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, 2005
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 August 22, 2005
was 156,382,099.
COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page No.
PART I FINANCIAL INFORMATION................................................1
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
June 30, 2005 and December 31, 2004.....................1
Condensed Consolidated Statements of Operations -
Three and Six months ended June 30, 2005 and
June 30, 2004...........................................3
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2005 and
June 30, 2004...........................................4
Notes to Condensed Consolidated Financial Statements............5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....22
Item 4. Controls and Procedures........................................22
PART II OTHER INFORMATION...................................................23
SIGNATURES...................................................................25
i
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 2005 2004
---------- ------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 32 $ 15
Accounts receivable, net 2,364 259
Prepaid assets and other current receivables 15 -
---------- ------------
Total Current Assets 2,411 274
Property and Equipment, net 163 95
---------- ------------
Total Assets $ 2,574 $ 369
========== ============
See notes to condensed consolidated financial statements.
1
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
June 30, December 31,
LIABILITIES AND 2005 2004
STOCKHOLDERS' DEFICIT ---------- ------------
(unaudited)
Current Liabilities:
Accounts payable $ 1,685 $ 1,045
Related party payable 255 253
Line of credit 116 -
Notes payable 514 258
Other accrued liabilities 4,132 5,107
---------- ------------
Total Current Liabilities 6,702 6,663
Long Term Debt 4,843 3,034
---------- ------------
Total Liabilities 11,545 9,697
Commitments and Contingencies (Note F)
Stockholders' Deficit:
Convertible Preferred Stock, Series I & H Par
value $0.001 per share, 10% cumulative
dividends, Series I, 3% cumulative dividends
for Series H 1,550,000 authorized, 1,190,302
shares and 1,001,200 shares issued and
outstanding as of June 30, 2005 and December
31, 2004, respectively. The shares had an
aggregate liquidation value of $6,381 and
$3,677 at June 30, 2005 and December 31, 2004,
respectively. 1 1
Common Stock, par value $0.001 per share,
300,000,000 shares authorized, 156,382,099 and
134,346,053 issued and outstanding, at June 30,
2005 and December 31, 2004, respectively. 157 134
Additional Paid-in Capital 68,694 67,376
Accumulated Deficit (77,560) (76,576)
---------- ------------
(8,708) (9,065)
Treasury Stock, 3,437,500 shares (263) (263)
---------- ------------
Total Stockholders' Deficit (8,971) (9,328)
---------- ------------
Total Liabilities and Stockholders' Deficit $ 2,574 $ 369
========== ============
See notes to condensed consolidated financial statements.
2
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited - Dollars in Thousands, except per share data)
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
---------- ---------- ---------- ---------
Contract revenues $ 2,733 $ 112 $ 4,359 $ 294
Costs and expenses:
Cost of sales 2,631 255 4,020 507
Research and development - 1 - 7
General and administrative 401 472 961 918
Depreciation and amortization 6 65 12 129
---------- ---------- ---------- ---------
Total costs and expenses 3,038 793 4,993 1,561
---------- ---------- ---------- ---------
Loss from operations (305) (681) (634) (1,267)
Other expense:
Interest expense (202) (97) (350) (180)
---------- ---------- ---------- ---------
Loss before income taxes (507) (778) (984) (1,447)
Income taxes -- -- -- --
---------- ---------- ---------- ---------
Net loss $ (507) $ (778) $ (984) $ (1,447)
========== ========== ========== =========
Loss per share - basic and diluted $ (0.00) $ (0.01) $ (0.01) $ (0.01)
========== ========== ========== =========
Number of weighted average shares outstanding (000's)
- basic and diluted 148,848 127,235 140,416 123,921
========== ========== ========== =========
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,
2005 2004
----------- -----------
Cash flows from operating activities:
Net loss $ (984) $ (1,447)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 12 129
Amortization of debt discount - 15
Changes in operating assets and liabilities:
Accounts receivable, net (2,872) (26)
Prepaid assets (15) (4)
Checks written in excess of cash - (13)
Accounts payable 640 (6)
Other liabilities 2,408 500
----------- -----------
Net cash used in operating activities (811) (852)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (72) -
Cash flows from financing activities:
Advances from (to) related parties, net - 43
Increase in (repayment of) line of credit 116 (47)
Increase in notes and loans payable 684 863
Proceeds from sale of common stock 100 -
Proceeds from exercised warrants - 14
----------- -----------
Net cash provided by financing activities 900 873
----------- -----------
Increase in cash 17 21
Cash, beginning of period 15 -
----------- -----------
Cash, end of period $ 32 $ 21
=========== ===========
See notes to condensed consolidated financial statements.
