Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - APPLIED ENERGETICS, INC. | v463006_ex32-1.htm |
| EX-31.1 - EXHIBIT 31.1 - APPLIED ENERGETICS, INC. | v463006_ex31-1.htm |
| EX-23.1 - EXHIBIT 23.1 - APPLIED ENERGETICS, INC. | v463006_ex23-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2016
| ¨ | 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)
|
Delaware |
77-0262908 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification Number) |
| 2480 W Ruthrauff Road, Suite 140 Q | ||
| Tucson, Arizona | 85705 | |
| (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 | Name of Each Exchange on Which Registered | |
| Common Stock, $.001 par value | Over the Counter Bulletin Board |
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 x
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 x
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
| Large Accelerated Filer ¨ | Accelerated Filer ¨ | Non-Accelerated Filer ¨ | Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes x 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, 2016 (the last day of the registrant’s most recently completed second quarter) was approximately $10,549,000.
The number of outstanding shares of the registrant’s Common Stock, $.001 par value, as of March 29, 2017 was 154,785,520.
APPLIED ENERGETICS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2016
INDEX
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Cautionary Note Concerning Forward-Looking Statements
Certain statements in this Form 10-K constitute forward-looking statements within the meaning of the 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 the historical or current facts, and can be identified by the use of forward looking words such as "may", "believe", "will", "expect", "project", "anticipate", “estimates", "plans", "strategy", "target", "prospects" or "continue", and words of similar meaning. These forward looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results of operations and financial condition and may cause our actual results, performances or achievements to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. This Form 10-K contains important information as to risk factors under Item 1A. Although we believe that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to have been correct. We do not assume any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements.
Available Information
Applied Energetics, Inc. makes available free of charge on its website at www.appliedenergetics.net 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 Exchange Act, 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 executive office is located at 2480 W Ruthrauff road, Suite 140 Q, Suite 140 Q, Tucson, Arizona, 85705 and our telephone number is (520) 628-7415.
The company is a “shell company” as such term is defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. As of October 3, 2015, the company suspended its previous business activities.
The company is planning to reactivate its previous business activities pursuant to Teaming and Consulting Agreements with Applied Optical Sciences, Inc. (“AOS”) and Dr. Stephen W. McCahon, Ph.D., one of the company’s founders and owner of AOS who was primarily responsible for development of the Company’s existing Intellectual Property portfolio (collectively the “Consultants”). The company owns intellectual property that is integral and necessary for the development of Laser Guided Energy and Direct Discharge Electrical products for military and commercial uses (the “Products”) and the Consultants have the facilities and technical knowhow to utilize the company’s intellectual property in the development of the Products; and the Parties have agreed to cooperate in the proposal and fulfillment of research and development contracts for branches of the Department of Defense, agencies of the Federal Government and other Defense contractors and in other research and development activities relating to lasers. We intend to develop the next generation of Ultra-Short Pulse Lasers (“USP”). We are preparing for the next stage of LGE development that involves the development of Advanced USP Laser Technologies. These lasers will allow for LGE weapon systems to be mounted on mobile platforms for multiple Anti-Terrorist missions including Counter Measures against Drones and other Hostile Inbound Objects, Counter-Improvised Explosive Devices (“C-IED”), Vehicle Stopping, and many others. Importantly, the highly advanced USP Laser technologies required for successful LGE deployment leads to many new and unique laser opportunities in commercial, medical, and military markets. Our goal is to increase the range and power and to decrease the size weight and cost of ultra-short pulse lasers. We expect to develop very high energy and power scaling ultra-short pulse lasers that have a very broad range of applicability for Department of Defense, commercial and medical applications. We are in discussions with and expect to team with a major Defense Contractor for co-development and manufacture of military products. We will also team with a leading commercial laser technology manufacturer for co-development of commercial products resulting from our research and development efforts.
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If the reactivation of our former business is successful we will no longer be a “shell Company” but will be classified as a Smaller Reporting Company until our annual revenues exceed $100 million and our public float has a value in excess of $250 million. We achieve significant revenues from our reactivated business.
The U.S. Government has significantly reduced defense spending over the past few years and we have not received any meaningful additional Government funding in 2015 and 2016. We have completed all of our Government contracts and do not have any funded Government contracts for future work. There is no assurance that the Company and its Consultants will obtain meaningful Government Funding.
Scientific Advisory Board
We have formed a Scientific Advisory Board to assist in our Strategic Roadmap Development, expected R&D activities, and to provide a sound technical basis for future teaming, investment, and market analysis. These members have been chosen based upon their areas of subject matter expertise and senior experience levels that span both the D.o.D. and commercial sectors. The members of the Scientific Advisory Board are:
Dr. Gregory Quarles
| · | Chief Scientific Officer for The Optical Society (OSA) in Washington, DC. |
| · | Ph.D. M.S., Physics, University of Oklahoma, 1987. |
| · | 30 years’ experience Optical Physics. Executive and Management Positions. Major Scientific Advisory Boards. |
| · | 100 Publications, 5 Patents issued. |
Dr. L. A. Schlie
| · | Ph.D. EE , 1970, MSEE, 1966, BSEE, University of Illinois, 1965. |
| · | 40 years’ experience In Optical Physics, Sr. Gov’t Scientist for Directed Energy Weapons. |
| · | 70 journal papers, 2 book chapters and 21 patents. |
| · | Member of Various Steering Committees for D.o.D., DOE, DARPA, NSF and DHS. |
| · | Advisor for DoD, DOE, NASA and NSF on laser technology, applications and effects. |
Dr. Charles Hale
| · | Director of Research and Development, Daylight Solutions. |
| · | Ph.D. Engineering, Purdue University, 1999, MBA, University of Arizona. 2006. |
| · | 21 years’ experience in engineering and program management in commercial and D.o.D. environments. |
| · | 14 publications, 1 patent issued. |
Dr. James Harrison
| · | Senior Independent Consultant. |
| · | Ph.D., M.S., B.S. Electrical Engineering, M.I.T., 1986. |
| · | 30 years’ experience in Lasers, Optical physics, Electronic materials, Program and Executive Management. |
| · | 60 scientific publications; 10 patents issued or pending, |
Employees
As of March 29, 2016, we had no employees, and we retain a consultant who is paid on an hourly basis.
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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
We have entered into a Teaming Agreement with Applied Optical Sciences, Inc. and a Consulting Agreement with Stephen W. McCahon (collectively “the Consultants”) with the expectation of reactivating our former businesses are exploring strategic alternatives which may change the nature of our business.
Because of the lack of government funding in 2015 and 2016, we have significantly reduced our work force and will have to rely on the consultants for processing and fulfillment of any Government or commercial contracts. There is no assurance that the Company and Consultants will be successful in procuring Government and/or commercial contracts for its reactivated business.
Our independent auditors have 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 auditors stated that our financial statements for the years ended December 31, 2015 and 2016 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 from operations 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.
Risk Related to Our Previous Business Activities
We may be unable to adequately protect our intellectual property rights, which could affect our ability to sustain the value of such assets.
Protecting our intellectual property rights is critical to our ability to maintain the value of our intellectual property. We hold a number of United States patents and patent applications, as well as trademark, and registrations which are necessary and contribute significantly to the preservation of our competitive position in the market. There can be no assurance that any of these patents or future patent applications and other intellectual property will not be challenged, invalidated or circumvented by third parties. In some instances, we have augmented our technology base by licensing the proprietary intellectual property of others. In the future, we may not be able to obtain necessary licenses on commercially reasonable terms. While we have entered into confidentiality and invention assignment agreements with our former employees, and entered into nondisclosure agreements with suppliers and appropriate customers so as to limit access to and disclosure of our proprietary information. These measures may not suffice to deter misappropriation or independent third party development of similar technologies. Based on our current financial condition, we may not have the funds available to enforce and protect our intellectual properties.
We may face claims of infringement of proprietary rights.
There is a risk that a third party may claim our products and technologies infringe on their proprietary rights. Whether or not our products infringe on proprietary rights of third parties, infringement or invalidity claims may be asserted or prosecuted against us and we could incur significant expense in defending them. If any claims or actions are asserted against us, we may not have the funds necessary to defend against such claims. Our failure to do so could adversely affect the value of our intellectual property.
We are subject to the penny stock rules adopted by the Securities and Exchange Commission that require brokers to provide extensive disclosure to their customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our common stock, which in all likelihood would make it difficult for our stockholders to sell their securities.
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Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. This classification would severely and adversely affect any market liquidity for our common stock.
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:
| · | The basis on which the broker or dealer made the suitability determination; and |
| · | That the broker or dealer received a signed, written agreement from the investor prior to the transaction |
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling stockholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common stock. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock, in all probability, will be subject to such penny stock rules for the foreseeable future and our stockholders will, in all likelihood, find it difficult to sell their shares of common stock.
A large number of shares of our common stock could be sold in the market in the near future, which could depress our stock price.
