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, 2002
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11871
COMMODORE APPLIED TECHNOLOGIES, INC.
-------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 11-3312952
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2121 Jamieson Avenue, Suite 1406
Alexandria, Virginia 22314
-------------------- -----
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (703) 567-1284
--------------
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 19, 2002
was 57,645,290.
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, 2002 and December 31, 2001..................2
Condensed Consolidated Statement of Operations -
Three and Six months ended June 30, 2002 and
June 30, 2001........................................3
Condensed Consolidated Statement of Cash Flows -
Six months ended June 30, 2002 and
June 30, 2001........................................4
Notes to Condensed Consolidated Financial Statements.........5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................12
PART II OTHER INFORMATION................................................17
SIGNATURES................................................................18
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 2002 2001
---------- ------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 122 $ 170
Accounts receivable, net 556 599
Prepaid assets and other current receivables 167 327
---------- ----------
Total Current Assets 845 1,096
Property and equipment, net 484 597
Patents and completed technology, net of
accumulated amortization of .
$1,395 and $1,375, respectively 80 100
Assets held for sale - component DRM -- 29,407
---------- ----------
Total Assets $ 1,409 $ 31,200
========== ==========
See notes to condensed consolidated financial statements.
1
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands, except per share data)
June 30, December 31,
LIABILITIES AND 2002 2001
STOCKHOLDERS' (DEFICIT) EQUITY ---------- ------------
(unaudited)
Current Liabilities:
Accounts payable $ 2,072 $ 3,916
Related party payable 128 160
Current portion of long term debt 33 90
Line of credit 144 108
Notes payable 1,111 1,155
Other accrued liabilities 2,233 2,035
---------- ----------
Total Current Liabilities 5,721 7,464
Liabilities held for sale - component DRM -- 22,165
---------- ----------
Total Liabilities 5,721 29,629
Commitments and contingencies -- --
Stockholders' (Deficit) Equity
Convertible Preferred Stock, Series E & F
par value $0.001 per share, 5% to 12%
cumulative dividends, 601,700 shares authorized,
390,200 and 410,200 shares issued and outstanding
as of June 30, 2002 and December 31, 2001
respectively.
The shares had an aggregate liquidation
and $5,403 at value of $5,140
June 30, 2002 and December 31, 2001
respectively. -- --
Common Stock, par value $0.001 per share,
125,000,000 shares authorized, 57,645,290
and 55,417,354 issued and outstanding,
at June 30, 2002 and December 31, 2001,
respectively. 58 55
Additional paid-in capital 66,654 66,759
Shareholder receivable (83)
Accumulated deficit (70,561) (65,243)
---------- ----------
(3,932) (1,571)
Treasury Stock, 4,750,000 shares at June 30, 2002 (380) --
---------- ----------
Total Stockholder's (Deficit) Equity (4,312) 1,571
---------- ----------
Total Liabilities and Stockholders'(Deficit) Equity $ 1,409 $ 31,200
========== ==========
See notes to condensed consolidated financial statements.
2
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited - Dollars in Thousands, except per share data)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Contract revenues $ 1,190 $ 1,159 $ 2,277 $ 2,484
Costs and expenses:
Cost of sales 688 1,122 1,631 1,934
Research and development 36 76 113 196
General and administrative 330 324 868 1,033
Depreciation and amortization 50 174 113 347
---------- ---------- --------- ---------
Total costs and expenses 1,104 1,696 2,725 3,510
---------- ---------- --------- ---------
Income (loss) from operations 86 (537) (448) (1,026)
---------- ---------- --------- ---------
Other income (expense):
Interest income -- -- -- 3
Interest expense (26) (51) (68) (313)
---------- ---------- --------- ---------
Net other income (expense) (26) (51) (68) (310)
---------- ---------- --------- ---------
Income (loss) before income taxes 60 (588) (516) (1,336)
Income taxes -- -- -- --
---------- ---------- --------- ---------
Income (loss) from continuing operations 60 (588) (516) (1,336)
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) (224) (4,802) (125)
---------- ---------- --------- ---------
Net loss $ (4,692) $ (812) $ (5,318) $ (1,461)
========== ========== ========= =========
Loss per share - basic and diluted $ (0.08) $ (0.02) $ (0.09) $ (0.03)
========== ========== ========= =========
Number of weighted average shares outstanding (000's) 57,645 52,807 57,478 51,371
========== ========== ========= =========
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,
2002 2001
-------- --------
Cash flows from operating activities:
Net loss $ (5,318) $ (1,461)
Add: net loss from discontinued operations 4,802 125
