APPLIED ENERGETICS, INC.

NOTE 1 – ORGANIZATION OF BUSINESS, GOING CONCERN AND SUMMARY OF SIGNFICANT 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.

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

For the year ended December 31, 2024, the company incurred a net loss of $9,174,958, had negative cash flows from operations of $5,092,690 and may incur additional future losses if the company is unable to secure significant government contracts. At December 31, 2024, the company had total current assets of $664,779 and total current liabilities of $732,418 resulting in a working capital deficit of $67,639. At December 31, 2024, the company had cash of $164,812.

Based on the company’s current business plan, it believes its cash balance as of the date of this filing, together with anticipated revenues from a government contracts, will be sufficient to meet its anticipated cash requirements for the near term. However, the current business plan may prove unachievable. Such conditions raise substantial doubts about the company’s ability to continue as a going concern for one year from the date the financial statements are issued.

The company’s existence depends upon management’s ability to develop profitable operations. Management is devoting substantially all of its efforts to developing its business and raising capital which may not result in profitable operations or enable it to overcome future liquidity concerns. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of assets, the amount or classification of liabilities or otherwise that might be necessary should the company be unable to continue as a going concern.

Trade conditions, such as exacerbated supplier shutdowns and delays, contribute to this uncertainty. Additionally, Russia’s military action in Ukraine, war in the Middle East, and related economic sanctions and attacks on the flow of goods and commodities around the globe could impact the company’s ability to source necessary supplies and equipment which could materially and adversely affect its ability to continue as a going concern. In addition, the company’s ability to continue as a going concern may depend on its ability to raise capital which may be impacted by these events, including as a result of increased market volatility, or decreased market liquidity. This may result in third-party financing being unavailable on terms acceptable to the company or at all. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

To further improve its liquidity position, the company’s management continues to explore additional equity financing through discussions with investment bankers and private investors. The company may be unsuccessful in its effort to secure additional equity financing.

Applied Energetics, Inc. is a corporation organized and existing under the laws of the State of Delaware. Our headquarters are located at 9070 S. Rita Road Suite 1500, Tucson, Arizona, 85747, including office and laboratory space, and our telephone number is (520) 628-7415.

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 matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. Significant estimates include revenue recognition, carrying amounts of long-lived assets, valuation assumptions for share-based payments, evaluation of debt modification accounting, effective borrowing rate determinations, analysis of fair value transferred upon debt extinguishment, legal claims and contingencies, valuation and calculation of measurements of income tax assets and liabilities.

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 shares underlying warrants, options, restricted stock units and our Series A Convertible Preferred Stock, which were not included in the computation of earnings per share because the effect was antidilutive, was 31,945,645 and 31,484,477 for the years ended December 31, 2024 and 2023, respectively.

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. We maintain our cash balances at a commercial bank, and, at times, balances exceed FDIC limits. As of December 31, 2024, $0 of our cash balance was uninsured.

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.

Revenue Recognition

The company recognizes revenue in accordance with ASC Topic 606 – Revenue from Contracts with Customers (“ASC 606”) to depict the transfer of control to the company’s customers in an amount reflecting the consideration to which the company expects to be entitled. The company determines revenue recognition through the following steps:

The company generates revenue from its customers by performing research and analysis services, and submits technical reports to its customers on a periodic basis summarizing the results of its findings. The company’s single performance obligation is to perform research services and provide feedback. The fee for these services was fixed.

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.

Segment Information

The Company operates asone operating segment with a focus on the development and manufacture of advanced high-performance lasers and optical systems, and integrated guided energy systems, for prospective defense, national security, industrial, biomedical, and scientific customers worldwide. The Company’s Chief Executive Officer, as its chief operating decision maker (“CODM”), manages and allocates resources to the operations of the Company on a consolidated basis. The CODM assesses performance and allocates resources based on the Company’s consolidated statements of operations and key components and processes of the Company’s operations are managed centrally. Segment asset information is not used by the CODM to allocate resources. This enables our Chief Executive Officer to assess our overall level of available resources and determine how best to deploy these resources across projects to monitor and evaluate overall company performance, allocating resources, and establishing management compensation in line with our long-term company-wide strategic goals** **

Significant Concentrations and Risks

We maintain cash balances at a commercial bank, and, at times, balances exceed FDIC limits. As of December 31, 2024, $0 of our cash balance was uninsured.

