UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
- ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11871
COMMODORE APPLIED TECHNOLOGIES, INC.
------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-3312952
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 East 58th Street, Suite 3238
New York, New York 10155
-------------------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 308-5800
--------------
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 is an accelerated filer
(as defined by Exchange Act Rule 12b-2). Yes No X .
---- ----
The number of shares the common stock outstanding at November 14, 2003
was 117,702,134.
COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page No.
PART I FINANCIAL INFORMATION................................................1
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
September 30, 2003 and December 31, 2002................2
Condensed Consolidated Statement of Operations -
Three and Nine months ended September 30,
2003 and September 30, 2002.............................4
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 2003 and
September 30, 2002......................................5
Notes to Condensed Consolidated Financial Statements............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................21
Item 4. Controls and Procedures........................................21
PART II OTHER INFORMATION...................................................22
SIGNATURES...................................................................23
1
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
--------------------
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, except per share data)
September 30, December 31,
ASSETS 2003 2002
---- ----
unaudited)
Current Assets:
Cash and cash equivalents $ 2 $ 59
Accounts receivable, net 82 92
Prepaid assets and other current
receivables 86 167
------------ -----------
Total Current Assets 170 318
Property and equipment, net 196 358
Patents and completed technology, net of
accumulated amortization of
$70 and $40, respectively 30 60
------------ -----------
Total Assets $ 396 $ 736
============ ===========
See notes to condensed consolidated financial statements.
2
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, except per share data)
September 30, December 31,
2003 2002
LIABILITIES AND ------------ ------------
STOCKHOLDERS' DEFICIT (unaudited)
Current Liabilities:
Accounts payable $ 1,084 $ 1,077
Related party payable - 80
Notes payable 1,595 714
Other accrued liabilities 3,699 2,723
------------ ------------
Total Current Liabilities 6,378 4,594
Long term debt -- 431
------------ ------------
Total Liabilities 6,378 5,025
Commitments and contingencies -- --
Stockholders' Deficit
Convertible Preferred Stock, Series E,F & H
par value $0.001 per share, 5% to 12%
cumulative dividends, series E and F, 3%
dividends for Series H, 1,561,700 authorized,
1,038,200 shares and 1,213,700 shares issued
and outstanding as of September 30, 2003 and
December 31, 2002, respectively. The shares
had an aggregate liquidation value of $4,206
and $6,716 at September 30, 2003
and December 31, 2002, respectively. 1 1
Common Stock, par value $0.001 per share,
300,000,000 shares authorized, 115,675,107
and 59,027,062 issued and outstanding, at
September 30, 2003 and December 31, 2002,
respectively. 115 59
Additional paid-in capital 67,247 67,129
Accumulated deficit (73,082) (71,215)
------------ ------------
(5,719) (4,026)
Treasury Stock, 3,437,500 shares (263) (263)
------------ ------------
Total Stockholder's Deficit (5,982) (4,289)
------------ ------------
Total Liabilities and
Stockholders' Deficit $ 396 $ 736
============ ============
See notes to condensed consolidated financial statements.
3
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited - Dollars in Thousands, except per share data)
Three months ended Nine months ended
Sept 30, Sept 30, Sept 30, Sept 30,
2003 2002 2003 2002
---- ---- ---- ----
Contract revenues $ 166 $ 1,104 $ 462 $ 3,381
Costs and expenses:
Cost of sales 212 728 615 2,359
Research and development 4 37 63 150
General and administrative 383 373 1,069 1,241
Depreciation and amortization 65 97 203 210
------------ ------------ ----------- ------------
Total costs and expenses 664 1,235 1,950 3,960
------------ ------------ ----------- ------------
Loss from operations (498) (131) (1,488) (579)
------------ ------------ ----------- ------------
Other income (expense):
Interest expense (221) (15) (379) (83)
------------ ------------ ----------- ------------
Net other income (expense) (221) (15) (379) (83)
------------ ------------ ----------- ------------
Loss before income taxes (719) (146) (1,867) (662)
Income taxes -- -- -- --
------------ ------------ ----------- ------------
Loss from continuing operations (719) (146) (1,867) (662)
Loss from discontinued operations of
component DRM (including loss on
disposal of $4,134 during the nine
months ended September 30, 2002) -- -- -- (4,802)
------------ ------------ ----------- ------------
Net loss $ (719) $ (146) $ (1,867) $ (5,464)
============ ============ =========== ============
Loss per share - from continuing
operations - basic and diluted $ (0.01) $ (0.00) $ (0.02) $ (0.01)
Loss per share - from discontinued
operations - basic and diluted $ (0.00) $ (0.00) $ (0.00) $ (0.09)
------------ ------------ ----------- ------------
Loss per share - basic and diluted $ (0.01) $ (0.00) $ (0.02) $ (0.10)
============ ============ =========== ============
Number of weighted average shares outstanding
(000's) 94,834 52,895 83,462 55,197
============ ============ =========== ============
See notes to condensed consolidated financial statements.