As of March 29, 2016, we had outstanding approximately 155 million shares of common stock. Approximately 92 million of our shares are currently freely trading without restriction under the Securities Act of 1933, having been held by their holders for over one year and are eligible for sale under Rule 144(k) of the Securities Act.
Provisions of our corporate charter documents could delay or prevent change of control.
Our Certificate of Incorporation authorizes our Board of Directors to issue up to 2,000,000 shares of "blank check" preferred stock without stockholder approval, in one or more series and to fix the dividend rights, terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences, and any other rights, preferences, privileges, and restrictions applicable to each new series of preferred stock. In addition, our Certificate of Incorporation divides our board of directors into three classes, serving staggered three-year terms. At least two annual meetings, instead of one, will be required to effect a change in a majority of our board of directors. The designation of preferred stock in the future, the classification of our Board of Directors, its three classes and the rights agreement could make it difficult for third parties to gain control of our company, prevent or substantially delay a change in control, discourage bids for our common stock at a premium, or otherwise adversely affect the market price of our common stock. Moreover, the holders of our outstanding Series A Preferred Stock have a right to put their shares to the company for an amount equal to the liquidation preference of approximately $340,000 plus unpaid dividends (approximately $119,000 as of December 31, 2016), in the event of a change of control. Such right could hinder our ability to sell our assets or merge with another company.
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The redemption and dividend provisions of our outstanding preferred stock are onerous due to our current financial condition.
The company has redeemed substantially all of its outstanding preferred stock. At March 29, 2017, 13,602 shares were outstanding with a liquidation preference of approximately $340,000 and unpaid dividends of $119,000. As of February 28, 2017, the liquidation preference of our outstanding preferred stock plus unpaid dividends thereon was approximately $468,000. If an event occurs that would require us to redeem the preferred stock, we may not have the required cash to do so.
In addition, our annual dividend payment on the preferred stock is approximately $34,000, which will further deplete our cash. We have not paid the dividends commencing with the quarterly dividend due August 1, 2013 and, as a result, the dividend rate has increased to 10% per annum and will remain at that level until such failure no longer continues. Dividends in arrears as of February 28, 2017 was approximately $128,000. These terms may also make it more difficult for us to sell equity securities or complete an acquisition.
We may require additional financing to maintain our reporting requirements and administrative expenses
We have no meaningful revenues and are dependent on our cash on hand to fund the costs associated with the reporting obligations under the Securities Exchange Act of 1934, as amended, and other administrative costs associated with our corporate existence. For the years ended December 31, 2016, 2015 and 2014, we incurred net losses of $492,605, $223,851 and $718,826, respectively. General and administrative expenses include salaries, accounting fees other professional fees and other miscellaneous expenses. We do not expect to generate any revenues unless and until the commencement of business operations. In the event that our available funds prove to be insufficient, we will be required to seek additional financing. Our failure to secure additional financing could have a material adverse effect on our ability to pay the accounting and other fees in order to continue to fulfill our reporting obligations and pursue our business plan. We do not have any arrangements with any bank or financial institution to secure additional financing and such financing may not be available on terms acceptable and in our best interests.
Management has broad discretion over the selection of our prospective business and business opportunities
Any person who invests in our securities will do so without an opportunity to evaluate the specific merits or risks of our prospective business and business opportunities. As a result, investors will be entirely dependent on the broad discretion and judgment of management in connection with the selection of a prospective business. The business decisions made by our management may not be successful.
Stockholders may not receive disclosure or information regarding a prospective business and business opportunities
As of the date of this annual report, we have not yet identified any prospective business or industry in which we may seek to become involved and at present we have no information concerning any prospective business. Management is not required to and may not provide stockholders with disclosure or information regarding our prospective business opportunities. Moreover, a prospective business opportunity may not result in a benefit to stockholders or prove to be more favorable to stockholders than any other investment that may be made by shareholders and investors.
We have not specified an industry for new prospective business opportunities and accordingly risks associated with a specific business cannot be ascertained
There is no basis for stockholders to evaluate the possible merits or risks of potential new business opportunities or the particular industry in which we may ultimately operate. To the extent that we effect a business combination with a financially unstable entity or an entity that is in its early stage of development or growth, including entities without established records of revenues or income, we will become subject to numerous risks inherent in the business and operations of that financially unstable company. In addition, to the extent that we effect a business combination with an entity in an industry characterized by a high degree of risk, we will become subject to the currently unascertainable risks of that industry. A high level of risk frequently characterizes certain industries that experience rapid growth, including internet companies. Although management will endeavor to evaluate the risks inherent in a particular new prospective business or industry, there can be no assurance that we will properly ascertain or assess all such risks or that subsequent events may not alter the risks that we perceive at the time of the consummation of any new business opportunity.
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There are many blank check companies for which we will compete to attract business opportunities
We expect to encounter intense competition from other entities seeking to pursue new business opportunities. Many of these entities are well-established and have extensive experience in identifying new prospective business opportunities. Many of these competitors possess greater financial, technical, human and other resources than we do. Based upon our limited financial and personnel resources, we may lack the resources as compared to those of many of our potential competitors.
We are deemed a “Shell Company” as such we are subject to additional reporting and disclosure requirements that may affect our short-term prospects to implement our business plan and could result in a loss of your entire investment.
Shell companies are prohibited from using a Form S-8 to register securities pursuant to employee compensation plans. However, the rules do not prevent us from registering securities pursuant to registration statements. Additionally, the rule regarding Form 8-K requires shell companies to provide more detailed disclosure upon completion of a transaction that causes it to cease being a shell company. We must file a current report on Form 8-K containing the information required pursuant to Regulation S-K and in a registration statement on Form 10, within four business days following completion of a transaction together with financial information of the private operating company. In order to assist the SEC in the identification of shell companies, we are also required to check a box on Form 10-Q and Form 10-K indicating that we are a shell company. To the extent that we are required to comply with additional disclosure because we are a shell company, we may be delayed in executing any mergers or acquiring other assets that would cause us to cease being a shell company.
Restrictions on the reliance of rule 144 by shell companies or former shell companies
Historically, the SEC staff has taken the position that Rule 144 is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies, like us. The SEC has codified and expanded this position in the amendments discussed above by prohibiting the use of Rule 144 for resale of securities issued by any shell companies (other than business combination related shell companies) or any issuer that has been at any time previously a shell company. The SEC has provided an important exception to this prohibition, however, if the following conditions are met:
| · | The issuer of the securities that was formerly a shell company has ceased to be a shell company; |
| · | The issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; |
| · | The issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Current Reports on Form 8-K; and |
| · | At least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its status as an entity that is not a shell company. |
As a result, it is likely that pursuant to Rule 144, stockholders who receive our restricted securities in a business combination will not be able to sell our shares without registration until one year after we have completed the business combination.
We most likely will issue additional securities in conjunction with a business opportunity which will result in a dilution of present stockholder ownership
Our certificate of incorporation authorizes the issuance of 500,000,000 shares of common stock. As of March 29, 2017, we have 154,785,520 shares issued and outstanding. We may be expected to issue additional shares in connection with our pursuit of new business opportunities and new business operations. To the extent that additional shares of common stock are issued, our stockholders would experience dilution of their respective ownership interests. If we issue shares of common stock in connection with our intent to pursue new business opportunities, a change in control of our company is expected to occur. The issuance of additional shares of common stock may adversely affect the market price of our common stock, in the event that an active trading market commences.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
In March, 2017, we have a month-to-month agreement to lease approximately 165 square feet of office space in Tucson, Arizona.
Our aggregate rent expense, including common area maintenance costs, was approximately $4,000 and $12,000 for 2016 and 2015, respectively.
We believe our facilities are adequate for our currently expected level of operations.
See Note 5 to our 2016 Consolidated Financial Statements, which is incorporated herein by reference for information with respect to our lease commitments at December 31, 2016.
Three of the Company’s shareholders commenced an action entitled Superius Securities Group, Inc.et. al. vs George Farley, et.al. (CA No. 2017-0024-VCMR) in the Court of Chancery of the state of Delaware (the “Action”). The complaint asserts that in March 2016, George Farley (‘Farley”), Chairman of the Board of Directors. Farley, as sole director of Applied Energetics, Inc. (“AERG” or the “Company”), acted without proper shareholder approval to amend AERG’s certificate of incorporation to increase the number of its authorized shares of stock from 125 million to 500 million. However, the Complaint acknowledges that the amendment was approved by a majority of AERG’s shareholders in an April 10, 2012 proxy vote. The Complaint makes no allegations that there was any defect in that vote. The proxy for the amendment expressly permitted such an increase in the number of AERG’s authorized shares “for any proper corporate purpose, including, without limitation, in connection with stock splits, stock dividends, sale of our Common Stock, employee stock incentive plan, other stock ownership plans, acquisitions and to engage in other types of capital raises or strategic transactions.”
The Complaint asserts that Farley breached his fiduciary duties of “loyalty, honesty and due care by issuing shares of stock to himself and the Company’s legal counsel at below fair market value, and failing to pursue corporate opportunities allegedly in the best interests of the Company and its stockholders.
