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, 2004
OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11871
COMMODORE APPLIED TECHNOLOGIES, INC.
------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-3312952
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 East 58th Street, Suite 3238
New York, New York 10155
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (212) 308-5800
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Exchange Act Rule 12b-2). Yes No X
------ -------
The number of shares the common stock outstanding at November 14, 2004 was
134,346,053.
COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page No.
PART I FINANCIAL INFORMATION................................................1
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
September 30, 2004 and December 31, 2003..................2
Condensed Consolidated Statement of Operations - Three
and Nine months ended September 30, 2004 and
September 30, 2003........................................4
Condensed Consolidated Statement of Cash Flows -
Nine months ended September 30, 2004 and
September 30, 2003........................................5
Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......19
Item 4. Controls and Procedures..........................................19
PART II OTHER INFORMATION...................................................20
SIGNATURES...................................................................21
1
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
--------------------
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, except per share data)
September 30, December 31,
ASSETS 2004 2003
------------ ------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 61 $ -
Accounts receivable, net 104 71
Prepaid assets and other current receivables 17 13
------------ ------------
Total Current Assets 182 84
Property and equipment, net 14 142
Patents and completed technology, net of
accumulated amortization of
$100 and $80, respectively - 20
------------ ------------
Total Assets $ 196 $ 246
============ ============
See notes to condensed consolidated financial statements.
2
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, except per share data)
September 30, December 31,
LIABILITIES AND 2004 2003
STOCKHOLDERS' DEFICIT ------------ ------------
(unaudited)
Current Liabilities:
Checks written in excess of cash $ - $ 13
Accounts payable 1,006 1,031
Related party payable 320 278
Current portion of long term debt 246 -
Line of credit 7 64
Other accrued liabilities 4,915 3,937
------------ ------------
Total Current Liabilities 6,494 5,323
Long Term Debt 2,645 1,575
------------ ------------
Total Liabilities 9,139 6,898
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, 1,013,700 shares and
1,033,700 shares issued and outstanding as
of September 30, 2004 and December 31,
2003, respectively.
The shares had an aggregate liquidation
Value of $3,856 and $4,142 at
September 30, 2004 and December 31,
2003 respectively. 1 1
Common Stock, par value $0.001 per share,
300,000,000 shares authorized, 127,273,071
and 117,702,133 issued and outstanding, at
September 30, 2004 and December 31, 2003,
respectively. 127 118
Additional Paid-in Capital 67,446 67,664
Accumulated Deficit (76,254) (74,172)
------------ ------------
(8,680) (6,389)
Treasury Stock, 3,437,500 shares (263) (263)
------------ ------------
Total Stockholders' Deficit (8,943) (6,652)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 196 $ 246
============ ============
See notes to condensed consolidated financial statements.
3
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited - Dollars in Thousands, except per share data)
Three months ended Nine months ended
Sept 30, Sept 30, Sept 30, Sept 30,
2004 2003 2004 2003
---------- ---------- --------- -----------
Contract revenues $ 155 $ 166 $ 449 $ 462
Costs and expenses:
Cost of sales 180 212 687 615
Research and development - 4 7 63
General and administrative 466 383 1,393 1,069
Depreciation and amortization 20 65 149 203
---------- ---------- --------- -----------
Total costs and expenses 666 664 2,236 1,950
---------- ---------- --------- -----------
Loss from operations (511) (498) (1,787) (1,488)
---------- ---------- --------- -----------
Other income (expense):
Interest expense (115) (221) (295) (379)
---------- ---------- --------- -----------
Net other income (expense) (115) (221) (295) (379)
---------- ---------- --------- -----------
Loss before income taxes (626) (719) (2,082) (1,867)
Income taxes -- -- -- --
---------- ---------- --------- -----------
Net loss $ (626) $ (719) $ (2,082) $ (1,867)
========== ========== ========= ===========
Loss per share - basic and diluted $ (0.01) $ (0.01) $ (0.02) $ (0.02)
========== ========== ========= ===========
Number of weighted average shares outstanding (000's)
basic and diluted 127,273 94,834 125,046 83,462
========== ========== ========= ===========
See notes to condensed consolidated financial statements.
