Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments
Item 2. Properties 14
Item 3. Legal Proceedings 15
PART II.
Item 6. [Reserved] 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9A. Controls and Procedures 23
Item 9B. Other Information 24
Item 9C. Disclosure regarding Foreign Jurisdictions that Prevent Inspections. 24
PART III.
Item 10. Directors, Executive Officers, and Corporate Governance 25
Item 11. Executive Compensation 28
Item 13. Certain Related Party Transactions and Director Independence 35
Item 14. Principal Accountant Fees and Services 36
PART IV.
Item 15. Exhibits and Financial Statement Schedules 37
Signatures: 38
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 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,”
“AE,” “we,” “our” or “us”) makes available free of charge on its website at www.appliedenergetics.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. Our website is located at www.appliedenergetics.com.
Applied Energetics, Inc. specializes in the development and manufacture
of advanced high-performance lasers, advanced optical systems, high voltage electronics, and integrated guided energy systems for prospective
defense, national security, industrial, biomedical, and scientific customers 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 Applied Energetics 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, biomedical and space
applications with optical sources operating from the deep ultraviolet to the far infrared portions of the electromagnetic spectrum.
Applied Energetics 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 protected by one or more of Applied Energetics’
27 issued patents and 11 Government Sensitive Patent Applications (“GSPA”). These GSPA’s are held under secrecy orders
of the US government, providing the company with greatly extended protection rights. The company also has seven pending patent applications
and one provisional patent application which is undergoing conversion to its non-provisional form. We continue to file patent applications
as we deem appropriate to protect our intellectual property and enhance our competitive advantage.
Applied Energetics’
Directed Energy technologies are 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. 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’ proprietary fiber-based architecture is a key differentiator for our most recent
technology demonstrators. Compared with traditional continuous wave laser technologies with their 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 tunability, and is effective against a wide variety of potential
targets.
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, Applied Energetics has delivered USP lasers to national security
users 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 results 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 laser 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 national security, biomedical, and advanced manufacturing market sectors.
Recent Developments
In May 2022, Applied Energetics
was awarded a $3.89 million, two-year grant from the Department of the Navy, Office of Naval Research (ONR), to develop an optical system
capable of defeating customer-specified threats for integration onto U.S. Marine Corps (USMC) platforms. We were awarded this grant to
accelerate the development and testing of Infrared (IR) optical technology with an ultrashort pulse laser (USPL) system. The overall
objective is to advance and ruggedize optical technologies that can be fielded on a variety of USMC platforms and are able to operate
in harsh conditions.
2
We also executed a Phase
I Small Business Technology Transfer (STTR) contract with the U.S. Army on June 2, 2022. The objective of the contract is the
delivery of an ultra-broadband infrared (IR) source. Under this contract, Applied Energetics, was to model novel approaches for the
eye-safe delivery of ultra-broadband infrared laser pulses to electro-optic sensors. Electro-Optical/Infrared (EO/IR) sensors are
imaging systems used for military applications. The STTR program is a federally funded initiative to incorporate small business
technological innovation into government supported research and development programs. STTRs require the small business to team with
a university or non-profit and are structured in three potential phases. Applied Energetics proposed to partner with the James C.
Wyant College of Optical Sciences at the University of Arizona for Phase I. The company completed work on this first phase of the
Army STTR and filed the report on January 3, 2023. Prior to the final report filing, AE submitted the Phase II
proposal by the submission deadline of December 7, 2022. The Phase II proposals can be up to $1.15 M in contract funding over a
24-month period. Any announcement on the Phase II STTR proposals is estimated by the Army to be released no later than Q2 of
2023.