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 133 347
Amortization of debt discount 18 29
Other non-cash charges - 53
Changes in assets and liabilities:
Accounts receivable, net 43 1,790
Prepaid assets 160 232
Accounts payable (47) (698)
Other liabilities 96 (351)
----------- ----------
Net cash (used in) provided by continuing operations (113) 66
Net cash provided by discontinued operations 184 617
----------- ----------
Net cash provided by operating activities 71 683
Cash flows from investing activities:
Purchase of equipment -- (10)
Advances to related parties (32) --
----------- ----------
Net cash used in continuing operations (32) (10)
Net cash used in discontinued operations (4) (47)
----------- ----------
Net cash used in investing activities (36) (57)
Cash flows from financing activities:
Increase in (repayment of) line of credit 36 (1,014)
Increase in notes and loans payable -- 1,000
Payments on notes payable and long-term debt (119) (282)
Proceeds from sale of common stock -- 200
----------- ----------
Net cash used in financing activities (83) (96)
Increase (decrease) in cash (48) 530
Cash, beginning of period 170 579
----------- ----------
Cash, end of period $ 122 $ 1,109
=========== ==========
See notes to condensed consolidated financial statements.
4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Commodore Applied Technologies, Inc. and subsidiaries (the "Company" or
"Applied") have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X. The
financial statement information was derived from unaudited financial statements
unless indicated otherwise. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's audited financial statements
included in the Company's annual report on Form 10-K for the year ended December
31, 2001.
Certain prior-year amounts have been reclassified to conform to the
current year presentation.
The accompanying financial statements have been prepared under the
assumption that Applied will continue as a going concern. Such assumption
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. For the six month period ended June 30, 2002, and
the years ended December 31, 2001, 2000 and 1999, Applied incurred losses of
$5,318,000, $6,554,000, $11,441,000 and $3,985,000, respectively. For the six
month period ended June 30, 2002, and for the years ended December 31, 2001,
2000 and 1999, Applied has also experienced net cash inflows (outflows) from
operating activities of $71,000, $1,907,000, $(2,002,000) and $(2,905,000). The
financial statements do not include any adjustments that might be necessary
should Applied be unable to continue as a going concern. Applied's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to obtain additional financing
as may be required, and ultimately to attain profitability. The Company has a
working capital deficit $4,876,000. 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 $200,000 at June 30, 2002
and December 31, 2001.
On May 16, 2002, a Notice of Default and Right to Pursue Remedies (the
"Notice") was issued to the Company by William J. Russell and Tamie B. Speciale
(the "Pledgees") claiming that the Company is in default under the Stock
5
Purchase Agreement (the "Agreement"), between the Company and Dispute Resolution
Management, Inc. ("DRM") and the related Stock Pledge Agreement (the "Stock
Pledge").
Pursuant to the Agreement, the Company agreed to repurchase from the
Pledgees, originally by September 29, 2001, and subsequently extended to January
16, 2002 and May 16, 2002, that number of the 9.5 million shares of the
Company's common stock issued in connection with the acquisition as necessary to
provide the Pledgees with cash of $14.5 million. As partial security for payment
of this repurchase obligation, the Company pledged to the Pledgees all shares of
DRM stock owned by the Company.
The Notice asserts that the Company is in default for its failure to
pay a repurchase of stock obligation, failure to perform certain covenants and
its insolvency. The Pledgees, as CEO and President of DRM, have transferred the
DRM Stock owned by the Company to and into the name of the Pledgees and has
tendered 4,750,000 shares of the Company's pledged common stock back to the
Company. As of May 16, 2002, the Company no longer owns an 81% interest in DRM.
In addition, the Notice made a demand for the immediate payment of (1)
$1,073,570, for advances to the Company for operating expenses during 2000-2001,
(2) $1,417,833, for advances to the Company for installment payments due to the
Pledgees under the Agreement, and (3) $1,500,000, for the Company's obligations
under the Agreement. The Pledgees intend to make demands for the immediate
payment of (4) all deficiency amounts, plus interest and expenses, due for the
Company's repurchase obligation under the Agreement, and (5) $8,582,167, plus
interest and expenses, for the accelerated make whole payment due by the Company
upon a sale of control. The Pledgees also reserved the right to vote the DRM
Stock in all DRM matters and to apply any funds or other property received on
the Company's pledged common stock to the Company's obligations.