The Company believes that the shareholder’s compliant is not meritorious and has filed a memorandum of law in support of a motion to dismiss the shareholder’s complaint in the Chancery Court of the State of Delaware.
We may also from time to time be involved in legal proceedings arising from the normal course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
Market price per share
Our common stock is currently quoted for trading on the Over the Counter Bulletin Boards and the OTC Pink, trading under the symbol “AERG”. The following table sets forth information as to the price range of our common stock for the period January 1, 2015 through December 31, 2016. No dividends on common stock were declared for these periods.
| Quarterly Periods | High | Low | ||||||
| 2015 | ||||||||
| First | 0.025 | 0.0033 | ||||||
| Second | 0.016 | 0.0043 | ||||||
| Third | 0.0069 | 0.002 | ||||||
| Fourth | 0.005 | 0.0017 | ||||||
| 2016 | ||||||||
| First | 0.013 | 0.002 | ||||||
| Second | 0.146 | 0.012 | ||||||
| Third | 0.100 | 0.048 | ||||||
| Fourth | 0.020 | 0.017 | ||||||
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Holders of Record
As of March 29, 2016, there were approximately 3,388 holders of record of Applied Energetics’ common stock.
Unregistered Sale of Securities and Use of Proceeds
In March 2017, the company issued 2,500,000 shares of common stock in exchange for $62,500 received from five individuals.
Dividends
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. We paid dividends via the issuance shares of Common Stock on our 6.5% Series A Convertible Preferred Stock in 2011. We paid cash dividends on our 6.5% Series A Convertible Preferred Stock in 2012 and February and May 2013. The company has not paid the dividends commencing with the quarterly dividend due August 1, 2013. Dividend arrearages as of December 31, 2016 and February 28, 2017 were approximately $119,000 and $128,000, respectively. 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.
Equity Compensation Plan Information
See Item 12.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following management discussion and analysis (“MD&A”) together with the risk factors set forth in Item 1A and with our audited Consolidated Financial Statements and Notes thereto included elsewhere herein.
Overview
The company is a “shell company” as such term is defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. As of October 3, 2015, the company suspended its previous business activities.
Prior to October 3, 2015, the company engaged in the design, development and manufacture of applied energy systems for military and commercial applications and Ultra Short Pulse lasers and high voltage lasers for commercial applications. Prior to October 3, 2015, the company engaged in the design, development and manufacture of applied energy systems for military and commercial applications and Ultra Short Pulse lasers and high voltage lasers for commercial applications.
The company is planning to reactivate its previous business activities pursuant to Teaming and Consulting Agreements with Applied Optical Sciences, Inc. (“AOS”) and Dr. Stephen W. McCahon, Ph.D. one of the company’s founders and owner of AOS who was primarily responsible for development of the Company’s existing Intellectual Property portfolio (collectively the “Consultants”). The company owns intellectual property that is integral and necessary for the development of Laser Guided Energy and Direct Discharge Electrical products for military and commercial uses (the “Products”) and the Consultants have the facilities and technical knowhow to utilize the company’s intellectual property in the development of the Products; and the Parties have agreed to cooperate in the proposal and fulfillment of research and development contracts for branches of the Department of Defense, agencies of the Federal Government and other Defense contractors and in other research and development activities relating to lasers. We intend to develop the next generation of Ultra-Short Pulse Lasers (“USP”). We are preparing for the next stage of LGE development that involves the development of Advanced USP Laser Technologies. These lasers will allow for LGE weapon systems to be mounted on mobile platforms for multiple Anti-Terrorist missions including Counter Measures Against Drones and other Hostile Inbound Objects, Counter-Improvised Explosive Devices (“C-IED”), Vehicle Stopping, and many others. Importantly, the highly advanced USP Laser technologies required for successful LGE deployment leads to many new and unique laser opportunities in both commercial, medical, and military markets.
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Our goal is to increase the range and power and to decrease the size weight and cost of ultra-short pulse lasers. We expect to develop very high energy and power scaling ultra-short pulse lasers that have a very broad range of applicability for Department of Defense, commercial and medical applications. We are in discussions with and expect to team with a major Defense Contractor for co-development and manufacture of military products. We will also team with a leading commercial laser technology manufacturer for co-development of commercial products resulting from our research and development efforts.
If the reactivation of our former business is successful we will no longer be a “shell company” but will be classified as a Small Reporting Company until our annual revenues from our reactivated business exceed $100 million and the value of our public share float exceeds $250 million.
Critical Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles 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 inputs and estimates 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 under the percentage of completion method of contract accounting, estimate to forecast loss on contracts under the completed contract method of accounting, the valuation of inventory, estimates of long-lived asset value, and estimate to forecast expected forfeiture rate on stock-based compensation and stock-based compensation expense.
Revenue Recognition
Revenue has been derived from ongoing contract work for systems development, effects testing and the design and development of demonstration systems and sub-systems for our Government and commercial customers. This work is expected to be generally performed under cost-plus contracts with Government customers.
Revenue under long-term Government contracts is generally recorded under the percentage of completion method. Revenue, billable monthly, under cost plus fixed fee contracts is recorded as costs are incurred and includes estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. Costs include direct labor, direct materials, subcontractor costs and overhead. General and administrative expenses allowable under the terms of the contracts are allocated per contract depending on its direct labor and material proportion to total direct labor and material of all contracts. As contracts can extend over one or more accounting periods, revisions in earnings estimated during the course of work are reflected during the accounting period in which the facts become known. When the current contract estimate indicates a loss, a provision is made for the total anticipated loss in the period in which the facts become known. Management evaluates many variables and makes various assumptions related to the estimation of total cost of completion of long-term contracts. Management reviews the progress and performance of all contracts monthly.
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The asset caption “accounts receivable” includes costs and estimated earnings in excess of billings on uncompleted contracts, which represents revenue recognized in excess of amounts billed. Such revenue is billable under the terms of the contracts at the end of the year, and is generally expected to be collected within one year. The liability “billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenue recognized.
Revenue for other products and services is recognized when such products and services are delivered or performed and, in connection with certain sales to certain customers, when the products and services are accepted, which is normally negotiated as part of the initial contract. Revenue from commercial, non-Governmental customers has historically been based on fixed price contracts where the sale is recognized upon acceptance of the product or performance of the service and when payment is probable. Contract costs are accumulated in the same manner as inventory costs and are charged to operations as the related revenue from contract is recognized. When the current contract estimate indicates a loss, a provision is made for the total anticipated loss in the period in which the facts become known.
Inventories
Inventories include material, direct labor and related manufacturing and administrative overhead and are stated at the lower-of-cost (determined on a weighted average basis) or market for raw materials and work-in-process inventory. When actual contract cost and the estimate to complete exceed the estimated contract revenues, a loss provision is recorded. Due to the nature of our inventory, we analyze inventory on an item-by-item basis compared to future usage and sales for obsolescence quarterly.
Share-Based Payments
Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period.
The fair value of each option grant is estimated at the date of grant using the Black-Scholes-Merton option valuation model. We make the following assumptions relative to this model: (i) the annual dividend yield is zero as we do not pay dividends on our common stock, (ii) the weighted-average expected life is based on a midpoint scenario, where the expected life is determined to be half of the time from grant to expiration, regardless of vesting, (iii) the risk free interest rate is based on the U.S. Treasury security rate for the expected life, and (iv) the volatility is based on the level of fluctuations in our historical share price for a period equal to the weighted-average expected life. We estimate forfeitures when recognizing compensation expense and adjust this estimate over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative adjustment, which is recognized in the period of change and which impacts the amount of unamortized compensation expense to be recognized in future periods.
Recoverability of Property and Equipment
We assess recoverability of property and equipment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
We assess the recoverability of property and equipment by determining whether the amortization of the balances over their remaining lives can be recovered through undiscounted future operating cash flows. The amount of impairment, if any, is measured based on projected discounted future operating cash flows. The assessment of the recoverability of long-lived assets will be impacted if estimated future operating cash flows are not achieved.
Income Taxes
Deferred tax assets and liabilities are recognized currently for the future tax consequences attributable to the temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized.
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Results of Operations
Our consolidated financial information for the years ending December 31, 2016, and 2015 is as follows:
| 2016 | 2015 | |||||||
| General and administrative | $ | (495,169 | ) | $ | (225,323 | ) | ||
| Other income: | ||||||||
| Gain on asset disposal | - | 1,000 | ||||||
| Other income | 2,542 | - | ||||||
| Interest income | 22 | 472 | ||||||
| Loss before provision for income taxes | (492,605 | ) | (223,851 | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net loss | $ | (492,605 | ) | $ | (223,851 | ) | ||
General and Administrative
General and administrative expenses increased approximately $270,000 to $495,000 for the year ended December 31, 2016 compared to $225,000 for the year ended December 31, 2015. Consulting and professional services increased by approximately $451,000, miscellaneous expense increased by $3,000 and travel related expenses increased by $3,000. Insurance & miscellaneous fees decreased by $39,000 and building related expenses decreased by approximately $17,000.
