10-K
1
f10k2020_appliedenerge.htm
ANNUAL REPORT
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
☒ Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For
the fiscal year ended December 31, 2020
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For
the transition period from __________ to __________
Commission
File Number 001-14015
Applied
Energetics, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code (520) 628-7415
Securities
registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock, $.001 par value AERG OTCQB
Securities
registered pursuant to Section 12(g) of the Exchange Act:
None
(Title
of Class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☒
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company, or an emerging growth company. See the definition of “large accelerated filer”, “accelerated
filer”, “smaller reporting company” and “emerging growth company’ in Rule 12b-2 of the Exchange
Act:
Large
Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller reporting company ☒ Emerging
growth company ☐
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting
common equity held by non-affiliates of the registrant, computed by reference to the last reported sales price at which the stock was
sold on June 30, 2020 (the last day of the registrant’s most recently completed second quarter) was approximately $26,605,000
The number of outstanding shares of the registrant’s Common Stock,
$.001 par value, as of April 8, 2021 was 199,375,149.
APPLIED
ENERGETICS, INC.
ANNUAL
REPORT ON FORM 10-K
FOR
THE YEAR ENDED DECEMBER 31, 2020
INDEX
Page No.
PART I.
Item 1. Business 1
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 11
Item 2. Properties 11
Item 3. Legal Proceedings 11
PART II.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 19
Item 9A. Controls and Procedures 19
Item 9B. Other Information 20
PART III.
Item 10. Directors, Executive Officers and Corporate Governance 21
Item 11. Executive Compensation 23
Item 14. Principal Accountant Fees and Services 26
PART IV.
Item 15. Exhibits, Financial Statement Schedules 27
Signatures: 29
i
PART
I
ITEM
1. BUSINESS
Cautionary
Note Concerning Forward-Looking Statements
Certain
statements in this Form 10-K constitute forward-looking statements within the meaning of the Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements include all statements that do not
relate solely to historical or current facts and can be identified by the use of forward-looking words such as “may”,
“believe”, “will”, “expect”, “project”, “anticipate”, “estimates”,
“plans”, “strategy”, “target”, “prospects” or “continue”, and words of similar
meaning. These forward-looking statements are based on the current plans and expectations of our management and are subject to
a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results
of operations and financial condition and may cause our actual results, performances or achievements to be materially different
from any future results, performances or achievements expressed or implied by such forward-looking statements. This Form 10-K
contains important information as to risk factors under Item 1A. Although we believe that the expectations reflected in such forward-looking
statements are reasonable, there can be no assurance that such expectations will prove to have been correct. We do not assume
any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other
factors affecting such forward-looking statements.
Available
Information
Applied
Energetics, Inc. (“company,” “Applied Energetics,” “AERG,” “we,” “our” or
“us”). makes available free of charge on its website at www.aergs.com its Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, as soon as reasonably practical after electronically filing or furnishing
such material to the Securities and Exchange Commission (“SEC”).
This
report may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549 or
at www.sec.gov. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
General
Applied
Energetics, Inc. is a corporation organized and existing under the laws of the State of Delaware. Our executive office is located
at 2480 W Ruthrauff Road, Suite 140 Q, Tucson, Arizona, 85705 and our telephone number is (520) 628-7415.
Applied
Energetics specializes in the development and manufacture of advanced high-performance lasers, high voltage electronics, advanced
optical systems, and integrated guided energy systems for defense, aerospace, industrial, and scientific markets worldwide.
Technology
and Patents
AERG has developed,
successfully demonstrated and holds all crucial intellectual property rights to a dynamic Directed Energy technology called Laser
Guided Energy (“LGETM”) and Laser Induced Plasma Channel (“LIPCTM”). LGE and LIPC
are technologies that can be used in a new generation of high-tech weapons. The Department of Defense (DOD) previously recognized
only two key types of Directed Energy Weapon (“DEW”) technologies, High Energy Lasers (“HEL”), and High-Power
Microwave (“HPM”). Neither the HEL nor the HPM intellectual property portfolio is owned by a single entity. The DOD
then designated a third DEW technology, LGE. Applied Energetics’ LGE and LIPC technologies are wholly owned by Applied Energetics
and patent protected with 26 current patents and an additional 11 Government Sensitive Patent Applications (“GSPA”).