4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - Dollars in Thousands, except per share data)
Nine months ended
September 30, September 30,
2003 2002
---- ----
Cash flows from operating activities:
Net loss $ (1,867) $ (5,464)
Add: net loss from discontinued operations -- 4,802
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 203 210
Amortization of debt discount 35 18
Changes in assets and liabilities:
Accounts receivable, net 10 (175)
Prepaid assets 81 235
Accounts payable 7 (119)
Other liabilities 614 175
------------ ------------
Net cash used in continuing operations (917) (318)
Net cash provided by discontinued operations -- 184
------------ ------------
Net cash used in operating
activities (917) (134)
Cash flows from investing activities:
Purchase of equipment (11) (3)
Advances to related parties (80) (23)
------------ ------------
Net cash used in continuing operations (91) (26)
Net cash used in discontinued operations - (4)
------------ ------------
Net cash used in investing
activities (91) (30)
Cash flows from financing activities:
Increase in (repayment of) line of credit -- 249
Increase in notes and loans payable 991 --
Payments on notes payable and long-term debt (40) (183)
------------ ------------
Net cash provided by financing
activities 951 66
Increase (decrease) in cash (57) (98)
Cash, beginning of period 59 170
------------ ------------
Cash, end of period $ 2 $ 72
============ ============
See notes to condensed consolidated financial statements.
5
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2003
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Commodore Applied Technologies, Inc. and subsidiaries (the "Company" or
"Applied") have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The financial
statement information was derived from unaudited financial statements unless
indicated otherwise. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's annual report on Form 10-K for the year ended December
31, 2002.
Certain prior-year amounts have been reclassified to conform to the
current year presentation.
The accompanying financial statements have been prepared under the
assumption that Applied will continue as a going concern. Such assumption
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. For the nine-month period ended September 30,
2003, and the years ended December 31, 2002, 2001 and 2000, Applied incurred
losses of ($1,867,000), ($5,972,000), ($6,554,000) and ($11,441,000),
respectively. For the nine month period ended September 30, 2003, and for the
years ended December 31, 2002, 2001 and 2000, Applied has also experienced net
cash inflows (outflows) from operating activities of $(917,000), $(123,000),
$965,000 and $(2,629,000). The financial statements do not include any
adjustments that might be necessary should Applied be unable to continue as a
going concern. Applied's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing as may be required, and ultimately to
attain profitability. Potential sources of cash include new contracts, external
debt and the sale of new shares of company stock or alternative methods such as
mergers or sale transactions. No assurances can be given, however, that Applied
will be able to obtain any of these potential sources of cash.
Anticipated losses on contracts are provided for by a charge to income
during the period such losses are identified. Changes in job performance, job
conditions, estimated profitability (including those arising from contract
penalty provisions) and final contract settlements may result in revisions to
cost and income and are recognized in the period in which the revisions are
determined. Allowances for anticipated losses totaled $376,000 and $238,000 at
September 30, 2003 and December 31, 2002, respectively. These allowances are
included in other accrued liabilities in the accompanying financial statements.
6
In as much as Applied rescinded certain options during 2002 and
reissued new options to the option holders, the options are considered variable
options and will be revalued each quarter to determine the effect on operations,
if any. During the quarter ended September 30, 2003, no expense has been
recognized for the variable options as the fair market value of Applied's common
stock at September 30, 2003 was lower than the exercise price of the variable
options.
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The preparation of consolidated
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The Company accounts for stock-based compensation under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income (loss), as all options vested had an exercise
price equal to the market value of the underlying common stock on the date of
grant or the date of repricing. No options were issued or vested during the
quarters ended September 30, 2003 and 2002, therefore, there would be no effect
on net income and earnings per share if the company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Note B - Supplemental Cash Flow Information
During the three and nine month periods ended September 30, 2003,
29,500 and 158,000 shares of Series E Preferred Stock were converted into
14,360,995 and 38,889,128 shares of the Company's common stock, respectively.
During the three and nine month periods ended September 30, 2003, the Company
paid dividends on the Series E Preferred Stock conversions of $0 and $141,929,
respectively, by converting into 0 shares and 1,566,989, shares of the Company's
common stock, respectively. The Company accrued dividends on Preferred Stock
Series E for the three and nine-month periods ended September 30, 2003, of
$40,721 and $171,240, respectively, which is included in Other Accrued
Liabilities.
During the three and nine month periods ended September 30, 2003, 0 and
17,500 shares of Preferred Stock Series F were converted into 0 shares and
2,450,514, shares of the Company's common stock, respectively. During the three
and nine month periods ended September 30, 2003, the Company paid dividends on
the Series E Preferred Stock conversions of $0 and $39,387, respectively, by
converting into 0 shares and 551,571, shares of the Company's common stock,
respectively. The Company accrued dividends on Preferred Stock Series F for the
three and nine-month periods ended September 30, 2003, of $36,836 and $105,621,
respectively, which is included in Other Accrued Liabilities.
During the three and nine month periods ended September 30, 2003, no
shares of Preferred Stock Series H were converted into shares of common stock.
The Company paid no accrued dividends on Preferred Stock Series H. The Company
accrued dividends on Preferred Stock Series H for the three and nine-month
periods ended September 30, 2003, of $6,000 and $18,000, respectively, which is
included in Other Accrued Liabilities.
During March 2003, a shareholder and officer agreed to convert his
$250,000 note payable and approximately $37,000 of accrued interest due from the
Company into 13,189,841 shares of the Company's common stock.