4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited - Dollars in Thousands, except per share data)
Nine months ended
September 30, September 30,
2004 2003
---------- -----------
Cash flows from operating activities:
Net loss $ (2,082) $ (1,867)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 149 203
Amortization of debt discount 22 35
Changes in assets and liabilities:
Accounts receivable, net (33) 10
Prepaid assets (4) 81
Checks written in excess of cash (13)
Accounts payable (25) 7
Other liabilities 755 614
---------- -----------
Net cash used in operating activities (1,231) (917)
Cash flows from investing activities:
Purchase of equipment (1) (11)
Advances from (to) related parties 42 (80)
---------- -----------
Net cash used in investing activities 41 (91)
Cash flows from financing activities:
Increase in (repayment of) line of credit (57) --
Increase in notes and loans payable 1,294 991
Payments on notes and loans payable -- (40)
Proceeds from exercised warrants 14 --
---------- -----------
Net cash provided by financing activities 1,251 951
Increase (decrease) in cash 61 (57)
Cash, beginning of period -- 59
---------- -----------
Cash, end of period $ 61 $ 2
========== ===========
See notes to condensed consolidated financial statements.
5
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2004
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Commodore Applied Technologies, Inc. and subsidiaries (the "Company" or
"Applied") have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The financial
statement information was derived from unaudited financial statements unless
indicated otherwise. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended September
30, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004.
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, 2003.
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 months ended September 30, 2004, and
for the years ended December 31, 2003, 2002, and 2001, Applied incurred losses
of $2,082,000, $2,957,000, $5,972,000, and $6,554,000, respectively. Applied has
also experienced net cash (outflows) inflows from operating activities of
$(955,000), $(121,000), and $965,000 for the years ended December 31, 2003,
2002, and 2001, respectively. 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, the sale of new shares of company stock or alternative methods such as
mergers or sale transactions. No assurances can be given, however, that Applied
will be able to obtain any of these potential sources of cash.
Anticipated losses on contracts are provided for by a charge to income
during the period such losses are identified. Changes in job performance, job
conditions, estimated profitability (including those arising from contract
penalty provisions) and final contract settlements may result in revisions to
cost and income and are recognized in the period in which the revisions are
determined. Allowances for anticipated losses totaled $376,000 and $313,000 at
September 30, 2004 and December 31, 2003, respectively. These allowances are
included in other accrued liabilities in the accompanying financial statements.
In as much as Applied rescinded certain options during 2002 and
reissued new options to the option holders, the options are considered variable
options and will be revalued each quarter to determine the effect on operations,
if any. During the quarter ended September 30, 2004, no expense has been
recognized for the variable options as the fair market value of Applied's common
stock at September 30, 2004 was lower than the exercise price of the variable
options.
6
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The preparation of consolidated
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The Company accounts for stock-based compensation under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income (loss), as all options vested had an exercise
price equal to the market value of the underlying common stock on the date of
grant or the date of repricing. No options were issued or vested during the
quarters ended September 30, 2004 and 2003, therefore, there would be no effect
on net income and earnings per share if the company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
Note B - Supplemental Cash Flow Information
During the three and nine month periods ended September 30, 2004, 0 and
20,000 shares of Series E Preferred Stock were converted into 0 and 9,071,937
shares of the Company's common stock, respectively. During the three and nine
month periods ended September 30, 2004, the Company paid no dividends on the
Series E Preferred Stock conversions. The Company accrued dividends on Preferred
Stock Series E for the three and nine month periods ended September 30, 2004, of
$30,089 and $94,074, respectively, which is included in Other Accrued
Liabilities.