These GSPA’s are held under secrecy orders of the US government and allow the company greatly extended protection rights.
Applied
Energetics technology is vastly different from conventional directed energy weapons, i.e. HEL, and HPM. LGE uses Ultra-Short Pulse
(USP) laser technology to combine the speed and precision of lasers with the overwhelming impact on targeted threats with high-voltage
electricity. This unique directed energy solution allows extremely high peak power and energy, with target and effects tenability
and is effective against a wide variety of potential targets. A key element of LGE is its novel ability to offer selectable and
tunable properties that can help protect non-combatants and combat zone infrastructure.
1
As
Applied Energetics moves toward the future, our corporate strategic roadmap builds upon the significant value of the company’s
USP capabilities and key intellectual property, including LGE and LIPC, to offer our prospective partners, co-developers and system
integrators a variety of next-generation Ultra Short-Pulse and frequency-agile optical sources, from the ultraviolet to the far
infrared portion of the electromagnetic spectrum, to address numerous challenges within the military, medical device, and advanced
manufacturing market sectors.
Key
Relationships and Business Development
Gregory Quarles joined Applied
Energetics, to serve as its Chief Executive Officer and a member of the Board of Directors, effective May 6, 2019. He was elected President
of the company in January 2021. He leads the company in its development of next generation advanced defense technologies based on compact
ultra-short pulse optical systems and laser guided energy. Dr. Quarles is an experienced CEO, board member and renowned physicist with
over 30 years of experience driving cutting-edge laser, optics, and photonics technology development and operations within advanced industrial
companies. Additionally, Dr. Quarles is a globally recognized leader for his strategic partnerships with the Department of Defense and
his innovative work in the progression of global materials research, specifically developing new laser and integrated photonic devices
for a variety of military, medical, and industrial applications.
Pursuant
to a Consulting Agreement, dated as of May 24, 2019, with SWM Consulting, LLC, an entity owned by Stephen W. McCahon, Dr. McCahon
serves as our Chief Scientist. This relationship gives us the technical and industry knowhow to utilize the company’s intellectual
property in the development of a next generation of Ultra-Short Pulse Lasers. The Consulting Agreement provides for a combination
of cash and equity compensation, as we have previously disclosed, for which Dr. McCahon leads Applied Energetics’ scientific
efforts including: leading the scientific team, developing new intellectual property, assisting with business development, transferring
legacy knowledge to new team members, recruiting and training talent, working with executives on corporate strategy, assisting
in budget development for R&D, meeting with clients on technical concepts, attending conferences, and producing thought leadership
for the company. Dr. McCahon works closely with Dr. Quarles on the company’s research and development activities and in
the proposal and fulfilment of research and development contracts for branches of the Department of Defense, agencies of the federal
government and other defense contractors and in other internal research and development activities relating to lasers and advanced
optical sources.
Pursuant to our July 16, 2018,
Master Services Agreement, Westpark Advisors, LLC assists the company in its comprehensive sales and marketing strategy for the greater
Washington DC area and broader Department of Defense markets. Westpark Advisors focuses on the company’s next generation USP laser
technologies, along with LGE and the company’s other novel laser technologies and provides business development, program management
and strategy consulting services, including sales and marketing of the company’s product line. Westpark Advisors’ Managing
Director, Patrick Williams provides full-time support to the company under this agreement.
Under
our February 15, 2019, Consulting and Advisory Services Agreement, WCCventures, LLC provides advice and guidance to management
including business strategy, marketing and capital needs.
AERG
also retains corporate communications firm Cameron Associates (“CA”), to provide investor relations services on behalf
of the company including counselling, management on appropriate investor communications, preparing and distributing press releases
and other public documents, orchestrating conference calls and responding to investor inquiries.
Effective
April 29, 2019, AERG. established its Board of Advisors and appointed Christopher Donaghey as its first member. Chris Donaghey
currently serves as the senior vice president and head of corporate development for Science Applications International Corporation
(“SAIC”), a $7 billion revenue defense and government agency technology integrator. As an executive of SAIC, Donaghey
works closely with SAIC’s senior management to support the development and implementation of SAIC’s strategic plan
with an emphasis on M&A to complement organic growth strategies and value creation. In his role on Applied Energetics’
Board of Advisors, Mr. Donaghey has significant input into the strategic direction of the company and provides assistance in building
lasting relationships in our defense markets.
