Stockholders’ Equity

9 Months Ended

Sep. 30, 2023

Stockholders’ Equity [Abstract]

STOCKHOLDERS’ EQUITY

NOTE 6 – STOCKHOLDERS’ EQUITY

Authorized Capital Stock

During the nine months ended September 30, 2022, the company issued 130,417 shares of common stock for previously vested and expensed shares in relation to a restricted stock agreement. For the nine months ended September 30, 2022, the company recorded $0 in relation to these shares.

During the nine months ended September 30, 2022, the company issued 100,000 shares of common stock upon the exercise of 100,000 options at an exercise price of $0.13 a share. As a result, the company received $13,000 in cash proceeds.as part of the transaction. 

During the nine months ended September 30, 2022, the company issued 25,000 shares of common stock upon the exercise of two warrants of 12,500 shares each, or 25,000 shares of common stock in the aggregate, at an exercise price of $0.05 a share. The company received $1,250 in cash proceeds as part of the transaction.

Effective August 1, 2022, the company entered into an Executive Employment Agreement with its Chief Financial and Operating Officer. As part of this agreement, the company granted 1,000,000 options to purchase shares of common stock at an exercise price of $2.36 per share. The options vest over a period of four years and expire ten years from the date of the grant. Under the agreement, this officer also received restricted stock units covering 400,000 shares (see “Share-Based Payments” below). The officer forfeited unvested options to purchase 950,000 shares of common stock which he had previously received for his service on the company’s Board of Advisors. The forfeiture of the unvested options resulted in the reversal of the previously recorded stock-based compensation expense in the amount of approximately $176,000.

As of nine months ended, September 30, 2022, the company recognized a subscription payable for $585,000 from the sale of common stock as a current liability on its balance sheet, reflecting the receipt of $585,000 in cash proceeds as part of a pending private equity placement transaction.

During the nine months ended September 30, 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 nine months ended September 30, 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 nine months ended September 30, 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 nine months ended September 30, 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 nine months ended September 30, 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 nine months ended September 30, 2023, the restricted stock units covering 150,000 shares of the company’s common stock vested. The company withheld 56,567 of these shares of common stock from the holders pursuant to their restricted stock unit agreements to cover its tax withholding obligation of $136,671.

Preferred Stock

As of September 30, 2023, and December 31, 2022, there were 13,602 shares of Series A Redeemable Convertible Preferred Stock (the “Series A Preferred Stock”) issued and outstanding, respectively. The company has not paid the dividends commencing with the quarterly dividend due August 1, 2013. Dividend arrearages as of September 30, 2023, including previously accrued dividends of $48,079 included in our balance sheet total approximately $348,929. 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 company 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 company may pay the Purchase Price (or a portion thereof), whether in cash or in shares of Common Stock, only if the company 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 company.

Share-Based Payments

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

We have, from time to time, also granted non-plan options to certain officers, directors, employees and consultants. Total stock-based compensation expense for grants to officers, employees and consultants was $2,528,293 and $1,261,626 for the nine months ended September 30, 2023, and 2022, respectively, which was charged to general and administrative expense.

During the nine months ended September 30, 2023, the company issued restricted stock units covering 940,909 shares for services rendered pursuant to an amendment to a master services agreement with a consultant.

During the nine months ended September 30, 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 nine months ended September 30, 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 nine months ended September 30, 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. In addition, the company issued restricted stock units covering 35,000 shares for services rendered pursuant to an employment agreement.

 During the nine months ended September 30, 2023, the company issued a non-qualified stock options 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 nine months ended September 30, 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 nine months ended September 30, 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 nine months ended September 30, 2023, the company issued restricted stock units covering 100,000 shares for services rendered pursuant to an employment agreement.

See Note 6 – Stockholders’ Equity – Authorized Capital Stock for details related to the exercise of an aggregate of 195,000 options during the nine months ended September 30, 2023.

The $2,528,293 stock-based compensation for the nine months ended September 30, 2023, was comprised of $1,182,972 option expense, $1,324,236 expense from the vesting of the restricted stock and $21,085 expense related to shares of common stock for services rendered pursuant to a board of advisor’s agreement.

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

As of September 30, 2023, the company has $9,445,984 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 nine months ended September 30, 2023:

	Shares			Weighted Average Exercise Price		Weighted Average Contractual Term Outstanding		Intrinsic Value
Outstanding at December 31, 2022		22,848,385		$	0.37		6.42	$	203,236,473
Granted		3,662,500			2.32		9.83		27,94,546
Exercised		(195,000	)		0.09		5.11		(1,898,382	)
Forfeited or expired		(30,451	)		-		-		(299,377	)
Outstanding at September 30, 2023		26,285,434			0.64		9.78		241,614,370
Outstanding and exercisable at September 30, 2023		21,004,321			0.24		7.83		201,553,841

We determine 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:

	Nine Months Ended September 30,
	2023			2022
Assumptions:
Risk-free interest rate		1.26 – 4.24	%		1.26 –1.30	%
Expected dividend yield		0	%		0	%
Expected volatility		109.48 – 130.00	%		126	%
Expected life (in years)		6			5

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 nine months ended September 30, 2023, was as follows:

	Restricted Stock Outstanding
	Shares			Weighted Average Fair Value per Share at Grant Date
Nonvested at December 31, 2022		2,819,545		$	1.93
Granted – restricted stock units and awards		1,075,909			1.86
Granted – performance-based stock units		-			-
Canceled		(50,000	)		-
Vested		(365,000	)		0.30
Nonvested at September 30, 2023		3,480,454		$	2.12

As of September 30, 2023, and December 31, 2022, there was $5,648,651 and $5,071,427, respectively, in unrecognized stock-based compensation related to unvested restricted stock agreements, net of estimated forfeitures.

As of September 30, 2023 and December 31, 2022, the company recorded $0 and $223,000, respectively, in unrecognized stock-based compensation related to a lockup agreement on 5,000,000 shares of common stock in the acquisition of assets of AOS valued at $0.4014 per share, representing the closing price on the date of the contract which is amortized over 36 months, of which, $0 and $223,000 was amortized for the nine months ended September 30, 2023 and 2022, respectively.

Warrant stock activity for the nine months ended September 30, 2023, was as follows:

	Warrant Activity
	Shares		Weighted Average Exercise Price		Weighted Average remaining Contractual Term (years)
Outstanding at December 31, 2022		1,750,000	$	0.0600		6.53
Granted		-		-		-
Exercised		-		-		-
Forfeited		-		-		-
Outstanding and exercisable at September 30, 2023		1,750,000	$	0.0600		5.78

	Warrants Outstanding						Warrants Exercisable
Range of Exercise Prices	Shares Outstanding		Weighted Avg. Remaining Contractual Life in Years		Weighted Avg. Exercise Price		Shares Exercisable		Weighted Avg. Exercise Price
$0.05 – $0.07		1,750,000		5.78	$	0.0600		1,750,000	$	0.0600
		1,750,000		5.78	$	0.0600		1,750,000	$	0.0600