The Company believes that it is not in default and has meritorious
defenses under the Agreement and Stock Pledge to the claims asserted by the
Pledgees. The Company plans and desires to reach an amicable resolution of this
matter. However, the Company's inability to resolve this matter and pay its
repurchase obligation would have a significant material adverse effect on the
financial condition of the Company, and the Company may not be able to continue
to operate as a going concern.
The Company's estimated loss of the DRM subsidiary may have a material
adverse effect on the financial condition of the Company and its cash flow
problems. The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements.
Excluding DRM, the Company's current monthly operating expenses exceed cash
revenues by approximately $100,000.
On August 19, 2002, the Company entered into a settlement agreement
with DRM. Under terms of the agreement, the Company acknowledged that it had
previously received back 4,750,000 shares of its common stock from DRM and its
shareholders. The Company is to receive an additional 1,187,500 shares of its
common stock and the Company is to issue to DRM 800,000 shares of Series H
Preferred stock for satisfaction of the remaining liabilities relating to the
purchase and working capital of DRM. The financial information included in the
accompanying form 10Q for the periods ending June 30, 2002 reflect the terms of
the settlement agreement. As of June 30, 2002 the Company recorded an estimated
loss on the disposal of DRM in the amount of $4,134,000.
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The preparation of consolidated
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
6
Note B - Segment Information
Using the guidelines set forth in SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", the Company has identified
two continuing reportable segments in which it operates, based on the services
it provides. The reportable segments are as follows: (i) Commodore Advanced
Sciences, Inc., which primarily provides various engineering, legal, sampling,
and public relations services to Government agencies on a cost plus basis; and
(ii) Commodore Solutions, Inc., which is commercializing technologies to treat
mixed and hazardous waste.
Applied evaluates segment performance based on the segment's net income
(loss). Applied's foreign and export sales and assets located outside of the
United States are not significant. Summarized financial information concerning
Applied's reportable segments is shown in the following table.
7
Three Months Ended 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 -- -- -- -- --
--------- -------- --------- ---------- ----------
Income (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 $ -- $ -- $ -- $ -- $ --
8
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 (516) 324 (403) -- (437)
operations
Loss from discontinued (4,802) -- -- (4,802) --
operations
--------- -------- --------- ---------- ----------
Net Income (loss) $ (5,318) $ 324 $ (403) (4,802) $ (437)
========= ======== ========= ========== ==========
Total assets $ 1,409 $ 845 $ 484 -- $ 80
Expenditures for long-lived assets $ 4 $ -- $ -- $ 4 $ --
9
Three Months Ended June 30, 2001
(Dollars in Thousands)
---------------------------------------- ---------------- --------------- -------------- ------------------ -----------------
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 1,159 $ 1,076 $ 83 $ -- $ --
Costs and expenses
Cost of sales 1,122 1,026 96 -- --
Research and development 76 -- 76 -- --
General and administrative 324 59 71 -- 194
Depreciation and amortization 174 19 114 -- 41
--------- -------- --------- ---------- ----------
Total costs and expenses 1,696 1,104 357 -- 235
--------- -------- --------- ---------- ----------
Income (loss) from operations (537) (28) (274) -- (235)
Interest income -- -- -- -- --
Interest expense (51) (10) -- -- (41)
Income taxes -- -- -- -- --
--------- -------- --------- ---------- ----------
Loss from continuing operations (588) (38) (274) -- (276)
Loss from discontinued (224) -- -- (224) --
operations
--------- -------- --------- ---------- ----------
Net income (loss) $ (812) $ (38) $ (274) $ (224) $ (276)
========= ======== ========= ========== ==========
Total assets $ 30,548 $ 2,478 $ 1,604 $ 3,477 $ 22,989
Expenditures for long-lived assets $ -- $ -- $ -- $ -- $ --
10
Six Months Ended June 30, 2001
(Dollars in Thousands)
---------------------------------------- --------------- --------------- ------------------ --------------- -----------------