During the three and nine month periods ended September 30, 2004, no
shares of Preferred Stock Series F were converted into shares of the Company's
common stock. The Company accrued dividends on Preferred Stock Series F for the
three and nine month periods ended September 30, 2004, of $37,241 and $110,914,
respectively, which is included in Other Accrued Liabilities.
During the three and nine month periods ended September 30, 2004, no
shares of Preferred Stock Series H were converted into shares of common stock.
The company paid no accrued dividends on Preferred Stock Series H. The Company
accrued dividends on Preferred Stock Series H for the three and nine month
periods ended September 30, 2004, of $6,049 and $18,016, respectively, which is
included in Other Accrued Liabilities.
7
Note C - Other Accrued Liabilities
Other accrued liabilities consist of the following:
September 30, December 31,
2004 2003
------------- ------------
(unaudited)
Compensation and employee benefits $ 1,791 $ 1,373
Dividend payable 1,628 1,405
Accrued interest 624 351
Loss reserve 376 313
Exit and forbearance fees on notes payable 219 219
Related parties 185 185
Other 92 91
------------- ------------
$ 4,915 $ 3,937
============= ============
Note D - Segment Information
The Company has identified three reportable segments in which it
operates, based on the guidelines set forth in the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 131. These
three segments are as follows: (i) Commodore Advanced Sciences, Inc., which
primarily provides various engineering, legal, sampling, and public relations
services to Government agencies on a cost plus basis; (ii) Commodore Solutions,
Inc., which is commercializing technologies to treat mixed and hazardous waste;
and (iii) Corporate overhead and other miscellaneous activities.
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.
8
Three Months Ended September 30, 2004
(Dollars in Thousands)
-------------------------------------------------------------------------------------------------------
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract revenues $ 155 $ 155 $ -- $ --
Costs and expenses
Cost of sales 180 122 58 --
Research and development -- -- -- --
General and administrative 466 156 19 291
Depreciation and amortization 20 -- 20 --
---------- --------- --------- ----------
Total costs and expenses 666 278 97 291
---------- --------- --------- ----------
Income (loss) from operations (511) (123) (97) (291)
Interest income -- -- -- --
Interest expense (115) -- -- (115)
---------- --------- --------- ----------
Loss before income taxes (626) (123) (97) (406)
Income taxes -- -- -- --
---------- --------- --------- ----------
Net income (loss) $ (626) $ (123) $ (97) $ (406)
========== ========= ========= ==========
Total assets $ 196 $ 196 $ -- $ --
Expenditures for long-lived assets $ 1 $ 1 $ -- $ --
9
Nine Months Ended September 30, 2004
(Dollars in Thousands)
-------------------------------------------------------------------------------------------------------
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract revenues $ 449 $ 409 $ 40 $ --
Costs and expenses
Cost of sales 687 366 321 --
Research and development 7 -- 7 --
General and administrative 1,393 279 168 946
Depreciation and amortization 149 20 129 --
---------- --------- --------- ----------
Total costs and expenses 2,236 665 625 946
---------- --------- --------- ----------
Income (loss) from operations (1,787) (256) (585) (946)
Interest income -- -- -- --
Interest expense (295) -- -- (295)
---------- --------- --------- ----------
Loss before income taxes (2,082) (256) (585) (1,241)
Income taxes -- -- -- --
---------- --------- --------- ----------
Net Income (loss) $ (2,082) $ (256) $ (585) $ (1,241)
========== ========= ========= ==========
Total assets $ 196 $ 196 $ -- $ -- $ --
Expenditures for long-lived assets $ 1 $ 1 $ -- $ --
10
Three Months Ended September 30, 2003
(Dollars in Thousands)
-------------------------------------------------------------------------------------------------------
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract revenues $ 166 $ 149 $ 17 $ --
Costs and expenses
Cost of sales 212 195 17 --
Research and development 4 -- 4 --
General and administrative 383 119 30 234
Depreciation and amortization 65 9 56 --