At December 31, 2016, there were no unrecognized compensation costs related to unvested restricted stock awards.
Other Income
Other income for the year ended December 31, 2016 increased from the year ended December 31, 2015 primarily due to an approximate $3,000 refund from the LGE product line. Net interest income for 2016 was lower by approximately $1,000 from 2015 primarily due to interest income on our bank deposits.
Net Loss
Our operations in 2016 resulted in a net loss of approximately $493,000, an increase of approximately $269,000 compared to the approximately $224,000 million net loss for 2015. Our net loss attributable to common stockholders per common share – basic and diluted remained level at approximately ($0.01) per share.
Trend Discussion
It is too early to determine if efforts to obtain new business under our Teaming and Consulting Agreement will be successful.
Liquidity and Capital Resources
At December 31, 2016, we had approximately $1,000 of cash and cash equivalents, a decrease of approximately $137,000 from December 31, 2015. In 2016, we used approximately $136,000 in operating activities. This amount is comprised primarily of our net loss of $493,000, partially offset by an increase in accrued expenses of $227,000, an increase in accounts payable of $67,000 and noncash stock based compensation expense of $63,000 resulting in net cash outflow of approximately $136,000.
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The company’s Board of Directors determined that as of October 3, 2014, the company suspended its current business activities. As a result, the company considers itself to be a “shell company” as such term is defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. The company is not expected to incur any material costs associated with the suspension of its activities. As of March 29, 2017, our backlog was $ -0-. We have ceased our operations and the board has suspended cash payments of director fees and all employees are to be employed part-time and paid on an hourly basis to preserve cash.
In their report accompanying our financial statements, our independent auditors stated that our financial statements for the year ended December 31, 2015 and 2016 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 from operations 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.
Backlog
At December 31, 2016 and 2015, we had a backlog (i.e., work load remaining on signed contracts) of approximately $-0- and $-0-, respectively, to be completed within the twelve months following those dates.
Contractual Obligations:
The following table summarizes our contractual obligations and other commercial commitments as of December 31, 2016:
| Payment by Period | ||||||||
| Total | Less than 1 Year | |||||||
| Operating leases | $ | 326 | $ | 326 | ||||
| Total | $ | 326 | $ | 326 | ||||
Not included in the above table are the dividends on our Series A Preferred Stock that are approximately $35,000 each year (approximately $9,000 each quarter), assuming no conversion of the outstanding shares of Series A Preferred Stock into shares of common stock.
Operating Leases
We have, in the past, operated in leased premises under operating leases. Total rent expense on premises amounted to approximately $4,000 and $12,000 for 2016 and 2015, respectively.
Preferred Stock
The Series A Preferred Stock has a liquidation preference of $25.00 per share. The Series A Preferred Stock bears dividends at an initial rate of 6.5% of the liquidation preference per share per annum, which accrues from the date of issuance, and is payable quarterly. We have not paid dividends commencing with the quarterly dividend due August 1, 2013 and, as a result, the dividend rate has increased to 10% per annum and will remain at that level until such failure no longer continues. Dividends in arrears as of February 28, 2016 were approximately $128,000.
The holders of the Series A Preferred Stock have a right to put the stock to the company for an aggregate amount equal to the liquidation preference (approximately $340,000) plus unpaid dividends of $125,000 in the event of a change in control. Dividends are payable 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 or (iii) any combination of the foregoing. As of December 31, 2016, there were 13,602 shares of Series A Preferred Stock outstanding.
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Recent Accounting Pronouncements
Refer to Note 2 of Notes to Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.
Off-Balance Sheet Arrangements
As of December 31, 2016, we had no significant off-balance sheet arrangements other than operating leases. For a description of our operating leases, see Note 7 to the Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, our financial position is subject to a variety of risks, such as the ability to collect our accounts receivable and the recoverability of the carrying values of our long-term assets. We do not presently enter into any transactions involving derivative financial instruments for risk management or other purposes.
Our available cash balances are deposited in bank demand deposit accounts. Substantially all of our cash flows are derived from our operations within the United States and today we are not subject to market risk associated with changes in foreign exchange rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements, the related notes and the Report of Independent Registered Public Accounting Firms thereon, are included in Applied Energetics’ 2016 Consolidated Financial Statements and are filed as a part of this report on page F-1 following the signatures.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its chief executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2016.
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Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our chief executive and principal financial officers and affected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
| · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company's assets; |
| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of the management and directors of the company; and |
| · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer (”PEO”)and Principal Financial Officer (“PFO”), has conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2016, based on the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). This assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on our assessment under the criteria described above, the PEO and PFO has concluded that our internal control over financial reporting was effective as of December 31, 2016.
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the SEC rules that permit smaller reporting companies to provide only management attestation in annual report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There has been no change in Applied Energetics’ internal control over financial reporting for the quarter ended December 31, 2016 that materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
Not Applicable
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
| The following is information with respect to our executive officers and directors: | ||||
| Name | Age | Principal Position | ||
| George P. Farley | 78 | Chief Executive Officer, Principal Financial Officer and Director | ||
George P. Farley: George P. Farley was designated as our chief executive officer and principal financial officer on March 2, 2016. Mr. Farley, a certified public accountant, has been a member of our Board of Directors since March 2004. Mr. Farley is Chairman of our Audit Committee and also serves as a member of our Compensation Committee. Since 1999, Mr. Farley has operated a consulting practice in which he assists and advises public and private companies in complex financial transactions, on complex accounting and reporting issues and at time providing Chief Financial Officer services. From 2005 until 2015 Mr. Farley was a principle financial advisor to magicJack VocalTec, Ltd and its founder. Through 2007, Mr. Farley served as a Director and a member of the Audit Committee of iCad, Inc. He has also served as a Director and member of the Audit Committee of Preserver Insurance Company, Inc. and Acorn Holdings Corp and as a Director for Olympia Leather Company, Inc. From November 1997 to August 1999, Mr. Farley was a Chief Financial Officer of Talk.com, Inc., which provides telecommunication services. Mr. Farley was also a director of Talk.com, Inc. Mr. Farley joined BDO USA, LLP in 1962 and was a partner at BDO USA, LLP from 1972 to 1995, where he specialized in complex financial transactions including over 100 Initial Public Offerings. He also served as the managing partner of BDO’s Philadelphia Office, National Director of Mergers and Acquisition and established BDO’s valuation practice.
Director Qualifications, Experience and Skills
Our director brings to our Board a wealth of executive leadership experience derived from his service as senior executive and, in many cases, founders of industry or knowledge specific consulting firms or operational businesses. They also offer extensive public company board experience. Our board members has demonstrated strong business acumen and an ability to exercise sound judgment and has a reputation for integrity, honesty and adherence to ethical standards. When considering whether directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the company’s business and structure, the Corporate Governance and Nominating Committee and the Board of Directors focused primarily on the information discussed in each of the Directors’ individual biographies set forth above and the specific individual qualifications, experience and skills as described below:
| · | Mr. Farley’s extensive knowledge of accounting, the capital markets, financial reporting and financial strategies from his extensive public accounting experience, and prior services as a chief financial officer of a public company and as audit committee member of several public companies. Mr. Farley specialized in “Transactional Accounting” managing the accounting and auditing function for numerous public financings, mergers, acquisitions, reorganizations and business dispositions. In 1993, Mr. Farley was part of the team that created a new financing vehicle, the Specified Purpose Acquisition Company “SPAC”. |
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires certain officers and directors of Applied Energetics, and any persons who own more than ten percent of the common stock outstanding to file forms reporting their initial beneficial ownership of shares and subsequent changes in that ownership with the SEC and the NASDAQ Stock Market. Officers and directors of Applied Energetics, and greater than ten percent beneficial owners are also required to furnish us with copies of all such Section 16(a) forms they file. None of our officers or directors failed to file any Section 16(a) forms, nor were any such persons late in making any such filings.
Code of Ethics
Applied Energetics has adopted a Code of Business Conduct and Ethics that applies to all of Applied Energetics’ employees and directors, including its chief executive officer, principal financial officer and principal accounting officer. Applied Energetics’ Code of Business Conduct and Ethics covers all areas of professional conduct including, but not limited to, conflicts of interest, disclosure obligations, insider trading, confidential information, as well as compliance with all laws, rules and regulations applicable to Applied Energetics’ business.
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Our Code of Ethics and Business Conduct is available at our website at www.appliedenergetics.net/default.aspx/investor-relations, or upon request made to us in writing at the following address, will be provided without charge:
Applied Energetics, Inc.
Attention: Compliance Officer
2410 West Ruthrauff road, Suite 140 Q,
Tucson, AZ 85705
Committees of the Board of Directors
Audit Committee
The Audit Committee of the Board of Directors is comprised of Mr. Farley. The Audit Committee makes recommendations concerning the engagement of independent public accountants, reviews the scope and results of the audit engagement with the independent public accountants, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of our internal accounting controls. Our Board of Directors has determined that Mr. Farley is an “audit committee financial expert” as defined under Item 407 of Regulation S-K of the SEC. Refer to Item 10 above for Mr. Farley's qualifications.