2
Recent
Developments
As of March 4, 2020, AERG
executed a contract having a value of $165,919.77 with the US Army under its STTR program for a 90-day Phase 1 research program to investigate
Standoff Electronic Denial systems using ultrashort pulse lasers. On October 20, 2020, it was
announced that the company had received notice from the Army that it was not selected for Phase II. While
we were disappointed, we continue to believe our advanced technologies can solve critical challenges faced by the U.S. military.
Applied Energetics has multiple proposals outstanding for a variety of applications and our team continues to vigorously pursue new opportunities
in an effort to leverage our significant intellectual property and core competencies in ultra-short pulse optical sources. The AERG team
has recently submitted several provisional patent applications to expand and protect our USP portion of the patent portfolio. We anticipate
that this intellectual property development will continue with other future submissions currently under development.
We submitted multiple proposals
to various government agencies in 2020. Due to the closures of multiple agencies and work-from-home orders across various regions of the
United States, we anticipate that reviews and funding decisions on these proposals might be delayed longer than anticipated as resources
are focused on other matters within the government. AERG has received multiple notices from government agencies stating that “the
vast number of proposals received, and the challenges posed by the COVID-19 pandemic have impacted the Government’s evaluation timelines.”
In addition to these review-based delays, the US federal budget for 2021 was not approved by Congress by the October 1, 2020 start
of the U.S. federal government fiscal year. The 2021 federal budget was signed into law on December 27, 2020 and the National Defense
Authorization Act for 2021 was enacted after a congressional override of the President’s veto
on January 1, 2021, a full three months after the official start of the 2021 fiscal year. This delay could also significantly impact
review of proposals and awards of near-term contracts in 2021. The 2021 National Defense Authorization Act has language actually calling
for funding and reports on strategies for “Development and fielding of high energy laser
capabilities”, which could be addressed with AERG USP optical sources.
Effective
March 15, 2021, AERG entered into a Lease Agreement with Campus Research Corporation, for approximately 13,000 rentable square
feet of office, laboratory and production space located at the UA Tech Park, a research and technology park owned and operated
by the University of Arizona. The company intends to consolidate its offices and expand its R&D capacity by leasing this space
which is outfitted with a Class 1000 (ISO Class 6) “clean room” and other turnkey laboratory and conference features.
The
lease term begins May 1, 2021 and ends on April 30, 2026. The base rent is $6.7626 per rentable square foot for year one, and
escalates to $9.2009 in year two, $11.4806 in year three, $13.1740 in year four and $14.9306 in year five, plus certain operating
expenses and taxes.
The
space is currently occupied by a global provider of lasers and laser-based technology which is vacating prior to the end of its
lease term. Thus we are benefiting from millions of dollars of capital investment made by the vacating tenant, and the vacating
tenant will continue to pay a portion of the full market rent, with the company paying the balance in the amounts set forth above.
We believe that this new strategic
location will support the company’s anticipated future growth and provide greater capacity for research, product development and
production activities. The move, expected to take place starting May 1, 2021, will provide the Company with an ITAR and laser safety compliant
facility totaling approximately 13,000 square feet, of which approximately 4,800 square feet is dedicated to the cleanroom
On
April 28, 2020, AERG was awarded a loan for $132,760 through the Small Business Administration (SBA) Paycheck Protection Program (PPP).
The terms of this loan were twenty-four months with a 1% annual interest rate. These funds were issued to cover payroll costs over eight
weeks covering May and June 2020. Through the utilization of this PPP loan, AERG was able to keep all employees fully engaged during these
two months of the pandemic. We intend to follow the guidelines set forth by the SBA on the PPP program which will allow AERG to apply
for a waiver of the loan, because of this full employment retention, and have the loan convert to a grant.
