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 March 31, 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 of common stock outstanding at May 20, 2002 was
57,645,290.
i
COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page No.
PART I FINANCIAL INFORMATION............................................1
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheet -
March 31, 2002 and December 31, 2001................1
Condensed Consolidated Statement of Operations -
Three months ended March 31, 2002 and
March 31, 2001......................................3
Condensed Consolidated Statement of Cash Flows -
Three months ended March 31, 2002 and
March 31, 2001......................................4
Notes to Condensed Consolidated Financial Statements........5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................9
PART II OTHER INFORMATION...............................................14
SIGNATURES...............................................................15
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)
March 31, December 31,
ASSETS 2002 2001
---------- -------------
(unaudited)
Current Assets:
Cash and cash equivalents $ 730 $ 1,271
Accounts receivable, net 1,051 817
Prepaid assets and other current receivables 350 373
---------- ----------
Total Current Assets 2,131 2,461
Property and Equipment, net 654 724
Intangible Assets
Patents and completed technology, net of
accumulated amortization of $1,385 and
$1,375, respectively. 90 100
Covenants not to compete, net of
accumulated amortization of $831
and $700. 1,794 1,925
Goodwill, net of accumulated amortization
of $1,686. 23,409 23,409
---------- ----------
Total Intangible Assets 25,293 25,434
Other Assets 36 36
---------- ----------
Total Assets $ 28,114 $ 28,655
========== ==========
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)
March 31, December 31,
LIABILITIES AND 2002 2001
STOCKHOLDERS' EQUITY ---------- -------------
(unaudited)
Current Liabilities:
Accounts payable $ 1,477 $ 1,422
Related party payable 141 160
Current portion of long term debt 2,650 2,650
Line of credit 360 108
Notes payable 15,672 15,655
Other accrued liabilities 1,957 2,037
---------- ----------
Total Current Liabilities 22,257 22,032
Long Term Debt 4,619 4,430
---------- ----------
Total Liabilities 26,876 26,462
Minority Interest 572 622
Commitments and Contingencies -- --
Stockholders' 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 authorized,
issued and outstanding as of March 31,
2002 and December 31, 2001, respectively.
The shares had an aggregate liquidation
value of $5,140 and $5,403 at
March 31, 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 March 31, 2002 and December 31, 2001,
respectively. 58 55
Additional Paid-in Capital 66,825 66,759
Accumulated Deficit (66,217) (65,243)
---------- ----------
Total Stockholders' Equity 666 1,571
---------- ----------
Total Liabilities and Stockholders' Equity $ 28,114 $ 28,655
========== ==========
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
March 31, March 31,
2002 2001
---------- ----------
Contract revenues $ 1,647 $ 4,021
Costs and expenses:
Cost of sales 814 912
Research and development 77 120
General and administrative 1,338 1,977
Depreciation and amortization 214 628
Minority interest (50) 252
---------- ----------
Total costs and expenses 2,393 3,889
---------- ----------
Income (loss) from operations (746) 132
---------- ----------
Other income (expense):
Interest income 3 13
Interest expense (231) (794)
---------- ----------
Net other income (expense) (228) (781)
---------- ----------
Loss before income taxes (974) (649)
Income taxes -- --
---------- ----------
Net loss $ (974) $ (649)
========== ==========
Loss per share $ (.02) $ (.01)
========== ==========
Number of weighted average shares outstanding (in thousands) 57,356 49,847
========== ==========
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)
Three months ended
March 31, March 31,
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss $ (974) $ (649)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 214 628
Amortization of debt discount 216 532
Minority interest (50) 252
Changes in assets and liabilities:
Accounts receivable (234) (106)
Prepaid assets 23 176
Other assets - 76
Accounts payable 55 (466)
Other liabilities (11) (416)
---------- ----------
Net cash provided/ (used) in operating activities (761) 27
Cash flows from investing activities:
Purchase of equipment (3) (38)
Advances to related parties (19) -
---------- ----------
Net cash used in investing activities (22) (38)
Cash flows from financing activities:
Increase in (repayment of) line of credit 252 (987)
Increase (decrease) in notes and loans payable (10) -
---------- ----------
Net cash provided/(used) in financing activities 242 (987)
Increase (decrease) in cash (541) (998)
Cash, beginning of period 1,271 1,980
---------- ----------
Cash, end of period $ 730 $ 982
========== ==========
See notes to condensed consolidated financial statements.
4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 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 U.S. generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. The financial
statement information was derived from unaudited financial statements unless
indicated otherwise. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 31, 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 period ended March 31, 2002, and for the
years ended December 31, 2001, 2000, and 1999, Applied incurred losses of
$974,000, $6,554,000, $11,441,000, and $3,985,000, respectively. For the period
ended March 31, 2002, and for the years ended December 31, 2001, 2000, and 1999,
Applied has also experienced net cash inflows (outflows) from operating
activities of ($761,000), $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 $20,126,000. 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 March 31, 2002
and December 31, 2001. In addition, on May 16, 2002, the Company received a
notice of default on the debt related to the purchase of Dispute Resolution
Management, Inc. (See Subsequent Events section)
The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
5
balances and transactions have been eliminated. The preparation of consolidated
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Note B - 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 U.S. government agencies on a cost plus basis; (ii) Commodore
Solutions, Inc., which is commercializing technologies to treat mixed and
hazardous waste; and (iii) Dispute Resolution Management, Inc., which was
acquired (81%) on August 30, 2000, provides a package of services to help
companies recover financial settlements from insurance policies to defray costs
associated with environmental liabilities.