Corporate
Overhead
Total ASI Solution DRM and Other
Contract revenues $ 2,484 $ 2,299 $ 185 $ -- $ --
Costs and expenses
Cost of sales 1,934 1,735 199 -- --
Research and development 196 -- 196 -- --
General and administrative 1,033 439 240 -- 354
Depreciation and amortization 347 39 231 -- 77
--------- -------- --------- ---------- ----------
Total costs and expenses 3,510 2,213 866 -- 431
--------- -------- --------- ---------- ----------
Income (loss) from operations (1,026) 86 (681) -- (431)
Interest income 3 -- -- -- 3
Interest expense (313) (36) -- -- (277)
Income taxes -- -- -- -- --
--------- -------- --------- ---------- ----------
Income (loss) from continuing (1,336) 50 (681) -- (705)
operations
Loss from discontinued (125) -- -- (125) --
operations --
--------- -------- --------- ---------- ----------
Net Income (loss) $ (1,461) $ 50 $ (681) $ (125) $ (705)
========= ======== ========= ========== ==========
Total assets $ 30,548 $ 2,478 $ 1,604 $ 3,477 $ 22,989
Expenditures for long-lived assets $ -- $ -- $ -- $ -- $ --
11
Note C - Contingencies
Applied has matters of litigation arising in the ordinary course of
business, which in the opinion of management, will not have a material adverse
effect on its financial condition or results of operations.
Note D - Subsequent Event
On August 19, 2002, the Company entered into a settlement agreement
with DRM. Under terms of the agreement, the Company acknowledged that it had
previously received back 4,750,000 shares of its common stock from DRM and its
shareholders. The Company is to receive an additional 1,187,500 shares of its
common stock and the Company is to issue to DRM 800,000 shares of Series H
Preferred stock for satisfaction of the remaining liabilities relating to the
purchase and working capital of DRM. The financial information included in the
accompanying form 10Q for the periods ending June 30, 2002 reflect the terms of
the settlement agreement. As of June 30, 2002 the Company recorded an estimated
loss on the disposal of DRM in the amount of $4,134,000.
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 estimated at $4,134,000 to Applied.
The Company is currently working on the commercialization of these
technologies through development efforts, licensing arrangements and joint
ventures. Through Commodore Advanced Sciences, Inc. ("ASI") formerly Advanced
Sciences, Inc., a subsidiary acquired on October 1, 1996, the Company has
contracts with various government agencies and private companies in the U.S. As
some government contracts are funded in one-year increments, there is a
possibility for cutbacks as these contracts constitute a major portion of ASI's
revenues, and such a reduction would materially affect the operations. However,
management believes its existing client relationships will allow the Company to
obtain new contracts in the future.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2002 Compared to Three and Six Months Ended
June 30, 2001
Revenues from continuing operations were $1,190,000 and $2,277,000 for
the three and six months ended June 30, 2002, compared to $1,159,000 and
$2,484,000 for the three and six months ended June 30, 2001. Such revenues were
primarily from the Company's subsidiary ASI.
In the case of ASI, revenues were $1,157,000 and $2,244,000
respectively for the three and six months ended June 30, 2002 as compared with
$1,076,000 and $2,299,000 for the three and six months ended June 30, 2001.
There are no material differences in sales. The revenues from ASI consisted of
engineering and scientific services performed for the United States government
under a variety of contracts. Revenue under cost-reimbursement contracts is
recorded under the percentage of completion method as costs are incurred and
include estimated fees in the proportion that costs to date bear to total
estimated costs. Currently, ASI has two major customers, each of which represent
more than 10% of total revenue. The combined revenue for these two customers was
$1,157,000 and $2,244,000 respectively (100% of total revenues) for the three
and six months ended June 30, 2002. Cost of sales was $606,000 and $1,451,000
respectively for the three and six months ended June 30, 2002 compared to
$1,026,000 and $1,735,000 respectively for the three and six months ended June
30, 2001. The decrease in cost of sales is due to greater efficiencies in
staffing and further reduction of sales associated expenses in the three and six
months ended June 30, 2002.
