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 June 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____ .
The number of shares the common stock outstanding at August 14, 2003
was 94,515,149
COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page No.
PART I FINANCIAL INFORMATION...............................................1
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
June 30, 2003 and December 31, 2002.........................1
Condensed Consolidated Statement of Operations - Three and Six
months ended June 30, 2003 and
June 30, 2002...............................................3
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 2003 and
June 30, 2002...............................................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.........20
Item 4. Controls and Procedures............................................20
PART II OTHER INFORMATION..................................................21
SIGNATURES..................................................................22
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)
June 30, December 31,
ASSETS 2003 2002
------------ -------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 21 $ 59
Accounts receivable, net 88 92
Prepaid assets and other current receivables 169 167
------------ -------------
Total Current Assets 278 318
Property and equipment, net 247 358
Patents and completed technology, net of
accumulated amortization of .
$60 and $40, respectively 40 60
------------ -------------
Total Assets $ 565 $ 736
============ =============
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)
June 30, December 31,
LIABILITIES AND 2003 2002
STOCKHOLDERS' DEFICIT ------------ -------------
(unaudited)
Current Liabilities:
Accounts payable $ 1,047 $ 1,077
Related party payable 144 80
Current portion of long term debt - -
Line of credit - -
Notes payable 1,151 714
Other accrued liabilities 3,688 2,723
------------ -------------
Total Current Liabilities 6,030 4,594
Long term debt - 431
------------ -------------
Total Liabilities 6,030 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,
1,048,700 shares and 1,213,700 issued and
outstanding as of June 30, 2003 and
December 31, 2002, respectively. The shares
had an aggregate liquidation value of
$4,356 and $6,716 at June 30, 2003 and
December 31, 2002, respectively. 1 1
Common Stock, par value $0.001 per share,
125,000,000 shares authorized, 88,124,270
and 59,027,062 issued and outstanding, at
June 30, 2003 and December 31, 2002,
respectively. 88 59
Additional paid-in capital 67,072 67,129
Accumulated deficit (72,363) (71,215)
------------ -------------
(5,202) (4,026)
Treasury Stock, 3,437,500 shares (263) (263)
------------ -------------
Total Stockholder's Deficit (5,465) (4,289)
------------ -------------
Total Liabilities and Stockholders' Deficit $ 565 $ 736
============ =============
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 Six months ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---------- --------- --------- ---------
Contract revenues $ 132 $ 1,190 $ 296 $ 2,277
Costs and expenses:
Cost of sales 198 688 403 1,631
Research and development - 36 59 113
General and administrative 472 330 686 868
Depreciation and amortization 72 50 138 113
---------- --------- --------- ---------
Total costs and expenses 742 1,104 1,286 2,725
---------- --------- --------- ---------
Income (loss) from operations (610) 86 (990) (448)
---------- --------- --------- ---------
Other income (expense):
Interest income - - - -
Interest expense (108) (26) (158) (68)
---------- --------- --------- ---------
Net other income (expense) (108) (26) (158) (68)
---------- --------- --------- ---------
Income (loss) before income taxes (718) 60 (1,148) (516)
Income taxes - - - -
---------- --------- --------- ---------
Income (loss) from continuing operations (718) 60 (1,148) (516)
Loss from discontinued operations of component DRM
(including loss on disposal of $4,134 during the three
months and six months ended June 30, 2002) - (4,752) - (4,802)
---------- --------- --------- ---------
Net loss $ (718) $ (4,692) $ (1,148) $ (5,318)
========== ========= ========= =========
Loss per share - from continuing operations - basic $ (0.01) $ (0.00) $ (0.01) $ (0.01)
and diluted
Loss per share - from discontinued operations - basic $ (0.00) $ (0.08) $ (0.00) $ (0.08)
and diluted ---------- --------- --------- ---------
Loss per share - basic and diluted $ (0.01) $ (0.08) $ (0.01) $ (0.09)
========== ========= ========= =========
Number of weighted average shares outstanding (000's) 84,834 57,645 76,694 57,478
========== ========= ========= =========
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)
Six months ended
June 30, June 30,
2003 2002
---------- ------------
Cash flows from operating activities:
Net loss $ (1,148) $ (5,318)
Add: net loss from discontinued operations - 4,802
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 137 133
Amortization of debt discount 35 18
Other non-cash charges - -
Changes in assets and liabilities:
Accounts receivable, net 4 43
Prepaid assets (2) 160
Accounts payable (30) (47)
Other liabilities 687 96
---------- -----------
Net cash (used in) provided by continuing operations (317) (113)
Net cash provided by discontinued operations - 184
---------- ------------
Net cash provided by
operating activities (317) 71
Cash flows from investing activities:
Purchase of equipment (6) -
Advances to related parties 64 (32)
---------- -----------
Net cash used in continuing operations (58) (32)
Net cash used in discontinued operations - (4)
---------- -----------
Net cash used in
investing activities (58) (36)
Cash flows from financing activities:
Increase in (repayment of) line of credit - 36
Increase in notes and loans payable 261 -
Payments on notes payable and long-term debt (40) (119)
Proceeds from sale of common stock - -
---------- -----------
Net cash used in
financing activities 221 (83)
Increase (decrease) in cash (38) (48)
Cash, beginning of period 59 170
---------- -----------
Cash, end of period $ 21 $ 122
========== ===========
See notes to condensed consolidated financial statements.
