Section
8.01 – Other Events
Response to Amended Schedule 14 A filed
February 2, 2018
On January 18, 2018, Thomas C. Dearmin and three
other shareholders, which collectively own approximately 3.63% of the outstanding common shares in Applied Energetics, Inc. (the
“Company”), filed a preliminary Schedule 14A consent statement (the “Consent Statement”) for the solicitation
of written consents from the shareholders of the Company. The Consent Statement proposes the possible repeal of the Company’s
Bylaws or Bylaw Amendments; the removal of George Farley as the sole director of the Company; and the election of Mr. Dearmin and
the two other shareholders as Directors of the Company. The Consent Statement also states that if the “Consent Solicitation
is successful, the Nominees will… appoint Mr. Dearmin as the Acting Chief Executive Officer of the Company.”
For the reasons set forth below, the Company
believes that the proposals in the Consent Statement, if successful, would result in great harm to the Company and its shareholders.
Furthermore, the Company believes that the purported reasons for the Consent Solicitation are meritless and that the Consent Solicitation
contains material omissions that should be disclosed to the Company’s shareholders prior to any vote on the proposals.
In
May, 2006, the Company’s Board of Directors asked Mr. Dearmin to step down as a Director and Chief Executive Officer of
the Company. Mr. Dearmin’s resignation as a Director took effect in 2007. The Company incurred cumulative losses of $16
million during his tenure as CEO. The Company believed Mr. Dearmin’s conduct was unbecoming of a Director and Chief Executive
Officer of a public company.
Thomas Dearmin’s then wife, Terese Dearmin
and father-in-law, Richard Harris, were the subject of a civil injunction action brought by the Securities and Exchange Commission
alleging violations of federal securities laws in separate instances of insider trading in the securities of the Company’s
predecessor entity U.S. Home & Garden, Inc. (USHG) ahead of the public announcement of its merger with Ionatron, Inc. The
SEC alleged that Terese Dearmin learned of the merger from Thomas Dearmin. In 2007, Terese Dearmin consented to the entry of a
final judgment that permanently enjoined her from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder and required the disgorgement of illicit gains and a civil penalty. The SEC Litigation Release is available online
at:
https://www.sec.gov/litigation/litreleases/2007/lr20155.htm
The insider trading allegations resulted in
the Company receiving negative press from widely read technology publication WIRED. See WIRED article, “Lighting Guns Strike
Again: Insider Trading Scandal.” See
https://www.wired.com/2007/06/ionatron-strike/?mbid=email_onsiteshare
In
2006, during an interview with the Los Angeles Times, Thomas Dearmin disclosed information concerning the Company’s device
that neutralized improvised explosive devices. The information was included in an article published by the Los Angeles Times on
or about February 12, 2006. The Company believes that the disclosure of this information led to a public rebuke by the then President
of the United States, George W. Bush. The Company believed that the Department of Defense would not enter into additional contracts
with the Company if Mr. Dearmin was employed by or associated with the Company. While the Company was allowed to complete its
existing contracts, it did not receive any further substantive contracts from the Department of Defense and suffered years of
setbacks and ultimately ceased all operations in 2014 and became a Shell Company.
On July 23, 2017, the Orange County Register,
the San Clemente Times, and the Dana Point Times reported that that Thomas Dearmin discharged a weapon in an apartment in an exclusive
gated community in Monarch Beach, CA. According to the news reports, after residents called the police to investigate the sound
of gunfire, Mr. Dearmin resisted arrest by barricading himself in the apartment and standing off the police for ten hours. The
reports state that the police ultimately used a SWAT team, tear gas and dogs to apprehend Mr. Dearmin. Mr. Dearmin was charged
with a felony for grossly
negligent
discharge of a firearm under Section 246.3 PC and a misdemeanor for resisting public
or police officer under Section 148(a) PC. Mr. Dearmin plead not guilty to the charges, but, upon information and belief, at a
pre-trial hearing on February 22, 2018, Mr. Dearmin’ s attorney informed the Court that Mr. Dearmin plans on taking a plea
agreement. The hearing was continued to April 3, 2018 at 8:30 am.
The news reports are available online at:
http://www.sanclementetimes.com/man-barricaded-self-monarch-beach-home-charged-police-say/
https://www.ocregister.com/2017/07/25/woman-at-center-of-police-standoff-in-dana-point-says-boyfriend-was-trying-to-prove-gun-was-unloaded
/
; and
http://www.danapointtimes.com/man-barricaded-self-monarch-beach-home-charged-police-say/
The Company believes that if Mr. Dearmin is
nominated as a board member or employed at the Company there is a risk of severely detrimental economic impact. For example, the
Company believes it will not receive any United States Government contracts if Mr. Dearmin is associated with the Company and further
believes that Mr. Dearmin’s association as either a director or officer will preclude the Company and its employees from
gaining security clearances necessary to work on Department of Defense contracts.
