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, 2002
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 .
The number of shares the common stock outstanding at November 14, 2002
was 57,645,290.
COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page No.
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PART I FINANCIAL INFORMATION...............................................1
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
September 30, 2002 and December 31, 2001.........................1
Condensed Consolidated Statement of Operations -
Three and nine months ended September 30, 2002
and September 30, 2001...........................................3
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 2002 and
September 30, 2001...............................................4
Notes to Condensed Consolidated Financial Statements................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........18
Item 4. Controls and Procedures............................................18
PART II OTHER INFORMATION..................................................20
SIGNATURES..................................................................21
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)
Sept 30, December 31,
ASSETS 2002 2001
---- ----
(unaudited)
Current Assets:
Cash and cash equivalents $ 72 $ 170
Accounts receivable, net 774 599
Prepaid assets and other current receivables 92 327
-------- ----------
Total Current Assets 938 1,096
Property and equipment, net 420 597
Patents and completed technology, net of
accumulated amortization of .
$1,405 and $1,375, respectively 70 100
-------- ----------
Total Intangible Assets 70 100
Assets held for sale - component DRM -- 29,407
-------- ----------
Total Assets $ 1,428 $ 31,200
======== ==========
See notes to condensed consolidated financial statements.
1
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, except per share data)
Sept 30, December 31,
LIABILITIES AND 2002 2001
STOCKHOLDERS' (DEFICIT) EQUITY ---- ----
(unaudited)
Current Liabilities:
Accounts payable $ 1,200 $ 1,371
Related party payable 137 160
Current portion of long term debt - 90
Line of credit 357 108
Notes payable 1,080 1,155
Other accrued liabilities 2,404 2,035
---------- ----------
Total Current Liabilities 5,178 4,919
Liabilities held for sale - component DRM -- 24,710
---------- ----------
Total Liabilities 5,178 29,629
Commitments and contingencies -- --
Stockholders' (Deficit) Equity
Convertible Preferred Stock, Series E,F & H
par value $0.001 per share, 5% to 12% cumulative
dividends for Series E and F, 3% for Series H,
1,401,700 shares authorized,
1,190,200 and 410,200 shares issued and
outstanding as of Sept 30, 2002 and
December 31, 2001, respectively.
The shares had an aggregate liquidation
value of $6,203 and $5,140 at Sept 30, 2002
and December 31, 2001, respectively. 1 --
Common Stock, par value $0.001 per share,
125,000,000 shares authorized, 57,645,290
and 55,417,354 issued and outstanding at
Sept 30, 2002 and December 31, 2001,
respectively. 58 55
Additional paid-in capital 67,331 66,759
Shareholder receivable (83) --
Accumulated deficit (70,677) (65,243)
---------- ----------
(3,370) (1,571)
Treasury Stock, 4,750,000 shares at Sept 30, 2002 (380) --
---------- ----------
Total Stockholder's (Deficit) Equity (3,750) 1,571
---------- ----------
Total Liabilities and Stockholders'(Deficit) Equity $ 1,428 $ 31,200
========== ==========
See notes to condensed consolidated financial statements.
2
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,
2002 2001 2002 2001
---- ---- ---- ----
Contract revenues $ 1,104 $ 1,071 $ 3,381 $ 3,555
Costs and expenses:
Cost of sales 728 890 2,359 2,824
Research and development 37 67 150 263
General and administrative 373 435 1,241 1,468
Depreciation and amortization 97 135 210 482
----------- ----------- ----------- ------------
Total costs and expenses 1,235 1,527 3,960 5,037
----------- ----------- ------------
-----------
Income (loss) from operations (131) (456) (579) (1,482)
----------- ----------- ----------- ------------
Other income (expense):
Interest income -- -- -- 3
Interest expense (15) (25) (83) (338)
----------- ----------- ----------- ------------
Net other income (expense) (15) (25) (83) (335)
----------- ----------- ----------- ------------
Income (loss) before income taxes (146) (481) (662) (1,817)
Income taxes -- -- -- --
----------- ----------- ----------- ------------
Income (loss) from continuing operations (146) (481) (662) (1,817)
Loss from discontinued operations of component
DRM (including loss on disposal of $4,134
during the nine months ended Sept 30, 2002) - (1,039) (4,802) (1,164)
----------- ----------- ----------- ------------
Net loss $ (146) $ (1,520) $ (5,464) $ (2,981)
=========== =========== =========== ============
Loss per share - basic and diluted $ (0.00) $ (0.03) $ (0.10) $ (0.06)
=========== =========== =========== ============
Number of weighted average shares outstanding (000's) 52,895 53,086 55,197 52,605
=========== =========== =========== ============
See notes to condensed consolidated financial statements.