4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 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 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 six month periods ended June 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 six-month period ended June 30, 2003, and
the years ended December 31, 2002, 2001 and 2000, Applied incurred losses of
($1,148,000), ($5,972,000), ($6,554,000) and ($11,441,000), respectively. For
the six month period ended June 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 $(317,000), $(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 $398,000 and $238,000 at
June 30, 2003 and December 31, 2002, respectively. These allowances are included
in other accrued liabilities in the accompanying financial statements.
5
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 June 30, 2003, no expense has been recognized
for the variable options as the fair market value of Applied's common stock at
June 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.
Note B - Supplemental Cash Flow Information
During the three and six month periods ended June 30, 2003, 19,500 and
128,500 shares of Series E Preferred Stock were converted into 8,391,418 and
24,528,133 shares of the Company's common stock, respectively. During the three
and six month periods ended June 30, 2003, the Company paid dividends on the
Series E Preferred Stock conversions of $0 and $141,929, respectively, converted
into 0 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
six-month periods ended June 30, 2003, of $54,297 and $130,519, respectively,
which is included in Other Accrued Liabilities.
During the three and six month periods ended June 30, 2003, 0 and
17,500 shares of Preferred Stock Series F were converted into 0 and 2,450,514,
shares of the Company's common stock, respectively. During the three and six
month periods ended June 30, 2003, the Company paid dividends on the Series E
Preferred Stock conversions of $0 and $39,387, respectively, converted into 0
and 551,571, shares of the Company's common stock, respectively. The Company
accrued dividends on Preferred Stock Series F for the three and six-month
periods ended June 30, 2003, of $36,836 and $68,785, respectively, which is
included in Other Accrued Liabilities.
During the three and six month periods ended June 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 six-month
periods ended June 30, 2003, of $6,000 and $12,000, respectively, which is
included in Other Accrued Liabilities.
6
Note C - Other Accrued Liabilities
Other accrued liabilities consist of the following:
June 30, December 31,
2003 2002
------------- ------------
Dividend payable $ 1,238 $ 1,210
Compensation and employee benefits 1,105 842
Loss reserve 398 238
Related party obligation to issue stock for
converted note payable and accrued interest 287 -
Exit and forbearance fees on notes payable 199 -
Related parties 185 185
Accrued interest 169 155
Other 107 93
------------- ------------
$ 3,688 $ 2,723
============= ============
Note D - Liability to Issue Shares of Common Stock
During March 2003, a shareholder and officer agreed to convert his
$250,000 note payable and $37,000 of accrued interest due from the Company into
13,189,841 shares of the Company's common stock. As the issuance of the common
stock has not occurred as of June 30, 2003, the Company has included these
amounts in Other Accrued Liabilities at June 30, 2003. The Company anticipates
issuing the shares of common stock when the shares are authorized to be issued.
These shares have not been issued as of August 14, 2003.
Note E - Stock Based Compensation
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 June 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 F - 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., which
primarily provides various engineering, legal, sampling, and public relations
services to Government agencies on a cost plus basis; (ii) Commodore Solution
Technologies, Inc., 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.