7
Note C - Other Accrued Liabilities
Other accrued liabilities consist of the following:
September 30, December 31,
2003 2002
---- ----
Dividend payable $ 1,324 $ 1,210
Compensation and employee benefits 1,219 842
Loss reserve 376 238
Exit and forbearance fees on notes payable 220 --
Related parties 185 185
Accrued interest 286 155
Other 89 93
------------ ------------
$ 3,699 $ 2,723
============ ============
Note D - Segment Information
The Company has identified three reportable segments in which it
operates, based on the guidelines set forth in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131. These
three segments are as follows: (i) Commodore Advanced Sciences, Inc. ("Advanced
Sciences"), which primarily provides various engineering, legal, sampling, and
public relations services to Government agencies on a cost plus basis; (ii)
Commodore Solution Technologies, Inc. ("Solution"), which is commercializing
technologies to treat mixed and hazardous waste; and (iii) Corporate overhead
and other miscellaneous activities.
Dispute Resolution Management, Inc. ("DRM"), from August 30, 2000 (date
of acquisition of 81% of DRM by the Company) to May 16, 2002 (date of
dissolution of 81% of DRM by the Company), provided a package of services to
help companies recover financial settlements from insurance policies to defray
costs associated with environmental liabilities. Loss from DRM is recorded in
the discontinued operations section of the segment information.
8
Applied evaluates segment performance based on the segment's net income
(loss). Applied's foreign and export sales and assets located outside of the
United States are not significant. Summarized financial information concerning
Applied's reportable segments is shown in the following tables.
Three Months Ended September 30, 2003
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract revenues $ 166 $ 149 $ 17 $ --
Costs and expenses
Cost of sales 212 195 17 --
Research and development 4 -- 4 --
General and administrative 383 119 30 234
Depreciation and amortization 65 9 56 --
------------ ------------ ----------- ------------
Total costs and expenses 664 323 107 234
------------ ------------ ----------- ------------
Income (loss) from operations (498) (174) (90) (234)
Interest income -- -- -- --
Interest expense (221) -- -- (221)
Income taxes -- -- -- --
------------ ------------ ----------- ------------
Income (loss) from continuing operations (719) (174) (90) (455)
Loss from discontinued
Operations -- -- -- --
------------ ------------ ----------- ------------
Net income (loss) $ (719) $ (174) $ (90) $ (455)
============ ============ =========== ============
Total assets $ 396 $ 168 $ 200 $ 28
Expenditures for long-lived assets $ 5 $ 5 $ -- $ --
9
Nine Months Ended September 30, 2003
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract revenues $ 462 $ 445 $ 17 $ --
Costs and expenses
Cost of sales 615 598 17 --
Research and development 63 -- 63 --
General and administrative 1,069 344 127 598
Depreciation and amortization 203 35 168 --
------------ ------------ ----------- ------------
Total costs and expenses 1,950 977 375 598
------------ ------------ ----------- ------------
Income (loss) from operations (1,488) (532) (358) (598)
Interest income -- -- -- --
Interest expense (379) (3) -- (376)
Income taxes -- -- -- --
------------ ------------ ----------- ------------
Income (loss) from continuing operations (1,867) (535) (358) (974)
Loss from discontinued
Operations -- -- -- --
------------ ------------ ----------- ------------
Net Income (loss) $ (1,867) $ (535) $ (358) $ (974)
============ ============ =========== ============
Total assets $ 396 $ 168 $ 200 $ 28
Expenditures for long-lived assets $ 11 $ 11 $ -- $ --
10
Three Months Ended September 30, 2002
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract revenues $ 1,104 $ 989 $ 115 $ --
Costs and expenses
Cost of sales 728 655 73 --
Research and development 37 -- 37 --
General and administrative 373 160 33 180
Depreciation and amortization 97 40 57 --
------------ ------------ ----------- ------------
Total costs and expenses 1,235 855 200 180
------------ ------------ ----------- ------------
Income (loss) from operations (131) 134 (85) (180)
Interest income -- -- -- --
Interest expense (15) (7) -- (8)
Income taxes -- -- -- --
------------ ------------ ----------- ------------
Loss from continuing operations (146) 127 (85) (188)
Loss from discontinued -- -- -- --
------------ ------------ ----------- ------------
Net income (loss) $ (146) $ 127 $ (85) $ (188)
============ ============ =========== ============
Total assets $ 1,428 $ 952 $ 356 $ 120
Expenditures for long-lived assets $ -- $ -- $ -- $ --
11
Nine Months Ended September 30, 2002
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract revenues $ 3,381 $ 3,233 $ 148 $ --
Costs and expenses
Cost of sales 2,359 2,106 253 --
Research and development 150 - 150 --
General and administrative 1,241 555 85 601
Depreciation and amortization 210 62 148 --
------------ ------------ ----------- ------------
Total costs and expenses 3,960 2,723 636 601
------------ ------------ ----------- ------------
Income (loss) from operations (579) 510 (488) (601)
Interest income -- -- -- --
Interest expense (83) (59) -- (24)
Income taxes -- -- -- --
------------ ------------ ----------- ------------
Income (loss) from continuing operations (662) 451 (488) (625)
Loss from discontinued operations (4,802) -- -- (4,802)
------------ ------------ ----------- ------------
Net Income (loss) $ (5,464) $ 451 $ (488) $ (5,427)
============ ============ =========== ============
Total assets $ 1,428 $ 952 $ 356 $ 120
Expenditures for long-lived assets $ 4 $ -- $ -- $ 4
12
Note E - Net Loss per Common Share
Basic net loss per common share ("Basic EPS") excludes dilution and is
computed by dividing net loss available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted net loss
per common share ("Diluted EPS") reflects the potential dilution that could
occur if stock options or other contracts to issue common stock were exercised
or converted into common stock. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an anti-dilutive effect on
net loss per common share.