3
Path
Forward
We believe that USP optical
sources, LGE and LIPC are the cornerstone to AERG’s future and remain the key areas of our R&D focus for the near term. We plan
to continue building our management team with highly qualified individuals. We intend to recruit additional personnel in the areas of
R&D, marketing and finance, and, possibly add members to our Board of Directors and our Board of Advisors. We have worked to align
key innovations with our roadmap to encourage and enable internal filing for a broad, strategic and robust intellectual property portfolio
of and continue surveying the literature for acquisitions of parallel intellectual property to that end. We also intend to pursue strategic
corporate acquisitions in related fields and technology. Although the company has achieved its near-term capital raising goals, we continue
to explore any favorable equity financing opportunities.
Our goal with the AERG Strategic
Plan is to increase the energy, peak power and frequency agility of USP optical sources while decreasing the size, weight, and cost of
these systems. We are in the process of developing this breadth of very high peak power USP lasers and additional optical sources that
have a very broad range of applicability for threat disruption for the Department of Defense, commercial, and medical applications. Although
the historical market for AERG’s LGE and USP technology is the U.S. Government, the USP technologies are expected to provide numerous
platforms for commercial additive and subtractive manufacturing and medical device and imaging markets, creating a substantially larger
market for our products to address. During 2020, the AERG team was able to develop partnership and teaming arrangements with the three
leading laser and optics institutes in the United States, namely, the University of Arizona, the University of Central Florida, and the
University of Rochester Laboratory for Laser Energetics. Our desire is to work on programs jointly where the strengths of each organization
can assist in escalating knowledge and delivery of systems to the government sponsors, and to train the next generation of scientists
and engineers to work in the Directed Energy fields.
The ongoing Coronavirus Disease
2019 (COVID-19) pandemic does present unique risks and uncertainties that may alter or otherwise affect our path forward. Our management
continues to monitor the possible effects of the COVID-19 on the execution of our plan of operations, our prospective contracts, and the
availability of financing to fund our strategic and operational plans going forward. Despite these challenges, we have continued to execute
our business development plans and to deliver on our government contracts as per the timeline commitments. During this fiscal year, we
submitted multiple proposals and have been engaged in meetings on a daily and weekly basis with various agencies and departments both
remotely and in person in Washington, DC and at various other government facilities. Dr. Quarles, our President and CEO, has traveled
to DC on multiple occasions during the pandemic in 2020 and remains very committed to pursuing this business even in these challenging
times. The interest in our technology and applications remains high, and we continue to submit proposals for all appropriate opportunities
and share our vision of the disruptive capabilities of USP optical sources for both near- and far-term threats and dual-use commercial
applications.
Through
our analysis of the market, and in discussions with potential customers, we would also conclude that customers are becoming more
receptive and interested in directed energy technologies. According to the Department of Defense fiscal 2019 budget, its directed
energy spending grew from approximately $500 million in 2017 to over $1 billion in 2019, an increase of 100%. The 2020 budget
reflected directed energy spending of $1.2 billion, an additional increase of 20% over 2019, and from 2017 through 2020, the directed
energy budget grew from approximately $500 million to approximately $1.2 billion, averaging approximately 40% per year. As a result,
we continue to be even more optimistic about our future and the growing opportunities in directed energy applications. The AERG
team anticipates a continuation of strong funding for the Directed Energy community. With our existing patent portfolio, and through
further advancements of our technologies, we believe we have the substantial building blocks needed to become a significant and
successful developer in our USP and LGE marketplaces.
Market
for Our Technology
Directed
Energy Weapons
Directed
energy weapon system means military action involving the use of directed energy to incapacitate, damage, or destroy enemy equipment,
facilities, and assets. Previous to LGE, the only two viable directed energy weapon systems were High Energy Laser (HEL), which
uses heat to burn targets and High Power Radio Frequency (HP-RF), weapons that use electromagnetic energy at specific frequencies
to disable electronic systems.
4
HEL
and HP-RF directed energy technologies have been under development for decades with numerous DoD and other government contractors
participating. The unique attributes of directed energy weapon systems —the ability to create precise effects against multiple
targets near-instantaneously and at a very low cost per shot—have great potential to help the DoD in addressing future warfare
requirements. The DoD invests research and development dollars into directed energy solutions to fill gaps identified by warfighters.
For example, in future conflicts with capable enemies possessing large inventories of guided missiles, it may be operationally
risky and cost-prohibitive for the U.S. military to continue to rely exclusively on a limited number of kinetic missile interceptors.
