UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December
31, 2023
☐Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period
from __________ to __________
Commission File Number 001-14015
Applied Energetics,
Inc.
(Exact Name of Registrant
as Specified in Its Charter)
(Address of Principal Executive Offices) (Zip Code)
Registrant’s
telephone number, including area code: (520)628-7415
Securities registered
pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock, $.001 par value AERG OTCQB
Securities registered
pursuant to Section 12(g) of the Exchange Act:
None
(Title of Class)
Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark
whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller
reporting company” and “emerging growth company’ in Rule 12b-2 of the Exchange Act:
Large Accelerated Filer ☐ Accelerated Filer ☐
Non-Accelerated Filer ☐ Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth
company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark
whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting
firm that prepared or issued its audit report. ☐
If securities are registered
pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark
whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by
any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market
value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the last reported
sales price at which the stock was sold on June 30, 2023 (the last day of the registrant’s most recently completed second quarter)
was approximately $460,279,473.
The number of outstanding
shares of the registrant’s Common Stock, $.001 par value, as of March 25, 2024 was 211,362,688.
APPLIED ENERGETICS,
INC.
ANNUAL REPORT ON FORM
10-K
FOR THE YEAR ENDED
DECEMBER 31, 2023
INDEX
Page No.
PART I.
Item 1. Business 1
Item 1A. Risk Factors 8
Item 1B. Unresolved Staff Comments 15
Item 1C. Cybersecurity 15
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Mine Safety Disclosure 16
PART II.
Item 6. [Reserved] 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9A. Controls and Procedures 25
Item 9B. Other Information 26
Item 9C. Disclosure regarding Foreign Jurisdictions that Prevent Inspections. 26
PART III.
Item 10. Directors, Executive Officers, and Corporate Governance 27
Item 11. Executive Compensation 31
Item 13. Certain Related Party Transactions and Director Independence 37
Item 14. Principal Accountant Fees and Services 37
PART IV.
Item 15. Exhibits and Financial Statement Schedules 38
Signatures: 40
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, such expectations may prove incorrect over time. 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 and optical systems, 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 (USP) 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. Applied Energetics’ LGE and LIPC technologies are wholly
owned by Applied Energetics and protected by one or more of Applied Energetics’ 25 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 extended protection
rights. The company also has nine pending patent applications. 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. 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 also 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
Effective
March 12, 2024, the grant previously awarded to Applied Energetics, Inc. from a U.S. Department of Defense customer has been transitioned
into a contract. The original grant had a two-year period of performance. The new contract supersedes the May 2022 grant and carries a
ceiling value of $1,217,535 under a base period of performance through November 11, 2024 and a 12-month unfunded option period that ends
November 11, 2025. The company intends to provide additional information in a Current Report on Form 8-K upon approval from the government
agency.
On
March 5, 2024, Applied Energetics entered into an Employment Agreement with James Harrison, PhD, pursuant to which Dr. Harrison is
to serve as Director of New Product Innovation, commencing on April 3, 2024. In this new role, Dr. Harrison’s responsibilities
are to include setting a vision and strategy that supports and accelerates the entire development lifecycle of optical and laser
products, from conceptualization to commercialization. His work is to involve collaboration with leaders across business
development, operations, and scientific to drive the company’s strategic goal of providing cutting-edge laser and optical
products to national security and commercial customers. For his services, the company has agreed to pay Dr. Harrison a cash salary
of $200,000 per year.
2
Dr.
Harrison is an experienced professional in the area of laser sources including design, manufacturing, program management and business
development, with an emphasis on semiconductor and solid-state lasers. With more than 30 years of experience in opto-electronic sources,
Dr. Harrison has demonstrated experience designing, building and scaling products that drive business growth and deliver customers innovative
new technologies. He has held global leadership positions in engineering and research and development with tier-1 suppliers of photonics
devices, where his responsibilities included providing substantial support for volume manufacturing of semiconductor lasers and packaged
sources.
Effective
February 11, 2024, Applied Energetics entered into a Memorandum of Understanding (MOU) with BluGlass Limited, a global supplier of gallium
nitride (GaN) lasers to the national security, quantum and manufacturing industries, to collaborate and explore joint business opportunities
that advance Applied Energetics' laser and optical systems innovations and BluGlass's expertise in GaN-based laser diode technologies.