4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2005
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 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 six-month period ended June 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005.
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, 2004.
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 months ended June 30, 2005, and for
the years ended December 31, 2004, 2003, and 2002, Applied incurred losses of
$984,000, $2,404,000; $2,957,000; and $5,972,000, respectively. The Company has
also experienced net cash outflows from operating activities of ($1,532,000),
($955,000), and ($123,000) for the years ended December 31, 2004, 2003 and 2002,
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 $376,000 at
June 30, 2005 and December 31, 2004, respectively. These allowances are included
in other accrued liabilities in the accompanying financial statements.
5
In as much as Applied rescinded certain options during 2002 and
reissued new options to the option holders, the options are considered variable
options and are revalued each quarter to determine the effect on operations, if
any. During the three and six months ended June 30, 2005, no expense has been
recognized for the variable options as the fair market value of Applied's common
stock at June 30, 2005 was lower than the exercise price of the variable
options.
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. The preparation of consolidated
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The Company accounts for stock-based compensation under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income (loss), as all options vested had an exercise
price equal to the market value of the underlying common stock on the date of
grant or the date of repricing. No options held by employees were issued or
vested during the three and six months ended June 30, 2005 and 2004, 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 of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
Note B - Supplemental cash flow information
During the three and six month periods ended June 30, 2005, 0 and 5,500
shares of Series E Preferred Stock were converted into 0 and 5,832,573 shares of
the Company's common stock, respectively. During the three and six month periods
ended June 30, 2005, the Company paid no dividends on the Series E Preferred
Stock conversions. The Company accrued dividends on Series E Preferred Stock for
the three and six-month periods ended June 30, 2005, of $0 and $24,923
respectively, which is included in Other Accrued Liabilities.
During the three and six month periods ended June 30, 2005, no shares
of Series F Preferred Stock were converted into shares of the Company's common
stock. The Company accrued dividends on Series F Preferred Stock for the three
and six-month periods ended June 30, 2005, of $0 and $36,355, respectively,
which is included in Other Accrued Liabilities.
On April 12, 2005, the Company entered into an exchange agreement with
The Shaar Fund, LTD (the "Shaar Exchange Agreement"). Under terms of the Shaar
Exchange Agreement, the Company agreed that Shaar will exchange all of its
right, title and interest in and to the remaining outstanding shares of the
Series E Preferred and Series F Preferred (including all other accrued and
unpaid dividends thereon) for 395,302 shares of the Company's Series I
Preferred.
6
During the three and six month periods ended June 30, 2005, no shares
of Series H Preferred Stock were converted into shares of common stock. The
company paid no accrued dividends on Series H Preferred Stock. The Company
accrued dividends on Series H Preferred Stock for the three and six-month
periods ended June 30, 2005, of $6,000 and $12,000, respectively, which is
included in Other Accrued Liabilities.
During the three and six month periods ended June 30, 2005, 5,000 and
5,000 shares of Series I Preferred Stock were converted into 6,203,473 and
6,203,473 shares of the Company's common stock, respectively. During the three
and six month periods ended June 30, 2005, the Company paid no dividends on the
Series I Preferred Stock conversions. The Company accrued dividends on Series I
Preferred Stock for the three and six-month periods ended June 30, 2005, of
$84,598 and $84,598 respectively, which is included in Other Accrued
Liabilities.
Of the $1,700, 580 of outstanding dividends accrued on the Series E and
F Preferred Stock as of April 12, 2005, including those accrued during the six
months ended June 30, 2005, all but $300,000 were forgiven by their holder
pursuant to the Shaar Exchange Agreement noted above, and related agreements.
The Company recorded the forgiveness of the $1,400,580 accrued dividends as an
addition to additional paid-in capital, as the Company had originally reduced
additional paid-in capital for the accrual of these dividends. Pursuant to the
Shaar Exchange Agreement and related agreements, the $300,000 of accrued
dividends that were not forgiven were re-financed into the principal balance on
the note payable due Shaar.