12
In the case of Commodore Solution, Inc. ("Solution"), revenues were
$33,000 and $33,000 respectively for the three and six months ended June 30,
2002 as compared with $83,000 and $185,000 respectively for three and six months
ended June 30, 2001. The decrease is primarily due to the decrease in
feasibility studies and commercial processing during this period. Revenues were
primarily from remediation services performed for engineering and waste
treatment companies in the U.S. under a variety of contracts. Solution has two
major customers, each of whom represents more than 10% of the revenue for the
three and six months ended June 30, 2002. The combined revenue for these two
customers was $33,000 and $33,000 respectively (100% of the Solution's total
revenue) for the three and six months ended June 30, 2002. Cost of sales was
$82,000 and $180,000 respectively for the three and six months ended June 30,
2002 as compared to $96,000 and $199,000 respectively for the three and six
months ended June 30, 2001. The decrease in cost of sales is attributable to
slightly reduced sales and marketing expenses for the SET technology, which the
Company anticipates will result in greater revenues from Solution in the
remainder of 2002. 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, 2002, the Company incurred
research and development costs of $36,000 and $113,000 respectively as compared
to $76,000 and $196,000 respectively for the three and six months ended June 30,
2001. Research and development costs include salaries, wages, and other related
costs of personnel engaged in research and development activities, contract
services and materials, test equipment and rent for facilities involved in
research and development activities. Research and development costs are expensed
when incurred, except those costs related to the design or construction of an
asset having an economic useful life 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, 2002 were $330,000 and $868,000 respectively
as compared to $324,000 and $1,033,000 respectively for the three and six months
ended June 30, 2001. This difference is due to the reduction in staffing and
other expenses.
Interest expense for continuing operations for the three and six months
ended June 30, 2002 was $26,000 and $68,000, respectively as compared to $51,000
and $313,000, respectively for the three and six months ended June 30, 2001. The
decrease in interest expense is primarily related to amortization of non-cash
interest costs associated with the Brewer Promissory Note, the amortization of
non-cash interest costs associated with the Bridge Loan Notes, and the
amortization of non-cash interest costs associated with the Milford/Shaar Bridge
Loan Notes.
The estimated loss from discontinued operations is approximately
$4,752,000 and $4,802,000, respectively for the three and six months ended June
30, 2002 as compared to $224,000 and $125,000, respectively for the three and
six months ended June 30, 2001. The difference results primarily from the
estimated loss on disposal of DRM of approximately $4,134,000. The remaining
difference is the result of the reduced retainers paid by DRM's current
customers and the lack of material settlements on their existing client
agreements.
13
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002 and December 31, 2001 ASI had a $144,000 and $108,000
outstanding balance, respectively, on its revolving lines of credit.
For the three and six months ended June 30, 2002, the Company incurred
a net income (loss) from continuing operations of $60,000 and ($516,000),
respectively as compared to a net loss of ($588,000) and ($1,336,000),
respectively for the three and six months ended June 30, 2001. For the period
ended June 30, 2002, and for the years ended December 31, 2001, 2000, and 1999,
Applied has also experienced net cash inflows (outflows) from operating
activities of $71,000, $1,907,000, ($2,002,000), and ($2,905,000). At June 30,
2002 the Company had working capital deficit of $4,876,000 and shareholders'
deficit of $4,312,000.
During the six-month period ended June 30, 2002, the Company converted
20,000 shares of Series F Convertible Preferred Stock for 1,360,544 shares of
the Company's common stock. Additionally, the Company issued 867,392 shares of
the Company's common stock in satisfaction of all accrued dividends pertaining
to the Series E and Series F Convertible Preferred Stock conversions to date.
In March 2000, the Company completed $2.0 million in financing through
private placement. The Company issued 226,000 shares of a new Series F
Convertible Preferred Stock, convertible into Common Stock at the market price,
after September 30, 2000 and up through April 30, 2003 at which time it
automatically converts to Common Stock. The Series F Convertible Preferred Stock
has a variable rate dividend averaging 8.15% over the term of the security. The
Company reserved the right to redeem all the Series F Convertible Preferred
Stock on or before September 30, 2000 by payment of $2.3 million plus any
accrued dividends.
In September 2000, the Company completed $500,000 in financing in the
form of a loan (the "Brewer Note") from S. Brewer Enterprises, Inc. ("SB
Enterprises"), which is owned by one of its officers and directors, Shelby T.