Such a “missile competition” could allow an adversary to impose costs on U.S. forces by compelling them to intercept
each incoming missile with far more expensive kinetic munitions. The DoD has made significant leaps in both performance and maturity
as a result of many years of research with multiple threat-intercept technologies and is being directed by Congress to increase
funding and evaluation of pulsed laser technology in future Directed Energy platforms in FY2021.
Laser
Guided Energy
AERG’s
patented LGE weapon technology works via wireless electrical energy transmission through the atmosphere, to disable vehicles and
other threats to our security. AERG has developed the underlying technologies that allow a user to precisely control where the
directed energy goes in direction, range, and magnitude. AERG’s LGE technologies are combined to create “laser filaments”
as the laser passes through the atmosphere. The filaments in turn create Laser Induced Plasma Channels (“LIPC”) which
enable the transmission of electrical energy.
Our
development of LGE has led to a third directed energy technology creating a generational opportunity for a completely new weapon
system development. The Company uniquely owns the critical intellectual property for LGE. The unique properties and demonstrated
target effects of LGE allow for mission areas and applications that are not accessible to either HEL or RF directed energy. Therefore,
LGE fills numerous requirements in the urban and asymmetric warfare environment. There is a very broad range of targets and effects
that LGE addresses that are uniquely different from HEL and RF directed energy and therefore we do not compete directly within
those application spaces.
Competition
AERG’s
proprietary LIPC based LGE technology is a unique directed energy weapon, with products that can be integrated onto platforms
being developed for use by the U.S. Government. Over the past several years, a handful of major defense contractors have received
significant funding for DE systems development, manufacturing and integration. These contractors specialize in different directed
energy weapon system platforms to respond to a variety of threats. Although AERG competes against other weapon systems for funding,
the uniqueness of the LGE technology should continue to support its development into weapon platform programs. AERG, like many
other small defense contractors, was adversely affected by cutbacks in U.S. Government spending after 2011. AERG believes that
there is renewed U.S. Government interest in directed energy applications and believes that continued development of its USP capabilities,
including LGE and LIPC technologies, and growing interest from all branches of the U.S. armed forces and other government agencies
will lead to increases in government spending on directed energy weaponry in the coming years. Likewise, there are multiple new
threats that must be addressed with unique and emerging technologies, and AERG is working diligently to rapidly advance development,
demonstration, testing and engineering of the Advanced Ultrashort Pulse Lasers throughout the spectrum from the ultraviolet to
the far infrared. As a percentage of the federal budget, this has the possibility to rapidly accelerate and compare in magnitude
with the LGE/LIPC product lines over the next several years.
Furthermore,
AERG’s primary direct LGE and USP optical sources competition are corporations and contractors supported by foreign governments
who may be attempting to develop similar technologies. AERG believes that such foreign activity will create additional U.S. Government
funding for both USP sources and LGE in order to maintain our country’s lead in directed-energy weapons.
Some
of AERG’s biggest commercial competitors are Trumpf (German), Coherent (US), Thales (France) and IPG (US), all billion-dollar
market class companies that have substantially more resources than AERG.
Employees
As of March 20, 2021, we had
two employees, and we retain five full- and part-time consultants and interns.
5
ITEM
1A. RISK FACTORS
Future
results of operations of Applied Energetics involve a number of known and unknown risks and uncertainties. Factors that could
affect future operating results and cash flows and cause actual results to vary materially from historical results include, but
are not limited to those risks set forth below:
Risk
Related to Our Company
Our
independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern,
which may hinder our ability to obtain future financing.
In
their report accompanying our financial statements, our independent registered public accounting firm stated that our financial
statements for the year ended December 31, 2020 were prepared assuming that we would continue as a going concern, and that they
have substantial doubt as to our ability to continue as a going concern. Our auditors have noted that our recurring losses and
negative cash flow from operations and the concern that we may incur additional losses due to the reduction in government contract
activity raise substantial doubt about our ability to continue as a going concern.
Our
business has generated little or no revenues during the past two fiscal years and had a net operating loss during each period.
