NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
NOTE
1 – ORGANIZATION OF BUSINESS, GOING CONCERN AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
condensed consolidated financial statements include the accounts of Applied Energetics, Inc. and its wholly owned subsidiary North Star
Power Engineering, Inc. (“North Star”) (collectively, “company,” “Applied Energetics,” “AERG”,
“we,” “our” or “us”). All intercompany balances and transactions have been eliminated.
The
unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States (“GAAP”) for interim financial information, the instructions for Form 10-Q and the rules and regulations
of the SEC. Accordingly, since they are interim statements, the accompanying unaudited condensed consolidated financial statements do
not include all of the information and notes required by GAAP for annual financial statements, but reflect all adjustments consisting
of normal, recurring adjustments, that are necessary for a fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. Interim results are not necessarily indicative of the results that may be expected for any future
periods. The December 31, 2020, balance sheet information was derived from the audited financial statements as of that date. The
interim unaudited condensed consolidated financial statements should be read in conjunction with the company’s audited consolidated
financial statements contained in our Annual Report on Form 10-K.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business. For the nine-month period ended September 30, 2021, the company
incurred a net loss of $3,780,611, had negative cash flows from operations of $2,279,647 and may incur additional future losses due to
the reduction in government contract activity. At September 30, 2021, the company had total current assets of $5,207,448 and total current
liabilities of $1,358,280 resulting in working capital of $3,849,168. At September 30, 2021, the company had cash of $5,142,332.
During
the nine months ended September 30, 2021, the company completed the issuance of 11,110,915 total shares of its common stock at prices
of $0.32 per share and $0.75 per share, or $5,299,000 in the aggregate. Based on the company’s current business plan, it believes
its cash balance as of the date of this filing will be sufficient to meet its anticipated cash requirements for the next twelve months.
However, there can be no assurance that the current business plan will be achievable. Such conditions raise substantial doubts about
the company’s ability to continue as a going concern for one year from the date the financial statements are issued.
The
company’s existence is dependent upon management’s ability to develop profitable operations. Management is devoting substantially
all of its efforts to developing its business and raising capital and there can be no assurance that the company’s efforts will
be successful. No assurance can be given that management’s actions will result in profitable operations or enable it to overcome
future liquidity concerns. The accompanying consolidated financial statements do not include any adjustments that might result should
the company be unable to continue as a going concern. The ongoing COVID-19 pandemic contributes to this uncertainty.
To
further improve its liquidity position, the company’s management continues to explore additional equity financing through discussions
with investment bankers and private investors. There can be no assurance that the company will be successful in its effort to secure
additional equity financing.
The
financial statements do not include any adjustments relating to the recoverability of assets and the amount or classification of liabilities
that might be necessary should the company be unable to continue as a going concern.
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, including office and laboratory space, and our telephone number is (520) 628-7415.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
Use
of Estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Management bases its assumptions on historical experiences and on various other assumptions that it
believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. In addition, management considers the basis and methodology
used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount
of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning
accounting principles and financial statement presentation. Such estimates and assumptions could change in the future as more information
becomes known which could impact the amounts reported and disclosed herein. Significant estimates include revenue recognition, carrying
amounts of long-lived assets, valuation assumptions for share-based payments, evaluation of debt modification accounting, effective borrowing
rate determinations, analysis of fair value transferred upon debt extinguishment, valuation and calculation of measurements of income
tax assets and liabilities and valuation of debt discount related to beneficial conversion features.
Net
Loss Attributable to Common Stockholders
Basic
loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common
shares outstanding for the period before giving effect to stock options, stock warrants, restricted stock units and convertible
securities outstanding, which are considered to be dilutive common stock equivalents. Diluted net loss per common share is
calculated based on the weighted average number of common and potentially dilutive shares outstanding during the period after giving
effect to dilutive common stock equivalents. Contingently issuable shares are included in the computation of basic loss per share
when issuance of the shares is no longer contingent. The number of warrants, options, restricted stock units and our Series A
Convertible Preferred Stock, which were not included in the computation of earnings per share because the effect was antidilutive,
was 32,019,604 and 53,742,670 for the nine months ended September 30, 2021 and 2020, respectively.