3
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - Dollars in Thousands, except per share data)
Nine months ended
Sept 30, Sept 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $ (5,464) $ (2,981)
Add: net loss from discontinued operations 4,802 1,164
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 210 511
Amortization of debt discount 18 46
Other non-cash charges - 50
Changes in assets and liabilities:
Accounts receivable, net (175) 2,476
Prepaid assets 235 322
Other assets - (17)
Accounts payable (119) (996)
Other liabilities 175 (665)
-------------- --------------
Net cash used in continuing operations (318) (90)
Net cash provided by discontinued operations 184 799
-------------- --------------
Net cash (used in) provided by
operating activities (134) 709
Cash flows from investing activities:
Purchase of equipment (3) (11)
Advances to related parties (23) (62)
-------------- --------------
Net cash used in continuing operations (26) (73)
Net cash (used in) provided by discontinued operations (4) 25
-------------- --------------
Net cash used in investing activities (30) (48)
Cash flows from financing activities:
Increase in (repayment of) line of credit 249 (1,298)
Increase in notes and loans payable -- 1,000
Payments on notes payable and long-term debt (183) (745)
Proceeds from sale of common stock -- 200
-------------- --------------
Net cash provided by (used in) financing activities 66 (843)
Decrease in cash (98) (182)
Cash, beginning of period 170 579
-------------- --------------
Cash, end of period $ 72 $ 397
============== ==============
See notes to condensed consolidated financial statements.
4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Sept 30, 2002
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 accounting principles generally
accepted in the United States of America 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 accounting principles generally accepted
in the United States of America 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, 2002 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002.
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, 2001.
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,
2002, and the years ended December 31, 2001, 2000 and 1999, Applied incurred
losses of $5,464,000, $6,554,000, $11,441,000 and $3,985,000, respectively. For
the nine month period ended September 30, 2002, and for the years ended December
31, 2001, 2000 and 1999, Applied has also experienced net cash inflows
(outflows) from operating activities of $(134,000), $1,907,000, $(2,002,000) and
$(2,905,000). 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.
The Company has a working capital deficit of $4,240,000 as of September 30,
2002. 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 $198,000 and $200,000 at
September 30, 2002 and December 31, 2001, respectively.
5
On May 16, 2002, a Notice of Default and Right to Pursue Remedies (the
"Notice") was issued to the Company by William J. Russell and Tamie B. Speciale
(the "Pledgees") claiming that the Company is in default under the Stock
Purchase Agreement (the "Agreement"), between the Company and Dispute Resolution
Management, Inc. ("DRM") and the related Stock Pledge Agreement (the "Stock
Pledge"). As of May 16, 2002, the Company no longer owns 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 will receive an additional 1,187,500
shares of its common stock from DRM and its shareholders.
Additionally, the Company issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per share, each such share of
Series H Preferred having a stated value of $1.00 per share, to Dispute
Resolution Management, Inc. ("DRM"), William J. Russell and Tamie P. Speciale as
part of the DRM Settlement Agreement as of September 30, 2002 for satisfaction
of the remaining liabilities relating to the purchase and working capital of
DRM. The Series H Preferred shall have the following rights, privileges, and
limitations:
(a) The conversion feature shall be exercisable on June 30, 2003.
(b) No Series H Preferred may be converted prior to June 30, 2003.
Until July 31, 2005, only 80,000 shares of the Series H Preferred
shall be convertible in any calendar quarter. The balance of any
unconverted Series H Preferred Stock may be converted at any time
on or after August 1, 2005.
(c) The conversion price of the Series H Preferred 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.
(d) The Series H Preferred shall have a non-cumulative annual dividend
of 3%, payable in cash or Series H Preferred within 30 days of the
end of the Company's fiscal year, at the Company's election.
(e) The Series H Preferred shall not be transferable.
The financial information included in the accompanying form 10Q for the
periods ending September 30, 2002 reflects the terms of the DRM Settlement
Agreement. For the nine months ended September 30, 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 may 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. Excluding DRM, the
Company's current monthly operating expenses exceed cash revenues by
approximately $100,000.
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.