For
the fiscal years ended December 31, 2019 and 2020, we had revenues of $-0- and $175,920, and we had net losses of $5,563,339 and $3,230,494,
respectively. We can give no assurances that our planned operations will generate revenues in the future or whether any such revenues
will result in profitability.
We
may need additional financing to fund our operations going forward. If we are unable to obtain additional financing on acceptable
terms, we may need to modify or curtail our development plans and operations.
As of December 31,
2020, we had $3,323,290 of available cash and cash equivalents and working capital of $1,566,365 and in January and
February of 2021, we raised an additional $2,258,000. Our cash position is sufficient for the next several months, but we may need
to raise additional capital in order to fund our operations beyond that. We must allocate funds toward SEC compliance as well as
ITAR and other federal regulatory compliance. We also need funds for our general and administrative expenses include salaries,
accounting fees, other professional fees and other miscellaneous expenses. Our failure to secure sufficient financing could render
us unable to pay accounting and other fees required to continue to fulfill our SEC reporting obligations. Also, we have incurred
a five-year lease obligation for our new facility and will have moving, computer networking and other expenses related thereto.
We also may require additional funding for research and development before we are able to commercialize our technology. During
the fiscal year, we achieved our capital raising goal, and a portion of the funds for research and development may come from government
contracts or sub-contracts with larger contractors. However, we may need to raise additional funds to supplement these contracts
even if we are able to secure them.
Our operating plans
and capital requirements are subject to change based on how we determine to proceed with respect to development programs and if
we pursue any strategic alternatives. Additional funds may be raised through the issuance of equity securities, but such financing
may not be available on terms acceptable to us if at all. Any equity financing would cause the percentage ownership by our current
stockholders to be diluted, which dilution may be substantial. Also, any additional equity securities issued may have rights, preferences
or privileges senior to those of existing stockholders. If such financing is not available when required or is not available on
acceptable terms, we may be required to modify or curtail our operations, which could cause investors to lose the entire amount
of their investment.
The
ongoing global pandemic has caused unpredictability in capital markets. If this uncertainty continues, it could make it more difficult
for companies, including ours, to access capital. It is currently difficult to estimate with any certainty how long the pandemic
and resulting curtailment of business will continue, and its effect on capital markets and our ability to raise funds in the future
is, accordingly, difficult to quantify.
6
Risk
Related to Our Business Activities
We
may be unable to adequately protect our intellectual property rights, which could affect our ability to sustain the value of such
assets.
Protecting
our intellectual property rights is critical to our ability to maintain the value of our intellectual property. We hold a number
of United States patents and patent applications, as well as trademarks, and registrations which are necessary and contribute
significantly to the preservation of our competitive position in the market. We can offer no assurance that any of these patents
or future patent applications and other intellectual property will not be challenged, invalidated or circumvented by third parties.
In some instances, we have augmented our technology base by licensing the proprietary intellectual property of others. In the
future, we may not be able to obtain necessary licenses on commercially reasonable terms. While we have entered into confidentiality
and invention assignment agreements with our consultants and entered into nondisclosure agreements with suppliers and appropriate
customers so as to limit access to and disclosure of our proprietary information. These measures may not suffice to deter misappropriation
or independent third-party development of similar technologies. Based on our current financial condition, we may not have the
funds available to enforce and protect our intellectual properties.
We
may face claims of infringement of proprietary rights.
There
is a risk that a third party may claim our products and technologies infringe on their proprietary rights. Whether or not our
products infringe on proprietary rights of third parties, infringement or invalidity claims may be asserted or prosecuted against
us, and we could incur significant expense in defending them. If any claims or actions are asserted against us, we may not have
the funds necessary to defend against such claims. Our failure to do so could adversely affect the value of our intellectual property.
Management
has broad discretion over the selection of our prospective business and business opportunities
Any
person who invests in our securities will do so without an opportunity to evaluate the specific merits or risks of our prospective
business and business opportunities. As a result, investors will be entirely dependent on the broad discretion and judgment of
management in connection with the selection of a prospective business. The business decisions made by our management may not be
successful.
We
depend on the recruitment and retention of qualified personnel, and failure to attract and retain such personnel could seriously
harm our business.
Due
to the specialized nature of our businesses, our future performance is highly dependent upon the continued services of our key
engineering and scientific personnel. To the extent we obtain Government contracts or significant commercial contracts our prospects
depend upon our ability to attract and retain qualified engineering, scientific and manufacturing personnel for our operations.
Competition for personnel is intense, and we may not be successful in attracting or retaining qualified personnel. Our failure
to compete for these personnel could seriously harm our business, results of operations and financial condition. Additionally,
since the majority of our business involves technologies that are classified due to national security reasons, we must hire U.S.
Citizens who have the ability to obtain a security clearance. This further reduces our potential labor pool.
Our
future success will depend on our ability to develop and commercialize technologies and applications that address the needs of
our markets.
Both
our defense and commercial markets are characterized by rapidly changing technologies and evolving industry standards. Accordingly,
our future performance depends on a number of factors, including our ability to:
● identify emerging technological trends in our target markets;
● develop and maintain competitive products;
7
● enter into suitable arrangements for volume production of mature products.
We
believe that, in order to be competitive in the future, we will need to continue to develop and commercialize technologies and
products, which will require the investment of financial and engineering resources. Due to the design complexity of our products,
we may in the future experience delays in completing development and introduction on a commercial scale of new products. Any delays
could result in increased costs of development, deflect resources from other projects or incur loss of contracts.
In
addition, there can be no assurance that the market for our technologies and products will develop or continue to expand as we
currently anticipate. The failure of our technology to gain market acceptance could significantly reduce any ability to generate
revenue and harm our business. Furthermore, we cannot be sure that our competitors will not develop competing or differing technologies
which gain market acceptance in advance of our products. The possibility that our competitors might develop new technology or
products might cause our existing technology and products to become obsolete or create significant price competition. If we fail
in our new product development and commercialization efforts or our products fail to achieve market acceptance more rapidly than
our competitors, our revenue will decline and our business, financial condition and results of operations will be negatively affected.
We
heavily depend on key personnel, for the successful execution of our business plan. The loss of one or more key members of our
management team could have a material adverse effect on our business prospects.
We
are highly dependent upon Gregory J. Quarles, our President and Chief Executive Officer, and Stephen McCahon, our Chief Scientist.
We depend on Drs. Quarles’s and McCahon’s decades of expertise for the development of our technology. We also
depend upon their global visibility and outreach as well as our directors’ networks of contacts and experience to recruit key
talent to the Company. We do not have key-man insurance on any of these individuals. Loss of the services of these key members of
our management team, or of our Board of Directors’ ability to identify and hire key talent, could have a material adverse
effect on our business prospects, financial condition and results of operations.
If
we are unable to hire additional qualified personnel, our business prospects may suffer.
Our
success and achievement of our business plans depend upon our ability to recruit, hire, train and retain additional highly qualified
technical and managerial personnel. Competition for qualified employees among high technology companies is intense, and any inability
to attract, retain and motivate additional highly skilled employees required for the implementation of our business plans and
activities could strongly impact our business. Our inability to attract and retain the necessary technical and managerial personnel
and scientific, regulatory and other consultants and advisors could materially damage our business prospects, financial condition
and results of operations.
The
market for our technology has a limited number of potential customers.
Given
the highly specialized nature of our technology, the potential market for our products is limited to a relative few potential
customers who tend to allocate significant budgeted amounts to selected projects. Currently, we are marketing our technology and
focusing our research and development on the defense sector, in which demand is ultimately determined primarily by the US federal
defense budget and the needs and priorities of the Department of Defense and its various agencies. The potential customers in
this area are defense agencies for direct contacts and major defense contractors for subcontracts. Thus the demand for our products
depends on their needs for our technology and selecting us for research and development. Although we intend to diversify into
other applications for our technology and markets, we cannot be certain that opportunities in those markets will present themselves
when we are ready, or that we will otherwise be able, to do so.
8
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:
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission
payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and
remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing
recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because
of these regulations and restrictions, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures
and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling
stockholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading
activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common
stock. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common
stock. Our common stock, in all probability, will be subject to such penny stock rules and other restrictions for the foreseeable
future and our stockholders will, in all likelihood, find it difficult to sell their shares of common stock.
Because
we are a former shell company, our stockholders face restrictions on their reliance on Rule 144 to sell their shares.