Any
resultant new laser capabilities and optical systems will be based on existing and emerging technologies currently under development within
the companies. Under the MoU, the companies intend to collaborate to develop innovative solutions in technology areas critical to emerging
national security and commercial markets, including new laser wavelengths and higher performance, yielding more efficient and cost-effective
products. The MOU sets out the framework for collaboration, however, it is not a definitive agreement with commercial terms and timelines.
Effective
August 23, 2023, Applied Energetics executed a contract with the Department of the Navy, Office of Naval Research with an aggregate contract
price of $1.99 million payable over two years as the company performs its obligations under the contract. The objective of the contract
is to develop a high-peak and high-average power USP optical system. The system is expected to demonstrate effects compatible with multiple
Navy platforms and missions with an attractive size, weight, and power-cooling footprint. The company’s continuing development
efforts in collaboration with ONR signify the importance of sustained development and maturation of USP-based directed energy systems
to support the Navy’s technological priorities.
Effective
May 15, 2023, Applied Energetics executed a Phase II Small Business Technology Transfer (STTR) contract with the U.S. Army at an
aggregate contract price of $1.148 million payable over two years as the company performs its obligations thereunder, with the first
year currently funded. The objective of this Phase II award is to further the development and testing of an IR laser system
utilizing technologies that were investigated under the US Army Phase I STTR contract which the company was awarded in May 2022.
This Phase II contract award follows a successful Phase I which established a computational concept with physical modeling and
simulation to establish the feasibility of an IR laser system. Phase I was performed in collaboration with the James C. Wyant
College of Optical Sciences at the University of Arizona. The company has continued its work under the contract, and provided all
required reports, since its execution.
In
May 2022, the Department of the Navy, Office of Naval Research (ONR) awarded Applied Energetics a $3.89 million, two-year grant, 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. Research under this grant has been completed and all progress reported to the program manager.
Effective
June 7, 2023, the company entered into the First Amendment to Lease Agreement, which amended its existing Lease Agreement over its headquarters
at the University of Arizona Tech Park. The amendment has expanded the Lease to add new 8,374 usable square-foot suite of offices, conference
rooms and cubicle areas directly across an atrium from the company’s current headquarters so that the company will occupy the entire
first floor of the building. This has enabled the company to separate its public-facing facilities from its restricted access space easily.
The amendment also extended the Lease over the company’s existing headquarters through July 31, 2028, and grants the company an
option over 5,520 usable square feet of manufacturing space. The company moved its administrative offices into the new space in August
2023.
3
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. We believe that our efforts in this area of development have begun
to produce results. In addition to the contracts which we have been awarded, 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. We have also engaged in discussions with private entities and academic institutions with the objective of possibly
collaborating on one or more projects. Some of these could result in further customer agreements or other opportunities to grow our business.
Applied
Energetics has recently been involved with the Tulsa Innovation Labs (TIL) and Oklahoma State University (OSU) in defining opportunities
to participate in the US Department of Commerce, Economic Development Administration (EDA) Tech Hubs program request for proposals. Tech
Hubs was authorized by the bipartisan CHIPS and Science Act, a key part of President Biden’s Investing in America agenda, which
he signed into law in August 2022. In August of 2023, Applied Energetics was a founding consortium member of the Tech Hub proposal submitted
under the title of Tulsa Hub for Equitable and Trustworthy Autonomy (THETA). On October 23, 2023, the US EDA named the THETA Tech Hub
as part of the historic $500 million investment in economic competitiveness and national security. This designation makes the THETA consortium
eligible for $70 million or more in federal funding to accelerate the advanced development of autonomous technologies. The submitted
papers specify that THETA will emphasize the development of UAS and counter-UAS (CUAS), artificial intelligence (AI), and cybersecurity
technologies. As such, Applied Energetics anticipates working closely with the Unmanned Systems Research Institute (USRI) and the Oklahoma
Aerospace Institute for Research and Education (OAIRE), both at Oklahoma State University, to partner on the UAS and counter-UAS technology
research supporting the THETA TechHub. The completed Phase 2 proposal was submitted to the EDA on February
29, 2024 requesting funding for implementation projects to help propel the region into a self-sustaining, globally competitive TechHub.