Significant
Concentrations and Risks
We
maintain cash balances at a commercial bank and, at times, balances exceed FDIC limits. As of September 30, 2021, $4,892,332 was uninsured.
NOTE
2 – NEW ACCOUNTING STANDARDS
The
company has reviewed all issued accounting pronouncements and plans to adopt those that are applicable to it. The company does not expect
the adoption of any other pronouncements to have an impact on its results of operations or financial position.
In
December 2019, the FASB issued amended guidance in the form of ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes.” This ASU is intended to simplify various aspects related to accounting for income taxes by removing certain
exceptions to the general principles in Topic 740 and clarifying certain aspects of the current guidance to promote consistency among
reporting entities. ASU 2019-12 is effective for annual periods beginning after December 15, 2020 and interim periods within those annual
periods, with early adoption permitted. An entity that elects early adoption must adopt all the amendments in the same period. Most amendments
within this ASU are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified
retrospective basis. The company has evaluated the impact of this new standard and notes the guidance will not have a material impact
on our financial statements.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
On
August 5, 2020, the FASB issued ASU No. 2020-06 which simplifies the accounting for certain financial instruments with characteristics
of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 simplifies the
guidance in U.S. GAAP on the issuer’s accounting for convertible debt instruments. Such guidance includes multiple disparate sets
of classification, measurement, and derecognition requirements whose interactions are complex. ASU 2020-06 is effective for annual periods
beginning after December 15, 2021 and interim periods within those annual periods, with early adoption permitted. An entity that elects
early adoption must adopt all the amendments in the same period. Most amendments within this ASU are required to be applied on a prospective
basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The company is in the initial stage
of evaluating the impact of this new standard however it does not believe the guidance will have a material impact on our financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard requires all leases that have a term of over 12 months
to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured
at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will
be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized
as a single operating expense on a straight-line basis over the lease term. Costs for a financing lease will be disaggregated and recognized
as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability).
The company has adopted this standard beginning July 1, 2020, and the company now applies it on a modified retrospective basis to leases
existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. For the nine
months ended September 30, 2021 the company had one lease to which the standard applies. The adoption of the new standard resulted in
the recognition of a right-of-use asset and lease liability of $617,569 and $617,569, respectively. At September 30, 2021, the right-of-use
asset and lease liability were valued at $572,180 and $596,396, respectively
NOTE
3 – NOTES PAYABLE
On
May 24, 2019, the company entered into an Asset Purchase Agreement (the “APA”) with Applied Optical Sciences, LLC (“AOS”)
to acquire certain assets. As consideration for the APA, the company entered into a promissory note issued to the shareholders of AOS
for $2,500,000. The note is non-interest bearing and shall be repaid in equal installments, the first two payments were due on February
10, 2021 and subsequent payments being due May, 24, 2021 and the remainder on the last day of each six-month period thereafter, the final
such payment being due on November 24, 2022. The Promissory Note may be prepaid at any time (in whole or in part). Upon inception, the
company recorded a debt discount in the amount of $2,500,000 in relation to the transaction which is being amortized over the life of
the loan as compensation expense. During the nine months ended September 30, 2021, the company made payments in the amount of $1,000,000,
in the aggregate, for this promissory note. As of September 30, 2021 and December 31, 2020, the note is not in default.
Paycheck
Protection Program
On
April 28, 2020, the company entered into a loan agreement with Alliance Bank of Arizona, N.A. for a loan in the amount of $132,760 pursuant
to the Paycheck Protection Program (the “PPP”) under the Coronavirus Aid, Relief, and Economic Security Act enacted on March
27, 2020 (the “CARES Act”). This loan is evidenced by a promissory note dated April 27, 2020 and matures two years from the
disbursement date. This loan bears interest at a rate of 1.00% per annum, with the first nine months of interest deferred. Principal
and interest are payable monthly commencing nine months after the disbursement date and may be prepaid by the company at any time prior
to maturity with no prepayment penalties. This loan contains customary events of default relating to, among other things, payment defaults
or breaches of the terms of the loan. Upon the occurrence of an event of default, the lender may require immediate repayment of all amounts
outstanding under the note.