6
Note B - Segment Information
Using the guidelines set forth in SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", the Company has identified
two continuing reportable segments in which it operates, based on the services
it provides. The reportable segments are as follows: (i) Commodore Advanced
Sciences, Inc., which primarily provides various engineering, legal, sampling,
and public relations services to Government agencies on a cost plus basis; and
(ii) Commodore Solutions, Inc., which is commercializing technologies to treat
mixed and hazardous waste.
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 table.
7
Three Months Ended Sept 30, 2002
(Dollars in Thousands)
-------------------------------------------------------------------------------------------------------------
Corporate
Overhead
Total ASI 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 -- -- -- --
-------- ------ ------- --------
Income (loss) from continuing operations (146) 127 (85) (188)
Loss from discontinued
Operations -- --
-------- ------ ------- --------
Net income (loss) $ (146) $ 127 $ (85) $ (188)
======== ====== ======= ========
Total assets $ 1,428 $ 952 $ 356 $ 120
Expenditures for long-lived assets $ -- $ -- $ -- $ --
8
Nine Months Ended September 30, 2002
(Dollars in Thousands)
------------------------------------------------------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution DRM 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 (662) 451 (488) -- (625)
operations
Loss from discontinued (4,802) -- -- (4,802) --
Operations
-------- -------- ------- --------- -------
Net Income (loss) $ (5,464) $ 451 $ (488) $ (4,802) $ (625)
======== ======== ======= ========= =======
Total assets $ 1,428 $ 952 $ 356 $ -- $ 120
Expenditures for long-lived assets $ 4 $ -- $ -- $ 4 $ --
9
Three Months Ended September 30, 2001
(Dollars in Thousands)
------------------------------------------------------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 1,071 $ 1,071 $ -- $ -- $ --
Costs and expenses
Cost of sales 890 890 -- -- --
Research and development 67 -- 67 -- --
General and administrative 435 259 161 -- 15
Depreciation and amortization 135 20 115 -- --
-------- -------- ------- --------- -------
Total costs and expenses 1,527 1,169 343 -- 15
-------- -------- ------- --------- -------
Income (loss) from operations (456) (98) (343) -- (15)
Interest income -- -- -- -- --
Interest expense (25) 25 -- -- (50)
Income taxes -- -- -- -- --
-------- -------- ------- --------- -------
Loss from continuing operations (481) (73) (343) -- (65)
Loss from discontinued (1,039) -- -- (1,039) --
operations -------- -------- ------- --------- -------
Net income (loss) $ (1,520) $ (73) $ (343) $ (1,039) $ (65)
======== ======== ======= ========= =======
Total assets $ 31,514 $ 1,537 $ 1,489 $ 3,091 $25,397
Expenditures for long-lived assets $ 9 $ -- $ -- $ 9 $ --
10
Nine Months Ended September 30, 2001
(Dollars in Thousands)
------------------------------------------------------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 3,555 $ 3,370 $ 185 $ -- $ --
Costs and expenses
Cost of sales 2,824 2,625 199 -- --
Research and development 263 -- 263 -- --
General and administrative 1,468 698 401 -- 369
Depreciation and amortization 482 59 346 -- 77
-------- -------- -------- --------- -------
Total costs and expenses 5,037 3,382 1,209 -- 446
-------- -------- -------- --------- -------
Income (loss) from operations (1,482) (12) (1,024) -- (446)
Interest income 3 -- -- -- 3
Interest expense (338) (11) -- -- (327)
Income taxes -- -- -- -- --
-------- -------- -------- --------- -------
Income (loss) from continuing (1,817) (23) (1,024) -- (770)
operations --
Loss from discontinued (1,164) -- -- (1,164) --
Operations -------- -------- -------- --------- -------
Net Income (loss) $ (2,981) $ (23) $ (1,024) $ (1,164) $ (770)
======== ======== ======== ========= =======
Total assets $ 31,514 $ 1,537 $ 1,489 $ 3,091 $25,397
Expenditures for long-lived assets $ 48 $ -- $ -- $ 48 $ --
11
Note C - 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 D - Subsequent Events
On August 21, 2002, the Company issued a press release regarding the
failure of CASI, to obtain a further extension of its Analytical Services
Support subcontract to provide sampling and analytical work in support of the
closure of the Department of Energy's (DOE's) Rocky Flats site. The contract
expired on September 30, 2002. For the past two calendar years this contract
represented approximately 65% of the Company's aggregate gross revenues, after
excluding discontinued operations. While the loss of this contract will have a
short-term impact, management currently believes that it will obtain future
contracts using the SET technology that may replace the lost revenues.