Brewer. The Brewer Note bears a 9.75% interest rate, payable monthly, with a
balloon principal payment at the end of the term. The note was due and payable
on March 15, 2001 and was extended under the same terms and conditions until
December 31, 2001. The Brewer Note is convertible into Common Stock at the
market price up through December 31, 2001.
On March 15, 2001, SB Enterprises executed an Amended and Restated
Promissory Note (the "Restated Brewer Note"), which extended the maturity date
of the note until December 31, 2001. Additionally, the conversion feature of the
Restated Brewer Note was changed to the 5-day average closing price of the
Company's common stock prior to a conversion notice. On April 9, 2001, SB
Enterprises issued a conversion notice for $250,000 of the outstanding principal
of the Brewer Restated Note. The conversion price was calculated by the previous
5-day average of the closing price of the Company's common stock and was
converted into 1,041,667 shares. The remaining principal balance of $250,000 is
outstanding as of August 19, 2002. The Company has not been notified of the
holder's intent to declare a default on the Brewer Note.
In November 2000, the Company completed $500,000 in financing in the
form of a loan (the "Weiss Group Note") from a group of four investors; $75,000
of which was borrowed from the son of Paul E. Hannesson, our former President
and Chief Executive Officer, and $25,000 of which was borrowed from Stephen A.
Weiss, a shareholder of Greenberg Traurig, LLP, our former corporate and
securities counsel. The Weiss Group Note bears interest at 12% per annum, was
due and payable on February 12, 2001, and is secured by the first $500,000 of
loans or dividends that the Company may receive from DRM. As consideration for
such loan, Environmental, one of the Company's principal stockholders owning
approximately 15% of the Common Stock, transferred to the investors a total of
1,000,000 shares of common stock. All holders of the Weiss Group Note have
granted payment extensions until May 31, 2002. The Company has not been notified
of the holders' intent to declare a default on the Weiss Group Note.
14
Effective April 5, 2001, the Company issued warrants to purchase
500,000 shares of its common stock at an exercise price of $0.22 per share (the
closing price of our common stock on the American Stock Exchange on such date)
to all holders of the Weiss Group Note in consideration of such persons
extension of the due date of such loans from February 12, 2001 to June 30, 2001.
Effective January 24, 2002, the Company issued warrants to purchase
500,000 shares of its common stock at an exercise price of $0.15 per share (the
closing price of our common stock on the American Stock Exchange on such date)
to all holders of the Weiss Group Note in consideration of such persons
extension of the due date of such loans from June 30, 2001 to May 31, 2002.
On May 23, 2001, a private investor purchased $250,000 of the Company's
common stock at the market price. The Company issued the private investor
1,923,077 shares of common stock of the Company as a result of the equity
purchase. In connection with the purchase of the shares of the Company's common
stock, the Company issued the private investor a 2-year warrant for 500,000
shares of the Company's common stock at an exercise price of $0.22 per share.
On June 13, 2001, the Company issued and sold to Milford Capital
Management, Inc. and the Shaar Fund, Ltd. (hereinafter known as "Milford/Shaar")
one-year, 15% Senior Secured Promissory Notes (the "Milford/Shaar Bridge Loan
Notes") in the aggregate principal amount of $1,000,000. In connection with the
Milford/Shaar Bridge Loan Notes, the Company issued to Milford/Shaar a five-year
warrant for 333,333 shares of the Company's common stock at an exercise price of
$0.22 per share. The Company pledged its equipment and SET related intellectual
property as collateral for the Milford/Shaar Bridge Loan Notes. The Company
shall pay Milford/Shaar principal and interest on a monthly basis in arrears.
The Milford/Shaar Bridge Loan Notes may be prepaid at any time without penalty.
The Company made all payments on the Milford/Shaar Bridge Loan Notes
until November 13, 2001. The Company asked for and received a forbearance of
payments on the Milford/Shaar Bridge Loan Notes from November 13, 2001 until
August 13, 2002. The Company has not been notified of the holders' intent to
declare a default on the Milford/Shaar Bridge Loan Notes.
The Company had an irrevocable obligation to repurchase from the former
shareholders of DRM, by May 16, 2002, that number of 9.5 million shares of the
Company's common stock (at a per share price equal to the greater of $1.50 or
the closing price of our common stock 30 days prior to purchase) as shall be
necessary to provide the holders of such shares with a total of $14.5 million.