NOTE 2 – NEW ACCOUNTING STANDARDS

In November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2024-03 Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) Disaggregation of Income Statement Expenses. The guidance in ASU 2024-03 requires public business entities to disclose in the notes to the financial statements, among other things, specific information about certain costs and expenses including purchases of inventory; employee compensation; and depreciation, amortization and depletion expenses for each caption on the income statement where such expenses are included. ASU 2024-03 is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted, and the amendments may be applied prospectively to reporting periods after the effective date or retrospectively to all periods presented in the financial statements. The Company is currently evaluating the provisions of this guidance and assessing the potential impact on the Company’s financial statement disclosures.

In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This guidance is intended to enhance the transparency and decision-usefulness of income tax disclosures. The amendments in ASU 2023-09 address investor requests for enhanced income tax information primarily through changes to disclosure regarding rate reconciliation and income taxes paid both in the U.S. and in foreign jurisdictions. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 on a prospective basis, with the option to apply the standard retrospectively. Early adoption is permitted. The company is currently evaluating this guidance to determine the impact it may have on its consolidated financial statements disclosures.

In November 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2023-07 - Segment Reporting (ASC 280): Improvements to Reportable Segment Disclosures, which enables investors to better understand an entity's overall performance and assess potential future cash flows through improved reportable segment disclosure requirements. The amendments enhance disclosures about significant segment expenses, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. ASU 2023-07 is effective for annual periods beginning after December 15, 2023. The Company adopted ASU No. 2023-07 on December 31, 2024. The adoption of the standard did not result in any significant disclosure changes in the Notes to the Consolidated Financial Statements.

No other new accounting pronouncements recently adopted or issued had or are expected to have a material impact on the consolidated financial statements.

NOTES 3 – NOTES PAYABLE

Premium Financing

On March 16, 2023, the company entered into an agreement with Oakwood D&O Insurance to provide financing in the amount of $155,541 for the insurance premium associated with two D&O policies. Both policies commenced March 12, 2023, and provided coverage for the next 12 months, expiring March 12, 2024. The loan bears interest at a fixed rate of 8.75% per annum, required the company to prepay $40,410 and appears on the balance sheet as a current asset. On April 12, 2023, the company commenced monthly principal and interest payments of $17,282, which was the first payment of nine remaining months due of $155,541. In accordance with the terms of the agreement, the final payment was made on December 6, 2023, thus, as of December 31, 2023, the outstanding balance on the note was $0.

On March 12, 2024, the company entered into an agreement with Oakwood D&O Insurance to provide financing in the original principal amount of $189,302 for the insurance premium associated with two D&O policies. Both policies commenced March 12, 2024, and provided coverage for the next 15 months, expiring June 11, 2025. The loan bears interest at a fixed rate of 9.50% per annum, requires the company to prepay $41,057 and appears on the balance sheet as a current asset. On April 12, 2024, the company made the first of twelve-monthly principal and interest payments of $15,775 on the loan, the aggregate amount of principal and interest on which is $199,184. The last payment is scheduled to be made on March 12, 2025. As of December 31, 2024, the outstanding principal and interest balance on the note was $47,325 and was recorded as notes payable, a current liability, on the company’s consolidated balance sheet.

