See accompanying notes to condensed consolidated
financial statements (unaudited).
See accompanying notes to condensed consolidated
financial statements (unaudited).
See accompanying notes to condensed consolidated
financial statements (unaudited).
See accompanying notes to condensed consolidated
financial statements (unaudited).
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 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 accompanying interim
unaudited 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,”
“we,” “our” or “us”). 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 period ended March 31, 2021, the company incurred a net loss of approximately
$1,086,000, had negative cash flows from operations of approximately $646,000 and may incur additional future losses due to the reduction
in government contract activity. At March 31, 2021, the Company had total current assets of approximately $4,559,000 and total current
liabilities of approximately $1,600,000 resulting in working capital of approximately $2,959,000. At March 31, 2021, the Company had cash
of approximately $4,394,000.
During the three months
ended March 31, 2021, the Company completed the issuance of 7,056,250 total shares of its common stock at a price of $0.32 per
share, or $2,258,000 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 the resolution
of its liquidity problems. 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.
In order to improve
the company’s liquidity, the company’s management is actively pursuing 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 executive office is located at 9070 S.
Rita Road Suite 1500, Tucson, Arizona, 85747, we have office and laboratory space at 4595 S Palo Verde Rd, Suite 517, Tucson, AZ
85714 as well as office space at 2480 W Ruthrauff Road, Ste 140Q, Tucson, AZ 85705 and our telephone number is (520) 628-7415.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 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 32,909,390 and 35,097,466 for the years ended March 31, 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 March 31, 2021 approximately $4,144,000
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 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.
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.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2021
(Unaudited)
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 payment is 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 three months ended March 31, 2021, the Company made a payment in
the amount of $500,000 for this promissory note. As of March 31, 2021 and December 31, 2020, the note is not in default.
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 $133,658
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.
During
the three months ending December 31, 2020, the Company converted $47,499 of notes payable into 158,329 shares of common stock.
The following
reconciles notes payable as of March 31, 2021 and December 31, 2020:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
Beginning balance
|
|
$
|
2,681,157
|
|
|
$
|
4,697,890
|
|
Notes payable
|
|
|
117,209
|
|
|
|
4,456,760
|
|
Accrued interest
|
|
|
328
|
|
|
|
297,849
|
|
Transfer from prepaid
|
|
|
-
|
|
|
|
108,064
|
|
Initial beneficial conversion feature
|
|
|
-
|
|
|
|
(919,000
|
)
|
Amortize beneficial conversion feature
|
|
|
-
|
|
|
|
919,000
|
|
Payments on notes payable
|
|
|
(513,023
|
)
|
|
|
(1,480,951
|
)
|
Repayment of interest
|
|
|
-
|
|
|
|
(152,603
|
)
|
Converted into common stock
|
|
|
(47,499
|
)
|
|
|
(5,515,852
|
)
|
Total
|
|
|
2,238,172
|
|
|
|
2,681,157
|
|
Less-Notes payable - current
|
|
|
(1,225,991
|
)
|
|
|
(1,547,695
|
)
|
Notes payable - non-current
|
|
$
|
1,012,181
|
|
|
$
|
1,133,462
|
|
Future principal
payments for the Company’s Notes as of March 31, 2021 are as follows:
2021
|
|
$
|
1,225,991
|
|
2022
|
|
|
1,012,181
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
2,238,172
|
|
Of
the $2,238,172 note payable balance, $1,225,991 are short term of which $1,000,000 are payments on the note to acquire Applied
Optical Sciences and $1,012,181 are long term, of which $1,000,000 are payments on the note to acquire Applied Optical Sciences.
Of the note to acquire Applied Optical Sciences, the first payment was 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.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 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 three months ended March 31, 2021 and 2020
was $208,335 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’ DEFICIT
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.
During the three months
ended March 31, 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 three months
ended March 31, 2021, the Company issued 158,329 shares of common stock upon the conversion of $47,499 of convertible notes (see
Note 3).
During the three months
ended March 31, 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 three months ended
March 31, 2021, the Company issued 600,000 shares of common stock upon the exercise of 600,000 warrants at an exercise price of $0.07
a share.
During the three months ended March 31, 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 three months
ended March 31, 2021, the Company recognized stock based compensation in the amount of $170,029.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2021
(Unaudited)
Preferred Stock
As of March 31, 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 March 31, 2021 including previously accrued dividends included in our balance sheet
are approximately $264,000. 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
MARCH 31, 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 approximately $174,579 and $440,000 for three months ended March 31, 2021
and 2020, respectively, which was charged to general and administrative expense.
There was no related
income tax benefit recognized 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 March 31, 2021, options
to purchase 29,909,090 shares of common stock were outstanding with a weighted average exercise price of $0.1374 with a weighted
average remaining contract term of approximately 5.4 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 $19,959,000.