Effective August 1, 2022,
our board of directors appointed Christopher Donaghey, age 50, to serve as Chief Financial and Chief Operating Officer. The company and
Mr. Donaghey entered into an Executive Employment Agreement, pursuant to which he is serving for an initial term of four years, with
automatic renewal for additional one-year periods thereafter unless either party terminates the agreement. The agreement calls for salary
of $350,000 per year, plus standard benefits and eligibility for a bonus at the discretion of the board. The company has also granted
Mr. Donaghey additional options to purchase up to 1,000,000 shares of its common stock under its 2018 Incentive Stock Plan, which vest
over four years and have an exercise price of $2.36 per share, and Restricted Stock Units representing up to 400,000 shares of the company’s
common stock which also vest over four years. The Restricted Stock Units are issued pursuant to a Restricted Stock Unit Agreement, dated
as of July 13, 2022. Mr. Donaghey forfeited unvested options to purchase up to 950,000 shares of common stock which he had previously
received for service on the company’s Board of Advisors.
Mr. Donaghey is an experienced
financial executive with a proven track-record in delivering profitable growth, including extensive experience within the defense industry.
He joins Applied Energetics from Science Applications International Corporation (SAIC), a defense and government agency technology integrator,
where he served as the senior vice president and head of corporate development. In this role, he was responsible for executing the company’s
mergers and acquisitions (M&A) and strategic ventures strategy, working closely with the senior management team to support the development
and implementation of SAIC’s strategic plan with an emphasis on M&A and external emerging technology investments to complement
organic growth strategies and value creation. He joined SAIC in 2017, as senior vice president of finance for SAIC’s operations,
and provided strategic leadership and business guidance to the organization. Mr. Donaghey is also a Founder and Executive Board member
of the Silicon Valley Defense Group, a non-profit organization whose mission is to create the nexus of pioneering ideas, people, and
capital that will unlock new sources of innovation for national security and power the digital evolution of the defense industrial base.
Prior to joining SAIC, Donaghey
was vice president of Corporate Strategy and Development for KeyW Corporation, a national security solutions provider for the Intelligence,
Cyber and Counterterrorism Communities, where he guided the overall corporate strategy, M&A, and capital markets activities.
Mr. Donaghey was also a senior
research analyst for SunTrust Robinson Humphrey Capital Markets where he provided investment advice and insight to institutional investors
covering public defense technology, government IT services, and commercial aerospace industries. During his tenure at SunTrust, Donaghey
was ranked the number one defense analyst and number two analyst overall for stock selection by Forbes/Starmine in 2005 and was named
in the Wall Street Journal Best on the Street survey in 2005, 2008, and 2009.
Mr. Donaghey served in the
U.S. Navy Reserve where he provided scientific and technical analysis of missile guidance and control systems and advanced electronics
for the Short-Range Ballistic Missile group at the Defense Intelligence Agency’s Missile and Space Intelligence Center. Donaghey
earned his bachelor’s degree in mechanical engineering from Texas Tech University and served as an officer in the U.S. Navy.
Mr. Donaghey previously served
on Applied Energetics’ Board of Advisors since April 30, 2019, providing input into the strategic direction of the company and
assistance in building relationships in the defense markets.
3
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. Applied Energetics has applications pending before the USPTO
for the marks USP TM, USPL TM, AERG TM and AE TM and anticipates allowance and/or registration within the next six months. The company
also has seven pending patent applications and one provisional patent application which is undergoing conversion to its non-provisional
form. We continue to file patent applications as we deem appropriate to protect our intellectual property and enhance our competitive
advantage.
In April 2022, we repaid
the remaining balance on the Paycheck Protection Program loan, which we took out in 2020. The original loan was in the amount of $132,760,
but our compliance with the guidelines set forth by the Small Business Administration regarding use of the proceeds of the loan qualified
us for a waiver of a portion of this amount. We had been repaying the remaining balance in monthly installments at an annual interest
rate of 1%.