The following reconciles notes payable as of December 31, 2024 and December 31, 2023:

NOTE 4 – DUE TO RELATED PARTIES

On July 31, 2018, the company’s now deceased CEO deposited $50,000 into the company’s account. Although it has been suggested that the funds may have been intended for use toward this CEO’s healthcare, the company does not know for certain what the purpose of the funds were or the nature of any intended investment. Accordingly, the company is investigating the appropriate disposition of the funds which will likely be to the estate of the former CEO. Until such a determination is made, the company does not intend to use these funds for any corporate purpose. For reporting purposes, the company has treated the deposit as a due to related party.

NOTE 5 – STOCKHOLDERS’ DEFICIT

Authorized Capital Stock

The company’s authorized capital stock consists of 500,000,000 shares of common stock at a par value of $.001 per share and 2,000,000 shares of preferred stock at a par value of $.001 per share.

During the year ended December 31, 2023, the company issued the remaining 9,584 shares of common stock with a grant date fair value of $21,085, pursuant to a restricted stock agreement dated May 2021.

During the year ended December 31, 2023, the company issued 100,000 shares of common stock upon the exercise of 100,000 options at an exercise price of $0.07 a share. As a result, the company received $7,000 in cash proceeds as part of the transaction.

During the year ended December 31, 2023, the company issued 75,000 shares of common stock upon the exercise of 75,000 options at an exercise price of $0.13 a share. As a result, the company received $9,750 in cash proceeds as part of the transaction.

During the year ended December 31, 2023, the company issued 10,000 shares of common stock upon the exercise of 10,000 options at an exercise price of $0.13 a share. As a result, the company received $1,300 in cash proceeds as part of the transaction.

During the year ended December 31, 2023, the company issued 10,000 shares of common stock upon the exercise of 10,000 options at an exercise price of $0.07 a share. As a result, the company received $700 in cash proceeds as part of the transaction.

During the year ended December 31, 2023, the company issued 30,000 shares of common stock upon the exercise of 30,000 options at an exercise price of $0.35 a share. As a result, the company received $10,500 in cash proceeds as part of the transaction.

During the year ended December 31, 2023, the company issued 30,000 shares of common stock upon the exercise of 30,000 options at an exercise price of $0.07 a share. As a result, the company received $2,100 in cash proceeds as part of the transaction.

During the year ended December 31, 2023, the company issued 27,934 shares of common stock upon the exercise of 27,934 options at an exercise price of $0.13 a share. As a result, the company received $3,631 in cash proceeds as part of the transaction.

During the year ended December 31, 2023, the company issued 2,066 shares of common stock upon the exercise of 2,066 options at an exercise price of $0.40 a share. As a result, the company received $826 in cash proceeds as part of the transaction.

During the year ended December 31, 2023, the restricted stock units covering 150,000 shares of the company’s common stock vested. The company issued 150,000 and withheld 56,567 shares of common stock from the holders pursuant to their restricted stock unit agreements to cover its tax withholding obligation of $136,671

During the year ended December 31, 2024, the company completed the placement of 1,896,182 shares of its common stock, par value, $0.001 per share, in a private sale to individual purchasers at a price of $2.20 per share, for aggregate proceeds in the amount of $4,171,601

During the year ended December 31, 2024, the company issued 180,000 shares of common stock upon the exercise of options at an exercise price of $0.07 a share, for proceeds in the amount of $12,600.

During the year ended December 31, 2024, the company issued 60,000 shares of common stock upon the exercise of options at an exercise price of $0.35 a share, for proceeds in the amount of $21,000.

During the year ended December 31, 2024, the company issued 100,000 shares of common stock upon the exercise of options at an exercise price of $0.40 a share, for proceeds in the amount of $40,000.

During the year ended December 31, 2024, the company issued 265,000 shares of common stock upon exercise of warrants at an exercise price of $0.06 per share for proceeds in the amount of $15,899.

During the year ended December 31, 2024, restricted stock units covering 186,666 shares of the company’s common stock vested. The company issued 186,666 and withheld 64,028 shares of common stock from the holders pursuant to their restricted stock unit agreements to cover its tax withholding obligation of $82,300.