On October 1, 2002, the Company cancelled all 3,644,373 employee,
officer and director options issued under the 1998 Stock Option Plan, as amended
(the "Plan"). On October 2, 2002, the Company issued to employees, officers and
directors 6,847,217 options at the current market price ($0.07 per share) under
the Plan. The Plan currently has issued 51% of the options to employees and has
issued 49% of the options to officers and directors. All options issued on
October 2, 2002, under the Plan are fully vested and will be treated as variable
options with respect to the accounting treatment of such options.
Additionally, on October 2, 2002, the Company awarded an aggregate
amount of 3,000,000 options to officers outside of the Plan at the current
market price ($0.07 per share), with vesting contingent upon meeting certain
performance measures established by the Company's Compensation Committee (the
"Performance Options"). As of November 11, 2002, such performance criteria have
not been met and the Performance Options remain unvested.
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 note was due and payable
on March 15, 2001 and was extended under the same terms and conditions until
December 31, 2001. Effective October 29, 2002, the Company issued warrants to
purchase 1,000,000 shares of its common stock at an exercise price of $0.05 per
share (the closing price of our common stock on the American Stock Exchange on
such date) to SB Enterprises, the holder of the Brewer Note, in consideration of
such person's extension of the due date of the Brewer Note from December 31,
2001 to January 1, 2004.
12
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,
investigation remediation and management of hazardous, mixed and radioactive
waste.
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's loss of
the DRM subsidiary may 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. Excluding DRM, the Company's current monthly
operating expenses exceed cash revenues by approximately $100,000.
The Company is currently working on the commercialization of these
technologies through development efforts, licensing arrangements and joint
ventures. Through Commodore Advanced Sciences, Inc. ("ASI") 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 ASI's
revenues, and such a reduction would materially affect the operations. However,
management believes its existing client relationships will allow the Company to
obtain new contracts in the future.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2002 Compared to Three and Nine Months
Ended September 30, 2001
Revenues from continuing operations were $1,104,000 and $3,381,000 for
the three and nine months ended September 30, 2002, compared to $1,071,000 and
$3,555,000 for the three and nine months ended September 30, 2001. Such revenues
were primarily from the Company's subsidiary ASI.
In the case of ASI, revenues were $989,000 and $3,233,000 respectively
for the three and nine months ended September 30, 2002 as compared with
$1,071,000 and $3,370,000 for the three and nine months ended June 30, 2001.
There are no material differences in sales. The revenues from ASI consisted of
engineering and scientific services performed for the United States government
under a variety of contracts. 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. Currently, ASI has two major customers, each of which represent
more than 10% of total revenue. The combined revenue for these two customers was
$989,000 and $3,233,000 respectively (100% of total revenues) for the three and
nine months ended September 30, 2002. Cost of sales was $655,000 and $2,106,000
respectively for the three and nine months ended September 30, 2002 compared to
$890,000 and $2,625,000 respectively for the three and nine months ended
September 30, 2001. 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, 2002.
13
In the case of Commodore Solution, Inc. ("Solution"), revenues were
$115,000 and $148,000 respectively for the three and nine months ended September
30, 2002 as compared with $0 and $185,000 respectively for three and nine months
ended June 30, 2001. Solution continues to do feasibility studies and commercial
processing during this period. Revenues were primarily from remediation services
performed for engineering and waste treatment companies in the U.S. under a
variety of contracts. Solution has two major customers, each of whom represents
more than 10% of the revenue for the three and nine months ended September 30,
2002. The combined revenue for these two customers was $115,000 and $148,000
respectively (100% of the Solution's total revenue) for the three and nine
months ended September 30, 2002. Cost of sales was $73,000 and $253,000
respectively for the three and nine months ended September 30, 2002 as compared
to $0 and $199,000 respectively for the three and nine months ended September
30, 2001. The increase in cost of sales is attributable to higher sales expenses
for the SET technology, which the Company anticipates will result in greater
revenues from Solution in the year 2003. 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, 2002, the Company
incurred research and development costs of $37,000 and $150,000 respectively as
compared to $67,000 and $263,000 respectively for the three and nine months
ended September 30, 2001. 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 which 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, 2002 were $373,000 and $1,241,000
respectively as compared to $435,000 and $1,468,000 respectively for the three
and nine months ended September 30, 2001. This difference is due to the
reduction in staffing and other expenses.