Note C - Other Accrued Liabilities
Other accrued liabilities consist of the following:
June 30, 2005 December 31, 2004
------------- -----------------
(unaudited) (audited)
Compensation and employee benefits $ 2,102 $ 1,876
Dividend payable 153 1,696
Accrued interest 393 664
Subcontractors 674 -
Loss reserve 376 376
Exit and forbearance fees on notes payable - 219
Related parties 185 185
Other 249 91
------------- ----------------
$ 4,132 $ 5,107
============= ================
7
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.
Three Months Ended June 30, 2005
(Dollars in Thousands)
--------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution and Other
Contract revenues $ 2,733 $ 2,664 $ 69 $ --
Costs and expenses
Cost of sales 2,631 2,578 53 --
Research and development -- -- -- --
General and administrative 401 19 -- 382
Depreciation and amortization 6 6 -- --
--------- --------- -------- --------
Total costs and expenses 3,038 2,603 53 382
--------- --------- -------- --------
Income (Loss) from operations (305) 61 16 (382)
Interest income -- -- -- --
Interest expense (202) -- -- (202)
Income taxes -- -- -- --
--------- --------- -------- --------
Net Income (Loss) $ (507) $ 61 $ 16 $ (584)
========= ========= ======== ========
Total assets $ 2,574 $ 2,466 $ 86 $ 22
Expenditures for long-lived assets $ 22 $ 20 $ -- $ 2
8
Six Months Ended June 30, 2005
(Dollars in Thousands)
--------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution and Other
Contract revenues $ 4,359 $ 4,273 $ 86 $ --
Costs and expenses
Cost of sales 4,020 3,966 54 --
Research and development -- -- -- --
General and administrative 961 190 16 755
Depreciation and amortization 12 12 -- --
--------- --------- -------- --------
Total costs and expenses 4,993 4,168 70 755
--------- --------- -------- --------
Loss from operations (634) 105 16 (755)
Interest income -- -- -- --
Interest expense (350) -- -- (350)
Income taxes -- -- -- --
--------- --------- -------- --------
Net Income (Loss) $ (984) $ 105 $ 16 $(1,105)
========= ========= ======== ========
Total assets $ 2,574 $ 2,466 $ 86 $ 22
Expenditures for long-lived assets $ 72 $ 70 $ -- $ 2
9
Three Months Ended June 30, 2004
(Dollars in Thousands)
--------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution and Other
Contract revenues $ 112 $ 112 $ -- $ --
Costs and expenses
Cost of sales 255 166 89 --
Research and development 1 -- 1 --
General and administrative 472 19 71 382
Depreciation and amortization 65 11 54 --
--------- --------- -------- --------
Total costs and expenses 793 196 215 382
--------- --------- -------- --------
Loss from operations (681) (84) (215) (382)
Interest income -- -- -- --
Interest expense (97) -- -- (97)
Income taxes -- -- -- --
--------- --------- -------- --------
Net loss $ (778) $ (84) $ (215) $ (479)
========= ========= ======== ========
Total assets $ 168 $ 143 $ 11 $ 14
Expenditures for long-lived assets $ -- $ -- $ -- $ --
10
Six Months Ended June 30, 2004
(Dollars in Thousands)
Three Months Ended June 30, 2004
(Dollars in Thousands)
--------------------------------------------------------------------------------
Corporate
Overhead
Total ASI Solution and Other
Contract revenues $ 294 $ 254 $ 40 $ --
Costs and expenses
Cost of sales 507 244 263 --
Research and development 7 -- 7 --
General and administrative 918 121 151 646
Depreciation and amortization 129 20 109 --
--------- --------- -------- --------
Total costs and expenses 1,561 385 530 646
--------- --------- -------- --------
Loss from operations (1,267) (131) (490) (646)
Interest income -- -- -- --
Interest expense (180) -- -- (180)
Income taxes -- -- -- --
--------- --------- -------- --------
Net Loss $ (1,447) $ (131) $ (490) $ (826)
========= ========= ===-==== ========
Total assets $ 168 $ 143 $ 11 $ 14
Expenditures for long-lived assets $ -- $ -- $ -- $ --
11
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 122,005,936 and 123,370,308 shares of
common stock as of June 30, 2005 and 2004, respectively, were not included in
the computation of Diluted EPS. Common stock equivalents from preferred stock
convertible into shares of common stock were also not included in the
computation of Diluted EPS. The inclusion of the options and warrants and
convertible preferred stock 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.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Overview
The Company is engaged in providing a range of engineering and
technical 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 the Company's proprietary Solvated
Electron Technology ("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.