Options and warrants to purchase 34,274,905 and 26,485,113 shares of
common stock as of September 30, 2003 and 2002, respectively, were not included
in the computation of Diluted EPS. The inclusion of the options would have been
anti-dilutive, thereby decreasing net loss per common share.
Note F - Contingencies
Applied has matters of litigation arising in the ordinary course of
business which in the opinion of management will not have a material adverse
effect on its financial condition or results of operations.
Note G - Subsequent Events
Issuance of Common Stock subsequent to September 30, 2003
The Company issued a total of 2,027,027 shares of its common stock
during the period from September 30, 2003 to November 14, 2003, in connection
with various conversion notices from the holders of the Company's Series E
Convertible Preferred Stock, par value ($0.001) per share (the "Series E
Preferred") and the holders of the Company's Series F Convertible Preferred
Stock, par value ($0.001) per share (the "Series F Preferred").
13
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Overview
Commodore Applied Technologies, Inc. and subsidiaries (the "Company" or
"Applied"), is engaged in providing a range of engineering, technical, and
financial services to the public and private sectors related to (i) remediating
contamination in soils, liquids and other materials, and disposing of or reusing
certain waste by-products by utilizing SET; and (ii) providing services related
to environmental management for on-site and off-site identification, remediation
and management of hazardous, mixed and radioactive waste.
The Company is currently working on the commercialization of these
technologies through development efforts, licensing arrangements and joint
ventures. Through Advanced Sciences, formerly Advanced Sciences, Inc., a
subsidiary acquired on October 1, 1996, the Company has contracts with various
government agencies and private companies in the U.S. As some government
contracts are funded in one-year increments, there is a possibility for cutbacks
as these contracts constitute a major portion of Advanced Sciences' revenues,
and such a reduction would materially affect the operations. Advanced Sciences
has experienced a significant decrease in revenue caused by fewer contracts and
overall, less work being performed by Advanced Sciences. However, management
believes its existing client relationships will allow the Company to obtain new
contracts in the future.
Applied discontinued the operations of its previously 81% owned
subsidiary DRM, on May 16, 2002 as a result of Applied's inability to meet the
terms and conditions of the Stock Purchase Agreement with DRM. The loss from the
disposition of DRM is recorded at $4,134,000 to Applied. The Company currently
requires additional cash to sustain existing operations and to meet current
obligations and ongoing capital requirements. The Company's current monthly
operating expenses exceed cash revenues by approximately $86,000.
The Company held its 2002 Annual Meeting at The Fitzpatrick Hotel
located at 687 Lexington Avenue, New York, NY 10015 on September 12, 2003 -
11:00 a.m. EST. The results of the meeting were as follows:
The stockholders owning a majority of the issued and outstanding shares
of the Company's Common Stock have voted:
1. to elect Bentley J. Blum, Shelby T. Brewer, Frank E. Coffman,
James M. DeAngelis, Paul E. Hannesson, Michael P. Kalleres and
William A. Wilson as Directors;
2. to amend the Certificate of Incorporation to increase the number
of authorized shares of common stock from 125,000,000 shares to
300,000,000 shares.
3. to approve the Company's Short Term Incentive Plan.
4. to ratify the Company's 1998 Stock Option Plan, as amended.
5. to approve options issued to the Chief Executive Officer outside
the Company's 1998 Stock Option Plan, as amended.
6. to approve options issued to the Chief Financial Officer outside
the Company's 1998 Stock Option Plan, as amended.
7. to ratify Tanner + Co. as the Company's independent auditors for
the year ended December 31, 2003.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2003 Compared to Three and Nine Months
Ended September 30, 2002
Revenues from continuing operations were $166,000 and $462,000 for the
three and nine months ended September 30, 2003 compared to $1,104,000 and
$3,381,000 for the three and nine months ended September 30, 2002. Such revenues
were primarily from the Company's subsidiary Advanced Sciences.
In the case of Advanced Sciences, revenues were $149,000 and $445,000
respectively for the three and nine months ended September 30, 2003 as compared
with $989,000 and $3,233,000 for the three and nine months ended September 30,
2002. Advanced Sciences has experienced a significant decrease in revenue caused
by fewer contracts and overall, less work being performed by Advanced Sciences.
The revenues from Advanced Sciences consisted of engineering and scientific
services performed for the United States government under a variety of
contracts, most of which provide for reimbursement of cost plus fixed fees.
Revenue under cost-reimbursement contracts is recorded under the percentage of
completion method as costs are incurred and include estimated fees in the
proportion that costs to date bear to total estimated costs. Advanced Sciences
has two major customers, each of which represent more than 10% of total revenue.
14
The combined revenue for these two customers was $149,000 and $445,000
respectively (100% of total revenues) for the three and nine months ended
September 30, 2003. Cost of sales was $195,000 and $598,000 respectively for the
three and nine months ended September 30, 2003 compared to $655,000 and
$2,106,000 respectively for the three and nine months ended September 30, 2002.
The decrease in cost of sales is due to greater efficiencies in staffing and
further reduction of sales associated expenses in the three and nine months
ended September 30, 2003.
In the case of Solution, revenues were $17,000 and $17,000 respectively
for the three and nine months ended September 30, 2003 as compared with $115,000
and $148,000 respectively for three and nine months ended September 30, 2002.