---------- --------- --------- ----------
Total costs and expenses 664 323 107 234
---------- --------- --------- ----------
Income (loss) from operations (498) (174) (90) (234)
Interest income -- -- -- --
Interest expense (221) -- -- (221)
---------- --------- --------- ----------
Loss before income taxes (719) (174) (90) (455)
Income taxes -- -- -- --
---------- --------- --------- ----------
Income (loss) from continuing operations (719) (174) (90) (455)
Loss from discontinued
Operations -- -- -- --
---------- --------- --------- ----------
Net income (loss) $ (719) $ (174) $ (90) $ (455)
========== ========= ========= ==========
Total assets $ 396 $ 168 $ 200 $ 28
Expenditures for long-lived assets $ 5 $ 5 $ -- $ --
11
Nine Months Ended September 30, 2003
(Dollars in Thousands)
-------------------------------------------------------------------------------------------------------
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract revenues $ 462 $ 445 $ 17 $ --
Costs and expenses
Cost of sales 615 598 17 --
Research and development 63 -- 63 --
General and administrative 1,069 344 127 598
Depreciation and amortization 203 35 168 --
---------- --------- --------- ----------
Total costs and expenses 1,950 977 375 598
---------- --------- --------- ----------
Income (loss) from operations (1,488) (532) (358) (598)
Interest income -- -- -- --
Interest expense (379) (3) -- (376)
---------- --------- --------- ----------
Loss before income taxes (1,867) (535) (358) (974)
Income taxes -- -- -- --
---------- --------- --------- ----------
Net Income (loss) $ (1,867) $ (535) $ (358) $ (974)
========== ========= ========= ==========
Total assets $ 396 $ 168 $ 200 $ 28
Expenditures for long-lived assets $ 11 $ 11 $ -- $ --
12
Note E - Net Loss per Common Share
Basic net loss per common share ("Basic EPS") excludes dilution and is
computed by dividing net loss available to common shareholders by the weighted
average number of common shares outstanding during the period. Diluted net loss
per common share ("Diluted EPS") reflects the potential dilution that could
occur if stock options or other contracts to issue common stock were exercised
or converted into common stock. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an anti-dilutive effect on
net loss per common share.
Options and warrants to purchase 120,721,815 and 34,274,905 shares of
common stock as of September 30, 2004 and 2003, respectively, were not included
in the computation of Diluted EPS. The inclusion of the options would have been
anti-dilutive, thereby decreasing net loss per common share.
Note F - Contingencies
Applied has matters of litigation arising in the ordinary course of
business which in the opinion of management will not have a material adverse
effect on its financial condition or results of operations.
Note G - Subsequent Events
Issuance of Common Stock subsequent to September 30, 2004
The Company issued a total of 7,072,982 shares of its common stock
during the period from September 30, 2004 to November 14, 2004, in connection
with various conversion notices from the holders of the Company's Series E
Convertible Preferred Stock, par value ($0.001) per share (the "Series E
Preferred") and the holders of the Company's Series F Convertible Preferred
Stock, par value ($0.001) per share (the "Series F Preferred").
13
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Overview
Commodore Applied Technologies, Inc. and subsidiaries (the "Company" or
"Applied"), is engaged in providing a range of engineering, technical, and
financial services to the public and private sectors related to (i) remediating
contamination in soils, liquids and other materials, and disposing of or reusing
certain waste by-products by utilizing SET; and (ii) providing services related
to environmental management for on-site and off-site identification, remediation
and management of hazardous, mixed and radioactive waste.
The Company owns technologies related to the separation and destruction
of mixed waste, polychlorinated biphenyls (PCBs) and chlorofluorocarbons (CFCs).
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. However, management believes its existing client relationships will
allow the Company to obtain new contracts in the future.
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 $100,000.