During the year ended December 31, 2024 and 2023, the company recognized stock-based compensation in the amount of $3,768,819 and $3,493,397, respectively.

Preferred Stock

As of December 31, 2024 and 2023, there were 13,602 shares of Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) issued and outstanding, respectively. The company has not paid the dividends commencing with the quarterly dividend due August 1, 2013. Dividend arrearages as of December 31, 2024, including previously accrued dividends included in our balance sheet are approximately $391,057. Our Board of Directors suspended the declaration of the dividend, commencing with the dividend payable as of February 1, 2015, since we did not have a surplus (as such term is defined in the Delaware general corporation Law) as of December 31, 2014, until such time as we have a surplus or net profits for a fiscal year.

Our Series A Preferred Stock has a liquidation preference of $25.00 per share. The Series A Preferred Stock bears dividends at the rate of 6.5% of the liquidation preference per share per annum, which accrues from the date of issuance, and is payable quarterly. Dividends may be paid in: (i) cash, (ii) shares of our common stock (valued for such purpose at 95% of the weighted average of the last sales prices of our common stock for each of the trading days in the ten trading day period ending on the third trading day prior to the applicable dividend payment date), provided that the issuance and/or resale of all such shares of our common stock are then covered by an effective registration statement and the company’s common stock is listed on a U.S. national securities exchange or the Nasdaq Stock Market at the time of issuance or (iii) any combination of the foregoing. If the company fails to make a dividend payment within five business days following a dividend payment date, the dividend rate shall immediately and automatically increase by 1% from 6.5% of the liquidation preference per offered share of Series A preferred stock to 7.5% of such liquidation preference. If a payment default shall occur on two consecutive dividend payment dates, the dividend rate shall immediately and automatically increase to 10% of the liquidation preference for as long as such payment default continues and shall immediately and automatically return to the initial dividend rate at such time as the payment default is no longer continuing.

Each share of Series A Preferred Stock is convertible at any time at the option of the holder into a number of shares of common stock equal to the liquidation preference (plus any unpaid dividends for periods prior to the dividend payment date immediately preceding the date of conversion by the holder) divided by the conversion price (initially $12.00 per share, subject to adjustment in the event of a stock dividend or split, reorganization, recapitalization or similar event). If the closing sale price of the common stock is greater than 140% of the conversion price on 20 out of 30 trading days, the company may redeem the Series A Preferred Stock in whole or in part at any time through October 31, 2010, upon at least 30 days’ notice, at a redemption price, payable in cash, equal to 100% of the liquidation preference of the shares to be redeemed, plus unpaid dividends thereon to, but excluding, the redemption date, subject to certain conditions. In addition, beginning November 1, 2010, the company may redeem the Series A Preferred Stock in whole or in part, upon at least 30 days’ notice, at a redemption price, payable in cash, equal to 100% of the liquidation preference of the Series A Preferred Stock to be redeemed, plus unpaid dividends thereon to, but excluding, the redemption date, under certain conditions.

If a change of control occurs, each holder of shares of Series A Convertible Preferred Stock that are outstanding immediately prior to the change of control shall have the right to require the corporation to purchase, out of legally available funds, any outstanding shares of Series A Convertible Preferred Stock at the defined purchase price. The purchase price is defined as: per share of Preferred Stock,101% of the liquidation preference thereof, plus all unpaid and accumulated dividends, if any, to the date of purchase thereof. The purchase price is payable, at the corporation’s option, (x) in cash, (y) in shares of the common stock at a discount of 5% from the fair market value of Common Stock on the Purchase Date (i.e. valued at a 95% discount of the Common Stock on the Purchase Date), or (z) any combination thereof.