There were marginal revenues recorded for the three and nine month period ended
September 30, 2003 due to (i) SET processing contracts being negotiated but not
yet initiated, (ii) United States Environmental Protection Agency (the "USEPA")
demonstration of the SL-2 system at a client location in Oak Ridge, Tennessee
for inclusion to the Company's nationwide permit for PCB destruction; and (iii)
the relocations of the SET equipment to Hanford, Washington. Revenues, when
recognized, are primarily from remediation services performed for engineering
and waste treatment companies in the U.S. under a variety of contracts. Cost of
sales was $17,000 and $17,000 respectively for the three and nine months ended
September 30, 2003 as compared to $73,000 and $253,000 respectively for the
three and nine months ended September 30, 2002. The cost of sales, when
incurred, is attributable to installation, set-up, supplies and salary expenses
for the SET technology. The cost of sales also includes other direct sales and
marketing expenses when incurred. Anticipated losses on engagements, if any,
will be provided for by a charge to income during the period such losses are
first identified.
For the three and nine months ended September 30, 2003, the Company
incurred research and development costs of $4,000 and $63,000 respectively as
compared to $37,000 and $150,000 respectively for the three and nine months
ended September 30, 2002. Research and development costs include salaries,
wages, and other related costs of personnel engaged in research and development
activities, contract services and materials, test equipment and rent for
facilities involved in research and development activities. Research and
development costs are expensed when incurred, except those costs related to the
design or construction of an asset having an economic useful life are
capitalized, and then depreciated over the estimated useful life of the asset.
The decrease in research and development expense is due to the continued
commercialization focus of the Company.
General and administrative expenses for continuing operations for the
three and nine months ended September 30, 2003 were $383,000 and $1,069,000
respectively as compared to $373,000 and $1,241,000 respectively for the three
and nine months ended September 30, 2002. There is no material difference
between the compared operational periods.
Interest expense for continuing operations for the three and nine
months ended September 30, 2003 was $221,000 and $379,000, respectively as
compared to $15,000 and $83,000, respectively for the three and nine months
ended September 30, 2002. The increase in interest expense is primarily related
to amortization of interest costs associated with the Blum Demand Note, the
amortization of interest costs associated with the Weiss Group Note and the
amortization of interest costs, forbearance fees and exit fees associated with
the Milford/Shaar Bridge Loan Note.
15
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003 and December 31, 2002 Advanced Sciences had a $0
and $0 outstanding balance, respectively, on its revolving line of credit.
For the three and nine month periods ended September 30, 2003, the
Company incurred a net loss of ($719,000) and ($1,867,000), respectively as
compared to a net loss of ($146,000) and ($5,464,000), respectively for the
three and nine months ended September 30, 2002. For the nine-month period ended
September 30, 2003, and for the years ended December 31, 2002, 2001, and 2000,
Applied incurred losses of ($1,867,000), ($5,972,000), ($6,554,000) and
($11,441,000), respectively. Applied has also experienced net cash (outflows)
inflows from operating activities of $(123,000), $965,000, and $(2,629,000) for
the years ended December 31, 2002, 2001, and 2000, respectively.
During the three and nine month periods ended September 30, 2003, the
Company converted 29,500 and 158,000, respectively, shares of Series E Preferred
for 14,360,995 and 40,456,117 shares of the Company's common stock,
respectively. During the three and nine month periods ended September 30, 2003,
the Company converted 0 and 17,500, respectively, shares of Series F Preferred
for 0 and 3,002,085 shares of the Company's common stock, respectively. The
Company issued no shares of the Company's common stock with respect to accrued
dividends pertaining to the Series E and Series F Preferred conversions from the
period February 21, 2003 through September 30, 2003.
During the three and nine month periods ended September 30, 2003, the
Company converted no shares of Series H Preferred and issued no stock with
respect to accrued dividends pertaining to the Series H Preferred.
On June 28, 1996, the Company issued common stock and warrants at
initial public offering prices of $6.00 per share and $0.10 per warrant. The
Company's warrants, previously extended from June 16, 2001, expired on June 16,
2002. On March 6, 2003, the Company's common stock ceased to be listed on the
American Stock Exchange ("AMEX") and began trading in the over-the-counter
market in the so-called "pink sheets" of the National Quotation Bureau, Inc. and
the OTC Bulletin Board of the National Association of Securities Dealers, Inc.
(the "OTCBB"), where it is currently traded under the symbol CXII.
The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements. The
Company's current monthly operating expenses exceed cash revenues by
approximately $86,000 at September 30, 2003.
In November 1999, the Company completed $2.5 million in financing
through private placement. The Company issued 335,000 shares of a new Series E
Convertible Preferred Stock (the "Series E Preferred"), convertible into common
stock at the market price, after September 30, 2000 and up through April 30,
2004 at which time it automatically converts to common stock. The Series E
Preferred has a variable rate dividend averaging 8.15% over the term of the
security. There are 120,000 shares of Series E Preferred with a face value of
$1,200,000 outstanding as of September 30, 2003. There is $802,160 of accrued
dividends payable on the Series E Preferred as of September 30, 2003.
In March 2000, the Company completed $2.0 million in financing through
private placement. The Company issued 266,700 shares of a new Series F
Convertible Preferred Stock (the "Series F Preferred"), convertible into common
stock at the market price, after September 30, 2000 and up through April 30,
2004 at which time it automatically converts to common stock. The Series F
Preferred has a variable rate dividend averaging 8.15% over the term of the
security. There are 118,200 shares of Series F Preferred with a face value of
$1,182,000 outstanding as of September 30, 2003. There is $494,939 of accrued
dividends payable on the Series F Preferred as of September 30, 2003.