Interest expense for continuing operations for the three and nine
months ended September 30, 2002 was $15,000 and $83,000, respectively as
compared to $25,000 and $338,000, respectively for the three and nine months
ended September 30, 2001. The decrease in interest expense is primarily related
to amortization of non-cash interest costs associated with the Brewer Promissory
Note, the amortization of non-cash interest costs associated with the Bridge
Loan Notes, and the amortization of non-cash interest costs associated with the
Milford/Shaar Bridge Loan Notes.
The estimated loss from discontinued operations is approximately $0 and
$4,802,000, respectively for the three and nine months ended September 30, 2002
as compared to $1,039,000 and $1,164,000, respectively for the three and nine
months ended September 30, 2001. The difference results primarily from the
estimated loss on disposal of DRM of approximately $4,134,000. The remaining
difference is the result of the reduced retainers paid by DRM's current
customers and the lack of material settlements on their existing client
agreements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002 and December 31, 2001 ASI had a $357,000 and
$108,000 outstanding balance, respectively, on its revolving lines of credit.
14
For the three and nine months ended September 30, 2002, the Company
incurred a net loss from continuing operations of ($146,000) and ($662,000),
respectively as compared to a net loss of ($481,000) and ($1,817,000),
respectively for the three and nine months ended September 30, 2001. For the
period ended September 30, 2002, and for the years ended December 31, 2001,
2000, and 1999, Applied has also experienced net cash inflows (outflows) from
operating activities of ($134,000), $1,907,000, ($2,002,000), and ($2,905,000).
At September 30, 2002 the Company had working capital deficit of $4,240,000 and
shareholders' deficit of $3,750,000.
During the nine-month period ended September 30, 2002, the Company
converted 20,000 shares of Series F Convertible Preferred Stock for 1,360,544
shares of the Company's common stock. Additionally, the Company issued 867,392
shares of the Company's common stock in satisfaction of all accrued dividends
pertaining to the Series E and Series F Convertible Preferred Stock conversions
to date.
In March 2000, the Company completed $2.0 million in financing through
private placement. The Company issued 226,000 shares of a new Series F
Convertible Preferred Stock, convertible into Common Stock at the market price,
after September 30, 2000 and up through April 30, 2003 at which time it
automatically converts to Common Stock. The Series F Convertible Preferred Stock
has a variable rate dividend averaging 8.15% over the term of the security. The
Company reserved the right to redeem all the Series F Convertible Preferred
Stock on or before September 30, 2000 by payment of $2.3 million plus any
accrued dividends.
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 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 is 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"), which extended the maturity date
of the note until December 31, 2001. Additionally, the conversion 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 by the previous
5-day average of the closing price of the Company's common stock and was
converted into 1,041,667 shares. The remaining principal balance of $250,000 is
outstanding as of November 14, 2002.
Effective October 29, 2002, the Company issued a two-year warrant to
purchase 1,000,000 shares of its common stock at an exercise price of $0.05 per
share (the closing price of our common stock on the American Stock Exchange on
such date) to SB Enterprises, the holder of the Brewer Note, in consideration of
such person's extension of the due date of such loans from December 31, 2001 to
January 1, 2004.
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
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 15% of the Common Stock, transferred to the investors a total of
1,000,000 shares of common stock. All holders of the Weiss Group Note have
granted payment extensions until May 31, 2002. As of November 14, 2002, the
Company has not been notified of the holders' intent to declare a default on the
Weiss Group Note.
15
Effective April 5, 2001, the Company issued warrants to purchase
500,000 shares of its common stock at an exercise price of $0.22 per share (the
closing price of our common stock on the American Stock Exchange on such date)
to all holders of the Weiss Group Note in consideration of such persons
extension of the due date of such loans from February 12, 2001 to June 30, 2001.
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 American Stock Exchange on such date)
to all holders of the Weiss Group Note in consideration of such persons
extension of the due date of such loans from June 30, 2001 to May 31, 2002.
On May 23, 2001, a private investor purchased $250,000 of the Company's
common stock at the market price. The Company issued the private investor
1,923,077 shares of common stock of the Company as a result of the equity
purchase. In connection with the purchase of the shares of the Company's common
stock, the Company issued the private investor a 2-year warrant for 500,000
shares of the Company's common stock at an exercise price of $0.22 per share.
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 333,333 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 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. As of November 14, 2002, the Company has not been notified of
the holders' intent to declare a default on the Milford/Shaar Bridge Loan Notes.