The original repurchase obligation deadline of August 30, 2001, subsequently
extended through May 16, 2002 by a series of extensions (initially extended to
September 29, 2001, further extended to October 29, 2001, further extended to
January 16, 2002 and was subsequently extended until May 16, 2002). As partial
security for the payment of such obligation, all of the shares of DRM common
stock owned by the Company have been pledged to Messrs. William J. Russell and
Tamie P. Speciale, the former sole stockholders of DRM. The Company was unable
to make such $14.5 million payment. The pledgees foreclosed on the DRM stock;
which resulted in the Company losing its entire equity ownership in the DRM
subsidiary. The Company recorded an estimated loss on its disposal of DRM of
$4,134,000.
The Company currently requires additional cash to sustain existing
operations and meet current obligations (including those described above) and
the Company's ongoing capital requirements. The Company's current monthly
operating expenses exceed its cash revenues by approximately $100,000. The
continuation of the Company's operations is dependent in the short term upon its
ability to obtain additional financing and, in the long term, to generate
sufficient cash flow to meet its obligations on a timely basis, to obtain
additional financing as may be required, and ultimately to attain profitability.
15
The Company's auditor's opinion on our fiscal 2001 financial statements
contains a "going concern" qualification in which they express doubt about the
Company's ability to continue in business, absent additional financing.
The Company currently is negotiating with a lender to obtain debt
financing, to supplement funds generated from operations, to meet the Company's
cash needs over the next 12 months. The Company intends to meet its long term
capital needs through obtaining additional contracts that will generate funds
from operations and obtaining additional debt or equity financing as necessary
or engaging in merger or sale transactions. There can be no assurance that such
sources of funds will be available to the Company or that it will be able to
meet its short or long term capital requirements.
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards of approximately
$39,000,000. The amount of net operating loss carryforward that can be used in
any one year will be limited by the applicable tax laws which are in effect at
the time such carryforward can be utilized. A full valuation allowance has been
established to offset any benefit from the net operating loss carryforwards. It
cannot be determined when or if the Company will be able to utilize the net
operating losses.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Quarterly Report are "forward-looking
statements" intended to qualify for the safe harbors from liability established
by Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These forward-looking statements
can generally be identified as such because the context of the statement will
include words such as the Company "believes," "anticipates," "expects" or words
of similar import. Similarly, statements that describe the Company's future
plans, objectives or goals are also forward-looking statements. Such statements
may address future events and conditions concerning, among other things, the
Company's results of operations and financial condition; the consummation of
acquisition and financing transactions and the effect thereof on the Company's
business; capital expenditures; litigation; regulatory matters; and the
Company's plans and objectives for future operations and expansion. Any such
forward-looking statements would be subject to the risks and uncertainties that
could cause actual results of operations, financial condition, acquisitions,
financing transactions, operations, expenditures, expansion and other events to
differ materially from those expressed or implied in such forward-looking
statements. Any such forward-looking statements would be subject to a number of
assumptions regarding, among other things, future economic, competitive and
market conditions generally. Such assumptions would be based on facts and
conditions as they exist at the time such statements are made as well as
predictions as to future facts and conditions, the accurate prediction of which
may be difficult and involve the assessment of events beyond the Company's
control. Further, the Company's business is subject to a number of risks that
would affect any such forward-looking statements. These risks and uncertainties
include, but are not limited to, the 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.
16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
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 - none
(b) Reports on Form 8-K.
1. The Company filed a Current Report on Form 8-K, dated
January 12, 2002, regarding a 120-day extension to its
Stock Purchase Agreement with Dispute Resolution
Management, Inc., until May 16, 2002.
2. The Company filed a Current Report on Form 8-K, dated May
21, 2002, regarding the termination of its Stock Purchase
Agreement and Notice of Default with Dispute Resolution
Management, Inc.
17
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 19, 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)
18
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Commodore Applied Technologies, Inc
(the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Shelby T. Brewer, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ Shelby T. Brewer
--------------------
Shelby T. Brewer
Chief Executive Officer
August 19, 2002
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Commodore Applied Technologies, Inc
(the "Company") on Form 10-Q for the period ended June 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
James M. DeAngelis, Chief Financial Officer of the Company, certify, pursuant to
18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
the Company.
/s/ James M. DeAngelis
----------------------
James M. DeAngelis
Chief Financial Officer
August 19, 2002
19