Ongoing Business Development Activities
Over the past few years,
we have submitted multiple proposals to, and attended briefings with, various defense and other government agencies who have expressed
an interest in our technology and applications. Due to the closures of multiple agencies and work-from-home orders during the Covid-19
pandemic, reviews and funding decisions on these proposals were delayed longer than anticipated as resources were focused on other matters
within the government. Since the reopening of proposal reviews and processing, our team has been invited to, and completed, multiple
briefings focused on our capabilities and submissions. We intend to continue developing and submitting proposals and to be available
to attend on-site briefings to the extent possible. However, this positive action by the agencies could be reversed as Covid remains
an ongoing risk. Any changes to reinstate the closures or work-from-home orders could again hamper the ability of the AE team to schedule
on-site briefings for our proposals undergoing review.
Two significant pieces of
legislation impacted Applied Energetics that were signed by the President on September 30, 2022. The first piece, bill S. 4900, the “SBIR
and STTR Extension Act of 2022,” authorizes the Small Business Innovation Research (SBIR), Small Business Technology Transfer (STTR),
and six related pilot programs through Fiscal Year 2025; requires agencies with an SBIR or STTR program to establish a due diligence
program to assess the potential risk posed by program applicants’ foreign ties; requires certain departments and agencies to report
on national security risks within their SBIR/STTR programs; and establishes increased minimum performance standards for firms that have
won a certain number of awards during a specified period of time.
The other piece of legislation
that we have seen multiple times in the past decade is the Continuing Resolution (CR), HR 6833, which was amended three times to provide
fiscal year 2023 appropriations to federal agencies through December 30, 2022, for continuing projects and activities of the federal
government and includes supplemental appropriations to respond to the Russian military action in Ukraine. This CR provided for a continuation
of funding for currently funded programs through December 30, but no new contracts until the 2023 fiscal year appropriations was approved
by Congress. This CR allowed for current Applied Energetics programs to continue. The Consolidated Appropriations Act, 2023 was passed
by the US House of Representatives and the US Senate and signed by President Biden on December 29, 2022. A similar situation occurred
in the prior year as the US government final fiscal year 2022 appropriations bill was signed into law by President Biden on the night
of March 11, 2022 and included increases in areas of particular interest to the company.
Strategic Plan and Analysis
The core of our strategy has been to continue growing our management
and science teams with highly qualified individuals. This has driven our recruitment efforts in the areas of R&D, science, modeling
and simulation, marketing and finance. We are also contemplating adding members to our Board of Directors and our Board of Advisors. Our
board and leadership team have worked to align key innovations with our roadmap to encourage and enable internal filing for a broad, strategic
and robust intellectual property portfolio and continue surveying the literature for acquisitions of parallel intellectual property to
that end. We also intend to pursue strategic corporate acquisitions in related fields and technology. The company’s management continues
to explore any favorable equity financing opportunities.
4
Our goal with the Applied
Energetics Strategic Plan is to increase the energy, peak power and frequency agility of USP optical sources while decreasing the size,
weight, and cost of these systems. We are in the process of developing this breadth of very high peak power USP lasers and additional
optical sources that have a very broad range of applicability for threat disruption for the Department of Defense, commercial, and biomedical
applications, such as biophotonic illumination and imaging. Although the historical market for Applied Energetics’ LGE and USP technology
is the U.S. Government, the USP technologies are expected to provide numerous platforms for commercial additive and subtractive manufacturing
and biomedical and imaging markets, creating a substantially larger market for our products to address. Since 2020, the Applied Energetics
team 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.
Despite the challenges posed by COVID-19, we have continued to execute
our business development plans, further our research and development program and submit filings for intellectual property and proposals
for grants and contracts. During the past three years, we continued to submit proposals and have been engaged in meetings on a continuous
basis with various agencies and departments both remotely and in person in Washington, DC and at various other government facilities.
Having received a significant research grant and an STTR contract during the second quarter of 2022, we believe the interest in our technology
and applications remains high, and we continue to submit proposals for all appropriate opportunities and share our vision of the disruptive
capabilities of USP optical sources for both near- and far-term threats and dual-use commercial applications.