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
Advanced Sciences, 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 Advanced Sciences' existing client
relationships will allow the Company to obtain new contracts in the future.
The Company has identified two reportable segments in which it
operates, based on the guidelines set forth in the Statement of Financial
Accounting Standards No. 131. These two segments are as follows: Commodore
Advanced Sciences, Inc., which primarily provides various engineering, legal,
sampling, and public relations services to Government agencies on a cost plus
basis; and Commodore Solutions, Inc., which is commercializing technologies to
treat mixed and hazardous waste.
The Company currently requires additional cash to sustain existing
operations and to meet current obligations and ongoing capital requirements. The
Company's current monthly operating expenses exceed cash revenues by
approximately $80,000. Currently, the Company is addressing this cash shortfall
through loans from The Shaar Fund, Ltd., but The Shaar Fund, Ltd. is under no
obligation to continue to make such advances to the Company. If this lender
decided to discontinue advances, the Company would not be able to meet its
current obligations. In addition, the Company owes $818,330 in loans that are
currently due or are payable on demand. Although the lenders on these loans have
not yet called the loans, the Company does not currently have the ability to pay
these loans absent additional financing.
The Company's report of independent registered public accounting firm
on our fiscal 2002, 2003 and 2004 financial statements contains a "going
concern" qualification in which they express substantial 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.
13
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in conformity with U.S. generally
accepted accounting principles. As such, we are required to make certain
estimates, judgments and assumptions that we believe are reasonable based upon
the information available. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented.
Our accounting policies that are the most important to the portrayal of
our financial condition and results, and which require the highest degree of
management judgment relate to the reserves for doubtful accounts receivable and
the valuation of stock and options issued for services.
Reserves for Doubtful Accounts
Management estimates the amount of required reserves for the potential
non-collectibility of accounts receivable based upon the customer's financial
condition, age of the customer's receivables, changes in payment histories, and
consideration of other relevant factors. Because the reserve for doubtful
accounts is an estimate of events that have not yet occurred, we could incur
additional charges or benefits in the future to reflect differences between
estimated and actual collections.
Valuation of stock and options
We value and account for the issuance of equity instruments to
non-employees to acquire goods and services based on the fair value of the goods
and services or the fair value of the equity instrument at the time of issuance,
whichever is more reliably measurable. The fair value of stock issued for goods
or services is determined based on the quoted market price on the date the
commitment to issue the stock has occurred. The fair value of stock options or
warrants granted to non-employees for goods or services is calculated on the
date of grant using the Black-Scholes options pricing model.
Revenue Recognition
Substantially all the Company's current revenues consist of engineering
and scientific services performed for the U.S. Government and prime contractors
that serve the U.S. Government under a variety of contracts, most of which
provide for unit prices. Revenue under unit price contracts are recorded when
the services are provided.
Most of the Company's historical contracts provided for reimbursement
of costs plus fixed fees. Direct and indirect contract costs incurred in
reimbursement plus cost contracts are subject to audit by the Defense Contract
Audit Agency ("DCAA"). Management does not expect these audits to materially
affect the financial statements and has established appropriate allowances to
cover potential audit disallowances. Contract revenues have been recorded in
amounts which are expected to be realized upon final settlement. The DCAA has
audited the Company's contracts through 1996. An allowance for doubtful accounts
and potential disallowances has been established based upon the portion of
billed and unbilled receivables that management believes may be uncollectible.
14
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2005 Compared to Three and Six Months Ended
June 30, 2004
Revenues were $2,733,000 and $4,359,000 for the three and six months
ended June 30, 2005, respectively, compared to $112,000 and $294,000 for the
three and six months ended June 30, 2004, respectively. Such revenues were
primarily from the Company's subsidiary ASI.
In the case of ASI, revenues were $2,664,000 and $4,273,000,
respectively, for the three and six months ended June 30, 2005 as compared with
$112,000 and $254,000 for the three and six months ended June 30, 2004,
respectively. Advanced Sciences has experienced a significant increase in
revenue as the result of the September 2004 award of the eDAM contract in Oak
Ridge, TN and overall, more 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 three major
customers, two of which represent more than 10% of total revenue each. The
combined revenue for these three customers was $2,664,000 and $4,273,000,
respectively, (100% of total revenues) for the three and six months ended June
30, 2005. Cost of sales was $2,578,000 and $3,966,000, respectively, for the
three and six months ended June 30, 2005 compared to $166,000 and $244,000,
respectively, for the three and six months ended June 30, 2004. The increase in
cost of sales can be attributed to an increase in variable costs caused by the
eDAM contract and overall, more work being performed by Advanced Sciences.