If the Corporation pays all or a portion of the Purchase Price in Common Stock, no fractional shares of Common Stock will be issued; instead, the company will round the applicable number of shares of Common Stock up to the nearest whole number of shares; provided that the Corporation may pay the Purchase Price (or a portion thereof), whether in cash or in shares of Common Stock, only if the Corporation has funds legally available for such payment and may pay the Purchase Price (or a portion thereof) in shares of its Common Stock only if (i) the Common Stock is listed on a U.S. national securities exchange or the Nasdaq Stock Market at the time of issuance and (ii) a shelf registration statement covering the issuance by the Corporation and/or resales of the Common Stock issuable as payment of the Purchase Price is effective on the Payment Date unless such shares are eligible for immediate resale in the public market by non-affiliates of the Corporation.

Stock Option and Stock Issuance Plan

Effective November 12, 2018, the Board of Directors of Applied Energetics, Inc. adopted the 2018 Incentive Stock Plan. The plan provides for the allocation and issuance of options (both incentive stock options and non-qualified stock options) to officers, directors, employees and consultants of the company. The board reserved a total of 50,000,000 shares for possible issuance under the plan.

We have, from time to time, also granted non-plan shares, restricted stock units and options to certain officers, directors, employees and consultants. Total stock-based compensation expense for grants to officers, employees and consultants was $3,768,819 and $3,493,397 for the years ended December 31, 2024, and 2023, respectively, which was charged to general and administrative expense.

During the year ended December 31, 2023, the company issued incentive stock options to purchase up to 312,500 shares of common stock, at an exercise price of $2.05, to one employee.

During the year ended December 31, 2023, the company issued incentive stock options to purchase up to 50,000 shares of common stock, at an exercise price of $2.20, to two employees.

During the year ended December 31, 2023, the company issued incentive stock options to purchase up to 100,000 shares of common stock, at an exercise price of $2.25, to one new employee.

During the year ended December 31, 2023, the company issued a non-qualified stock option to purchase up to 100,000 shares of common stock, at an exercise price of $2.51, to one consultant. In addition, the company issued incentive stock options to purchase up to 100,000 shares of common stock, at an exercise price of $2.35, to one new employee.

During the year ended December 31, 2023, the company issued incentive stock options to purchase up to 150,000 shares of common stock, at an exercise price of $2.41, to one employee.

During the year ended December 31, 2023, the company issued incentive stock options to purchase up to 2,800,000 shares of common stock, at an exercise price of $2.35, to eleven employees.

During the year ended December 31, 2024, the company issued non-qualified stock options to purchase up to 250,000 shares of common stock, at an exercise price of $1.99, to one director. These options vest over a period ofthree years in the amount of 100,000 shares on the first anniversary of their issuance and 75,000 shares on each of the second and third anniversaries.

During the year ended December 31, 2024, the company issued incentive stock options to purchase up to 1,000,000 shares of common stock, at an exercise price of $0.78, to one employee.

During the year ended December 31, 2024, the Company modified certain outstanding stock option awards previously granted to employees and no executive team options were repriced. The modification involved the cancellation of 2,800,000 stock options with an exercise price of $2.35 as of the modification date, and the issuance of replacement options for the same number of shares at an exercise price of $0.81. The modification resulted in incremental stock-based compensation expense of $42,000 of which $2,154 was recognized during the year ended December 31, 2024 and the remainder will be recognized over the remaining vesting period of the new awards.

See Note 5 – Stockholders’ Equity – Authorized Capital Stock for details related to the exercise of an aggregate of 340,000 options and 265,000 warrants during the year ended December 31, 2024.

The $3,768,819 stock-based compensation for the year ended December 31, 2024.

The company recognized no related income tax benefit because our deferred tax assets are fully offset by a valuation allowance.

Stock Options

We determine the fair value of option grant share-based awards at their grant date, using a Black-Scholes- Merton Option Pricing Model.

As of December 31, 2024, the company has $8,154,901 of unrecognized compensation cost related to unvested stock options granted and outstanding, net of estimated forfeitures. The cost is expected to be recognized on a weighted average basis over a period of approximately six years.