Compensation Committee
The Compensation Committee of the Board of Directors is comprised of Mr. Farley. The committee is responsible for establishing and maintaining executive compensation practices designed to encourage company profitability and enhance long-term shareholder value.
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee is comprised of Mr. Farley. The Committee is responsible for establishing and maintaining corporate governance practices designed to aid the long-term success of Applied Energetics and effectively enhance and protect shareholder value.
Strategic Planning Committee
The Strategic Planning Committee is comprised of Mr. Farley. The Committee is responsible for providing oversight to establish strategic direction for the company, develop with Company management and recommend to the Board a short and long-term strategic plan for the company, periodically review and update the plan, investigate and review merger, acquisition, joint venture and other business combination and strategic opportunities and to provide oversight for monitoring and executing strategies.
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ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table discloses, for the periods presented, the compensation for the person who served as our Chief Executive Officer and our Principal Financial Officer for the years ended December 31, 2016, and 2015 (the “Named Executive”). George P. Farley was designated as our Chief Executive Officer and Principal Financial Officer on March 2, 2016 and he did not receive any compensation for the year ended December 31, 2015.
SUMMARY COMPENSATION TABLE
| Name and Principal Position | Year | Salary (1) | Stock Awards (2) | Total | ||||||||||||
| George P Farley, | 2016 | $ | 150,000 | $ | 5,000 | $ | 155,000 | |||||||||
| Chief Executive Officer and Principal Financial Officer | 2015 | $ | - | $ | - | $ | - | |||||||||
| (1) | Mr. Farley earned $12,500 per month for 2016, of which $24,500 was paid. |
| (2) | In March 2016, Mr. Farley was issued 5,000,000 shares of common stock under the 2007 Equity Incentive Plan. |
Employment Agreements for Named Executive Officers
None
Director Compensation
Our director did not receive compensation for the year ended December 31, 2016.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION:
During the fiscal year ended December 31, 2016, none of our executive officers served on the Board of Directors or the Compensation Committee of any other company whose executive officers also serve on our Board of Directors or our Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS:
The following table sets forth information regarding the beneficial ownership of our Common Stock, based on information provided by the persons named below in publicly available filings, as of March 29, 2017:
| · | each of our directors and executive officers; |
| · | all directors and executive officers of ours as a group; and |
| · | each person who is known by us to beneficially own more than five percent of the outstanding shares of our Common Stock. |
Unless otherwise indicated, the address of each beneficial owner is care of Applied Energetics, 2480 W Ruthrauff Road, suite 140 Q, Tucson, Arizona 85705. Unless otherwise indicated, the company believes that all persons named in the following table have sole voting and investment power with respect to all shares of common stock that they beneficially own.
For purposes of this table, a person is deemed to be the beneficial owner of the securities if that person has the right to acquire such securities within 60 days of March 29, 2017 upon the exercise of options or warrants. In determining the percentage ownership of the persons in the table below, we assumed in each case that the person exercised all options which are currently held by that person and which are exercisable within such 60 day period, but that options and warrants held by all other persons were not exercised, and based the percentage ownership on 154,785,520 shares outstanding on March 29, 2017.
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| Name of Beneficial Owner | Number of Shares Beneficially Owned (1) | Percentage of Shares Beneficially Owned (1) | ||||||
| George P. Farley | 5,000,000 | (2) | 3.2 | % | ||||
| Stephen W. McCahon | 17,927,861 | (3) | 11.6 | % | ||||
| Superius Securities Group Inc. Profit Sharing Plan | 8,535,997 | (4) | 5.5 | % | ||||
| All directors and executive officers as a group (1 person) | 5,000,000 | 3.2 | % | |||||
| * Less than 1% | ||||||||
| (1) | Computed based upon the total number of shares of common stock, restricted shares of common stock and shares of common stock underlying options held by that person that are exercisable within 60 days of the Record Date. |
| (2) | Based on information contained in a report on Schedule 13D filed with the SEC on February 24, 2017. |
| (3) | Based on information contained in a report on Schedule 13D filed with the SEC on February 24, 2017. Based on information known by the company, Mr. McCahon’s address is C/O Applied Optical Sciences, 4595 Palo Verde Rd. Suite 517, Tucson, Arizona 85714. |
| (4) | Based on information contained in a report on Schedule 13G filed with the SEC on October 29, 2009. The address of Superius Securities Group Inc. Profit Sharing Plan is 94 Grand Ave., Englewood, NJ 07631. |
Securities Authorized for Issuance Under Equity Compensation Plans
The following table details information regarding our existing equity compensation plans as of December 31, 2016:
Equity Compensation Plan Information
| Plan category | Number of securities to be issued upon exercise of outstanding options | Weighted- average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |||||||||
| Equity compensation plans approved by security holders | - | $ | - | 343,067 | ||||||||
| Equity compensation plans not approved by security holders | - | $ | - | - | ||||||||
| Total | - | $ | - | 343,067 | ||||||||
The following is a description of currently open stock option and equity plans.
The 2007 Stock Incentive Plan (“2007 Plan”), which provides for the grant of any or all of the following types of awards: (1) stock options, which may be either incentive stock options or non-qualified stock options, (2) restricted stock, (3) deferred stock, (4) stock appreciation rights, and (5) other stock-based awards. A total of 10,000,000 shares of common stock have been reserved for distribution pursuant to the 2007 Plan provided, however, that the maximum number of shares available for award or grant during the first five years of the 2007 Plan shall be an aggregate of 5,000,000 shares; and provided further that the maximum number of shares available for award or grant during any consecutive twelve month period shall be 1,000,000 shares during the first two years of the 2007 Plan and 2,000,000 shares during the third through fifth years of the 2007 Plan. The five-year limitation period ended September 10, 2012. As of December 31, 2016, there were no options to purchase shares were outstanding under this plan, no restricted stock grants remain outstanding under the plan and approximately 1 million shares were available for grant from this plan.
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We have, from time to time, also granted non-plan options and other equity-based awards to certain officers, directors, employees and consultants. No inducement grants as defined were made during 2016, nor are any outstanding from previous years.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Parties
Except as disclosed herein, no director, executive officer, stockholder holding at least 5% of shares of our common stock, or any family member thereof, had any material interest, direct or indirect, in any transaction, or proposed transaction since the year ended December 31, 2016.
Review, Approval or Ratification of Transactions with Related Persons
Pursuant to our Code of Business Conduct, all officers and directors of the company who have, or whose immediate family members have, any direct or indirect financial or other participation in any business that supplies goods or services to Applied Energetics, are required to notify our Compliance Officer, who will review the proposed transaction and notify the Audit Committee of our Board of Directors for review and action as it sees fit, including, if necessary, approval by our Board of Directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES:
On February 25th, 2016, the company engaged RBSM LLP as its independent registered public accounting firm for the audit of our financial statements for the year ended December 31, 2016. The following is a summary of the fees billed to the company by its prior independent registered Public Accounting firm, RBSM LLP for professional services rendered for the years ended December 31, 2016 and December 31, 2015.
| 2016 | 2015 | |||||||
| Audit fees | $ | 8,500 | $ | - | ||||
| Audit related fees | - | - | ||||||
| All other fees | - | - | ||||||
| Tax fees | 3,250 | - | ||||||
| $ | 11,750 | $ | - | |||||
The following is a summary of the fees billed to the company by its prior independent registered public accounting firm, Liggett & Webb P.A. for professional services rendered for the years ended December 31, 2016 and December 31, 2015.
| 2016 | 2015 | |||||||
| Audit fees | $ | 2,500 | $ | 8,250 | ||||
| Audit related fees | - | - | ||||||
| All other fees | - | - | ||||||
| Tax fees | - | 4,000 | ||||||
| $ | 2,500 | $ | 12,250 | |||||
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Fees for audit services include fees associated with the annual audit of the company and its subsidiaries, the review of our quarterly reports on Form 10-Q. Tax fees include tax compliance, tax advice, research and development credits and tax planning related to federal and state tax matters.