As of March 31, 2021,
there was approximately $541,000 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.
There was no activity
of our restricted stock units and restricted stock grants for three months ended March 31, 2021 and 2020.
The following table summarizes the activity
of our stock options for the three months ended March 31, 2021:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
|
32,000,000
|
|
|
$
|
0.1419
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
(1,090,910
|
)
|
|
$
|
0.0500
|
|
Forfeited or expired
|
|
|
(1,000,000
|
)
|
|
$
|
0.3700
|
|
Outstanding at March 31, 2021
|
|
|
29,909,090
|
|
|
$
|
0.1374
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2021
|
|
|
24,621,590
|
|
|
$
|
0.1043
|
|
As of March 31, 2021
and December 31, 2020 there was no unrecognized stock-based compensation related to unvested restricted stock agreements, net of
estimated forfeitures.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2021
(Unaudited)
As of March 31, 2021
and December 31, 2020 there was $724,750 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 AOS valued at $0.4014
a share as that was the closing price on the date of the contract and is amortized over 36 months. $167,250 and $167,250 was amortized
for the three months ended March 31, 2021 and 2020, respectively.
|
|
Warrant Activity
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
Outstanding at December 31, 2020
|
|
|
3,550,000
|
|
|
$
|
0.0627
|
|
|
|
6.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercised
|
|
|
(600,000
|
)
|
|
$
|
0.0692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at March 31, 2021
|
|
|
2,950,000
|
|
|
$
|
0.0614
|
|
|
|
7.08
|
|
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Contractual
|
|
|
Weighted Avg.
|
|
|
Shares
|
|
|
Weighted Avg.
|
|
Range of Exercise Prices
|
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.05 - $0.08
|
|
|
|
2,950,000
|
|
|
|
7.08
|
|
|
$
|
0.0614
|
|
|
|
2,950,000
|
|
|
$
|
0.0614
|
|
|
|
|
|
2,950,000
|
|
|
|
7.08
|
|
|
$
|
0.0614
|
|
|
|
2,950,000
|
|
|
$
|
0.0614
|
|
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
$13,000 for the three months ended March 31, 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 commences 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 March 31, 2021, we
had approximately $4,000 in future minimum lease payments due in less than a year.
APPLIED ENERGETICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
MARCH 31, 2021
(Unaudited)
Guarantees
We agree to indemnify
our 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 we could be required to make under these indemnification agreements is unlimited. However,
we maintain a director’s and officer’s liability insurance policy that limits our exposure and enables us to recover
a portion of any future amounts paid. As a result, we believe the estimated fair value of these indemnification agreements is minimal
because of our insurance coverage and we have not recognized any liabilities for these agreements as of March 31, 2021 and 2020.
Litigation
On July 3, 2019, Gusrae,
Kaplan & Nusbaum and its partner, Ryan Whalen filed a claim in the District Court for the Southern District of New York against
the company, its directors, officers, attorneys and a consultant. The action alleges libel, securities fraud and related claims.
The company believes that this suit lacks merit and intends to dispute these allegations. 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 yet ruled on the motion.
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. Gusrae,
Kaplan & Nusbaum and Ryan Whalen have not yet responded to the complaint.
As previously reported,
on June 15, 2020, Grace A.C. Dearmin, as the Administrator of the Estate of Thomas Carr Dearmin, filed a cross-complaint against
the company and company directors Jonathan Barcklow and Bradford Adamczyk, alleging causes of action against them for breach of
contract and conversion. On February 8, 2021, the court granted the company’s motion to dismiss on personal jurisdiction
grounds as to the company, Mr. Barcklow and Mr. Adamczyk.
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.
We may, from time to
time, be involved in legal proceedings arising from the normal course of business.
NOTE 8 – SUBSEQUENT EVENT
Subsequent to March 31, 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.
Subsequent to March 31, 2021, the Company issued 200,000 shares of
common stock upon the exercise of 200,000 warrants at an exercise price of $0.07 per share.
On April 21, 2021, the
company amended its Master Services Agreement, dated as of July 16, 2018, with Westpark Advisors, LLC, pursuant to a First Amendment
to Master Services Agreement. The amendment grants Westpark Advisors options to purchase an additional 1,000,000 shares of common
stock at an exercise price of $0.40 per share, in exchange for Westpark Advisors continued service to the company. The options
vest over a period of three years from the date of the amendment.
Effective May 12, 2021, the
company and Mr. Donaghey renewed his consulting agreement, extending his service on the Board of Advisors 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.
The company’s
management has evaluated subsequent events occurring after March 31, 2021, the date of our most recent balance sheet, through the
date our financial statements were issued.