Through our analysis of the market, and in discussions
with potential customers, we remain convinced that customers are becoming more receptive and interested in directed energy technologies.
According to the US Department of Defense fiscal budgets from 2017 through 2023, its directed energy spending grew from approximately
$500 million in 2017 to over $1.695 billion in 2023, an increase of nearly 240%. Market analysis and projections have estimated that
this directed energy sector is anticipated to exceed $10.1 billion globally by 2026. We continue to be optimistic about our future and
the growing opportunities in directed energy applications, especially since this growth to nearly $1.7 B annually is being accomplished
without a recognized Program of Record (POR) for directed energy platforms. Once these technologies are funded in production for a POR,
these DOD budgets for DE will grow exponentially larger to support the technology insertion. The Applied Energetics team anticipates
a continuation of strong funding for the directed energy community. With our existing patent portfolio, and through further advancements
of our technologies, we believe we have the substantial building blocks needed to become a significant and successful developer in 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 technological advances
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 and, again, in fiscal 2023, 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
AE’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 relatively small number of major defense contractors have received significant
funding for directed energy systems development, manufacturing and integration, using continuous wave high energy laser 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
AE competes against other directed energy systems for funding, the uniqueness of our technologies should continue to support their development
into weapon platform programs. AE 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 AE 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.
AE’s primary direct
USP optical source competition are corporations and contractors supported by foreign governments who may be attempting to develop similar
technologies. AE 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, DRS Daylight Solutions and L3Harris Technologies.
Some of AE’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 AE.
Employees
As of March 29, 2023, we had fourteen employees, and we retain another
six full- and part-time consultants.
6
Supplies and Raw Materials
We depend upon the availability of materials and major electro-optical
components and the performance of our suppliers. Some of our products require relatively scarce fabricated materials. We generally have
not experienced significant difficulties in procuring these necessary materials, components and other supplies for our products. However,
the global supply chain continues to struggle toward normalcy following the Covid-19 pandemic. Our inability to procure the necessary
optical and fabricated materials, components, electronics and other supplies for our products could negatively affect our results of operations,
financial condition and liquidity. In addition, a significant prolonged increase in inflation could negatively impact the cost of materials
and components. We continuously monitor potential supply chain issues and work with our suppliers to mitigate delays in our receipt of
necessary materials, components and other supplies, and reduce costs, particularly in light of the Covid-19 pandemic’s impact on
global supply chain. We also monitor supplier liquidity and work continuously with our supply base to ensure an adequate source of supply
and to reduce costs. We pursue cost reductions through a number of mechanisms, including consolidating or re-sourcing our purchases, entering
long-term agreements, reducing the number of suppliers, strategic global sourcing and competition among suppliers, and the opportunity
to develop and deliver scarce components that have few contracts or suppliers. In some instances, we depend upon a single source of supply,
but we are developing multiple sources to mitigate the risk. In some cases, we must comply with specific procurement requirements, which
may limit the suppliers and subcontractors we may utilize.
Regulatory Matters
Our business is subject to
extensive regulation in the industries we serve. We market our technology to numerous U.S. government agencies and entities, including
but not limited to all of the branches of the U.S. Department of Defense (DoD) and the Department of Homeland Security. Similar government
authorities exist in all of the countries in which we do business.
The U.S. government currently
represents all of our current revenues and likely a substantial portion of any projected revenues for the foreseeable future. U.S. government
contracts are subject to termination by the government, either for convenience or for default in the event of our failure to perform
under the applicable contract. In the case of a termination for convenience, we would normally be entitled to reimbursement for our allowable
costs incurred, termination costs and a reasonable profit. If terminated by the government as a result of our default, we could be liable
for payments made to us for undelivered goods or services, additional costs the government incurs in acquiring undelivered goods or services
from another source and any other damages it suffers.