The following table summarizes the activity of our stock options for the years ended December 31, 2024 and 2023:

The Company determines the fair value of option grant share-based awards at their grant date, using a Black-Scholes- Merton Option Pricing Model applying the assumptions in the following table:

Restricted Stock

During the year ended December 31, 2023, the company issued restricted stock units covering an aggregate of 1,075,909 shares for services rendered pursuant to an amendment to a master services agreement with a consultant and employee agreements.

As of December 31, 2024, the company has $3,323,467 unrecognized compensation cost related to unvested restricted stock units granted and outstanding.

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. Restricted stock activity for the years ended December 31, 2024 and 2023, was as follows:

Warrants

The following table summarizes the activity of our warrants for the years ended December 31, 2024 and 2023:

NOTE 6 – REVENUE RECOGNITION

The company derives revenue from technical research detailing the findings of its investigations to its customers under contract for specific projects. Under Topic 606, revenue is recognized when control of promised goods and services is transferred to customers, and the amount of revenue recognized reflects the consideration to which an entity expects to be entitled in exchange for the goods and services transferred. A performance obligation is a contractual promise to transfer a distinct good or service to the customer and is the unit of account under Topic 606. The transaction price of a contract is allocated to distinct performance obligations and recognized as revenue when or as the performance obligations are satisfied. The company’s contracts require significant integrated services and are accounted for as a single performance obligation, and revenue is recognized by the company over the contract term at a fixed contract price.

During the year ended December 31, 2024, the company modified its contract with a customer for changes in the contract specifications and requirements. The modification was for services that are not distinct from the existing contract due to the significant integration of services performed. The modification was accounted for as if it was part of the existing contract and a cumulative catch-up adjustment was recorded for the year ended December 31, 2024.

Contract modifications are routine in the performance of our contracts. Contracts are often modified to account for changes in the contract specifications or requirements. In most instances, contract modifications are for goods or services that are not distinct, and, therefore, are accounted for as part of the existing contract.

The following table summarizes the company’s accounts receivable, net,

Concentrations

During the year ended December 31, 2024, three customers accounted for a total of $2,414,055 or 99% of revenue recognized. As of December 31, 2024, the company has $335,839 of accounts receivable recorded as current assets on the balance sheet. As of December 31, 2024, one customer accounted for $237,647 or 71% of accounts receivable.

During the year ended December 31, 2023, the company earned revenue from three contracts with two separate customers. One customer accounted for $1,946,715 or 74% of revenue recognized during the period. As of December 31, 2023, the company has $567,792 of accounts receivable recorded as current assets on the balance sheet. As of December 31, 2023, one customer accounted for $567,792 or 100% of accounts receivable.

NOTE 7 – COMMITEMENTS AND CONTINGENCIES

Operating Leases

In March 2021, the company signed a five-year lease for a 13,000 square foot laboratory/office space in Tucson. The initial base rent was $6.7626 per rentable square foot for year one and escalated to $9.2009 per rentable square foot in year two. It is to further escalate to $11.4806 per rentable square foot in year three, $13.1740 per rentable square foot in year four and $14.9306 per rentable square foot in year five, in addition to certain operating expenses and taxes.

On June 7, 2023, the company entered into an amendment to extend the term of the original lease from April 26, 2026 to July 31, 2028. Included in the lease amendment is extension space commencing on August 1, 2023. As of August 1, 2023 the Company has secured additional square footage in the amount of 9,805 rentable square feet (8,375 usable square feet). The initial base rent for the expansion space was $9.10 per rentable square foot for year one, and escalated to $10.20 in year two, $11.30 in year three, $12.40 in year four and $13.50 in year five, plus certain operating expenses and taxes.

On July 3, 2024, Applied Energetics, Inc. exercised its option to lease more than 5,000 square feet of additional space at the University of Arizona Tech Park. The company will occupy, in the aggregate, approximately 26,000 sq. ft. of space at the Arizona Tech Park. The company took the option to lease this additional space under the June 7, 2023, amendment.