In the case of Commodore Solution, Inc. ("Solution"), revenues were
$69,000 and $86,000, respectively, for the three and six months ended June 30,
2005 as compared with $0 and $40,000, respectively, for three and six months
ended June 30, 2004. Solution had one major customer during the three and
six-month periods ended June 30, 2005, which accounted for $69,000 and $86,000,
respectively, or 100% of the total revenues for the period. 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 $53,000 and $54,000, respectively, for the three and six months ended
June 30, 2005 as compared to $89,000 and $263,000, respectively, for the three
and six months ended June 30, 2004. The cost of sales, when incurred, is
attributable to sales and marketing expenses for the SET technology. Anticipated
losses on engagements, if any, will be provided for by a charge to income during
the period such losses are first identified.
For the three and six months ended June 30, 2005, the Company incurred
research and development costs of $0 and $0, respectively, as compared to $1,000
and $7,000, respectively, for the three and six months ended June 30, 2004.
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.
15
General and administrative expenses for continuing operations for the
three and six months ended June 30, 2005 were $401,000 and $961,000,
respectively, as compared to $472,000 and $918,000, respectively, for the three
and six months ended June 30, 2004. This difference is primarily due to the
deferred salaries for the executives of the Company for the three and six-month
periods ended June 30, 2005, the addition of a full time accounting employee,
and fees associated with a marketing consultant for the SET technology.
In the case of Advanced Sciences, general and administrative costs for
the three and six-month periods ended June 30, 2005 were $19,000 and $190,000,
respectively, compared to $19,000 and $121,000, respectively, for the three and
six months ended June 30, 2004. This increase is primarily due to the additional
administrative costs associated with the eDAM contract in Oak Ridge, TN.
Solution incurred general and administrative costs of $0 and $16,000,
respectively, for the three and six-month periods ended June 30, 2005 as
compared to $71,000 and $151,000, respectively, for the three and six-month
periods ended June 30, 2004. This decrease was primarily due to the reassignment
of a Solution's employee to CASI field work on the eDAM contract in Oak Ridge,
TN.
Interest expense for the three and six months ended June 30, 2005 was
$202,000 and $350,000, respectively, as compared to $97,000 and $180,000,
respectively, for the three and six month periods ended June 30, 2004. The
increase in interest expense of $105,000 and $170,000, respectively, for the
three and six month periods ended June 30, 2005 is primarily related to an
increase in cash interest costs associated with a higher notes payable balance
and a higher line of credit balance compared to the prior year.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005 and December 31, 2004 Advanced Sciences had a $116,000
and $17,000 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 $80,000 at June 30, 2005. Currently, the Company is addressing
this cash shortfall though loans from The Shaar Fund, Ltd., but The Shaar Fund,
Ltd. is under no obligation to continue to make such advances to the Company. If
this lender decided to discontinue advances, the Company would not be able to
meet its current obligations. In addition, the Company owes $818,330 in loans
that are currently due or are payable on demand as of June 30, 2005. Although
the lenders on these loans have not yet called the loans, the Company does not
currently have the ability to pay these loans absent additional financing.
The Company's report of independent registered public accounting firm
on our fiscal 2002, 2003 and 2004 financial statements contains a "going
concern" qualification in which they express substantial 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.
16
For the three and six month periods ended June 30, 2005, the Company
incurred a net loss of $507,000 and $984,000, respectively, as compared to a net
loss of $778,000 and $1,447,000 for the three-month period ended June 30, 2004,
respectively. For the six month period ended June 30, 2004, and for the years
ended December 31, 2004, 2003, and 2002, Applied incurred losses of ($984,000),
($2,404,000), ($2,957,000), and ($5,972,000), respectively. The Company has also
experienced net cash outflows from operating activities of ($1,532,000),
($955,000), and ($123,000) for the years ended December 31, 2004, 2003 and 2002,
respectively.
During the three and six month periods ended June 30, 2005, the Company
converted (i) 0 and 5,500, respectively, shares of Series E Preferred; (ii) 0
shares of Series F Preferred; and (iii) 5,000 and 5,000, respectively, shares of
Series I Preferred, for 6,203,473 and 12,036,046, respectively, shares of the
Company's common stock for the three and six month periods ended June 30, 2005.