U.S. government contracts
generally are subject to the Federal Acquisition Regulation (FAR), which sets forth policies, procedures and requirements for the acquisition
of goods and services by the U.S. government. Defense contracts are additionally subject to the Defense Federal Acquisition Regulation
Supplement (DFARS). Other applicable laws and regulations apply as well. These regulations impose a broad range of requirements, many
of which are unique to government contracting, including various procurement, import and export, security, contract pricing and cost,
contract termination and adjustment, audit and product integrity requirements. Failure to comply with these regulations and requirements
could result in reductions to the value of contracts, contract modifications or termination, cash withholding on contract payments, forfeiture
of profits, and/or the assessment of civil or criminal penalties and fines and could lead to cause-based suspension or debarment from
U.S. government contracting or subcontracting for a period of time.
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, 2022 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.
7
Our business has generated
only limited revenues during the past fiscal year, after having no revenue during fiscal 2021, and had a net operating loss during each
period.
For the fiscal years ended
December 31, 2022 and 2021, we had revenues of $1,307,757 and $0, respectively, and we had net losses of $5,771,642 and $5,425,453, 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, 2022,
we had $5,640,308 in available cash and cash equivalents and working capital of $5,329,699. We believe 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 Defense Contract Audit Agency (DCAA), International Traffic in Arms Regulations (ITAR) and other
federal regulatory compliance. We also need funds for general and administrative expenses, including salaries, benefits, supplies and
equipment, lease expense on our headquarters, accounting, legal, and other professional fees and other miscellaneous expenses. Our failure
to secure sufficient financing could render us unable to fund these necessary costs and expenses. We also may require additional funding
for research and development before we are able to commercialize our technology. During the 2022 fiscal year, we achieved our capital
raising goal, and a portion of the funds for research and development came from government grant/contract awards. We may secure additional
government contracts or sub-contracts with larger contractors to fund additional research and development. However, we may need to raise
additional 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. We may raise additional
funds through the issuance of equity securities, but such financing may not be available on terms acceptable to us if at all. Any equity
financing would cause the percentage ownership by our current stockholders to be diluted, and such dilution may be substantial. Also,
any additional equity securities issued may have rights, preferences or privileges senior to those of existing stockholders. If such financing
is not available when required or is not available on acceptable terms, we may be required to modify or curtail our operations, which
could cause investors to lose the entire amount of their investment.
The ongoing global Covid-19
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 Industry and Business
Activities
Economic, geopolitical
and other factors beyond our control can affect our business.
Our business, operating results,
financial condition and liquidity may be adversely affected by changes in global economic conditions and geopolitical risks, including
the inflationary environment in the United States and internationally, commodity prices, supply chain challenges, exchange rates, potential
changes in policy positions or priorities, levels of government spending and deficits, the availability and cost of labor, the threat
environment, trade policies, political conditions, and other challenges that could affect the global economy. Inflationary pressures
have increased labor and material costs at a higher rate higher than in recent years. Due to the nature of our government business, and
the customer and supplier contracts within those businesses, we may not be able to increase our contract value or pricing to offset these
cost increases, particularly with grants or fixed price contracts. This could adversely affect our operating profits and margins particularly
if the increased inflation continues. Similarly, expected increases in interest rates from recent historical lows in the U.S. and in
other countries in which we operate could negatively impact financial markets and tighten the availability of, and increase our cost
of capital, which could have an adverse effect on our operating results, financial condition and liquidity. Tightening of credit in financial
markets also could adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations.
Similarly, such tightening of credit may adversely affect our supplier base and increase the potential for one or more of our suppliers
to experience financial distress or bankruptcy. In addition, geopolitical risks could affect government priorities, budgets and policies,
which could impact sales of defense and other products and services.
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The Covid pandemic has
affected and may continue to affect our supply chain and operations.