For fiscal year 2024, which started on October 1, 2023, the National Defense Authorization Act (NDAA) was delayed
and finally approved on December 22, 2023 (HR 2670), but the Defense Appropriations bill was not approved at that time. The
NDAA sets defense spending policies, and the appropriations bills fund government spending. This impacts all proposals under review by
the Department of Defense. On September 30, 2023, President Biden signed a Continuing Resolution (CR), HR 5860, which extended the government
operations through November 17, 2023, and he then signed three further CRs, including HR 6363 on November 11, 2023 extending through January
19, 2024, HR 2872 extending through March 1, 2024, and HR 7463, extending through March 8, 2024, as to four of the 12 annual budget bills,
and through March 22, 2024 for the remaining eight. On March 23, 2024, the Defense Appropriations Bill was passed and signed by President
Biden which will ensure the US government is funded through September 30, 2024 and that new government contracts can be funded during
the 2024 fiscal year.
Strategic Plan and
Analysis
The
core of our strategy has been to continue growing our management and science teams with highly qualified individuals. This has driven
our recruitment efforts in the areas of R&D, science, modeling and simulation, marketing and finance. We are also contemplating adding
members to our Board of Directors and our Board of Advisors. Our board and leadership team have worked to align key innovations with
our roadmap to encourage and enable internal filing for a broad, strategic, and robust intellectual property portfolio and continue surveying
the literature for acquisitions of parallel intellectual property to that end. We also intend to pursue strategic corporate acquisitions
in related fields and technology. The company’s management continues to explore any favorable equity financing opportunities.
Our
goal with the Applied Energetics Strategic Plan is to increase the energy, peak power and frequency agility of USP optical sources while
decreasing the size, weight, and cost of these systems. We are in the process of developing this breadth of very high peak power USP
lasers and additional optical sources that have a very broad range of applicability for threat disruption for the Department of Defense,
commercial, and biomedical applications, such as biophotonic illumination and imaging. Although the historical market for Applied Energetics’
LGE and USP technology is the U.S. Government, the USP technologies are expected to provide numerous platforms for commercial additive
and subtractive manufacturing and biomedical and imaging markets, creating a substantially larger market for our products to address.
Since 2020, the Applied Energetics team has been able to develop partnership and teaming arrangements with the three leading laser and
optics institutes in the United States, namely, the University of Arizona, the University of Central Florida, and the University of Rochester
Laboratory for Laser Energetics. Our desire is to work on programs jointly where the strengths of each organization can assist in escalating
knowledge and delivery of systems to the government sponsors and to train the next generation of scientists and engineers to work in
the directed energy fields.
4
We
have continued to execute our business development plans, further our research and development program and submit filings for intellectual
property and proposals for grants and contracts. During the past several years, we continued to submit proposals and have been engaged
in meetings on a continuous basis with various agencies and departments both remotely and in person in Washington, DC and at various
other government facilities. Having received a significant research grant and several contracts during the past two fiscal years, 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 reach $17.8 billion globally by 2028. We continue
to be optimistic about our future and the growing opportunities in directed energy applications, especially since this growth to nearly
$1.7 B annually is being accomplished without a recognized Program of Record (POR) for directed energy platforms. We believe that once
these technologies are funded in production for a POR, or are approved to be integrated on fielded platforms in volumes to effect threat
reduction, these DOD budgets for directed energy will grow exponentially larger to support the technology insertion. The Applied Energetics
team anticipates a continuation of strong funding for the directed energy community. With our existing patent portfolio, and through
further advancements of our technologies, we believe we have the substantial building blocks needed to become a significant and successful
developer in the USP marketplace.
Our
research and development programs depend on our ability to procure the necessary optical and fabricated materials, components, electronics
and other supplies. A significant, prolonged increase in inflation could negatively impact the cost of materials and components, which
could be a particular problem with respect to our fixed fee contracts. Within the current geopolitical context, there are ongoing embargos
of exports from some global suppliers of various materials that are used in electronics and some diode and laser materials, which can
have negative effects on technology supply chains. We continuously monitor potential supply chain issues and supplier liquidity and work
with our supply base to ensure adequate sources of materials at reasonable costs. In some instances, we depend upon a single source of
supply, but we are developing multiple sources, both internal to AE and externally where possible to mitigate the risk. In some cases,
we must comply with specific procurement requirements, which can limit the suppliers and subcontractors we may utilize.