7
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 June 30, 2003
(Dollars in Thousands)
Corporate
Overhead
Total ASI Solution and Other
Contract revenues $ 132 $ 132 $ - $ -
Costs and expenses
Cost of sales 198 198 - -
Research and development - - - -
General and administrative 472 149 35 288
Depreciation and amortization 72 16 56 -
-------- --------- ---------- ------------
Total costs and expenses 742 363 91 288
-------- --------- ---------- ------------
Income (loss) from operations (610) (231) (91) (288)
Interest income - - - -
Interest expense (108) (1) - (107)
Income taxes - - - -
-------- --------- ---------- ------------
Income (loss) from continuing operations (718) (232) (91) (395)
Loss from discontinued
Operations - - - -
-------- --------- ---------- ------------
Net income (loss) $ (718) $ (232) $ (91) $ (395)
======== ========= ========== ============
Total assets $ 565 $ 157 $ 250 $ 158
Expenditures for long-lived assets $ - $ - $ - $ -
8
Six Months Ended June 30, 2003
(Dollars in Thousands)
Corporate
Overhead
Total ASI Solution and Other
Contract revenues $ 296 $ 296 $ - $ -
Costs and expenses
Cost of sales 403 403 - -
Research and development 59 - 59 -
General and administrative 686 225 97 364
Depreciation and amortization 138 26 112 -
-------- --------- ---------- ------------
Total costs and expenses 1,286 654 268 364
-------- --------- ---------- ------------
Income (loss) from operations (990) (358) (268) (364)
Interest income - - - -
Interest expense (158) (3) - (155)
Income taxes - - - -
-------- --------- ---------- ------------
Income (loss) from continuing (1,148) (361) (268) (519)
operations
Loss from discontinued operations - - - -
-------- --------- ---------- ------------
Net Income (loss) $ (1,148) $ (361) $ (268) $ (519)
======== ========= ========== ============
Total assets $ 565 $ 157 $ 250 $ 158
Expenditures for long-lived assets $ 6 $ 6 $ - $ -
9
Three Months Ended June 30, 2002
(Dollars in Thousands)
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 1,190 $ 1,157 $ 33 $ - $ -
Costs and expenses
Cost of sales 688 606 82 - -
Research and development 36 - 36 - -
General and administrative 330 185 12 - 133
Depreciation and amortization 50 9 41 - -
-------- --------- ---------- ------------ ------------
Total costs and expenses 1,104 800 171 - 133
-------- --------- ---------- ------------ ------------
Income (loss) from operations 86 357 (138) - (133)
Interest income - - - - -
Interest expense (26) (26) - - -
Income taxes - - - - -
-------- --------- ---------- ------------ ------------
Loss from continuing operations 60 331 (138) - (133)
Loss from discontinued operations (4,752) - - (4,752) -
-------- --------- ---------- ------------ ------------
Net income (loss) $ (4,692) $ 331 $ (138) $ (4,752) $ (133)
======== ========= ========== ============ ============
Total assets $ 1,409 $ 845 $ 484 $ - $ 80
Expenditures for long-lived assets $ - $ - $ - $ - $ -
10
Six Months Ended June 30, 2002
(Dollars in Thousands)
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 2,277 $ 2,244 $ 33 $ - $ -
Costs and expenses
Cost of sales 1,631 1,451 180 - -
Research and development 113 - 113 - -
General and administrative 868 395 52 - 421
Depreciation and amortization 113 22 91 - -
-------- --------- ---------- ------------ ------------
Total costs and expenses 2,725 1,868 436 - 421
-------- --------- ---------- ------------ ------------
Income (loss) from operations (448) 376 (403) - (421)
Interest income - - - - -
Interest expense (68) (52) - - 16
Income taxes - - - - -
-------- --------- ---------- ------------ ------------
Income (loss) from continuing operations (516) 324 (403) - (437)
-
Loss from discontinued operations (4,802) - - (4,802) -
-------- --------- ---------- ------------ ------------
Net Income (loss) $ (5,318) $ 324 $ (403) $ (4,802) $ (437)
======== ========= ========== ============ ============
Total assets $ 1,409 $ 845 $ 484 $ - $ 80
Expenditures for long-lived assets $ 4 $ - $ - $ 4 $ -
11
Note G - 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 June 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 H - 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 I - Subsequent Events
Issuance of Common Stock subsequent to June 30, 2003
The Company issued a total of 9,608,701 shares of its common stock
during the period from June 30, 2003 to August 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").
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 $80,000.
The Company is currently working on the commercialization of these
technologies through development efforts, licensing arrangements and joint
ventures. Through Commodore Advanced Sciences, Inc. ("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.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2003 Compared to Three and Six Months Ended
June 30, 2002
Revenues from continuing operations were $132,000 and $296,000 for the
three and six months ended June 30, 2003 compared to $1,190,000 and $2,277,000
for the three and six months ended June 30, 2002. Such revenues were primarily
from the Company's subsidiary ASI.