The ongoing Covid-19 pandemic has negatively affected our business,
supply chains, and operations. As a result of Covid-19, governments, businesses and individuals have taken actions such as instituting
closures, lockdowns, quarantines, and travel restrictions and requirements, adopting remote working. Lockdowns and labor shortages resulting
from Covid-19, as well as the continuing economic recovery, negatively impacted global supply capabilities. Decreases in the availability
of supplies, increases in the cost of supplies, and delivery issues have caused shortages and delays, as well as increased costs, for
the procurement of raw materials, components and other supplies required for our performance. The global economic, supply and demand uncertainties
caused by Covid-19 remain. Due to the continued effects of Covid-19 and related uncertainty, we expect to continue to experience the challenges
described above for an uncertain period of time into the future.
Moreover, if developments
in the pandemic limit our workforce or those of our suppliers from working effectively, such business disruptions could hinder our research
or otherwise impede our ability to perform on our obligations to customers and may result in increased costs. Developments in the pandemic
may affect our ability to hire, develop and retain our talented and diverse workforce, and to maintain our corporate culture. It is critical
that we find and train new qualified personnel. The pandemic also may materially impact U.S. government contracts and grants, including
changes or shifts in defense spending due to budgetary constraints, the allocation of funds to governmental responses to Covid-19, a
failure to complete the government budget process resulting in a Continuing Resolution (CR) or a government shutdown, or delayed or reduced
funding of programs.
Although, in the US, hospitalization and death rates have moderated
in recent months, the duration of the Covid-19 pandemic remains uncertain. Its future impact depends on developments concerning its scope,
severity and duration, the effect of additional variants and whether additional outbreaks of the pandemic will continue to occur, the
efficacy, acceptance, distribution and availability of vaccines, new or continued attempts to contain the pandemic’s spread or treat
its impact, and governmental, business and individual personal responses (including restrictions and limitations on travel and transportation)
among others. Some of the pandemic’s impacts may continue into the future even after the virus itself no longer poses a significant
public health risk. Any of these factors, could have a material adverse effect on our business, results of operations, financial condition
and liquidity.
Changes in US government
spending could negatively affect our business.
Substantially all of our
current and planned near-term revenues are or may be from US government contracts and grants awarded under various programs, primarily
with the Department of Defense (DoD), and, possibly, with intelligence agencies and other departments and agencies. Changes in US government
spending for various reasons, including as a result of potential changes in policy positions or priorities, could negatively impact our
results of operations, financial condition and liquidity. Our programs are subject to US government policies, budget decisions and appropriation
processes which are driven by macroeconomic and geopolitical factors as well as Congress’s ability to enact, and the administration’s
willingness to execute, appropriations bills and other legislation. In recent years, the US government has been unable to complete its
budget process before the end of its fiscal year, resulting in government shutdowns and Continuing Resolutions emergency funding only
at prior-year levels. In addition, failure to raise the debt ceiling could cause the U.S. government to default on debts which it has
already incurred. U.S. government spending levels and available program funding are thus hard to estimate in the medium- and long-term.
Significant changes in U.S. government spending or changes in U.S. government priorities, policies and requirements could have a material
adverse effect on our results of operations, financial condition and liquidity.
We face risks relating
to performance of our US government contracts and our ability to secure additional contracts and/or grants.
Our success depends on our
ability to complete timely and satisfactory performance on our existing customer projects and to secure additional grants and contracts.
Performance delays, cost overruns, technology failures, materials or components shortages, or contract delays, could negatively impact
our business prospects, results of operations, financial condition and liquidity. U.S. government contracts generally permit the government
to terminate the contract, in whole or in part, without prior notice, at the U.S. government’s convenience or for default based
on performance. Correspondingly, subcontracts which we may seek to enter with prime government contractors, may be terminable by the
prime contractor upon government termination of the prime contract. We may be unable secure additional contracts to offset any revenues
lost as a result of the termination of any such contracts.