Pre-Approval Policies and Procedures
Consistent with the SEC requirements regarding auditor independence, our Audit Committee has adopted a policy to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm. Under the policy, the Audit Committee must approve non-audit services prior to the commencement of the specified service. Our independent registered public accounting firm, RBSM LLP, have verified to our Audit Committee that they have not performed, and will not perform any prohibited non-audit service.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed or incorporated by reference as part of this report:
| (a) | (1) The Consolidated Financial Statements of Applied Energetics, Inc. are filed as part of this report on page F-1 following the signatures. |
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Exhibits:
| EXHIBIT NUMBER | DESCRIPTION |
| 2.1 | Amended and Restated Plan and Agreement of Merger entered into as of March 17, 2004, by and among U.S. Home & Garden, Inc. (“USHG”), Ionatron Acquisition Corp., a wholly-owned subsidiary of USHG, Robert Kassel (for purposes of Sections 5.9, 6.2(d), 6.2(j), 9.4 and 10.10 only), Fred Heiden (for purposes of Section 9.4 only), and Ionatron, Inc. and Robert Howard, Stephen W. McCahon, Thomas C. Dearmin and Joseph C. Hayden (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 8-K filed with the SEC on March 24, 2004). |
| 3.1 | Certificate of Incorporation, as amended, (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 10-KSB for the fiscal year ended June 30, 1995). |
| 3.2 | Certificate of Amendment of Certificate of Incorporation of the Registrant filed with the Secretary of State of the State of Delaware on April 29, 2004 (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 10-Q for the quarterly period ended March 31, 2004). |
| 3.3 | Certificate of Elimination of the 10% Series A Convertible Preferred Stock of the Registrant (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 8-K filed with the SEC on October 28, 2005). |
| 3.4 | Certificate of Designation of the 6.5% Series A Redeemable Convertible Preferred Stock of the Registrant (incorporated by reference to the comparable exhibit filed with the Registrant’s 8-K filed with the SEC on October 28, 2005). |
| 3.5 | Certificate of Ownership and Merger of Applied Energetics, Inc. into Ionatron, Inc. (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 8-K filed with the SEC on February 20, 2008). |
| 3.6 | Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3 of the Registrant’s Form 10-Q for the Quarter ended June 30, 2007. |
| 3.7 | Certificate of Amendment to Certificate of Incorporation filed with the Secretary of State of the State of Delaware on September 10, 2007. |
| 4.1 | Form of certificate evidencing Common Stock, $.001 par value, of the Registrant (incorporated by reference to Exhibit 4.1 of the Registrant's Registration Statement on Form S-1 (Registration No. 333-38483)). |
| 10.1 | 2007 Stock Incentive Plan (as amended) (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 10-K for the year ended December 31, 2007). |
| 10.2 | Applied Energetics, Inc. consulting agreement with SVJ Enterprises LLC effective April 1, 2013 (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 8-K filed with the SEC on April 17, 2013) |
| 21 | Subsidiaries (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 10-K for the year ended December 31, 2006) |
| 23.1 | Consent of RBSM LLP |
| 31.1 | Certification of Chief Executive Officer and Principal Financial Officer pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Chief Executive Officer and Principal Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.1 | Compensation Committee Charter (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 10-K for the year ended December 31, 2010) |
| 99.2 | Corporate Governance and Nominating Committee Charter (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 10-K for the year ended December 31, 2009) |
| 99.3 | Audit Committee Charter (incorporated by reference to the comparable exhibit filed with the Registrant’s Form 10-K for the year ended December 31, 2009 |
| 23 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 31st day of March 2017.
| APPLIED ENERGETICS, INC. | |||
| By | /s/ George P Farley | ||
| George P Farley | |||
| Director, Chief Executive Officer and Principal Financial Officer | |||
| 24 |
APPLIED ENERGETICS, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2016 and 2015
INDEX
| Page No. | ||
| Report of RBSM LLP Independent Registered Public Accounting Firm on Financial Statements | F - 2 | |
| CONSOLIDATED FINANCIAL STATEMENTS: | ||
| Consolidated Statements of Operations | F - 3 | |
| Consolidated Balance Sheets | F - 4 | |
| Consolidated Statements of Stockholders' Equity | F - 5 | |
| Consolidated Statements of Cash Flows | F - 6 | |
| Notes to the Consolidated Financial Statements | F - 7 |
| F-1 |
805 Third Avenue
14th Floor
New York, NY 10022
212.838-5100
212.838.2676/ Fax
www.rbsmllp.com
Report of the Independent Registered Public Accounting Firm
To the Board of Directors and shareholders
Applied Energetics, Inc.
We have audited the accompanying consolidated balance sheets of Applied Energetics, Inc. (the “Company”) as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ equity and cash flows for the two years in the period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2016 and 2015 and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles in the United States.
The accompanying consolidated financial statements have been prepared assuming that the Applied Energetics, Inc. will continue as a going concern. As more fully described in Note 1 to the consolidated financial statements, the Company has incurred recurring operating losses and will have to obtain additional capital to sustain operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
New York, NY
March 31, 2017
| F-2 |
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
| 2016 | 2015 | |||||||
| Revenue | $ | - | $ | - | ||||
| Cost of revenue | - | - | ||||||
| Gross profit | - | - | ||||||
| Operating expenses: | ||||||||
| General and administrative | 495,169 | 225,323 | ||||||
| Total operating expenses | 495,169 | 225,323 | ||||||
| Operating loss | (495,169 | ) | (225,323 | ) | ||||
| Other income | ||||||||
| Gain on asset disposal | - | 1,000 | ||||||
| Other income | 2,542 | - | ||||||
| Interest income | 22 | 472 | ||||||
| Total other income | 2,564 | 1,472 | ||||||
| Loss before provision for income taxes | (492,605 | ) | (223,851 | ) | ||||
| Provision for income taxes | - | - | ||||||
| Net loss | (492,605 | ) | (223,851 | ) | ||||
| Preferred stock dividends | (34,005 | ) | (34,005 | ) | ||||
| Net loss attributable to common stockholders | $ | (526,610 | ) | $ | (257,856 | ) | ||
| Net loss attributable to common stockholders per common share – basic and diluted | $ | (0.01 | ) | $ | (0.01 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 93,207,438 | 91,785,520 | ||||||
See accompanying notes to consolidated financial statements.
| F-3 |
CONSOLIDATED BALANCE SHEETS
| DECEMBER 31, | ||||||||
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 680 | $ | 136,840 | ||||
| Other assets | 312 | - | ||||||
| Total current assets | 992 | 136,840 | ||||||
| TOTAL ASSETS | $ | 992 | $ | 136,840 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 66,986 | $ | - | ||||
| Accrued expenses - current | 233,833 | 7,063 | ||||||
| Accrued dividends | 48,080 | 48,079 | ||||||
| Total current liabilities | 348,899 | 55,142 | ||||||
| Total liabilities | 348,899 | 55,142 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity | ||||||||
| Series A convertible preferred stock, $.001 par value, 2,000,000 shares authorized and 13,602 shares issued and outstanding at December 31, 2016 and at December 31, 2015 (Liquidation preference $340,050 and $340,050, respectively) | 14 | 14 | ||||||
| Common stock, $.001 par value, 500,000,000 shares authorized; 154,785,520 and 91,785,520 shares issued and outstanding at December 31, 2016 and at December 31, 2015, respectively | 154,785 | 91,785 | ||||||
| Additional paid-in capital | 79,179,432 | 79,179,432 | ||||||
| Accumulated deficit | (79,682,138 | ) | (79,189,533 | ) | ||||
| Total stockholders’ equity | (347,907 | ) | 81,698 | |||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 992 | $ | 136,840 | ||||
See accompanying notes to consolidated financial statements.
| F-4 |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance as of December 31, 2014 | 107,172 | $ | 107 | 91,785,520 | $ | 91,785 | $ | 79,236,839 | $ | (79,296,426 | ) | $ | 32,305 | |||||||||||||||
| Purchase of preferred stock | (93,570 | ) | (93 | ) | - | - | (57,407 | ) | 330,744 | 273,244 | ||||||||||||||||||
| Net loss for the year ended December 31, 2015 | - | - | - | - | - | (223,851 | ) | (223,851 | ) | |||||||||||||||||||
| Balance as of December 31, 2015 | 13,602 | $ | 14 | 91,785,520 | $ | 91,785 | $ | 79,179,432 | $ | (79,189,533 | ) | $ | 81,698 | |||||||||||||||
| Stock-based compensation expense | - | - | 63,000,000 | 63,000 | - | - | 63,000 | |||||||||||||||||||||
| Net loss for the year ended December 31, 2016 | - | - | - | - | - | (492,605 | ) | (492,605 | ) | |||||||||||||||||||
| Balance as of December 31, 2016 | 13,602 | $ | 14 | 154,785,520 | $ | 154,785 | $ | 79,179,432 | $ | (79,682,138 | ) | $ | (347,907 | ) | ||||||||||||||
See accompanying notes to consolidated financial statements.
| F-5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
| 2016 | 2015 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (492,605 | ) | $ | (223,851 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Gain on equipment disposal | - | (1,000 | ) | |||||
| Noncash stock based compensation expense | 63,000 | - | ||||||
| Changes in assets and liabilities: | ||||||||
| Prepaid expenses and other assets | (312 | ) | 59,305 | |||||
| Accounts payable | 66,987 | (4,967 | ) | |||||
| Accrued expenses | 226,770 | (379 | ) | |||||
| Net cash used in operating activities | (136,160 | ) | (170,892 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from disposal of equipment | - | 1,000 | ||||||
| Net cash provided by investing activities | - | 1,000 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Payment on purchase of preferred stock | - | (57,500 | ) | |||||
| Net cash used in financing activities | - | (57,500 | ) | |||||
| Net decrease in cash and cash equivalents | (136,160 | ) | (227,392 | ) | ||||
| Cash and cash equivalents, beginning of year | 136,840 | 364,232 | ||||||
| Cash and cash equivalents, end of year | $ | 680 | $ | 136,840 | ||||
| Supplemental Cash Flow Information | ||||||||
| Cancellation of preferred stock dividend | $ | - | $ | 330,744 | ||||
| Cash paid for interest and taxes | $ | - | $ | - | ||||
See accompanying notes to consolidated financial statements.
| F-6 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The 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"). All intercompany balances and transactions have been eliminated. Certain reclassifications have been made to prior period financial statement amounts to conform to the current presentation.