16
In September 2000, the Company completed $500,000 in financing in the
form of a loan (the "Brewer Note") from S. Brewer Enterprises, Inc. ("SB
Enterprises"), which is owned by one of its officers and directors, Shelby T.
Brewer. The Brewer Note bears a 9.75% interest rate, payable monthly, with a
balloon principal payment at the end of the term. The Brewer Note was due and
payable on March 15, 2001 and was extended under the same terms and conditions
until December 31, 2001. The Brewer Note was convertible into Common Stock at
the market price up through December 31, 2001.
On March 15, 2001, SB Enterprises executed an Amended and Restated
Promissory Note (the "Restated Brewer Note"), that extended the maturity date of
the note until December 31, 2001. Additionally, the conversion price feature of
the Restated Brewer Note was changed to the 5-day average closing price of the
Company's common stock prior to a conversion notice. On April 9, 2001, SB
Enterprises issued a conversion notice for $250,000 of the outstanding principal
of the Brewer Restated Note. The conversion price was calculated based upon the
previous 5-day average of the closing price of the Company's common stock, and
the Restated Brewer Note was converted into 1,041,667 shares of the Company's
common stock. The Company believes that this transaction is exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), under Section 4(2) thereof as a transaction not involving any
public offering of securities.
On December 12, 2002, SB Enterprises executed an Amended and Restated
Promissory Note Extension (the "Restated Brewer Note Extension"), which extended
the maturity date of the Restated Brewer Note until January 1, 2004. In
connection with the Restated Brewer Note Extension, the Company issued SB
Enterprises a 2-year warrant for 1,000,000 shares of the Company's common stock
at an exercise price of $0.05 per share. On March 14, 2003, SB Enterprises
issued a conversion notice for the remaining principal balance of $250,000 plus
accrued interest of $36,563. The conversion price was calculated based upon the
previous 5-day average of the closing price of the Company's common stock, and
the Restated Brewer Note was converted into 13,189,842 shares of the Company's
common stock. The shares of common stock were issued to S. B. Enterprises on
September 30, 2003. The Company believes that this transaction is exempt from
the registration requirements of the Securities Act, under Section 4(2) thereof
as a transaction not involving any public offering of securities.
In October 2001, Advanced Sciences refinanced their line of credit with
Commerce Funding Corporation (the "Commerce Credit Line"). The Commerce Credit
Line is not to exceed 85 percent of eligible receivables or $1,000,000 and is
due October 2002, and subsequently extended until November 2003, with interest
payable monthly at prime plus 2 percent (6.75 percent as of December 31, 2002).
The Commerce Credit Line is collateralized by the receivables of Advanced
Sciences and is guaranteed by the Company. The Commerce Credit Line contains
certain financial covenants and restrictions including minimum ratios that
Advanced Sciences must satisfy. Advanced Sciences was in compliance with the
covenants of the Commerce Credit Line at November 14, 2003.
In addition, the Commerce Credit Line agreement stipulates that no
payments shall be made by Advanced Sciences to the Company other than monthly
scheduled payments of principal with respect to the $8,280,000 subordinated
indebtedness owed by Advanced Sciences to the Company (which is eliminated in
consolidation) and intercompany indebtedness not to exceed $20,000 in any month.
In addition, Advanced Sciences shall not incur indebtedness in excess of
$25,000, other than trade payables, the above subordinated indebtedness and
other contractual obligations to suppliers and customers incurred in the
ordinary course of business.
In November 2000, the Company completed $500,000 in financing in the
form of a loan (the "Weiss Group Note") from a group of four investors; $75,000
of which was borrowed from the son of Paul E. Hannesson, our former President
and Chief Executive Officer, and $25,000 of which was borrowed from Stephen A.
Weiss, a shareholder of Greenberg Traurig, LLP, our former corporate and
securities counsel. The Weiss Group Note bears interest at 12% per annum, was
due and payable on February 12, 2001, and is secured by the first $500,000 of
17
loans or dividends that the Company may receive from DRM. As consideration for
such loan, Environmental, one of the Company's principal stockholders owning
approximately 9.25% of the Company's common stock, transferred to the investors
a total of 1,000,000 shares of the Company's common stock. The current principal
balance of the Weiss Group Note is $253,603 and remains unpaid as of November
14, 2003. All have granted payment extensions until January 1, 2004.
Effective April 16, 2001, the Company issued warrants to purchase
1,000,000 shares of its common stock at an exercise price of $0.22 per share
(the closing price of our common stock on the AMEX on such date) to all holders
of the Weiss Group Note in consideration of the extension of the due date of the
Weiss Group Note from February 12, 2001 to June 30, 2001. The Company believes
that this transaction is exempt from the registration requirements of the
Securities Act, under Section 4(2) thereof as a transaction not involving any
public offering of securities.
Effective January 24, 2002, the Company issued warrants to purchase
500,000 shares of its common stock at an exercise price of $0.15 per share (the
closing price of our common stock on the AMEX on such date) to all holders of
the Weiss Group Note in consideration of the extension of the due date of such
loans by such persons from June 30, 2001 to May 31, 2002. The Company believes
that this transaction is exempt from the registration requirements of the
Securities Act, under Section 4(2) thereof as a transaction not involving any
public offering of securities.