The Company's auditor's opinion on our fiscal 2002 and 2003 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 requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements.
The Company will hold its 2003 Annual Meeting at The Fitzpatrick Hotel
located at 687 Lexington Avenue, New York, NY 10015 on December 21, 2004 - 11:00
a.m. EST. The record date for the shareholders of the Company for the Company's
2003 Annual Meeting is November 10, 2004.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 2004 Compared to Three and
Nine Months Ended September 30, 2003
Revenues from continuing operations were $155,000 and $449,000 for the
three and nine months ended September 30, 2004 compared to $166,000 and $462,000
for the three and nine months ended September 30, 2003. Such revenues were
primarily from the Company's subsidiary Advanced Sciences.
In the case of Advanced Sciences, revenues were $155,000 and $409,000
respectively for the three and nine months ended September 30, 2004 as compared
with $149,000 and $445,000 for the three and nine months ended September 30,
2003. Advanced Sciences has experienced a significant decrease in revenue caused
by fewer contracts and overall, less work being performed by Advanced Sciences.
The revenues from Advanced Sciences consisted of engineering and scientific
services performed for the United States government under a variety of
contracts, most of which provide for reimbursement of cost plus fixed fees.
Revenue under cost-reimbursement contracts is recorded under the percentage of
completion method as costs are incurred and include estimated fees in the
proportion that costs to date bear to total estimated costs. Advanced Sciences
has two major customers, each of which represents more than 10% of total
14
revenue. The combined revenue for these two customers was $155,000 and $409,000
respectively (100% of total revenues) for the three and nine months ended
September 30, 2004. Cost of sales was $122,000 and $366,000 respectively for the
three and nine months ended September 30, 2004 compared to $195,000 and $598,000
respectively for the three and nine months ended September 30, 2003. 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, 2004.
In the case of Solution, revenues were $0 and $40,000 respectively for
the three and nine months ended September 30, 2004 as compared with $17,000 and
$17,000 respectively for three and nine months ended September 30, 2003. There
were marginal revenues recorded for the three and nine month period ended
September 30, 2004 due to (i) SET processing contracts being negotiated but not
yet initiated, (ii) United States Environmental Protection Agency (the "USEPA")
demonstration of the SL-2 system at a client location in Oak Ridge, Tennessee
for inclusion to the Company's nationwide permit for PCB destruction; and (iii)
the relocations of the SET equipment to Hanford, Washington. Revenues, when
recognized, are primarily from remediation services performed for engineering
and waste treatment companies in the U.S. under a variety of contracts. Cost of
sales was $58,000 and $321,000 respectively for the three and nine months ended
September 30, 2004 as compared to $17,000 and $17,000 respectively for the three
and nine months ended September 30, 2003. The cost of sales, when incurred, is
attributable to installation, set-up, supplies and salary expenses for the SET
technology. The cost of sales also includes other direct sales and marketing
expenses when incurred. Anticipated losses on engagements, if any, will be
provided for by a charge to income during the period such losses are first
identified.
For the three and nine months ended September 30, 2004, the Company
incurred research and development costs of $0 and $7,000 respectively as
compared to $4,000 and $63,000 respectively for the three and nine months ended
September 30, 2003. Research and development costs include salaries, wages, and
other related costs of personnel engaged in research and development activities,
contract services and materials, test equipment and rent for facilities involved
in research and development activities. Research and development costs are
expensed when incurred, except those costs related to the design or construction
of an asset having an economic useful life are capitalized, and then depreciated
over the estimated useful life of the asset. The decrease in research and
development expense is due to the continued commercialization focus of the
Company.
General and administrative expenses for continuing operations for the
three and nine months ended September 30, 2004 were $466,000 and $1,393,000
respectively as compared to $383,000 and $1,069,000 respectively for the three
and nine months ended September 30, 2003. This difference is primarily due to
the increased salaries, the majority of which is deferred, for the executives of
the Company for the periods ended September 30, 2004.