For the three and six month periods ended June 30, 2005, 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 $252,397 as of June 30,
2005 and remains unpaid as of August 22, 2005.
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 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
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.
17
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
Milford/Shaar Bridge Loan Notes were restructured into the New Shaar Convertible
Note as of April 11, 2005. Prior to the New Shaar Convertible Note, the current
principal balance of the Milford/Shaar Bridge Loan Notes was $3,033,741 as of
March 31, 2005. Additionally, as of December 31, 2004, there was $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 is payable on demand. The current principal balance of the Blum Demand Note
is $312,032 as of June 30, 2005 and remains unpaid as of August 22, 2005.
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.
On April 12, 2005, the Company authorized the issuance of 550,000
shares of Series I Convertible Preferred Stock ("Series I Preferred"), par value
$0.001 per share, each such share of Series I Preferred having a stated value of
$10.00 per share.
The Series I Preferred shall have the following rights, privileges, and
limitations:
a) The conversion feature shall be exercisable immediately.
18
b) The conversion price of the Series I Preferred shall be determined
by the average closing price of Company's common stock in the
previous 10 trading days, but in no event shall the conversion
price be more than $0.0285 per share.
c) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
d) The Series I Preferred shall have a non-cumulative annual dividend
of 10%, payable in cash or shares of the Company's common stock at
the Company's election.
e) Dividend will be paid quarterly commencing May 15, 2005, to the
Holders of record of shares of the Series I Preferred Stock.
Dividends until February 14, 2006 shall accrue but shall not be
payable until February 15, 2006.
f) The Company will reserve 75 million shares of its common stock for
the conversion of the Series I Preferred.
On April 12, 2005, the Company entered into an exchange agreement with
The Shaar Fund, LTD (the "Shaar Exchange Agreement"). Under terms of the Shaar
Exchange Agreement, the Company agreed that Shaar will exchange all of its
right, title and interest in and to the remaining outstanding shares of the
Series E Preferred and Series F Preferred (including all other accrued and
unpaid dividends thereon) for 395,302 shares of the Company's Series I
Preferred.
Additionally, under the Shaar Exchange Agreement, the Company issued an
Amended and Restated Secured Promissory Note of the Company, amending and
restating a note originally issued June 13, 2001, which such Note has an
outstanding principal balance as of April 12, 2005 of $3,251,585.35 ("Old Shaar
Note").
On April 12, 2005 Shaar executed a purchase agreement ("Milford Capital
Purchase Agreement") to Milford Capital & Management ("Milford"). In accordance
with the terms of the Milford Capital Purchase Agreement, Shaar purchased a
secured promissory note of the Company, initially issued to Milford on June 13,
2001, in the original principal amount of $500,000, which had an outstanding
principal balance on March 31, 2005 of $188,149 ("Old Milford Note"), together
with (i) all interest, additional obligations, forbearance fees, exit fees,
penalties and other amounts due and payable from time to time under or in
connection with the Old Milford Note, and (ii) the Forbearance Amount in
connection with the Forbearance Agreement, dated January 30, 2004, between
Milford and the Company, and Shaar in which Shaar agreed to forgive payment from
the Company to Shaar of $300,000 of accrued and unpaid dividends on shares of
the Company's Series E Preferred held by Shaar ("Forgiven Dividends") and
consented to the transfer of the dollar value of the Forgiven Dividends to
Milford as part of the forbearance fee payable to Milford under the Forbearance
Agreement of 2004.
Shaar and the Company have agreed that Shaar will exchange the
outstanding principal amount of the Old Shaar Note and the Old Milford Note
(including all accrued and unpaid interest, unpaid fees and Forgiven Dividends)
for the Company's newly issued 10% convertible secured promissory note (the "New
Shaar Convertible Note").