The accompanying 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 year ended December 31, 2016, the company incurred a net loss of approximately $493,000, had negative cash flows from operations of $136,000 and may incur additional future losses due to the reduction in Government contract activity. These matters raise substantial doubt as to the company’s ability to continue as a going concern.
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.
Nature of Business
Applied Energetics, Inc. is a corporation organized and existing under the laws of the State of Delaware. Our executive office is located at 2480 west Ruthrauff Road, Suite 140 Q, Tucson, Arizona, 85705 and our telephone number is (520) 628-7415.
The company is a “shell company” as such term is defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. As of October 3, 2014, the company suspended its previous business activities.
Prior to October 3, 2014, the company engaged in the design, development and manufacture of applied energy systems for military and commercial applications and Ultra Short Pulse lasers and high voltage lasers for commercial applications.
The Company is planning to reactivate its previous business activities pursuant to a Teaming and Consulting Agreement with Applied Optical Sciences, Inc. and Stephen W. McCahon, one of the Company’s founders. The company owns intellectual property that is integral and necessary for the development of Laser Guided Energy and Direct Discharge Electrical products for military and commercial uses (the “Products”) and the Consultants have the facilities and technical knowhow to utilize the company’s intellectual property in the development of the Products; and the Parties have agreed to cooperate in the proposal and fulfillment of research and development contracts for branches of the Department of Defense, agencies of the Federal Government and other Defense contractors.
If the reactivation of our former business is successful we will no longer be a “shell company” but will be classified as a Development Stage Company until we achieve significant revenues from our reactivated business.
Use of Estimates
The preparation of 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 under the percentage of completion method of contract accounting, the valuation of inventory, carrying amounts of long-lived assets, valuation assumptions for share-based payments and measurements of income tax assets and liabilities.
| F-7 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Revenue Recognition
A majority of revenue under long-term government contracts is recorded under the percentage of completion method. Revenue, billable monthly under cost plus fixed fee contracts, is recorded as costs are incurred and includes estimated earned fees in the proportion that costs incurred to date bear to total estimated costs. Costs include direct labor, direct materials, subcontractor costs and manufacturing and administrative overhead allowable under the contract. General and administrative expenses allowable under the terms of contracts are allocated per contract, depending on its direct labor and material proportion to total direct labor and material of all contracts. As contracts can extend over one or more accounting periods, revisions in earnings estimated during the course of work are reflected during the accounting period in which the facts become known. When the current contract estimate indicates a loss, a provision is made for the total anticipated loss in the current period. We do not generally provide an allowance for returns from our government customers because our customer agreements do not provide for a right of return.
The asset caption “accounts receivable” includes costs and estimated earnings in excess of billings on uncompleted contracts, which represents revenue recognized in excess of amounts billed. Such revenue is billable under the terms of contracts at the end of the year, but was not invoiced until the following year and is generally expected to be collected within one year.
Revenue for other products and services is recognized when such products and services are delivered or performed and, in connection with certain sales to Government agencies, when the products and services are accepted, which is normally negotiated as part of the initial contract. Revenue from commercial, non-Governmental, customers is based on fixed price contracts where the sale is recognized upon acceptance of the product or performance of the service and when payment is probable. Contract costs are deferred in the same manner as inventory costs and are charged to operations as the related revenue from contracts is recognized. When a current contract estimate indicates a loss, a provision is made for the total anticipated loss in the period in which such facts become evident.
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 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 38,256 and 67,422 for the years ended December 31, 2016 and 2015, respectively.
| F-8 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Current Assets and Liabilities
The carrying amount of accounts payable approximate fair value due to the short maturity of these instruments.
Cash and Cash Equivalents
Cash equivalents are investments in money market funds or securities with an initial maturity of three months or less. These money market funds are invested in government and US treasury based securities.
Income Taxes
Deferred tax assets and liabilities are recognized currently for the future tax consequences attributable to the temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not that such assets will not be realized. Our valuation allowance is currently 100% of our assets.
We consider all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed for some portion or all of a net deferred tax asset. Judgment is used in considering the relative impact of negative and positive evidence. In arriving at these judgments, the weight given to the potential effect of negative and positive evidence is commensurate with the extent to which it can be objectively verified. We record a valuation allowance to reduce our deferred tax assets and review the amount of such allowance annually. When we determine certain deferred tax assets are more likely than not to be utilized, we will reduce our valuation allowance accordingly.
Share-Based Payments
Employee stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. The fair value of each option grant is estimated at the date of grant using the Black-Scholes-Merton option valuation model. We make the following assumptions relative to this model: (i) the annual dividend yield is zero as we do not pay dividends on common stock, (ii) the weighted-average expected life is based on a midpoint scenario, where the expected life is determined to be half of the time from grant to expiration, regardless of vesting, (iii) the risk free interest rate is based on the U.S. Treasury security rate for the expected life, and (iv) the volatility is based on the level of fluctuations in our historical share price for a period equal to the weighted-average expected life. We estimate forfeitures when recognizing compensation expense and adjust this estimate over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative adjustment, which is recognized in the period of change and which impacts the amount of unamortized compensation expense to be recognized in future periods.
Significant Concentrations and Risks
We maintain cash balances at a commercial bank and, at times, balances exceed FDIC limits. Substantially all of our accounts receivable are with agents or departments of the US Federal Government which, although concentrated in one group of common entities, does not expose us to significant credit risk.
| F-9 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Research and Development Costs
Research and development costs include experimentation, design, and enhancement of proprietary technologies and products and are expensed as incurred.
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.
NOTE 3 – STOCKHOLDERS’ EQUITY
Authorized Capital Stock
Our 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. On April 10, 2012, our stockholders approved an amendment to our certificate of incorporation to increase our authorized common stock from 125,000,000 to 500,000,000 shares at such time as our Board of Directors determined that effecting such amendment will be in the best interests of our company and our stockholders.
A certificate of amendment to increase our authorize common stock from 125,000,000 to 500,000,000 shares was filed and accepted and recorded by the Secretary of State of the State of Delaware on March 3, 2016.
Preferred Stock
As of December 31, 2016 and 2015 there were 13,602 and 13,602 shares of Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) outstanding, respectively. The company has not paid the dividends commencing with the quarterly dividend due August 1, 2013. Dividend arrearages as of December 31, 2016 including previously accrued dividends included in our balance sheet are approximately $119,000. 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.
| F-10 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
In the fourth quarter of 2015, the company purchased 93,570 shares of its Series A Convertible Preferred Stock for approximately $58,000. The company cancelled the shares and returned them to unissued status. The company also reversed approximately $331,000 of accrued dividends payable.
Share-Based Payments
Applied Energetics adopted an Amended and Restated 2007 Stock Incentive Plan (“2007 Plan”) that provides for the grant of any or all of the following types of awards: (1) stock options, (2) restricted stock, (3) deferred stock, (4) stock appreciation rights, and (5) other stock-based awards, including restricted stock units, for periods up to 10 years. Stock options granted under the plans are generally for a fixed number of shares to employees and directors with an exercise price equal to the fair market value of the shares at the date of grant. Options granted to employees will generally vest over two to four years. Most options granted have a contractual life of 5 years from the grant date. Restricted stock granted under the plans to employees generally vest immediately and/or over a period of up to four years. Some restricted stock granted under the plans vest only upon meeting certain departmental or company-wide performance goals. Both restricted stock and options granted to non-employee directors generally vest immediately on the date of grant. We have, from time to time, also granted non-plan options to certain officers, directors and employees. Total stock-based compensation expense for grants to officers, employees and consultants was approximately $63,000 and $-0- for the years ended December 31, 2016 and 2015, respectively, which was charged to general and administrative expense. In March, 2016 the Company sold, in exchange for services, 35,000,000 shares of its common stock to Consultants and 20,000,000 common shares to the Chief Executive Officer for $0.001 per share.
| F-11 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2016 and 2015, there were outstanding options to purchase -0- and 32,000, respectively, of common stock. There were no unvested restricted stock units outstanding and there were no unvested restricted stock awards outstanding as of December 31, 2016 and December 31, 2015.