The company incurred lease expense for its operating leases of $318,350 which was included in general and administrative expenses in the statements of operation for the year ended December 31, 2024. During the year ended December 31, 2024, the company made cash lease payments in the amount of $288,532.

At December 31, 2024, we had approximately $361,000 in future minimum lease payments due in less than a year. The below table presents the future minimum lease payments due reconciled to lease liabilities.

Guarantees

The company agrees to indemnify its officers and directors for certain events or occurrences arising as a result of the officers or directors serving in such capacity. The maximum amount of future payments that the company could be required to make under these indemnification agreements is unlimited. However, the company maintains a director’s and officer’s liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result, it believes the estimated fair value of these indemnification agreements is minimal because of its insurance coverage, and it has not recognized any liabilities for these agreements as of December 31, 2024 and 2023.

Litigation

On July 3, 2019, Gusrae, Kaplan & Nusbaum and its partner, Ryan Whalen filed a complaint in the United States District Court for the Southern District of New York against the company, its directors, officers, attorneys and a consultant. The action alleged libel, securities fraud and related claims. The company filed a motion to dismiss the complaint on October 24, 2019. On December 13, 2019, Gusrae Kaplan and Mr. Whalen filed an opposition to the company’s motion. On January 10, 2020, the company filed a reply brief. On August 5, 2021, the plaintiffs filed a Notice of Voluntary Dismissal of the action without prejudice.

On January 15, 2021, the company filed a complaint in the United States District Court, Southern District of New York, against Gusrae, Kaplan & Nusbaum and Ryan Whalen for malpractice and breach of New York Rules of Professional Conduct by both parties as former counsel to the company. On May 28, 2021, Gusrae, Kaplan & Nusbaum and Mr. Whalen filed a motion to dismiss the complaint. On June 25, 2021, the company filed an opposition to the motion. On July 13, 2021, Gusrae Kaplan & Nusbaum and Mr. Whalen filed their reply brief. On March 30, 2022, United States Magistrate Judge Debra Freeman signed an order denying the motion of GKN and Mr. Whalen to dismiss the company’s claim for malpractice and for rescission of the shares-for-fees agreement under which GKN and Whalen received 1,242,710 shares of the company’s common stock. The motion was partially granted as to the separate claim for violation of NYRPC 1.7 and 1.8 because the court found that it was duplicative of the malpractice claim. The parties are currently engaged in discovery. No trial date has been set.

On July 26, 2023, the company filed a complaint in the Superior Court of the State of Delaware against Gusrae Kaplan Nusbaum PLLC and Ryan Whalen, for malicious prosecution in connection with the July 2019 suit brought in the Southern District of New York. On September 11, 2023, Gusrae, Kaplan & Nusbaum and Mr. Whalen filed a motion to dismiss the complaint. On April 16, 2024, the court granted the motion on the grounds of lack of personal jurisdiction over the defendants. The company filed a Notice of Appeal with the Supreme Court of the State of Delaware on May 2, 2024. The Delaware Supreme Court upheld the dismissal on December 18, 2024.

As with any litigation, the company cannot predict the outcome with certainty, but the company expects to provide further updates on the status of the litigation as circumstances warrant.

The company may, from time to time, be involved in legal proceedings arising from the normal course of business.

NOTE 8 – INCOME TAXES

An analysis of the difference between the expected federal income tax for the years ended December 31, 2024, and 2023, and the effective income tax rate is as follows:

Tax effects of temporary differences at December 31, 2024 and December 31, 2023 are as follows:

Deferred tax assets and liabilities are computed by applying the federal and state income tax rates in effect to the gross amounts of temporary differences and other tax attributes, such as net operating loss carry-forwards. In assessing if the deferred tax assets will be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which these deductible temporary differences reverse. During the year ended December 31, 2024, the deferred tax assets and the valuation allowance increased by $1,342,607 mainly as a result of current year tax loss.