Interest expense for continuing operations for the three and nine
months ended September 30, 2004 was $115,000 and $295,000, respectively as
compared to $221,000 and $379,000, respectively for the three and nine months
ended September 30, 2003. The decrease in interest expense is primarily related
to the forbearance fees and exit fees of $219,000 associated with the
Milford/Shaar Bridge Loan Note recorded in the three and nine months ended
September 30, 2003.
15
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004 and December 31, 2003 Advanced Sciences had a $7
and $64 outstanding balance, respectively, on its revolving line of credit.
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 $100,000 at September 30, 2004.
The Company's auditor's opinion on our fiscal 2002 and 2003 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 requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements.
For the three and nine month periods ended September 30, 2004, the
Company incurred a net loss of ($626,000) and ($2,082,000), respectively as
compared to a net loss of ($719,000) and ($1,867,000), respectively for the
three and nine months ended September 30, 2003. For the nine-month period ended
September 30, 2004, and for the years ended December 31, 2003, 2002, and 2001,
Applied incurred losses of ($2,082,000), ($2,957,000), ($5,972,000) and
($6,554,000), respectively. Applied has also experienced net cash (outflows)
inflows from operating activities of $(955,000), $(121,000), and $965,000 for
the years ended December 31, 2003, 2002, and 2001, respectively.
During the three and nine month periods ended September 30, 2004, the
Company converted 0 and 20,000 respectively, shares of Series E Preferred and 0
shares of Series F Preferred for 0 and 9,071,937, respectively, shares of the
Company's common stock. For the three and nine month periods ended September 30,
2004, the Company converted no shares of Series H Preferred and issued no stock
with respect to accrued dividends pertaining to the Series H Preferred.
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. The
Weiss Group Note bears interest at 12% per annum and was due and payable on
February 12, 2001. All holders of the Weiss Group Note have granted payment
extensions to the Company until January 15, 2005 in exchange for warrants for
2,500,000 shares of the Company's common stock at an exercise price of $0.0285.
The current principal balance of the Weiss Group Note is $252,363 as of
September 30, 2004 and remains unpaid as of November 14, 2004. The warrant
discount remaining on the Weiss Group note at September 30, 2004 is $7,326.
Effective February 14, 2004, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 1,500,000 shares at an
exercise price of $0.05 per share of the Company's common stock in connection
with the Weiss Group Note.
Effective February 15, 2004, the Company issued warrants to purchase
2,500,000 shares of its common stock at an exercise price of $0.0285 per share
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 15, 2005.
The value of the warrants of approximately $29,344 was recorded as a discount on
the associated notes payable and will be amortized through January 15, 2005. 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 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
1,973,077 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.
The Company re-priced this warrant in November 2003 to $0.0285 and extended the
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expiration date of this warrant to November 19, 2005. 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.
The private investor exercised this warrant on April 7, 2004 and
received 500,000 shares of the Company's common stock.
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 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
December 31, 2005. In connection with the Milford/Shaar Bridge Loan Notes, the
Company issued to Milford/Shaar in February 2004, a five-year warrant for
250,000 shares of the Company's common stock at an exercise price of $0.03 per
share. 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 $2,648,741
as of September 30, 2004 and remains unpaid as of November 14, 2004.
Additionally, as of November 14, 2004, there is $119,073 in accumulated
forbearance fees and $100,000 due in exit fees on the Milford/Shaar Bridge Loan
Notes.
On October 2, 2002, Mr. Bentley Blum, a Director of the Company, had
previously loaned the Company with $125,000 of 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 using the conversion feature of 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 continued to provide
cash installments in the form of a loan to the Company through February 2004
(the "Blum Demand Note"). The Blum Demand Note bears interest at 9% per annum
and has no due date at this time. The current principal balance of the Blum
Demand Note is $312,032 as of September 30, 2004 and remains unpaid as of
November 14, 2004, and is included in related party payable.