The Company had an irrevocable obligation under its stock purchase
agreement (the "Agreement") between the Company and Dispute Resolution
Management, Inc. ("DRM") to repurchase from the former shareholders of DRM, by
May 16, 2002, that number of 9.5 million shares of the Company's common stock
(at a per share price equal to the greater of $1.50 or the closing price of our
common stock 30 days prior to purchase) as shall be necessary to provide the
holders of such shares with a total of $14.5 million. The original repurchase
obligation deadline of August 30, 2001, subsequently extended through May 16,
2002 by a series of extensions (initially extended to September 29, 2001,
further extended to October 29, 2001, further extended to January 16, 2002 and
was subsequently extended until May 16, 2002). As partial security for the
payment of such obligation, all of the shares of DRM common stock owned by the
Company had been pledged to Messrs. William J. Russell and Tamie P. Speciale
(the "Pledgees"), the former sole stockholders of DRM under a Pledge Agreement
(the "Stock Pledge"). The Company was unable to make the $14.5 million payment
to DRM.
On May 16, 2002, a Notice of Default and Right to Pursue Remedies (the
"Notice") was issued to the Company by the Pledgees claiming that the Company is
in default under the Agreement and the Stock Pledge. As of May 16, 2002, the
Company no longer owns an 81% interest in DRM. The Pledgees foreclosed on the
DRM stock; which resulted in the Company losing its entire equity ownership in
the DRM subsidiary. The Company recorded a loss on its disposal of DRM of
$4,134,000.
On August 19, 2002, the Company and Dispute Resolution Management,
Inc., ("DRM") entered into a settlement agreement (the "DRM Settlement
16
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 will receive an additional 1,187,500 shares of its common stock from
DRM and its shareholders.
Additionally, the Company issued 800,000 shares of Series H Preferred
stock (the "Series H Preferred"), par value $0.001 per share, each such share of
Series H Preferred having a stated value of $1.00 per share, to Dispute
Resolution Management, Inc. ("DRM"), William J. Russell and Tamie P. Speciale as
part of the DRM Settlement Agreement as of September 30, 2002 for satisfaction
of the remaining liabilities relating to the purchase and working capital of
DRM. The Series H Preferred shall have the following rights, privileges, and
limitations:
(a) The conversion feature shall be exercisable on June 30, 2003.
(b) No Series H Preferred may be converted prior to June 30, 2003.
Until July 31, 2005, only 80,000 shares of the Series H Preferred
shall be convertible in any calendar quarter. The balance of any
unconverted Series H Preferred Stock may be converted at any time
on or after August 1, 2005.
(c) The conversion price of the Series H Preferred 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.
(d) The Series H Preferred shall have a non-cumulative annual dividend
of 3%, payable in cash or Series H Preferred within 30 days of the
end of the Company's fiscal year, at the Company's election.
(f) The Series H Preferred shall not be transferable.
The Company currently requires additional cash to sustain existing
operations and meet current obligations (including those described above) and
the Company's ongoing capital requirements. The Company's current monthly
operating expenses exceed its cash revenues by approximately $100,000. The
continuation of the Company's operations is dependent in the short term upon its
ability to obtain additional financing and, in the long term, 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.
The Company's auditor's opinion on our fiscal 2001 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
$39,000,000. The amount of net operating loss carryforward that can be used in
17
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
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 Company's ability to obtain additional
financing in the near future to sustain existing operations and meet current
obligations; 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, within the 90 days prior to
the filing date of this report, 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
Chief Executive Officer, and the Company's Chief Financial Officer
and Chief Accounting Officer. Based upon that evaluation, the
Company's President and Chief Executive Officer, 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
18
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.
19
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. 99.1 - 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 January 12,
2002, regarding a 120-day extension to its Stock Purchase
Agreement with Dispute Resolution Management, Inc., until May 16,
2002.
2. The Company filed a Current Report on Form 8-K, dated May 21,
2002, regarding the termination of its Stock Purchase Agreement
and Notice of Default with Dispute Resolution Management, Inc.
3. The Company filed a Current Report on Form 8-K, dated August 22,
2002, regarding the loss of its of its Analytical Services Support
subcontract to provide sampling and analytical work in support of
the closure of the Department of Energy's (DOE's) Rocky Flats
site.
20
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, 2002 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)
21
SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Shelby T. Brewer, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Commodore Applied
Technologies, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ Shelby T. Brewer
-------------------------------------
Chairman and Chief Executive Officer
22
SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, James M. DeAngelis, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Commodore Applied
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002
/s/ James M. DeAngelis
-------------------------------------
Chief Financial Officer and Treasurer
23