Mr. Dearmin’s recent arrest and felony
charge also raises grave concerns about his mental health.
Relatedly, the fact that Bradford T. Adamczyk,
Jonathan R. Barcklow, John E. Schultz Jr., and Oak Tree Asset Management Ltd., apparently, believe it would be in the Company and
shareholder’s best interests to nominate Mr. Dearmin as a member of the board and appoint him a chief executive officer,
raises serious concerns about their business judgment.
The proposals in the Amended Consent Statement,
if approved, would change the current Board of Directors that would trigger a change in control redemption feature in the Company’s
remaining Series A preferred shares, which could result in the requirement to immediately redeem Series A preferred shares for
a cash amount of $500,000. This change in control redemption feature, originally $18,000,000, has been disclosed in the Company’s
financial statements since 2005. Mr. Farley led the Board’s efforts to redeem the Series A preferred stock to reduce the
change of control obligation and cash dividend requirements and was successful in redeeming 676,500 series A preferred shares primarily
in exchange for the Company’s common stock.
Mr. Farley has been a director of the Company
since 2004 serving as the Board’s financial expert and Chairman of the Audit Committee. Mr. Farley was elected as Chief Executive
Officer and Chief Financial Officer in February 2015 and agreed to serve without cash compensation until such time as the Company
had financial resources sufficient to pay him a normal salary for these positions. In February 2016, in connection with the reactivation
of the Company’s business, Mr. Farley a agreed to an annual salary of $150,000 to be accrued but not paid until the Company
had the cash necessary to make payments. These accruals were required by SEC financial statement reporting requirements in order
to reflect the value of the individual efforts and benefits provided in the Company’s income statement. To date, substantially
all of the salary of Mr. Farley remain unpaid.
In February 2016, Mr. Farley for his agreements
to and efforts in reactivating the Company’s business, was issued 20 million common shares with a then fair market value
of $20,000 in partial satisfaction of accrued compensation. The Company also issued at the same time 38 million common shares at
the same fair market value to attorneys and consultants to obtain necessary services to continue the Company’s activities.
These attorneys and consultants also agreed to defer cash compensation for services until the Company had sufficient cash necessary
to pay the accrued liabilities for such services.
The Company has entered a financial advisory
agreement with BMA Securities, Inc. to act as the Company’s financial advisor on the Company’s plan of distribution
for its offering of recently registered 50 million common shares.
The Company recently commenced work on a new
unique application for its Short Pulse Laser and is working on obtaining government funding to help develop this application and
to demonstrate the application later this year.
The Company has recently obtained $335,000 of
funding from a number of sources by selling restricted shares of common stock and issuing convertible notes with a six month delayed
variable rate conversion feature. The current conversion price of the notes exceeds the market price per share on the closing dates
of the financings. The funds have been used to continue the Company’s operations. The Company expects fund future operations
from sales of its common stock, but may also obtain financing by issuing additional delayed variable rate conversion notes as this
is proving to be a beneficial means of financing.
The Company continues to seek strategic partners,
acquisition or merger prospects, with sufficient operations and financial resources necessary to fund our research and development
of advanced ultra short pulse lasers for military and industrial use.
In 2016, the Company engaged in preliminary
merger discussions with a Company controlled by Thomas Dearmin and Jonathan Barcklow. These discussions were discontinued when
the Company learned of potential violations of the Foreign Corrupt Practices Act, by the target Company and a significant shortfall
in its predicted revenues.
Another business opportunity involving Mr. Dearmin
and Mr. Barcklow and other potential investors discussed at a meeting in October, 2016 was not fruitful because Mr. Farley believed
that the participants failed to meet the Company’s standards for Directors and Officers as outlined in its Governance Documents.
Mr. Barcklow may be an employee/associate of
KMPG an international accounting firm that prohibits its partners, employees and associates from being members of a Board of Directors.
Mr. Barcklow may not be able to serve as a director of the Company unless he severs his association with KMPG.
The Company has not added additional directors
since 2015 because of the expense involved. However, Mr. Farley has a group of former Directors that he consults with on a regular
basis on business issues and opportunities. Some of these former directors may be asked to rejoin the Board of Directors once the
company is further along in its reactivation program and has obtained additional funding to insure continued operation.