As of December 31, 2024, we have cumulative federal, Arizona, and New Mexico net operating loss carryforwards of approximately $81.9 million, $21.5 million, and $0.3 million, respectively, which can be used to offset future income subject to taxes. Of the $81.9 million of Federal net operating loss carryforwards, $60.8 begin to expire in 2025. The remaining balance of $21.1 million is limited in annual usage of 80% of current years taxable income but do not have an expiration. Arizona and New Mexico net operating loss carryforwards begin to expire in 2037 and 2043, respectively. In addition, there are federal net operating loss carryforwards of approximately $27.0 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, 2024, we had cumulative federal and state unused research and development tax credits of approximately $302,000 and $122,000, which can be used to reduce future federal and Arizona income taxes, respectively. As of December 31, 2024, 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 are 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:

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.

The company considers the U.S. and Arizona to be major tax jurisdictions. As of December 31, 2024, for federal tax purposes the tax years 2021-2024 and for Arizona the tax years 2018 through 2024 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, 2024, and 2023, we had no accrued interest or penalties related to our unrecognized tax benefits.

NOTE 9 – SEGMENT INFORMATION

The Company is currently deemed to be comprised of onlyone operating segment andone reportable segment. The following table presents selected financial information with respect to the Company’s single reportable segment for the years ended December 31, 2024 and 2023:

As of December 31, 2024 and 2023, the Company's segment assets, which are equal to the Company's consolidated assets on the consolidated balance sheets, are owned and operated by United States entities and are classified within the United States.

NOTE 10 – SUBSEQUENT EVENTS

The company’s management has evaluated subsequent events occurring after December 31, 2024, the date of our most recent balance sheet, through the date our financial statements were issued.

Common Stock

Subsequent to the year ended December 31, 2024, the company issued 30,000 shares of common stock upon exercise of options at an exercise price of $0.40 per share.

Subsequent to the year ended December 31, 2024, restricted stock units covering 11,667 shares of the company’s common stock vested. The company issued 11,667 and withheld 3,460 shares of common stock from the holder pursuant to their restricted stock unit agreements to cover its tax withholding obligation of $2,560.

On January 14, 2025, the company completed the placement of 6,405,666 shares of its common stock, par value, $0.001 per share, some of which were underlying pre-funded common stock purchase warrants, in a private sale to individual purchasers at a price of $0.75 per share (or $0.749 per underlying share for pre-funded warrants), for aggregate proceeds in the approximate amount of $4,804,249. The pre-funded warrants are exercisable immediately at a price of $0.001 per share but may not be executed in any amount which would cause the holder thereof to beneficially own 5% or more of the company’s common stock. The company has agreed to use its best efforts to include the shares for registration with the Securities and Exchange Commission in any subsequent registration statement it files. All of the purchasers are accredited, sophisticated investors, and the issuance of the shares was not in connection with any public offering in accordance with Section 4(a)(2) of the Securities Act of 1933.

On February 6, 2025, the company completed the placement of 1,600,000 shares of its common stock, par value, $0.001 per share, some of which were underlying pre-funded common stock purchase warrants, in a private sale to individual purchasers at a price of $0.75 per share (or $0.749 per underlying share for pre-funded warrants), for aggregate proceeds in the amount of $1,200,000. The pre-funded warrants are exercisable immediately at a price of $0.001 per share but may not be executed in any amount which would cause the holder thereof to beneficially own 5% or more of the company’s common stock. The company has agreed to use its best efforts to include the shares for registration with the Securities and Exchange Commission in the registration statement it files. All of the purchasers are accredited, sophisticated investors, and the issuance of the shares was not in connection with any public offering in accordance with Section 4(a)(2) of the Securities Act of 1933.

On February 19, 2025, the company issued 80,000 shares to a service provider pursuant to an agreement for services to be provided.

Issuance of Options

Effective February 6, 2025, the company issued nonstatutory stock options to purchase 75,000 shares to each of two individuals who are principals of a contractor in exchange for services rendered. The options were issued under the company’s 2018 Incentive Stock Plan.