Under
the terms of the PPP, up to the entire amount of principal and accrued interest may be forgiven to the extent loan proceeds are used
for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business Administration
(“SBA”) under the PPP. The company partially used the loan amount for designated qualifying expenses and received notice
from the SBA on June 30, 2021 that the company would not be required to repay $81,550 in proceeds. As a result, the company received
partial forgiveness of the PPP amounting to $80,594 in principal and $956 in interest which is reflected within PPP forgiveness and other
income on the statements of operations. Additionally, the company made two payments during the quarter ended September 30, 2021 for a
total of $10,950. As of September 30, 2021, $41,160 in principal and $694 in interest were outstanding and continue to accrue interest
at 1% per annum. The loan is due to be repaid on April 20, 2022.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
Premium
Financing
On
March 25, 2021, the company entered into an agreement with Oakwood D&O Insurance to provide financing in an amount of $156,279 for
the insurance premium associated with two D&O policies. Both policies commenced March 12, 2021, and provided coverage for the next
12 months, expiring March 12, 2022. The loan bears interest at a fixed rate of 6.5% per annum and required the company to prepay $39,070
the last three months of the term and appears on the balance sheet as a current asset. On April 12, 2021, the company commenced monthly
principal and interest payments of $13,024 on the remaining nine months due of $117,209, the last payment of which is scheduled to be
made on December 31, 2020. As of September 30, 2021, the outstanding balance on the note was $26,047.
During
the nine months ending September 30, 2021, the company converted $47,499 of notes payable into 158,329 shares of common stock.
The
following reconciles notes payable as of September 30, 2021 and December 31, 2020:
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Beginning balance
|
|
$
|
2,681,157
|
|
|
$
|
4,697,890
|
|
Notes payable
|
|
|
117,209
|
|
|
|
4,456,760
|
|
Accrued interest
|
|
|
694
|
|
|
|
297,849
|
|
Transfer from prepaid
|
|
|
-
|
|
|
|
108,064
|
|
Initial beneficial conversion feature
|
|
|
-
|
|
|
|
(919,000
|
)
|
Amortize beneficial conversion feature
|
|
|
-
|
|
|
|
919,000
|
|
Payments on notes payable
|
|
|
(1,102,111
|
)
|
|
|
(1,480,951
|
)
|
Repayment of interest
|
|
|
-
|
|
|
|
(152,603
|
)
|
Extinguishment of Debt
|
|
|
(81,550
|
)
|
|
|
|
|
Converted into common stock
|
|
|
(47,499
|
)
|
|
|
(5,515,852
|
)
|
Total
|
|
|
1,567,900
|
|
|
|
2,681,157
|
|
Less-Notes
payable – current
|
|
|
(1,067,900
|
)
|
|
|
(1,547,695
|
)
|
Notes payable - non-current
|
|
$
|
500,000
|
|
|
$
|
1,133,462
|
|
Future
principal payments for the company’s Notes as of September 30, 2021 are as follows:
2022
|
|
$
|
1,067,900
|
|
2023
|
|
|
500,000
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
1,567,900
|
|
Of
the $1,567,900 note payable balance, $1,067,900 are short term of which $1,000,000 are payments on the note to acquire assets of Applied
Optical Sciences and $500,000 are long term. In accordance to the terms of note to acquire assets of Applied Optical Sciences, the first
two payments were paid on February 10, 2021 and May 24, 2021, respectively. The remaining payments are due on the last day of each six-month
period thereafter, the final such payment being due on November 24, 2022.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
NOTE
4 – DEFERRED COMPENSATION
On
May 24, 2019, the company entered into the APA with AOS to acquire certain assets. As consideration for the APA, the company entered
into a promissory note issued to the shareholders of AOS for $2,500,000. The company also recorded a debt discount, which is reported
on the balance sheet as deferred compensation, in the amount of $2,500,000, in relation to the transaction which is being amortized over
the life of the loan as compensation expense. The amortization of deferred compensation for the nine months ended September 30, 2021
and 2020 was $625,000 and $625,000, respectively. The amortization of deferred compensation for the three months ended September 30,
2021 and 2020 was $208,333 and $208,333, respectively.
NOTE
5 – DUE TO RELATED PARTIES
It
has come to the board’s attention that on July 31, 2018, our now deceased CEO deposited $50,000 into the company’s account.