Effective October 29, 2002, the lenders under the Weiss Group Note
voluntarily cancelled all warrants, issued on April 16, 2001, to purchase
1,000,000 shares at an exercise price of $0.22 per share of the Company's common
stock in connection with the Weiss Group Note. Effective October 29, 2002, the
lenders under the Weiss Group Note voluntarily cancelled all warrants, issued on
January 24, 2002, to purchase 500,000 shares at an exercise price of $0.15 per
share of the Company's common stock in connection with the Weiss Group Note.
Effective October 29, 2002, the Company issued warrants to purchase
1,500,000 shares of its common stock at an exercise price of $0.05 per share
(the closing price of our common stock on the AMEX on such date) to all holders
of the Weiss Group Note in consideration of the extension of the due date of
such loans by such persons from May 31, 2002 to January 1, 2004. The Company
believes that this transaction is exempt from the registration requirements of
the Securities Act, under Section 4(2) thereof as a transaction not involving
any public offering of securities.
On June 13, 2001, the Company issued and sold to Milford Capital
Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar")
one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan
Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year
warrant for 333,334 shares of the Company's common stock at an exercise price of
$0.22 per share. The Company pledged its equipment and SET related intellectual
property as collateral for the Milford/Shaar Bridge Loan Notes. The Company
shall pay Milford/Shaar principal and interest on a monthly basis in arrears.
The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty.
The Company believes that this transaction is exempt from the registration
requirements of the Securities Act, under Section 4(2) thereof as a transaction
not involving any public offering of securities.
18
The Company made all payments on the Milford/Shaar Bridge Loan Notes
until November 13, 2001. The Company asked for and received a forbearance of
payments on the Milford/Shaar Bridge Loan Notes from November 13, 2001 until
August 13, 2002. The Shaar Fund, Ltd., through the Shaar Bridge Loan, continues
to provide cash installments on a periodic basis in the form of additional
principal. The current principal balance of the Milford/Shaar Bridge Loan Notes
is $1,104,999 as of September 30, 2003 and remains unpaid as of November 14,
2003. Additionally, as of November 14, 2003, there is $119,073 in accumulated
forbearance fees and $100,000 due in exit fees on the Milford/Shaar Bridge Loan
Notes. The Company has not been notified of a default of the Milford/Shaar
Bridge Loan Notes as of November 14, 2003.
On October 2, 2002, Mr. Bentley Blum, a director of the Company, had
previously loaned the Company $125,000 in cash installments over the period of
one year (the "Blum Loan"). The Company elected to convert the Blum Loan to the
Company's common stock under the conversion feature of the Blum Loan, based upon
the 5-day average closing price of the Company's common stock prior to October
2, 2002. On October 2, 2002, Blum issued a conversion notice for $125,000 of the
outstanding principal of the Blum Loan into 2,500,000 shares. Mr. Blum continues
to provide cash installments in the form of a demand note ("Blum Demand Note")
to the Company. The Blum Demand Note bears interest at 9% per annum. The current
principal balance of the Blum Demand Note is $232,032 as of September 30, 2003
and remains unpaid as of November 14, 2003. The Company believes that this
transaction is exempt from the registration requirements of the Securities Act,
under Section 4(2) thereof as a transaction not involving any public offering of
securities.
On August 30, 2000, the Company entered into a Stock Purchase Agreement
(the "Agreement") Applied completed a stock purchase agreement with Dispute
Resolution Management, Inc. (DRM) and its two shareholders, William J. Russell
("Russell") and Tamie B. Speciale ("Speciale").
On May 16, 2002, William J. Russell and Tamie B. Speciale (the
"Pledgees") issued a Notice of Default and Right to Pursue Remedies (the
"Notice") to the Company claiming that the Company is in default under the
Agreement and the related Stock Pledge Agreement (the "Stock Pledge"). As of May
16, 2002, the Company no longer owned an 81% interest in DRM.
On August 19, 2002, the Company entered into a settlement agreement
with DRM (the "DRM Settlement Agreement"). Under terms of the DRM Settlement
Agreement, the Company acknowledged that it had previously received back
4,750,000 shares of its common stock from DRM and its shareholders. As part of
the DRM Settlement Agreement, the Company received an additional 1,187,500
shares of its common stock from DRM and its shareholders.
Under the DRM Settlement Agreement, as of September 30, 2002, the
Company also issued 800,000 shares of Series H Preferred stock, par value $0.001
per share (the "Series H Preferred Stock"), each such share of Series H
Preferred Stock having a stated value of $1.00 per share, to DRM, Russell and
Speciale in satisfaction of the remaining liabilities relating to the purchase
and working capital of DRM. The Series H Preferred Stock has the following
rights, privileges, and limitations:
a) No Series H Preferred Stock may be converted prior to June 30,
2003. Until July 31, 2005, only 80,000 shares of the Series H
Preferred Stock shall be convertible in any calendar quarter. The
balance of any unconverted shares of Series H Preferred Stock may
be converted at any time on or after August 1, 2005.
b) The conversion price of the Series H Preferred Stock shall be
determined by the average closing price of Company's common stock
in the previous 30 trading days, but in no event shall the
conversion price be less than $0.20 per share.
19
c) The Series H Preferred Stock shall have a non-cumulative annual
dividend of 3%, payable in cash or shares of Series H Preferred
Stock within 30 days of the end of the Company's fiscal year, at
the Company's election.
d) The Series H Preferred Stock shall not be transferable.