Market for Our Technology
Directed Energy Systems
Directed
energy systems involve the use of highly focused energy such as lasers or microwaves 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 or uncrewed
aerial drones, 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 competition could allow an adversary to impose costs on U.S. forces by compelling
them to intercept each incoming missile or drone 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, Northrop Grumman, Boeing, BAE Systems, nLight, General Atomics, DRS Daylight Solutions and L3Harris
Technologies. Although based on different types of directed energy, we may compete with these companies to provide solutions to
problems presented by potential customers.
6
Some
of AE’s biggest commercial competitors are Trumpf (German), Coherent (US), Thales (France). IPG (US), RAFAEL Advanced Defense
Systems Ltd. (Israel), and Light Conversion (Lithuania), most of which are billion-dollar market class companies that have
substantially more resources than AE.
Employees
As
of March 12, 2024, we had sixteen employees, with an additional employee scheduled to start work on April 3, 2024, and we retain another
six full- and part-time consultants.
Supplies and Raw
Materials
We
depend upon the availability of materials and major electro-optical components as well as the performance and reliability of our
suppliers. Some of our products require relatively scarce fabricated materials. Prior to the Covid-19 pandemic and resulting global
supply chain disruptions, we generally had not experienced significant difficulties in procuring these necessary materials,
components and other supplies for our products. However, during and following the pandemic, we experienced some difficulty obtaining
supplies and materials when we needed them and at acceptable prices. The global supply chain continues to struggle toward normalcy
although it has improved in recent months. 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, significant, prolonged inflation could negatively impact the cost of materials and components. We continue
to believe that conflicts overseas and related national security requirements, which limit the companies through which we can source
components, pose a significant risk.
In addition, our size coupled with our need for advanced, specialized
components poses challenges in getting suppliers to prioritize our orders. We currently seek to procure certain specialized materials
in relatively low volume which sometimes can lead to delays as we compete with larger volume customers for availability of these materials.
Alternatively, as we execute our business plan, higher volume purchases, particularly of customized components, may result in longer lead
times and pose other difficulties due to these and other supply constraints.
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 supply chain issues outlined above. 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 striving to develop multiple
sources to mitigate the risk. In some cases, we must comply with specific procurement and compliance 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 branches of the U.S. Department of Defense (DoD) and the Department of Homeland Security.
The
U.S. government 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.
7
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, 2023 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 only limited revenues during the past two fiscal years, after having no revenue during fiscal 2021, and had a
net operating loss during each periods.
For
the fiscal years ended December 31, 2023 and 2022, we had revenues of $2,631,443 and $1,307,757, respectively, and we had net losses
of $7,350,435 and $5,771,642, 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, 2023, we had $1,319,526 in available cash and cash equivalents and working capital of $ 1,108,274. We are conducting a small, private bridge financing to cover certain short-term expenses and 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 2023 fiscal year, nearly
all of the funds for our research and development came from government grant/contract awards, and we did not engage in any additional
capital raising activities. We may secure additional government contracts or sub-contracts with larger contractors to fund additional
research and development. However, we may need to raise additional capital to supplement these contracts even if we are able to secure
them.
Our
operating plans and capital requirements are subject to change based on how we determine to proceed with respect to development programs
and if we pursue any strategic alternatives. We may seek to raise additional funds through the issuance of equity securities, but such
financing may not be available on terms acceptable to us if at all. Any equity financing would cause the percentage ownership by our
current stockholders to be diluted, and such dilution may be substantial. Also, any additional equity securities issued may have rights,
preferences or privileges senior to those of existing stockholders. If such financing is not available when required or is not available
on acceptable terms, we may be required to modify or curtail our operations, which could cause investors to lose the entire amount of
their investment.
8
Risk Related to Our
Industry and Business Activities
Economic,
geopolitical and other factors beyond our control can affect our business.
Our
business, operating results, financial condition and liquidity may be adversely affected by changes in global economic conditions and
geopolitical risks, including the inflationary environment in the United States and internationally, commodity prices, supply chain challenges,
exchange rates, potential changes in policy positions or priorities, levels of government spending and deficits, the availability and
cost of labor, the threat environment, trade policies, political conditions, national or international crises, including recurring global health
emergencies such as occurred with the COVID-19 pandemic, and other challenges that could affect the global economy,
the demand for our technology and our ability to source materials and equipment. In recent years, inflationary pressures have increased
labor and material costs at a higher rate higher than in prior years. Due to the nature of our government business, and the customer
and supplier contracts within those businesses, we may not be able to increase our contract value or pricing to offset these cost increases,
particularly with grants or fixed price contracts. This could adversely affect our operating profits and margins particularly if the
increased inflation continues. Similarly, increases in interest rates from recent historical lows in the U.S. and internationally could
negatively impact financial markets and tighten the availability of, and increase our cost of, capital, which could have an adverse effect
on our operating results, financial condition and liquidity. Tightening 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 and security risks could affect government priorities, budgets and policies, which could impact
sales of defense and other products and services.