Although it has been suggested that the funds may have been intended for use toward Mr. Dearmin’s healthcare, the board does not
know for certain what the purpose of the funds were or the nature of any intended investment. Accordingly, the board is investigating
the appropriate disposition of the funds which will likely be to the estate of Mr. Dearmin. Until such a determination is made, the board
does not intend to use these funds for any corporate purpose. For reporting purposes, the company has treated the deposit as a due to
related party.
NOTE
6 – STOCKHOLDERS’ EQUITY
Authorized
Capital Stock
The
company’s authorized capital stock consists of 500,000,000 shares of common stock at a par value of $.001 per share and 2,000,000
shares of preferred stock at a par value of $.001 per share.
In
January 2020, the company received $603,000 from five non-affiliated individuals based on subscription agreements with the company for
which the company issued 2,010,000 shares of its common stock.
In
January 2020, the company issued 25,000 shares upon exercise of a warrant by a non-affiliated warrant holder at an exercise price of
$0.07 per share.
In
February 2020, the company received $510,000 from a non-affiliated individual based on a subscription agreement with the company for
which the company issued 1,700,000 shares of its common stock.
In
April 2020, the company received $11,000 from an individual based on a warrant exercise for which the company issued 150,000 shares of
its common stock.
In
April 2020, the company received $63,000 from an individual based on an option exercise for which the company issued 900,000 shares of
its common stock.
In
April 2020, the company received $531,000, in the aggregate, from an individuals based on subscription agreements with the company for
which the company issued 1,770,333 shares of its common stock.
During
the nine months ended September 30, 2021, the company issued 7,056,250 shares of common stock in a private placement to accredited investors
for $0.32 per share or $2,258,000 of net cash proceeds, in the aggregate.
During
the nine months ended September 30, 2021, the company issued 158,329 shares of common stock upon the conversion of $47,499 of convertible
notes (see Note 3).
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
During
the nine months ended September 30, 2021, the company issued 31,250 shares of common stock in relation to a restricted stock agreement
with a value of $4,550.
During
the nine months ended September 30, 2021, the company issued 800,000 shares of common stock upon the exercise of 800,000 warrants at
an exercise price of $0.07 a share.
During
the nine months ended September 30, 2021, the company issued 250,000 shares of common stock upon the exercise of 250,000 warrants at
an exercise price of $0.06 a share.
During
the nine months ended September 30, 2021, the company issued 1,005,682 shares of common stock upon the exercise of 1,090,910 options
at an exercise price of $0.05 a share. This exercise was performed on a cashless basis.
During
the nine months ended September 30, 2021, the company issued 259,741 shares of common stock upon the exercise of 500,000 options at an
exercise price of $0.37 a share. This exercise was performed on a cashless basis.
During
the nine months ended September 30, 2021, the company issued 1,760,000 options to purchase common stock at an exercise price of $0.40
a share. The options vest over a period of three years from the date of the amendment.
During
the nine months ended September 30, 2021 the company recognized stock based compensation in the amount of $848,277.
During
the nine months ended September 30, 2021, the company issued 4,054,665 shares of common stock in a private placement to accredited investors
for $0.75 per share or $3,041,000 of net cash proceeds, in the aggregate.
During
the nine months ended September 30, 2021, the company issued 50,000 shares of common stock upon the exercise of 50,000 warrants at an
exercise price of $0.06 a share.
During
the nine months ended September 30, 2021, the company issued 100,000 shares of common stock upon the exercise of 100,000 warrants at
an exercise price of $0.07 a share.
During
the nine months ended September 30, 2021, the company issued 200,000 shares of common stock upon the exercise of 200,000 warrants at
an exercise price of $0.06 a share.
During
the nine months ended September 30, 2021, the company issued 125,000 shares of common stock upon the exercise of 125,000 warrants at
an exercise price of $0.06 a share.
During
the nine months ended September 30, 2021, the company issued 60,000 shares of common stock upon the exercise of 60,000 warrants at an
exercise price of $0.06 a share.
During
the nine months ended September 30, 2021, the company issued 65,000 shares of common stock upon the exercise of 65,000 warrants at an
exercise price of $0.06 a share.
During
the nine months ended September 30, 2021, the company issued 475,000 shares of common stock with an exercise of 500,000 options.
25,000 shares of common stock were withheld with the exercise. This exercise was performed on a cashless basis.
During
the nine months ended September 30, 2021, the company issued 482,143 shares of common stock with an exercise of 500,000 options.
17,857 shares of common stock were withheld with the exercise. This exercise was performed on a cashless basis.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
Preferred
Stock
As
of September 30, 2021 and December 31, 2020 there were 13,602 shares of Series A Redeemable Convertible Preferred Stock (the “Series
A Preferred Stock”) issued and outstanding, respectively. The company has not paid the dividends commencing with the quarterly
dividend due August 1, 2013. Dividend arrearages as of September 30, 2021 including previously accrued dividends included in our balance
sheet are approximately $286,114. Our Board of Directors suspended the declaration of the dividend, commencing with the dividend payable
as of February 1, 2015 since we did not have a surplus (as such term is defined in the Delaware general corporation Law) as of December
31, 2014, until such time as we have a surplus or net profits for a fiscal year.
Our
Series A Preferred Stock has a liquidation preference of $25.00 per Share. The Series A Preferred Stock bears dividends at the rate of
6.5% of the liquidation preference per share per annum, which accrues from the date of issuance, and is payable quarterly. Dividends
may be paid in: (i) cash, (ii) shares of our common stock (valued for such purpose at 95% of the weighted average of the last sales prices
of our common stock for each of the trading days in the ten trading day period ending on the third trading day prior to the applicable
dividend payment date), provided that the issuance and/or resale of all such shares of our common stock are then covered by an effective
registration statement and the company’s common stock is listed on a U.S. national securities exchange or the Nasdaq Stock Market
at the time of issuance or (iii) any combination of the foregoing. If the company fails to make a dividend payment within five business
days following a dividend payment date, the dividend rate shall immediately and automatically increase by 1% from 6.5% of the liquidation
preference per offered share of Series A preferred stock to 7.5% of such liquidation preference. If a payment default shall occur on
two consecutive dividend payment dates, the dividend rate shall immediately and automatically increase to 10% of the liquidation preference
for as long as such payment default continues and shall immediately and automatically return to the Initial dividend rate at such time
as the payment default is no longer continuing.
Each
share of Series A Preferred Stock is convertible at any time at the option of the holder into a number of shares of common stock equal
to the liquidation preference (plus any unpaid dividends for periods prior to the dividend payment date immediately preceding the date
of conversion by the holder) divided by the conversion price (initially $12.00 per share, subject to adjustment in the event of a stock
dividend or split, reorganization, recapitalization or similar event.) If the closing sale price of the common stock is greater than
140% of the conversion price on 20 out of 30 trading days, the company may redeem the Series A Preferred Stock in whole or in part at
any time through October 31, 2010, upon at least 30 days’ notice, at a redemption price, payable in cash, equal to 100% of the
liquidation preference of the shares to be redeemed, plus unpaid dividends thereon to, but excluding, the redemption date, subject to
certain conditions. In addition, beginning November 1, 2010, the company may redeem the Series A Preferred Stock in whole or in part,
upon at least 30 days’ notice, at a redemption price, payable in cash, equal to 100% of the liquidation preference of the Series
A Preferred Stock to be redeemed, plus unpaid dividends thereon to, but excluding, the redemption date, under certain conditions.
If
a change of control occurs, each holder of shares of Series A Convertible Preferred Stock that are outstanding immediately prior to the
change of control shall have the right to require the corporation to purchase, out of legally available funds, any outstanding shares
of Series A Convertible Preferred Stock at the defined purchase price. The purchase price is defined as: per share of Preferred Stock,
101% of the liquidation preference thereof, plus all unpaid and accumulated dividends, if any, to the date of purchase thereof. The purchase
price is payable, at the corporation’s option, (x) in cash, (y) in shares of the common stock at a discount of 5% from the fair
market value of Common Stock on the Purchase Date (i.e. valued at a 95% discount of the Common Stock on the Purchase Date), or (z) any
combination thereof.
If
the Corporation pays all or a portion of the Purchase Price in Common Stock, no fractional shares of Common Stock will be issued; instead,
the company will round the applicable number of shares of Common Stock up to the nearest whole number of shares; provided that the Corporation
may pay the Purchase Price (or a portion thereof), whether in cash or in shares of Common Stock, only if the Corporation has funds legally
available for such payment and may pay the Purchase Price (or a portion thereof) in shares of its Common Stock only if (i) the Common
Stock is listed on a U.S. national securities exchange or the Nasdaq Stock Market at the time of issuance and (ii) a shelf registration
statement covering the issuance by the Corporation and/or resales of the Common Stock issuable as payment of the Purchase Price is effective
on the Payment Date unless such shares are eligible for immediate resale in the public market by non-affiliates of the Corporation.
Dividends
on our Preferred Stock are payable quarterly on the first day of February, May, August and November, in cash or shares of Common Stock,
at our discretion.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
Share-Based
Payments
Effective
November 12, 2018, the Board of Directors of Applied Energetics, Inc. adopted the 2018 Incentive Stock Plan. The plan provides for the
allocation and issuance of stock, restricted stock purchase offers and options (both incentive stock options and non-qualified stock
options) to officers, directors, employees and consultants of the company. The board reserved a total of 50,000,000 shares for possible
issuance under the plan.
We
have, from time to time, also granted non-plan options to certain officers, directors, employees and consultants. Total stock-based compensation
expense for grants to officers, employees and consultants was $848,277 and $1,138,244 for the nine months ended September 30, 2021 and
2020, respectively, which was charged to general and administrative expense.
Total
stock-based compensation expense for grants to officers, employees and consultants was $354,880 and $344,033 for the three months ended
September 30, 2021 and 2020, respectively, which was charged to general and administrative expense.
The
$848,277 stock-based compensation for the nine months ended September 30, 2021 was comprised of $323,971 option expense and $501,750
was the amortization of 5,000,000 shares of stock valued at $0.4014 over three years for the acquisition of assets of Applied Optical
Sciences as well as the recognition of $22,557 for the restricted stock agreements, partially offset by a reversal of $1,000 for the
cancellation of 1,000,000 shares.
The
company recognized no related income tax benefit because our deferred tax assets are fully offset by a valuation allowance.
We
determine the fair value of option grant share-based awards at their grant date, using a Black-Scholes- Merton Option-Pricing Model.
At
September 30, 2021, options to purchase 30,169,090 shares of common stock were outstanding with a weighted average exercise price of
$0.1652 with a weighted average remaining contract term of approximately 5.38 years with an aggregate intrinsic value (amount by which
Applied Energetics’ closing stock price on the last trading day of the year exceeds the exercise price of the option) of approximately
$47,812,253.
As
of September 30, 2021, the company recorded $770,916 of unrecognized compensation cost related to unvested stock options granted and
outstanding, net of estimated forfeitures. The cost is expected to be recognized on a weighted average basis over a period of approximately
one year.
The
company issued 70,000 shares through restricted stock grants during the nine months ended September 30, 2021 and 2020. The company renewed
a consulting agreement, extending services for an additional term of two sequential one-year periods. As compensation for the renewal,
Mr. Donaghey is to receive for each year of service during the renewal term 70,000 shares of AERG common stock and options to purchase
200,000 shares of common stock at an exercise price of $0.61 per share, reflecting the fair market value of the common stock on the date
of grant. 50% of the options vest on the first anniversary of the renewal, and the other 50% vest on the second anniversary. 50% of the
common stock vests immediately and the remaining 50% on the first anniversary of the agreement.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
The
following table summarizes the activity of our stock options for the nine months ended September 30, 2021:
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2020
|
|
|
32,000,000
|
|
|
$
|
0.1557
|
|
Granted
|
|
|
1,760,000
|
|
|
$
|
0.6257
|
|
Exercised
|
|
|
(2,590,910
|
)
|
|
$
|
0.1118
|
|
Forfeited or expired
|
|
|
(1,000,000
|
)
|
|
$
|
0.3700
|
|
Outstanding at September 30, 2021
|
|
|
30,169,090
|
|
|
$
|
0.1652
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2021
|
|
|
24,124,644
|
|
|
$
|
0.1126
|
|
As
of September 30, 2021 and December 31, 2020 there was $14,000 and $0, respectively in unrecognized stock-based compensation related to
unvested restricted stock agreements, net of estimated forfeitures.
