ethics covers all areas of professional conduct including, but not limited to, conflicts of interest, disclosure
obligations, insider trading, confidential information, as well as compliance with all laws, rules and regulations applicable to Applied
Energetics’ business.
Our
Code of Ethics and Business Conduct is available upon request made to us in writing at the following address, and will be provided without
charge:
Applied
Energetics, Inc.
Attention:
Chief Legal Officer
9070
S. Rita Road, Suite 1500
Tucson,
AZ 85747
Committees of the
Board of Directors
The members of the Board of Directors continue to evaluate the need
and utility of establishing one or more committees of the Board of Directors and to review relevant legal or regulatory requirements with
respect thereto. At present all functions that would be fulfilled by committees are being fulfilled by the entire board, and the board
believes that currently no committees are necessary or legally required. Although, as a “smaller reporting company” on the
OTCQB Market, the Company is not currently required to have Independent Directors, the Board of Directors believes that Messrs, Adamczyk,
Schultz, and Alber qualify as Independent Directors, as defined in the OTCQB Standards.
34
ITEM 11. EXECUTIVE
COMPENSATION
Summary Compensation
Table
The following table discloses
the compensation for the persons who served as our President and Chief Executive Officer, Chief Operating and Financial Officer, General
Counsel, Chief Legal Officer and Secretary, and Chief Science Officer for the years ended December 31, 2024 and 2023. Mr. Donaghey served
as our Chief Operating and Financial Officer from July 2022 until becoming President and CEO (and Principal Financial Officer) in November
2024. Dr. Quarles served as our Chief Executive Officer from May 6, 2019 and President since January 2022 through November 2024 when
he became CEO Emeritus. Ms. O’Hara was appointed General Counsel and Chief Legal Officer in January 2022 and Secretary in September
2022. Dr. McCahon has served as Chief Science Officer since May 2023.
Director Compensation
The
following table discloses our director compensation for the years ended December 31, 2024 and 2023: