Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 12
Item 2. Properties 12
Item 3. Legal Proceedings 12
PART II.
Item 6. [Reserved] 13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 20
Item 9A. Controls and Procedures 20
Item 9B. Other Information 21
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 21
PART III.
Item 10. Directors, Executive Officers and Corporate Governance 22
Item 11. Executive Compensation 25
Item 14. Principal Accountant Fees and Services 30
PART IV.
Item 15. Exhibits, Financial Statement Schedules 31
Signatures: 32
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 headquarters are located at 9070 S. Rita Road, Suite
1500, Tucson, Arizona, 85747 and our telephone number is (520) 628-7415.
Applied Energetics specializes
in the development and manufacture of advanced high-performance lasers, advanced optical systems, and integrated guided energy systems
for defense, aerospace, national security, industrial, biomedical, and scientific markets worldwide.
Technology, Capabilities and Patents
Applied Energetics, Inc. is
recognized as a global leader in developing the next generation optical sources exhibiting ever-increasing output energy, peak power and
frequency agility while also providing decreased size, weight, and cost of these systems for customers. Applied Energetics utilizes patented,
dual-use technologies to advance critical industries. Leveraging our proprietary fiber-based architecture and wavelength-and pulse-agility
capability, our Ultrashort Pulse (“USPTM”) technology can enable users to achieve specific effects across different use
cases with an unmatched blend of size, weight and power attributes. While initially designed to meet the emerging needs and priorities
for the national security community, our directed energy technology also has commercial applications in both the biomedical and advanced
manufacturing industries.
1
The AERG scientific team is
continuously innovating and expanding our patent portfolio to cover these technological breakthroughs and further enhance our suite of
solutions for threat disruption for the Department of Defense, the intelligence community, and for commercial, medical and space applications
with optical sources operating from the deep ultraviolet to the far infrared portions of the electromagnetic spectrum.
AERG has developed,
successfully demonstrated and holds all crucial intellectual property rights to a dynamic directed energy technology called Laser
Guided Energy (“LGE®”) and Laser Induced Plasma Channel (“LIPC®”). LGE and
LIPC are technologies that can be used in a new generation of high-tech directed energy systems. 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. The company also has seven provisional patents, and we continue to file patent applications as we deem
appropriate.
Applied Energetics technology is vastly different from conventional
directed energy systems, i.e. HEL, and HPM. LGE uses Ultrashort Pulse (USPTM) laser technology to combine the speed and precision
of lasers with the overwhelming impact on targeted threats with high-voltage electricity. Applied Energetics’ proprietary fiber-based
architecture is a key differentiator for our technology. Compared with traditional continuous wave technology with larger footprints,
AE’s architecture enables orders of magnitude size-weight-power reductions on all deliverables, creating powerful, dual-use and
agile systems that can fit a host of platforms while delivering very high intensity, ultrashort pulses of light to the required target.
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.
Applied Energetics’
unique optical fiber-based laser architectures enable unmatched wavelength agility as well as pulse duration agility. Using innovative
and highly specialized frequency shifting techniques, wavelengths can be custom tuned from the deep ultraviolet to the far Infrared. In
addition, temporal outputs can be adjusted from continuous wave to sub-picoseconds. The technology enables the customer to adjust the
lasers’ operating parameters, ultimately creating more flexibility to change wavelength and pulse width. This feature allows for
optimization of laser performance for defense or commercial applications.
Our proprietary USP laser
technology provides a significantly more compact solution than current continuous wave laser platforms while still delivering high peak
power. Continuous wave laser systems are typically used to heat a target and, during continuous illumination, this heat transfer leads
to melting or charring of the material. Using continuous wave output powers that now exceed 100 kilowatts (1kW = 1000 watts), it can take
anywhere from seconds to minutes to impact a target. By contrast, our team has delivered USP lasers to national security customers that
exceed five terawatts (1 TW = 1 trillion watts) in peak power, with the difference being that this peak power from a USP laser is delivered
in a pulse that is less than a trillionth of a second. During this short pulse duration, and having such a high peak intensity, near-instantaneous
ablation of the surface of the threat takes place. The net result of our innovative USP approaches are highly effective lasers with mountable
footprints that require only a fraction of the size and weight of other directed energy technologies.
As Applied Energetics looks 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 Ultrashort 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.
2
Business Development
We submitted multiple proposals to various government agencies in 2020
and 2021. Due to the closures of multiple agencies and work-from-home orders across various regions of the United States, reviews and
funding decisions on these proposals were delayed longer than anticipated as resources were 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.” Several of the government agencies that
have received and are reviewing our proposals started to open their facilities to limited off-site briefings starting on June 1, 2021.
Since that date, AERG’s team has been invited to, and completed, multiple briefings focused on our capabilities and submissions.
Effective August 2, 2021, the DOD reinstated a maximum telework position for their employees and contractors and reduced the on-site occupancy
to less than 50% of the normal occupancy. As the Delta variant increased, the DOD maintained the maximum telework policy, and on September
9, 2021, reduced the maximum on-site occupancy to less than 40% of normal occupancy. Further restrictions were announced on January 6,
2022, due to the onslaught of the Omicron variant, with maximum occupancy of facilities dropping to 25%, and a majority of workers teleworking.
These recent changes further hampered our ability to schedule on-site briefings for our proposals undergoing review. Beginning March 2022,
the DOD has announced a loosening of these restrictions in certain circumstances. In any event, we intend to continue developing and submitting
proposals and to be available to attend on-site briefings to the extent possible.
In addition to these review-based delays, the US federal budget for
2022 was not approved by Congress by the October 1, 2021, start of the U.S. federal government fiscal year. On September 21, 2021, the
U.S. House of Representatives passed H.R. 5305, and on September 30, 2021, the U.S. Senate passed the same bill, a continuing resolution
(CR) to extend federal government funding through December 3, 2021, and the President signed it into law (Public Law 117-43) on September
30, 2021, to avoid a government shutdown at the end of the fiscal year 2021. A second CR was signed into law on December 2, 2021, extending
funded operations through February 18, 2022. And most recently, a third CR was signed on February 17, 2022, extending funding through
March 11, 2022. The final appropriations bill was signed into law by President Biden on the night of March 11, 2022 and includes increases
in areas of particular interest to the company.
Pursuant to our 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. This agreement, which was originally executed as of July 16,
2018, was amended effective April 21, 2021, to grant Westpark Advisors options to purchase an additional 1,000,000 shares of AERG common
stock, par value $0.001 per share, at an exercise price of $0.40 per share, in exchange for Westpark Advisors’ continued service
to the company. The options vest over a period of three years from the date of the amendment. Otherwise, the other provisions of the agreement
remain in force and unchanged.
Recent Developments
Upon the successful examination, and with no opposition,
the United States Patent and Trademark Office (USPTO) officially entered the marks LGE® (Reg. No. 6,289,892) and LIPC®
(Reg. No. 6,316,069) on March 9, 2021, and April 6, 2021, respectively, in the principal register. AERG has applications
pending before the USPTO for USP, USPL, AERG and AE and anticipates allowance and/or registration within the next 12 months. The company
also has seven provisional patents, and we continue to file patent applications as we deem appropriate.
The team at Applied Energetics continued to expand during the third
and fourth quarters of 2021 and early 2022, with the addition of two new full-time employees (one, a laser technician and the other a
junior scientist) and in-house counsel as well as retention of world-class contractors to strengthen our human resources, compliance,
public relations, IT, and technical staff supporting the research and development in the laboratory. On February 22, 2022, we hired an
Executive Administrative Assistant to assist the CEO and CLO with organizational administration.
Christopher Donaghey serves on Applied Energetics’ Board of Advisors,
on which he has input into the strategic direction of the company and provides assistance in building lasting relationships in our defense
markets. Effective January 3, 2022, we agreed with Mr. Donaghey to further extended the term of his service for an additional five years,
adding an exclusivity requirement which prohibits Mr. Donaghey from providing the same advisory services to other companies in the directed
energy space. The company issued Mr. Donaghey options to purchase up to 750,000 shares of its common stock on exchange for his agreement
to extend his term and such exclusivity. The options are exercisable at a price of $2.40 per share and are subject to vesting at a rate
of 20% per year beginning on May 12, 2024.
3
Chris Donaghey currently serves
as the senior vice president and head of corporate development for Science Applications International Corporation (“SAIC”),
a defense and government agency technology integrator. In his role on Applied Energetics’ Board of Advisors, Mr. Donaghey provides
input into the strategic direction of the Company and assistance in building relationships in the defense markets. Mr. Donaghey was originally
appointed to the Board of Advisors, effective April 30, 2019, and effective May 12, 2021, we had agreed to extend the term of his service
for an additional one-year term plus a one-year automatic renewal in exchange for 70,000 shares of AERG’s common stock, and options
to purchase an additional 200,000 shares at an exercise price of $0.61 per share, for each year of service. The shares and options are
also subject to vesting over the term of his service.
Effective January 1, 2022,
the board of directors of Applied Energetics appointed Mary P. O’Hara to serve as its General Counsel and Chief Legal Officer. The
company and Ms. O’Hara entered into an Executive Employment Agreement, pursuant to which she is to serve for an initial term of
three years, with automatic renewal for additional one-year periods thereafter unless either party terminates the agreement. The agreement
calls for salary of $250,000 per year, plus standard benefits and eligibility for a bonus at the discretion of the board. The company
has also granted Ms. O’Hara additional options to purchase up to 640,000 shares of its common stock under its 2018 Incentive Stock
Plan, which vest over four years, at an exercise price of $2.40 per share. Ms. O’Hara has been in private law practice for twenty-nine
years and has broad experience in all facets of securities, corporate and commercial law. Ms. O’Hara has represented the company
for several years and is a member of its board of directors.
In May 2021, we moved
into our new headquarters consisting of approximately 13,000 rentable square feet of office, laboratory and production space located
at the University of Arizona Tech Park, a research and technology park owned and operated by the University of Arizona. This has
enabled us to consolidate our offices and expand our R&D capacity with a Class 1000 (ISO Class 6) “clean room” and
other turnkey laboratory and conference features. We have consolidated from our two previous locations and now have our management
and scientific teams under one roof. We also held our 2021 Annual Meeting of Stockholders in the large University of Arizona Tech
Park Conference Center, which provided the necessary equipment and refreshments. Attendees at the meeting received tours of the tech
park grounds.
We entered into the Lease
Agreement for the space, effective March 15, 2021, with Campus Research Corporation. The lease term began 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 was previously occupied
by a global provider of lasers and laser-based technology which vacated prior to the end of its lease term. Thus, we are benefiting from
millions of dollars of capital investment made to the facilities by the vacating tenant, and the vacating tenant continues to pay a portion
of the full market rent, with the company paying the balance in the amounts set forth above. This location, as an International Traffic
in Arms Regulations (ITAR) and laser safety compliant facility totaling approximately 13,000 square feet, with its approximately 4,800
square-foot Class 1000 (ISO 6) cleanroom, provides us the needed capacity for research, product development and production activities.
We followed the guidelines
set forth by the Small Business Administration on the Paycheck Protection Program loan, in the amount of $132,760 which we took out in
2020, partially using the proceeds for designated qualifying expenses, in particular, retaining employees. This qualified AERG for a waiver
of a portion of the loan. Accordingly, on July 2, 2021, we received a letter from our bank, via the SBA, approving conversion of $80,593.55
of the loan to a grant. Since then, we have been repaying the balance of the loan in monthly installments at the 1% annual interest rate.
As of December 31, 2021, $22,804 in principal and $1,385 in interest remained outstanding, and we expect to repay the remaining balance
in April 2022.
Path Forward
Our goal with the AERG
Strategic Plan is to increase the energy, peak power and frequency agility of fiber-based USP optical sources while decreasing the
size, weight, power-consumption 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, the intelligence community, and for commercial, biomedical, and space applications. Although the historical market for
AERG’s USP technology is the U.S. Government, derivatives of these USP technologies could provide future platforms for
commercial additive and subtractive manufacturing and medical device and optical imaging markets, creating larger dual-use market
for our products to address once testing, evaluation and integration have been completed in partnerships with the user community.
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.
4
The ongoing Coronavirus (COVID-19) pandemic does
present unique risks and uncertainties that may alter or otherwise affect our path forward. On January 8, 2022, the Pentagon decided to
extend its max telework policy to occupancies of less than 25%, and officials increased the region’s Health Protection Condition
(HPCON) to threat level Charlie. The increase marked the highest health alert at the Pentagon since the end of 2020. In early March 2022,
the Pentagon released these protections somewhat to threat level Bravo, returning to 50% occupancy in most workspaces and circumstances.
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. During the past two fiscal years, 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 2021 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 USPTM 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. The government has allocated $1.4 billion for various directed energy programs in 2021, and market
analysis and projections have estimated that this directed energy sector is anticipated to exceed $10.1 billion globally by 2026. The
DOD budget for directed energy was essentially flat between 2021 and 2022, approaching $1.2 billion for each year. As a result, we continue
to be 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 Systems
Directed energy systems involve the use of directed energy to incapacitate,
damage, or destroy enemy equipment, facilities, and assets. Previous to LGE, the only two viable directed energy systems were High Energy
Laser (HEL), which uses heat to burn targets and High Power Microwave (HPM) systems, that use electromagnetic energy at specific microwave
and radio frequencies to disable electronic systems.
HEL and HPM 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 has been directed
by Congress in fiscal year 2022 to increase funding and evaluation of pulsed laser technology in future directed energy platforms.
5
Applied Energetics utilizes patented, dual-use technologies to advance
critical industries. Leveraging our proprietary fiber-based architecture and wavelength- and pulse-agility capability, our ultrashort
pulse technology enables users to achieve specific effects across different use cases with an unmatched blend of size, weight and power
attributes. While initially designed to meet the emerging needs and priorities for the national security community, Applied Energetics’
directed energy technology also has commercial applications in both the biomedical and advanced manufacturing industries.
Fiber Based Laser Architecture
Applied Energetics’
proprietary fiber-based architecture is a key differentiator for our technology. Compared with traditional continuous wave technology
with larger footprints, AE’s architecture enables orders of magnitude size-weight-power reductions on all deliverables, creating
powerful, dual-use and agile systems that can fit a host of platforms while delivering very high intensity, ultrashort pulses of light
to the required target.
Using this unique architecture as a laser source
for an integrated system can enable Applied Energetics to develop, integrate and deliver a suite of technologies that best meet the needs
and requirements of its customers.
Wavelength- and Pulse- Agility
Applied Energetics’ optical fiber-based laser architectures enable
unmatched wavelength agility as well as pulse duration agility. Using innovative and highly specialized frequency shifting techniques,
wavelengths can be custom tuned from the deep ultraviolet to the far infrared. In addition, temporal outputs can be adjusted from continuous
wave to sub-picoseconds. The technology enables the customer to adjust the lasers’ operating parameters, ultimately creating more
flexibility to change wavelength and pulse width. This feature allows for optimization of laser performance for defense or commercial
applications.
Competition
AERG’s Ultrashort
Pulse sources, including proprietary LIPC® based LGE® technology, are unique and 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 directed energy systems development, manufacturing and integration, using continuous wave and
microwave technologies. These contractors specialize in different directed energy system platforms to respond to a variety of
threats. Applied Energetics believes that its pulsed laser systems can be a part of a layered defense solution alongside these other
technologies. Although AERG competes against other directed energy systems for funding, the uniqueness of our technologies should
continue to support their development into weapon platform programs. AERG believes that there is renewed U.S. Government interest in
directed energy applications and believes that continued development of its USP capabilities 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 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. We believe that USP technologies can rapidly accelerate in
magnitude, as a percentage of the federal budget, compared with other technologies over the next several years.
AERG’s primary direct
USP optical source 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 pulsed directed-energy systems. Other companies with directed energy capabilities, albeit
in continuous wave, microwave and other areas within directed energy, are Raytheon Technologies, Lockheed Martin, Northrup Grumman, Boeing,
BAE, nLight, General Atomics, Daylight Solutions and L3Harris Technologies.
Some of AERG’s biggest commercial competitors are Trumpf (German),
Coherent (US), Thales (France) and IPG (US), all of which are billion-dollar market class companies that have substantially more resources
than AERG.
6
Employees
As of March 28, 2022, we had
seven employees, and we retain another nine full- and part-time consultants and interns.
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, 2021 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, 2021 and 2020, we had revenues of $0 and $175,920, respectively, and we had net losses of $5,425,453
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, 2021, we had $3,662,615 of available cash and
cash equivalents and working capital of $2,290,259. 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 International
Traffic in Arms Regulations (ITAR) and other federal regulatory compliance. We also need funds for our general and administrative expenses,
including 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.
7
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.
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 portfolio. We hold a number of United States patents and patent applications, as well
as trademarks, and registrations which are necessary and contribute significantly to the preservation of our competitive position in the
market. 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 may seek to augment our technology base by licensing the
proprietary intellectual property of others, but we may be unable to obtain necessary licenses on commercially reasonable terms. We have
entered into confidentiality and invention assignment agreements with employees and 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. Our prospects for obtaining government contracts or significant commercial contracts depend upon our ability
to attract and retain qualified engineering, scientific and manufacturing personnel for our operations. 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; enhance our products by improving performance and adding innovative features
that differentiate our products from those of our competitors; develop and manufacture and bring products to market on-time and
on-budget; and enter into suitable arrangements for volume production of mature products.
8
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 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.
9
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 is not available for the resale of securities initially issued by companies that are,
or previously were, shell companies, like AERG. 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:
10
We
expect that we will be able to meet all of these requirements in the future, but unknown future events and circumstances could change
that outcome. As a result, pursuant to rule 144, stockholders who receive our restricted securities in a private placement or a business
combination may not be able to sell our shares without registration for up to one year after we have completed the private placement or
business combination.
A large number of shares
of our common stock could be sold in the market in the near future, which could depress our stock price.
As of March 26, 2022, we had
outstanding approximately 207,562,461 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) of 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 $295,000
as of December 31, 2021), 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, 2021, 13,602 shares were outstanding with a liquidation preference of approximately
$340,000 and unpaid dividends of $295,000. As of February 1, 2022, the liquidation preference of our outstanding preferred stock plus
unpaid dividends thereon was approximately $635,000. 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 COVID-19 pandemic
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.
11
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 10, 2022, we have approximately
207,692,878 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
of common stock in connection with our intent to pursue new business opportunities, a change in control of our company could occur. The
issuance of additional shares of common stock may also adversely affect the market price of our common stock, particularly given the historically
low trading volume in the market for our common stock.
ITEM 2. PROPERTIES
Effective March 15, 2021,
we entered into a Lease Agreement with Campus Research Corporation, for approximately 13,000 rentable square feet of office, laboratory
and production space located at the University of Arizona Science and Technology Park at 9070 South Rita Road, Tucson, AZ. The company
has consolidated its offices and expanded 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 began 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.
These facilities are adequate
for our current and expected level of operations.
Our aggregate rent expense,
including common area maintenance costs, was approximately $155,000 and $49,000 for 2021 and 2020, respectively.
See Note 7 to our 2021 Consolidated
Financial Statements, which is incorporated herein by reference for information with respect to our lease commitments on December 31,
2021.
ITEM 3. LEGAL PROCEEDINGS
On
July 3, 2019, Gusrae, Kaplan & Nusbaum and its partner, Ryan Whalen filed a complaint in the United States District Court for the
Southern District of New York against the company, its directors, officers, attorneys and a consultant. The action alleged libel, securities
fraud and related claims. The company filed a motion to dismiss the complaint on October 24, 2019. On December 13, 2019, Gusrae Kaplan
and Mr. Whalen filed an opposition to the company’s motion. On January 10, 2020, the company filed a reply brief. The United States
District Court has not ruled on the motion. On August 5, 2021, the plaintiffs filed a Notice of Voluntary Dismissal of the action without
prejudice.
On
January 15, 2021, the company filed a complaint in the United States District Court, Southern District of New York, against Gusrae, Kaplan
& Nusbaum and Ryan Whalen for malpractice and breach of New York Rules of Professional Conduct by both parties as former counsel to
the company. On May 28, 2021, Gusrae, Kaplan & Nusbaum and Mr. Whalen filed a motion to dismiss the complaint. On June 25, 2021, the
company filed an opposition to the motion. On July 13, 2021, Gusrae Kaplan & Nusbaum and Mr. Whalen filed their reply brief. The United
States District Court has not yet ruled on the motion.
On
September 7, 2021, Gusrae Kaplan & Nusbaum and its partner Ryan Whalen filed a complaint in the New York Supreme Court against the
company, its directors, officers, attorneys and a consultant, alleging a single claim for defamation per se based on the same conduct
underlying their claim of libel in their voluntarily dismissed federal court action. The company filed a motion to dismiss the complaint
on October 29, 2021, which motion included a request for sanctions for filing a frivolous complaint. Gusrae Kaplan & Nusbaum and Mr.
Whalen filed their opposition to the company’s motion to dismiss on January 13, 2022. The company filed its reply brief on February
17, 2022. The court has not yet ruled on the motion. On March 9, 2022, the company received notice that the court had scheduled oral arguments
on the motion to dismiss for May 23, 2022.
As
with any litigation, the company cannot predict the outcome with certainty, but the company expects to provide further updates on the
status of the litigation as circumstances warrant.
The
company may, from time to time, be involved in legal proceedings arising from the normal course of business.
12
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
Market Information and Holders
Our common stock is currently
quoted for trading on the OTCQB Market, trading under the symbol “AERG”. On March 30, 2022, the closing price of our common
stock on the OTCQB Market was $2.40. Over-the-counter market quotations, such as on the OTCQB, reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual transactions.
As of March 30, 2022, there
were approximately 389 holders of record of Applied Energetics’ common stock.
Unregistered Sale of Securities and Use of Proceeds
The company has reported all
information pertaining to all issuances of equity securities sold during the period covered by this Annual Report on Form 10-K in previously
filed report on Forms 10-Q and 8-K.
Dividends
Dividends on our Preferred
Stock are payable quarterly on the first day of February, May, August and November, in cash or shares of Common Stock. We paid dividends
via the issuance shares of Common Stock on our 6.5% Series A Convertible Preferred Stock in 2011. We paid cash dividends on our 6.5% Series
A Convertible Preferred Stock in 2012 and February and May 2013. The company has not paid the dividends commencing with the quarterly