The New Shaar Convertible Note shall have the following rights,
privileges, and limitations:
19
a) The New Shaar Convertible Note bears an interest rate of 10% per
annum, which is payable in cash or shares of the Company's common
stock at the Company's election.
b) Interest shall accrue on the principal amount for a one year
period ("Deferral Period"). On March 22, 2006, the Company will
make a single lump sum payment to the holder in an amount equal to
all interest that accrued during the Deferral Period
c) Beginning April 15, 2006, and monthly thereafter on the 15th day
of each month until March 22, 2009 ("Maturity Date"), the Company
shall pay to Shaar all accrued and unpaid interest ("Interest
Payments")on the principal balance of the note accruing during the
prior month.
d) On the Maturity Date, the Company shall make a single lump sum
payment to Shaar equal to the outstanding principal balance of the
New Shaar Convertible Note ("Principal Balance"), together with
all accrued and unpaid interest.
e) At the option of Shaar, the outstanding Principal Balance may be
converted, either in whole or in part, into shares of the
Company's common stock.
f) The conversion price of the payment of the Principal Balance, the
Deferral Period, and the Interest Payments shall be determined by
the average closing price of Company's common stock in the 10
trading days preceding the conversion date,, but in no event shall
the conversion price be more than $0.0285 per share ("Conversion
Price").
g) If the Company's common stock is not listed on an exchange at the
time of the conversion, then the conversion price will be 50% of
the market price at that time.
h) The New Shaar Convertible Note may not be prepaid by the Company
prior to the Maturity Date.
The current principal balance of the New Shaar Note is $4,846,233 as of
June 30, 2005 and remains unpaid as of August 22, 2005.
The recipient of securities in this transaction represented its
intention to acquire the securities for investment only and not with a view to,
or for sale in connection with, any distribution thereof, and appropriate
restrictive legends were affixed to the warrants and the certificates
representing the shares issued in this transaction. The Company made available
to The Shaar Fund Ltd., written information about the Company in accordance with
Rule 502 of the Securities Act and advised such recipient of the limitations on
resale of such securities. In addition, The Shaar Fund Ltd. was offered the
opportunity, prior to exchanging and/or purchasing any securities, to ask
questions of, and receive answers from, the Company concerning the terms and
conditions of the transaction and to obtain additional relevant information
about the Company. Based upon the facts above, the Company believed this
transaction to be exempt from the registration requirements of the Securities
Act in reliance on Section 4 (2) thereof as a transaction not involving any
public offering of securities.
On April 27, 2005, a private investor purchased $100,000 of the
Company's unregistered common stock at the market price. The Company issued the
private investor 10,000,000 shares of unregistered 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
3-year warrant for 4,000,000 shares of the Company's common stock at an exercise
price of $0.01 per share. 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.
20
The Company hopes to meet its short-term capital requirements
(including its $80,000 monthly cash shortfall) through continued loans from The
Shaar Fund, Ltd., although this lender is under no obligation to continue to
make advances to the Company. The Company intends to negotiate a forbearance
arrangement with other lenders on loans that are currently due. Ultimately, the
Company intends to reduce its cash shortfall and 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 (the "NOLs") of
approximately $36,487,000, which expire in the years 2010 through 2024. 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. It cannot be determined when or if the Company
will be able to utilize the NOLs.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual 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:
21
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,
2003 and 2004 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; the timing and award of contracts by
the U.S. Department of Energy for the cleanup of waste sites
administered by it;
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 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; and
o other circumstances affecting anticipated revenues and costs.
These risks and uncertainties could cause actual results of the Company
to differ materially from those projected or implied by such forward-looking
statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
ITEM 4. Controls and Procedures
-----------------------
(a) Evaluation of disclosure controls and procedures
Based on their evaluations as of June 30, 2005, the chief executive
officer and chief financial officer of the Company have concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the SEC.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls
over financial reporting or in other factors that could significantly affect
these internal controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
22
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
There have been no material legal proceedings to which the Company is a
party which have not been disclosed in previous filings with the Securities and
Exchange Commission. There are no material developments to be reported in any
previously reported legal proceedings.
ITEM 2. Change in Securities
Not applicable
ITEM 3. Defaults among Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Events
Not applicable.
ITEM 6. Exhibits and Reports on Form 8 - K
(a) Exhibits -
1. 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 May 15,
2005, announcing its March 31, 2005 Quarterly earnings.
23
2. The Company filed a Current Report on Form 8-K, dated July 27,
2005, announcing it entered into a stock purchase agreement (the
"Agreement") and a warrant agreement (the "Warrant") with a
private investor, Dr. Marion Danna (the "Investor") on April 27,
2005. The closing of the transactions contemplated by the
Agreement took place on July 10, 2005.
Under the terms of the Agreement the Investor purchased, for a
purchase price of $100,000.00, 10,000,000 shares of the Company's
common stock bearing a restrictive legend and a warrant for
4,000,000 shares of the Company's common stock with an exercise
price of $0.01, exercisable immediately with a three year life.
24
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 22, 2005 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)
25