Changes
in US government spending could negatively affect our business.
Substantially
all of our current and planned near-term revenues are or may be from US government contracts and grants awarded under various programs,
primarily with the Department of Defense (DoD), and, possibly, with intelligence, national security and other departments and agencies.
Changes in US government spending for various reasons, including as a result of potential changes in policy positions or priorities,
could negatively impact our results of operations, financial condition and liquidity. Our programs are subject to US government policies,
budget decisions and appropriation processes which are driven by macroeconomic and geopolitical factors as well as Congress’s ability
to enact, and the administration’s willingness to execute, appropriations bills and other legislation. In recent years, the US
government has been unable to complete its budget process before the end of its fiscal year, resulting in government shutdowns and Continuing
Resolutions emergency funding only at prior-year levels. In addition, failure to raise the debt ceiling could cause the U.S. government
to default on debts which it has already incurred. U.S. government spending levels and available program funding are thus hard to estimate
in the medium- and long-term. Significant changes in U.S. government spending or changes in U.S. government priorities, policies and
requirements could have a material adverse effect on our results of operations, financial condition and liquidity.
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. Appropriations bills may be delayed,
which may result in delays to funding, the collection of receivables and our contract performance due to lack of authorized funds to
procure related products and services. Under certain circumstances, we may use our own funds to meet our customers’ delivery dates
or other requirements, and we may not be reimbursed. If appropriations for programs are reduced or delayed, the U.S. government may terminate
any contract or subcontract under that program.
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. Contracts for development programs with complex design and technical challenges may be cost reimbursable.
However, if they are firm fixed price or fixed price incentive contracts, such challenges and unexpected cost increases may impact our
results of operations. US government contracts also require compliance with extensive and evolving procurement and other rules and regulations
and subject us to potential audits, investigations, and disputes. We may also become involved in programs that are classified or otherwise
restricted by the US government, which place limits on our ability to discuss our performance on these programs, including any risks,
disputes and claims.
We
may be unable to protect our intellectual property rights adequately, which could affect our ability to sustain the value of such assets.
Protecting
our intellectual property rights is critical to our ability to maintain and protect the value of our intellectual property portfolio.
We hold a number of United States patents and patent applications, as well as trademarks, and registrations which are necessary and contribute
significantly to the preservation of our competitive position in the market. Any of these patents or future patent applications and other
intellectual property could be challenged, invalidated or circumvented by third parties. In some instances, we may seek to augment our
technology base by licensing the proprietary intellectual property of others, but we may be unable to obtain necessary licenses or to
secure them on commercially reasonable terms. We have entered into confidentiality and invention assignment agreements with employees
and consultants and nondisclosure agreements with suppliers, potential job candidates, and appropriate customers so as to limit access
to and disclosure of our proprietary information. These measures may not suffice to deter misappropriation or independent third-party
development of similar technologies. Based on our current financial condition, we may not have the funds available to enforce and protect
our intellectual properties. Certain of our patents are Government Sensitive Patent Applications, meaning they are held under secrecy
orders of the US government which limits our ability to develop technology under them although their expiration date is extended until
such time as they are no longer classified.
We
may face claims of infringement of proprietary rights.
There
is a risk that a third party may claim our products and technologies infringe on their proprietary rights. Whether or not our products
infringe on proprietary rights of third parties, infringement or invalidity claims may be asserted or prosecuted against us and we could
incur significant expense in defending them. If any claims or actions are asserted against us, we may not have the funds necessary to
defend against such claims. Our failure to do so could adversely affect the value of our intellectual property.
Security breaches, cyber-attacks,
or other disruptions or incidents could expose us to liability and severely damage our operations and business development efforts.
We depend heavily on information
technology systems and infrastructure for our business. We, our collaborators and our service providers collect, store, and transmit
sensitive information including intellectual property, proprietary business information, and research results and related data, in connection
with our business operations. The secure maintenance of this information is critical to our operations and business strategy. Some of
this information could be an attractive target of criminal attacks by third parties with a wide range of motives and expertise, including