In the case of ASI, revenues were $132,000 and $296,000 respectively
for the three and six months ended June 30, 2003 as compared with $1,157,000 and
$2,244,000 for the three and six months ended June 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. ASI has two major customers, each of which represent more
than 10% of total revenue. The combined revenue for these two customers was
$132,000 and $296,000 respectively (100% of total revenues) for the three and
six months ended June 30, 2003. Cost of sales was $198,000 and $403,000
respectively for the three and six months ended June 30, 2003 compared to
$606,000 and $1,451,000 respectively for the three and six months ended June 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 six months
ended June 30, 2003.
13
In the case of Commodore Solution, Inc. ("Solution"), revenues were $0
and $0 respectively for the three and six months ended June 30, 2003 as compared
with $33,000 and $33,000 respectively for three and six months ended June 30,
2002. There were no revenues recorded for the three and six month period ended
June 30, 2003 due to (i) SET processing contracts being completed but not yet
billable under current revenue recognition guidelines, (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 $0 and $0 respectively
for the three and six months ended June 30, 2003 as compared to $82,000 and
$180,000 respectively for the three and six months ended June 30, 2002. The cost
of sales, when incurred, is attributable to sales and marketing expenses for the
SET technology. 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 six months ended June 30, 2003, the Company incurred
research and development costs of $0 and $59,000 respectively as compared to
$36,000 and $113,000 respectively for the three and six months ended June 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 six months ended June 30, 2003 were $472,000 and $686,000 respectively
as compared to $330,000 and $868,000 respectively for the three and six months
ended June 30, 2002. This difference is due to the reduction in staffing and
other expenses.
Interest income was $0 and $0, respectively, for the three and six
month periods ended June 30, 2003 compared to $0 and $0, respectively for the
three and six month period ended June 30, 2002. The Company did not have a
material amount of monies on deposit to generate interest income for these
periods.
Interest expense for continuing operations for the three and six months
ended June 30, 2003 was $108,000 and $158,000, respectively as compared to
$26,000 and $68,000, respectively for the three and six months ended June 30,
2002. The increase in interest expense is primarily related to amortization of
interest costs associated with the Brewer Promissory Note, the amortization of
interest costs associated with the Weiss Group Notes, the amortization of
interest costs and exit fees associated with the Milford/Shaar Bridge Loan
Notes.
14
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003 and December 31, 2002 ASI had a $0 and $0 outstanding
balance, respectively, on its revolving lines of credit.
For the three and six month periods ended June 30, 2003, the Company
incurred a net loss of ($718,000) and ($1,148,000), respectively as compared to
a net loss of ($4,692,000) and ($5,318,000), respectively for the three and six
months ended June 30, 2002. For the six-month period ended June 30, 2003, and
for the years ended December 31, 2002, 2001, and 2000, Applied incurred losses
of ($1,148,000), ($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 six month periods ended June 30, 2003, the Company
converted 19,500 and 128,500, respectively, shares of Series E Preferred for
8,391,418 and 26,095,122 shares of the Company's common stock, respectively.
During the three and six month periods ended June 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 June 30, 2003.
During the three and six month periods ended June 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's loss of the DRM subsidiary effective May 16, 2002 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 $80,000 at June 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 149,500 shares of Series E Preferred with a face value of
$1,495,000 outstanding as of June 30, 2003. There is $761,439 of accrued
dividends payable on the Series E Preferred as of June 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 June 30, 2003. There is $458,103 of accrued
dividends payable on the Series F Preferred as of June 30, 2003.
15
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 will be converted into 13,189,842 shares of the
Company's common stock. These shares have not been issued to SB Enterprises as
of August 14, 2003 and are recorded as a liability for $286,563. 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 August 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.
16
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 16.58% 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 $254,231 and remains unpaid as of August 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.
17
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 $984,959 and remains unpaid as of August 14, 2003. Additionally, as of August
14, 2003, there is $119,173 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 August 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 $192,032 and remains unpaid as of
August 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.
18
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 June 30, 2003. There is $20,762 of accrued dividends
payable on the Series H Preferred as of June 30, 2003.
The financial information included in the accompanying form 10Q for the
period ending June 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
business; capital expenditures; litigation; regulatory matters; and the
19
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, 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 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.
20
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
April 16, 2003, announcing its March 31, 2003 Quarterly
earnings.
21
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: August 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)
22