There are 800,000 shares of Series H Preferred with a face value of
$800,000 outstanding as of September 30, 2003. There is $26,762 of accrued
dividends payable on the Series H Preferred as of September 30, 2003.
The financial information included in the accompanying form 10Q for the
period ending September 30, 2003 reflects the terms of the DRM Settlement
Agreement. For the year ended December 31, 2002 the Company recorded a loss on
the disposal of DRM in the amount of $4,134,000. The Company's loss of the DRM
subsidiary has had, and may continue to have, a material adverse effect on the
financial condition of the Company and its cash flow problems. The Company
currently requires additional cash to sustain existing operations and to meet
current obligations and ongoing capital requirements. The Company's current
monthly operating expenses exceed cash revenues by approximately $86,000.
The Company's auditor's opinion on our fiscal 2002 financial statements
contains a "going concern" qualification in which they express doubt about the
Company's ability to continue in business, absent additional financing.
The Company currently is negotiating with a lender to obtain debt
financing, to supplement funds generated from operations, to meet the Company's
cash needs over the next 12 months. The Company intends to meet its long-term
capital needs through obtaining additional contracts that will generate funds
from operations and obtaining additional debt or equity financing as necessary
or engaging in merger or sale transactions. There can be no assurance that such
sources of funds will be available to the Company or that it will be able to
meet its short or long-term capital requirements.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards of approximately
$32,000,000. The amount of net operating loss carryforward that can be used in
any one year will be limited by the applicable tax laws which are in effect at
the time such carryforward can be utilized. A full valuation allowance has been
established to offset any benefit from the net operating loss carryforwards. It
cannot be determined when or if the Company will be able to utilize the net
operating losses.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These forward-looking statements
can generally be identified as such because the context of the statement will
include words such as the Company "believes," "anticipates," "expects" or words
of similar import. Similarly, statements that describe the Company's future
plans, objectives or goals are also forward-looking statements. Such statements
may address future events and conditions concerning, among other things, the
Company's results of operations and financial condition; the consummation of
acquisition and financing transactions and the effect thereof on the Company's
20
business; capital expenditures; litigation; regulatory matters; and the
Company's plans and objectives for future operations and expansion. Any such
forward-looking statements would be subject to the risks and uncertainties that
could cause actual results of operations, financial condition, acquisitions,
financing transactions, operations, expenditures, expansion and other events to
differ materially from those expressed or implied in such forward-looking
statements. Any such forward-looking statements would be subject to a number of
assumptions regarding, among other things, future economic, competitive and
market conditions generally. Such assumptions would be based on facts and
conditions as they exist at the time such statements are made as well as
predictions as to future facts and conditions, the accurate prediction of which
may be difficult and involve the assessment of events beyond the Company's
control. Further, the Company's business is subject to a number of risks that
would affect any such forward-looking statements. These risks and uncertainties
include, but are not limited to, the ability of the Company to commercialize its
technology; product demand and industry pricing; the ability of the Company to
obtain patent protection for its technology; developments in environmental
legislation and regulation; the ability of the company to obtain future
financing on favorable terms; and other circumstances affecting anticipated
revenues and costs. These risks and uncertainties could cause actual results of
the Company to differ materially from those projected or implied by such
forward-looking statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
ITEM 4. Controls and Procedures
-----------------------
a) Evaluation of disclosure controls and procedures. As required by
Rule 13a-15 under the Exchange Act, as of September 30, 2003, the
Company carried out an evaluation of the effectiveness of the
design and operation of the Company's disclosure controls and
procedures. This evaluation was carried out under the supervision
and with the participation of the Company's management, including
the Company's President, and the Company's Chief Financial Officer
and Chief Accounting Officer. Based upon that evaluation, the
Company's President, and Chief Financial Officer and Chief
Accounting Officer have concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to
material information relating to the Company required to be
included in the Company's periodic SEC filings. Disclosure
controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in
Company reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rule
and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed
under the Exchange Act is accumulated and communicated to
management, include the Company's Chief Executive Officer, and
Chief Financial Officer and Chief Accounting Officer as
appropriate, to allow timely decisions regarding required
disclosures.
b) Changes in internal controls. There have been no changes in
internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
21
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
There have been no material legal proceedings to which the Company is a
party which have not been disclosed in previous filings with the Securities and
Exchange Commission. There are no material developments to be reported in any
previously reported legal proceedings.
ITEM 2. Change in Securities
Not applicable.
ITEM 3. Defaults among Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Events
Not applicable.
ITEM 6. Exhibits and Reports on Form 8 - K
(a) Exhibits.
1. Exhibit 31.1 - Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
2. Exhibit 31.2 - Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
3. Exhibit 32 - Certification Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
1. The Company filed a Current Report on Form 8-K, dated
August 15, 2003, announcing its June 30, 2003 Quarterly
earnings and the Company's 2002 Annual Meeting to be held
on September 12, 2003.
22
SIGNATURES
Pursuant to the requirements 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.
Date: November 14, 2003 COMMODORE APPLIED TECHNOLOGIES, INC.
(Registrant)
By /s/ James M. DeAngelis
---------------------------------
James M. DeAngelis - Senior
Vice President and Chief
Financial Officer (as both
a duly authorized officer
of the registrant and the
principal financial officer
of the registrant)
23