On November 19, 2003, the Company issued a warrant to purchase
27,355,800 shares of its common stock at an exercise price of $0.0285 per share
(the closing price of our common stock on the OTCBB on such date) to the Blum
Asset Trust, a company controlled by Bentley Blum, a Director of the Company, in
consideration for the loans made to the Company and the usage of office space
and personnel of the Blum Asset Trust over the last five years. 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.
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.
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NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards (the "NOLs") of
approximately $34,000,000, which expire in the years 2010 through 2023. The
amount of NOLs that can be used in any one year will be limited by the
applicable tax laws that are in effect at the time such NOLs can be utilized.
The unused NOLs balances may be accumulated and used in subsequent years. A full
valuation allowance has been established to offset any benefit from the net
operating loss carryforwards. There can be no assurance that the Company will be
able to generate sufficient taxable income in the future to utilize any of the
NOLs.
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 and
uncertainties that would affect any such forward-looking statements. These risks
and uncertainties include, but are not limited to:
o the Company's critical need for additional cash to sustain
existing operations and meet existing obligations and capital
requirements (the Company's auditor's opinion on our fiscal 2002
and 2003 financial statements contains a "going concern"
qualification in which they express doubt about the Company's
ability to continue in business, absent additional financing);
o the ability to generate profitable operations from a large scale
remediation project;
o the ability of the Company to renew its nationwide permit to treat
PCBs;
o the ability of the Company to implement its waste processing
operations, including obtaining commercial waste processing
contracts and processing waste under such contracts in a timely
and cost effective manner.;
o the timing and award of contracts by the U.S. Department of Energy
for the cleanup of waste sites administered by it;
o the Company's ability to integrate acquired companies;
o the acceptance and implementation of the Company's waste treatment
technologies in the government and commercial sectors;
o the Company's ability to obtain and perform under other large
technical support services projects; developments in environmental
legislation and regulation;
o the ability of the Company to obtain future financing on favorable
terms;
o other circumstances affecting anticipated revenues and costs;
o the expiration of the Company's nationwide EPA permit expired in
September 2001. (the permit may be renewed subject to providing
additional information. The Company has not resubmitted
information for a new permit); and
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o the ability of the Company to replicate on a large scale,
economically viable basis, the results of its technology test
results.
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-15e under the Exchange Act, as of September 30, 2004, 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 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 during our most recent
fiscal quarter that has significantly affected or is reasonably
likely to significantly affect our internal controls over
financial reporting, including any corrective actions with regard
to significant deficiencies and material weaknesses.
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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. Unregistered Sales of Equity Securities and Use of Proceeds
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 Information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8 - K
(a) Exhibits.
1. 31.1 - Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
2. 31.2 - Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
3. 32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
4. 32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
1. The Company filed a Current Report on Form 8-K, dated August 16,
2004, announcing its June 30, 2004 Quarterly earnings.
2. The Company filed a Current Report on Form 8-K, dated September 2,
2004, announcing that its wholly owned engineering services
subsidiary, Commodore Advanced Sciences, Inc. (CASI), has been
awarded an environmental sampling and data integration contract by
Bechtel Jacobs Company, LLC of Oak Ridge, TN.
3. The Company filed a Current Report on Form 8-K, dated November 12,
2004, announcing that has initiated correspondence to its
shareholders concerning the 2003 Annual Meeting of shareholders to
be held on December 21, 2004. Additionally, the Company announced
that a protest of a provisional contract award to a team led by
its wholly owned subsidiary, Commodore Advanced Sciences, Inc. has
been resolved in the Company's favor. Additionally, the Company
announced that a protest of the Fast Flux Test Facility (FFTF)
contract award by DOE has been filed by the two losing teams, one
of which the Company was a member. The FFTF contract award was
protested to the Department of Energy, General Accounting Office
and the Small Business Association.
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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, 2004 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)
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