The
Black-Scholes option-pricing model includes the following weighted average assumptions for warrants awarded:
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
Assumptions:
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
.05-07
|
%
|
|
|
0
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
128-130
|
%
|
|
|
0
|
%
|
Expected life (in years)
|
|
|
2-3
|
|
|
|
0
|
|
As
of September 30, 2021 and December 31, 2020, the company recorded $390,250 and $892,000, respectively, in unrecognized stock-based compensation
related to a lockup agreement on 5,000,000 shares of common stock in the acquisition of assets of AOS valued at $0.4014 per share,
representing the closing price on the date of the contract which is amortized over 36 months. $501,750 and $501,750 was amortized for
the nine months ended September 30, 2021, and 2020, respectively.
|
|
Warrant Activity
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Average remaining Contractual Term
(years)
|
|
Outstanding at December 31, 2020
|
|
|
3,550,000
|
|
|
$
|
0.0627
|
|
|
|
5.77
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(1,650,000
|
)
|
|
$
|
0.0652
|
|
|
|
-
|
|
Forfeited
|
|
|
(125,000
|
)
|
|
$
|
0.0700
|
|
|
|
-
|
|
Outstanding and exercisable at September 30, 2021
|
|
|
1,775,000
|
|
|
$
|
0.0599
|
|
|
|
7.69
|
|
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Range of Exercise Prices
|
|
Shares
Outstanding
|
|
|
Weighted Avg.
Remaining Contractual
Life in Years
|
|
|
Weighted Avg.
Exercise Price
|
|
|
Shares
Exercisable
|
|
|
Weighted Avg.
Exercise Price
|
|
$0.05 - $0.08
|
|
|
1,775,000
|
|
|
|
7.69
|
|
|
$
|
0.0599
|
|
|
|
1,775,000
|
|
|
$
|
0.0652
|
|
|
|
|
1,775,000
|
|
|
|
7.69
|
|
|
$
|
0.0599
|
|
|
|
1,775,000
|
|
|
$
|
0.0652
|
|
NOTE
7 – COMMITMENTS AND CONTINGENCIES
Operating
Leases
In
May 2016, the company moved and entered into a month-to-month lease agreement to lease office space in Tucson, Arizona. In May 2019,
the company acquired Applied Optical Sciences and assumed the month-to-month lease for office and laboratory space also in Tucson, Arizona.
Rent
expense was approximately $145,000 and $35,000 for the nine months ended September 30, 2021 and 2020, respectively, and $52,000 and $11,000,
for the three months ended September 30, 2021 and 2020, respectively.
In
March 2021, the company signed a five-year lease for a 13,000 square foot laboratory/office space in Tucson. The lease term commenced
May 1, 2021 and ends on April 30, 2026. The base rent is $6.7626 per rentable square foot for year one, and escalates to $9.2009 in year
two, $11.4806 in year three, $13.1740 in year four and $14.9306 in year five, plus certain operating expenses and taxes.
At
September 30, 2021, we had $704,960 in future minimum lease payments, with $103,992, due within one year.
The
company determines if a contract contains a lease at inception. GAAP requires that the company’s leases be evaluated and classified
as operating or finance leases for financial reporting purposes. The classification evaluation begins at the commencement date and the
lease term used in the evaluation includes the non-cancellable period for which the company has the right to use the underlying asset,
together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option
which result in an economic penalty. The company has considered renewal options at the end of its active leases and has determined at
this time the company is not reasonably certain to renew the operating leases discussed below. All of the company’s leases are
classified as operating leases.
The
assets and liabilities from operating leases are recognized based on the present value of remaining lease payments over the lease term
using the company’s incremental borrowing rates or implicit rates, when readily determinable.
The
company’s leases do not provide an implicit rate that can be readily determined. Therefore, the company uses a discount rate based
on the incremental borrowing rate of its current external debt of 6.5%.
The
company’s weighted-average remaining lease term relating to its operating leases is 4.58 years, with a weighted-average discount
rate of the 6.5%.