Historically,
the SEC staff has taken the position that Rule 144 under the Securities Act of 1933, as amended, is not available for the resale of securities
initially issued by companies that are, or previously were, blank check companies, like us. The SEC has codified and expanded this position
in the amendments discussed above by prohibiting the use of Rule 144 for resale of securities issued by any shell companies (other than
business combination related shell companies) or any issuer that has been at any time previously a shell company. The SEC has provided
an important exception to this prohibition, however, if the following conditions are met:
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.
9
A
large number of shares of our common stock could be sold in the market in the near future, which could depress our stock price.
As of April 8, 2021, we had outstanding approximately 199,375,000 shares
of common stock. Approximately 100 million of our shares are currently freely trading without restriction under the Securities Act of
1933, as amended. The remaining shares have been held by their holders for over one year and are thus eligible for sale under rule 144(k)
under the Securities Act. Sale of these shares into the market could depress our stock price.
Provisions
of our corporate charter documents could delay or prevent change of control.
Our Certificate of Incorporation
authorizes our Board of Directors to issue up to 2,000,000 shares of “blank check” preferred stock without stockholder approval,
in one or more series and to fix the dividend rights, terms, conversion rights, voting rights, redemption rights and terms, liquidation
preferences, and any other rights, preferences, privileges, and restrictions applicable to each new series of preferred stock. In addition,
our Certificate of Incorporation divides our Board of Directors into three classes, serving staggered three-year terms. At least two annual
meetings, instead of one, will be required to effect a change in a majority of our Board of Directors. The designation of preferred stock
in the future and the classification of our Board of Directors, could make it difficult for third parties to gain control of our company,
prevent or substantially delay a change in control, discourage bids for our common stock at a premium, or otherwise adversely affect the
market price of our common stock. Moreover, the holders of our outstanding Series A Preferred Stock have a right to put their shares to
the company for an amount equal to the liquidation preference of approximately $340,000 plus unpaid dividends (approximately $261,000
as of December 31, 2020), in the event of a change of control. Such right could hinder our ability to sell our assets or merge with another
company.
The
redemption and dividend provisions of our outstanding preferred stock are onerous due to our current financial condition.
The company has redeemed substantially
all of its outstanding preferred stock. At December 31, 2020, 13,602 shares were outstanding with a liquidation preference of approximately
$340,000 and unpaid dividends of $261,000. As of April 8, 2021, the liquidation preference of our outstanding preferred stock plus unpaid
dividends thereon was approximately $610,000. If an event occurs that would require us to redeem the preferred stock, we may not have
the required cash to do so.
In addition, our annual dividend
payment on the preferred stock is approximately $34,000, which will further deplete our cash. We have not paid the dividends commencing
with the quarterly dividend due August 1, 2013 and, as a result, the dividend rate has increased to 10% per annum and will remain at
that level until such failure no longer continues. These terms may also make it more difficult for us to sell equity securities or complete
an acquisition.
The
global pandemic COVID-19, otherwise referred to as the Coronavirus, is slowing the process of applying for and awarding government
contracts and could impair our ability to expand our research and development capacity or raise additional funding if needed.
The
ongoing global pandemic has caused disruption in certain government contracting processes and procedures and made travel and other
necessities for securing such contracts more difficult. In addition, to the extent that any of our personnel or consultants are
affected by the virus, this could cause delays or disruption in our research and development program and affect our ability to
execute our plan of operations. The pandemic has also caused unpredictability in capital markets. If this uncertainty continues,
it could make it more difficult for companies, including ours, to access capital. It is currently difficult to estimate with any
certainty how long the pandemic and resulting will continue, and its effect on capital markets and our ability to raise funds
in the future is, accordingly, difficult to quantify.
Any
issuance of additional securities in conjunction with a business or financing opportunity which will result in a dilution of present
stockholders’ ownership
Our
certificate of incorporation authorizes the issuance of 500,000,000 shares of common stock. As of March 26, 2021, we have approximately
198,875,000 shares issued and outstanding. If funding opportunities present themselves on favorable terms, we may issue additional shares
to fund our business or in connection with our pursuit of new business opportunities and new business operations. To the extent that additional
shares of common stock are issued, our stockholders would experience dilution of their respective ownership interests. If we issue shares