The following table sets forth information regarding awards under our 2007 Stock Incentive Plan:
| As of December 31, 2016 | ||||||||||||||||||||
| Share Grants Approved | Options Outstanding | Restricted Stock Awards Outstanding | Restricted Stock Units Outstanding | Shares Available for Award | ||||||||||||||||
| 2007 Stock Incentive Plan | 10,000,000 | - | - | - | 343,067 | |||||||||||||||
| Total | - | - | - | 343,067 | ||||||||||||||||
On September 10, 2007, the stockholders of Applied Energetics approved the adoption of the company’s 2007 Plan. A total of 10,000,000 shares of common stock have been reserved for distribution pursuant to the 2007 Plan. Grants from the 2007 Plan can be either service based, where the grant vests with the passage of time, or performance based, where the grant vests based on the attainment of a pre-defined company or departmental goal. We have the practice of issuing new stock to satisfy the exercise of stock options.
The fair value of restricted stock and restricted stock units was estimated using the closing price of our common stock on the date of award and fully recognized upon vesting.
No options were granted in 2016 or 2015.
There are 343,067 aggregate shares available for grant from the Stock Incentive Plans as of December 31, 2016.
| F-12 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the activity of our stock options for the years ended December 31, 2016, and 2015:
| Shares | Weighted Average Exercise Price | |||||||
| Outstanding at December 31, 2014 | 32,000 | $ | 0.51 | |||||
| Granted | - | $ | - | |||||
| Exercised | - | $ | - | |||||
| Forfeited or expired | - | $ | - | |||||
| Outstanding at December 31, 2015 | 32,000 | $ | 0.51 | |||||
| Granted | - | $ | - | |||||
| Exercised | - | $ | - | |||||
| Forfeited or expired | (32,000 | ) | $ | 0.51 | ||||
| Outstanding at December 31, 2016 | - | $ | - | |||||
| Exercisable at December 31, 2016 | - | $ | - | |||||
As of December 31, 2016 and December 31, 2015, the 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 options outstanding was $0, as the exercise price was greater than the market price. As of December 31, 2016 and 2015, the weighted average remaining contractual life of options outstanding and options exercisable was -0- and 0.45 years, respectively. At December 31, 2016, there was $0 of unrecognized compensation costs related to unvested stock options, net of estimated forfeitures.
There was no activity of our restricted stock units and restricted stock grants for the years ended December 31, 2016 and 2015:
As of December 31, 2016, there was no unrecognized stock-based compensation related to unvested restricted stock, net of estimated forfeitures.
Compensation expense recorded for shares and options delivered to non-employee consultants for the years ended December 31, 2016 and 2015 was approximately $0 and $0, respectively.
NOTE 4– SIGNIFICANT CUSTOMERS
The majority of our customers are either the Government or contractors to the Government and represent -0-% and -0-% of our revenue for 2016 and 2015, respectively.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
In May 2016, we moved and entered into a month-to-month lease agreement to lease office space in Tucson, Arizona.
Rent expense was approximately $4,000 and $12,000 for 2016 and 2015, respectively.
At December 31, 2016, we had approximately $325 in future minimum lease payments due in less than a year.
| F-13 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2016 and 2015.
Litigation
Three of the Company’s shareholders commenced an action entitled Superius Securities Group, Inc.et. al. vs George Farley, et.al. (CA No. 2017-0024-VCMR) in the Court of Chancery of the state of Delaware (the “Action”), The complaint asserts that in March 2016, George Farley (‘Farley”), Chairman of the Board of Directors, Farley, as sole director of Applied Energetics, Inc. (“AERG” or the “Company”), acted without proper shareholder approval to amend AERG’s certificate of incorporation to increase the number of its authorized shares of stock from 125 million to 500 million. However, the Complaint acknowledges that the amendment was approved by a majority of AERG’s shareholders in an April 10, 2012 proxy vote. The Complaint makes no allegations that there was any defect in that vote. The proxy for the amendment expressly permitted such an increase in the number of AERG’s authorized shares “for any proper corporate purpose, including, without limitation, in connection with stock splits, stock dividends, sale of our Common Stock, employee stock incentive plan, other stock ownership plans, acquisitions and to engage in other types of capital raises or strategic transactions.”
The Complaint asserts that Farley breached his fiduciary duties of “loyalty, honesty and due care by issuing shares of stock to himself and the Company’s legal counsel at below fair market value, and failing to pursue corporate opportunities allegedly in the best interests of the Company and its stockholders.
The Company believes that the shareholder’s compliant is not meritorious and has filed a memorandum of law in support of a motion to dismiss the shareholder’s complaint in the Chancery Court of the State of Delaware.
We may from time to time be involved in legal proceedings arising from the normal course of business.
NOTE 6 – INCOME TAXES
The reconciliation of the difference between income taxes at the statutory rate and the income tax provision for the years ended:
| December 31 , | ||||||||
| 2016 | 2015 | |||||||
| Computed tax at statutory rate | $ | (181,894 | ) | $ | (76,270 | ) | ||
| State taxes | (27,093 | ) | (13,459 | ) | ||||
| Change in valuation allowance | 208,988 | 89,729 | ||||||
| Other | - | - | ||||||
| Provision (benefit) for taxes | $ | - | $ | - | ||||
| F-14 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets (liabilities) consist of the following:
| December 31 , | ||||||||
| 2016 | 2015 | |||||||
| Deferred Tax Assets: | ||||||||
| Accruals and reserves | $ | - | $ | - | ||||
| Depreciation and amortization | - | - | ||||||
| Federal tax credit carryforwards | 239,098 | 239,098 | ||||||
| State tax credit carryforwards | 340,399 | 340,399 | ||||||
| Net operating loss | 21,033,083 | 20,753,940 | ||||||
| Goodwill amortization | - | - | ||||||
| ASC 718 stock compensation | - | - | ||||||
| Valuation allowance | (21,612,580 | ) | (21,333,437 | ) | ||||
| Total deferred tax assets | $ | - | $ | - | ||||
We believe that sufficient uncertainty exists regarding the future realization of our deferred tax assets and thus a full valuation allowance is required. The valuation allowance for the year ended December 31, 2015 and 2016 decreased by $879,000 in 2015 and increased by $279,000 in 2016 due to changes in deferred tax assets.
As of December 31, 2016, we have cumulative federal and Arizona net operating loss carryforwards of approximately $59.2 million and $5.8 million, respectively, which can be used to offset future income subject to taxes. Federal net operating loss carryforwards begin to expire in 2020. Arizona net operating loss carryforwards begin to expire in 2032. In addition there are federal net operating loss carryforwards is approximately $27.1 million from USHG related to pre-merger losses. We also have pre-merger federal capital loss carryforwards of approximately $520,000.
As of December 31, 2016, we had cumulative unused research and development tax credits of approximately $239,000 and $340,000, which can be used to reduce future federal and Arizona income taxes, respectively. As of December 31, 2016, we have cumulative unused federal minimum tax credit carryforwards from USHG of approximately $244,000. The federal minimum tax credit carryforwards are not subject to expiration under current federal tax law.
Utilization of our USHG pre-merger net operating loss carryforwards and tax credits is subject to substantial annual limitations due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss carryforwards and tax credit carryforwards before utilization.
We have unrecognized tax benefits attributable to losses and minimum tax credit carryforwards that were incurred by USHG prior to the merger in March 2004 as follows:
| Balance at December 31, 2014 | $ | 9,635,824 | ||
| Additions related to prior year tax positions | - | |||
| Additions related to current year tax positions | - | |||
| Reductions related to prior year tax positions and settlements | ||||
| Balance at December 31, 2015 | $ | 9,635,824 | ||
| Additions related to prior year tax positions | - | |||
| Additions related to current year tax positions | - | |||
| Reductions related to prior year tax positions and settlements | - | |||
| Balance at December 31, 2016 | $ | 9,635,824 |
These benefits are not recognized as a result of uncertainty regarding the utilization of the loss carryforwards and minimum tax credits. If in the future we utilize the attributes and resolve the uncertainty in our favor, the full amount will favorably impact our effective income tax rate.
| F-15 |
APPLIED ENERGETICS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The company considers the U.S. and Arizona to be major tax jurisdictions. As of December 31, 2016, for federal tax purposes the tax years 2013, 2014 and 2015 and for Arizona the tax years 2013 through 2016 remain open to examination. The company currently does not expect any material changes to unrecognized tax positions within the next twelve months.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2016 and 2015, we had no accrued interest or penalties related to our unrecognized tax benefits.
NOTE 7 – SUBSEQUENT EVENT
The company’s management has evaluated subsequent events occurring after December 31, 2016, the date of our most recent balance sheet, through the date our financial statements were issued.
In March 2017, the company issued 2,500,000 shares of common stock in exchange for $62,500 received from five individuals.
In March 2017. The company granted each member of the Scientific Advisory Board options to purchase 2 million shares of $.001 par value common stock at a price of $0.05 per share. These options have a five year term and vest to the extent of 500,000 shares on the first anniversary of the grant and to the extent of 62,500 options per month during the 24 months following the initial vesting date.
The company also granted each member of the Scientific Advisory Board performance options to purchase 1.5 million shares of $0.001 par value common stock at a price of $0.25 per share. These options have a five year term and vest on the date the company has cumulative revenues of $5 million.
| F-16 |