Because the funding of U.S.
government programs is subject to congressional appropriations made on a fiscal year basis even for multi-year programs, programs are
often only partially funded initially and may not continue to be funded in future years. Appropriation bills may be delayed, which may
result in delays to funding, the collection of receivables and our contract performance due to lack of authorized funds to procure related
products and services. Under certain circumstances, we may use our own funds to meet our customer’s delivery dates or other requirements,
and we may not be reimbursed. If appropriations for programs are reduced or delayed, the U.S. government may terminate any contract or
subcontract under that program.
9
The growth of our business depends on the development, application
and manufacture of advanced technology and products aimed at achieving challenging goals. New technologies may be untested or unproven
and, in some instances, product requirements or specifications need to be developed. This could result in performance difficulties, delays,
cost overruns or failures which could require additional resources to address. Any failure to execute timely and effectively on our current
programs could hamper future contracting opportunities. We may also need to invest in internal research and development projects in order
to achieve certain grants or contracts, as our customers may demand proven concepts and solutions. These expenditures may not pay off
if we are not awarded the intended grants or contracts.
Under certain types of government
contracts, if we are unable to control costs or if our initial cost estimates are incorrect, our profitability could be negatively affected,
particularly under fixed-price development contracts. We may also experience cost underruns which would reduce contract value and related
expected revenues, and we may be unable to expand the contract scope or secure additional work to offset the resulting lost revenues.
We anticipate that any future contracts for development programs with complex design and technical challenges will typically be cost
reimbursable. However, if they are firm fixed price or fixed price incentive contracts, such challenges and unexpected costs increases
may impact our results of operations. US government contracts also require compliance with extensive and evolving procurement and other
rules and regulations and subject us to potential audits, investigations, and disputes. We may also become involved in programs that
are classified by the US government, which have security requirements that place limits on our ability to discuss our performance on
these programs, including any risks, disputes and claims.
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, potential job candidates, and appropriate customers so as to limit access to
and disclosure of our proprietary information. These measures may not suffice to deter misappropriation or independent third-party development
of similar technologies. Based on our current financial condition, we may not have the funds available to enforce and protect our intellectual
properties.
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 business and prospective business opportunities.
Any person who invests in
our securities will do so without an opportunity to evaluate the specific merits or risks of our prospective business and business opportunities.
As a result, investors will be entirely dependent on the broad discretion and judgment of management in connection with the selection
of a prospective business. The business decisions made by our management may not be successful.
We depend on the recruitment
and retention of qualified personnel, and failure to attract and retain such personnel could seriously harm our business.
Due to the specialized nature
of our businesses, our future performance is highly dependent upon the continued services of our key engineering and scientific personnel.
Our prospects for obtaining government contracts or significant commercial contracts depend upon our ability to attract and retain qualified
engineering, scientific and manufacturing personnel for our operations. 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.
10
Our future success will
depend on our ability to develop and commercialize technologies and applications that address the needs of our markets.
Both our defense and commercial
markets are characterized by rapidly changing technologies and evolving industry standards. Accordingly, our future performance depends
on a number of factors, including our ability to identify emerging technological trends in our target markets; develop and maintain competitive
products; enhance our products by improving performance and adding innovative features that differentiate our products from those of
our competitors; develop and manufacture and bring products to market on-time and on-budget; and enter into suitable arrangements for
volume production of mature products.
We believe that, 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, Christopher Donaghey, our Chief Financial and Operating Officer, and Stephen McCahon, our Chief Scientist. We depend on Drs.
Quarles’s and McCahon’s decades of expertise for the marketing and development of our technology. We also depend upon their
global visibility and outreach as well as Mr. Donaghey’s and our directors’ networks of contacts and experience to recruit
key talent to the company. We do not have key-man insurance on any of these individuals. Loss of the services of any of these key members
of our management team, or of our Board of Directors’ ability to identify and hire key talent, could have a material adverse effect
on our business prospects, financial condition and results of operations. Although a key component of our growth strategy is succession
planning and hiring additional key personnel, we may be unable to achieve this in the near term given constraints in the labor market
and our interest in recruiting highly qualified professionals.
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.
11
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