The
company incurred lease expense for its operating leases of $24,754 which was included in general and administrative expenses in the statements
of operation for the periods ended September 30, 2021. During the nine months ended September 30, 2021, the company made cash lease payments
in the amount of $37,671.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
The
following table presents information about the future maturity of the lease liability under the company’s operating leases as of
September 30, 2021:
Maturity of Lease Liability
|
|
Building
|
|
2021
|
|
$
|
22,602
|
|
2022
|
|
|
112,141
|
|
2023
|
|
|
143,325
|
|
2024
|
|
|
168,577
|
|
2025
|
|
|
191,779
|
|
Thereafter
|
|
|
66,536
|
|
Total undiscounted lease payments
|
|
$
|
704,960
|
|
Less imputed interest
|
|
|
(108,564
|
)
|
Present Value of Lease Liabilities
|
|
$
|
596,396
|
|
|
|
|
|
|
Remaining lease term
|
|
|
4.58
|
|
The
following table presents lease assets and liabilities and their balance sheet classification:
Classification
|
|
September 30,
2021
|
|
Right-of-use Assets
|
|
$
|
572,180
|
|
Current portion of operating lease obligations
|
|
|
66,940
|
|
Operating lease obligations, less current portion
|
|
|
529,456
|
|
Guarantees
The
company agrees to indemnify its officers and directors for certain events or occurrences arising as a result of the officers or directors
serving in such capacity. The maximum amount of future payments that the company could be required to make under these indemnification
agreements is unlimited. However, the company maintains a director’s and officer’s liability insurance policy that limits
its exposure and enables it to recover a portion of any future amounts paid. As a result, it believes the estimated fair value of these
indemnification agreements is minimal because of its insurance coverage, and it has not recognized any liabilities for these agreements
as of September 30, 2021 and 2020.
Litigation
On
July 3, 2019, Gusrae, Kaplan & Nusbaum and its partner, Ryan Whalen filed a complaint in the United States District Court for the
Southern District of New York against the company, its directors, officers, attorneys and a consultant. The action alleged libel, securities
fraud and related claims. The company filed a motion to dismiss the complaint on October 24, 2019. On December 13, 2019, Gusrae Kaplan
and Mr. Whalen filed an opposition to the company’s motion. On January 10, 2020, the company filed a reply brief. The United States
District Court has not ruled on the motion. On August 5, 2021, the plaintiffs filed a Notice of Voluntary Dismissal of the action. The
dismissal was “without prejudice,” which means the plaintiffs may refile claims that are not barred by the statute of limitations.
On
January 15, 2021, the company filed a complaint in the United States District Court, Southern District of New York, against Gusrae, Kaplan
& Nusbaum and Ryan Whalen for malpractice and breach of New York Rules of Professional Conduct by both parties as former counsel
to the company. On May 28, 2021, Gusrae, Kaplan & Nusbaum and Mr. Whalen filed a motion to dismiss the complaint. On June 25,
2021, the company filed an opposition to the motion. On July 13, 2021, Gusrae Kaplan & Nusbaum and Mr. Whalen filed their reply
brief. The United States District Court has not yet ruled on the motion.
APPLIED
ENERGETICS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2021
(Unaudited)
On September 7, 2021, Gusrae
Kaplan & Nusbaum and Ryan Whalen filed a complaint in the New York Supreme Court against the company, its directors, officers, attorneys
and a consultant, alleging a single claim for defamation per se based on the same conduct underlying their claim of libel in their voluntarily
dismissed federal court action. The company filed a motion to dismiss the complaint on October 29, 2021, which motion included a
request for sanctions for filing a frivolous complaint. Gusrae Kaplan & Nusbaum and Mr. Whalen’s deadline to oppose the
company’s motion to dismiss is currently November 16, 2021.
As
with any litigation, the company cannot predict the outcome with certainty, but the company expects to provide further updates on the
status of the litigation as circumstances warrant.
The
company may, from time to time, be involved in legal proceedings arising from the normal course of business.
NOTE
8 – SUBSEQUENT EVENT
In
October and November, 2021, the company issued 1,860,081 shares of common stock upon the exercise of 1,909,090 options at an
exercise price of $0.05 a share. These exercises were performed on a cashless basis.
In November, 2021 we issued
two options totaling 155,000 shares with a life of 10 years and an exercise price of $2.54.
The
company’s management has evaluated subsequent events occurring after September 30, 2021, the date of our most recent balance sheet,
through the date our financial statements were issued.