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.
Three Months Ended March 31, 2002
Corporate
Overhead
Total CASI Solution DRM and Other
Contract Revenues $ 1,647 $ 1,087 $ -- $ 560 $ --
Costs and expenses
Cost of Sales 814 814 -- -- --
Research and Development 77 -- 77 -- --
General and Administrative 1,338 210 40 816 272
Depreciation and Amortization 214 11 50 10 143
Minority Interest (50) -- -- -- (50)
------- ------- ---------- -------- ------------
Total costs and expenses 2,393 1,035 167 826 365
------- ------- ---------- -------- ------------
Income (Loss) from Operations (746) 52 (167) (266) (365)
Interest Income 3 -- -- 3 --
Interest Expense (231) -- -- -- (231)
------- ------- ---------- -------- ------------
Net Income (Loss) $ (974) $ 52 $ (167) $ (263) $ (596)
======= ======= ========== ======== ============
Total Assets $28,114 $ 1,986 $ 500 $ 3,748 $ 21,880
Expenditures for long-lived assets $ 3 $ -- $ -- $ 3 $ --
6
Three Months Ended March 31, 2001
Corporate
Overhead
Total CASI Solution DRM and Other
Contract Revenues $ 4,021 $ 1,223 $ 102 $ 2,696 $ --
Costs and expenses
Cost of Sales 912 809 103 -- --
Research and Development 120 -- 120 -- --
General and Administrative 1,977 280 169 1,368 160
Depreciation and Amortization 628 20 482 9 117
Minority Interest 252 -- -- -- 252
------- ------- ---------- -------- ------------
Total costs and expenses 3,889 1,109 874 1,377 529
------- ------- ---------- -------- ------------
Income (Loss) from Operations 132 114 (772) 1,319 (529)
Interest Income 13 -- 2 10 1
Interest Expense (794) (26) -- (10) (758)
------- ------- ---------- -------- ------------
Net Income (Loss) $ (649) $ 88 $ (770) $ 1,319 $ (1,286)
======= ======= ========== ======== ============
Total Assets $35,739 $ 2,361 $ 1,721 $ 4,127 $ 27,530
Expenditures for long-lived assets $ 38 $ -- $ -- $ 38 $ --
7
Note C - Contingencies
Applied has matters of litigation arising in the ordinary course of
business which in the opinion of management will not have a material adverse
effect on its financial condition or results of operations.
Note D - Subsequent Events
On May 16, 2002, a Notice of Default and Right to Pursue Remedies (the
"Notice") was issued to the Company by William J. Russell and Tamie B. Speciale
(the "Pledgees") claiming that the Company is in default under the Stock
Purchase Agreement (the "Agreement"), between the Company and Dispute Resolution
Management, Inc. ("DRM") and the related Stock Pledge Agreement (the "Stock
Pledge").
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 is in
the process of tendering 4,750,000 shares of the Company's pledged common stock
back to the Company. If such actions are not invalidated, 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.
Unless the Company reaches a satisfactory resolution of this matter,
the Company's loss of the DRM subsidiary will 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 $200,000.
8
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, (ii) the settlement of complex,
long-tail and latent insurance claims by utilizing a series of tools including
an internally developed risk modeling program, FOCUS, and (iii) 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 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. Through Dispute Resolution Management, inc.
("DRM"), an 81% owned subsidiary acquired August 30, 2000, the Company has
several engagements with various industrial, manufacturing and mining companies
in the U.S. and in Europe for the recovery of insurance claims.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001
Revenues were $1,647,000 for the three months ended March 31, 2002,
compared to $4,021,000 for the three months ended March 31, 2001. Such revenues
were primarily from the Company's two subsidiaries, ASI and DRM.
In the case of DRM, revenues were $560,000 for the three-month period
ended March 31, 2002 compared to $2,696,000 for the three-month period ended
March 31, 2001. The Company purchased its 81% interest in DRM on August 30, 2000
and was able to consolidate DRM's revenues and earnings as of that date.
Revenues in DRM were primarily from completed settlement agreements between
their clients and major insurers. DRM has several client engagements, of which
three represented more than 10% of DRM's annual revenue. The combined revenue
for these three customers was $343,000 or 61.25% of the DRM's total revenue for
the period ending March 31, 2002. Settlements are the result of 18 to 24 months
of effort by various employees of DRM, of which the expenses are captured in the
general and administrative costs section. Anticipated losses on engagements, if
any, will be provided for by a charge to income during the period such losses
are first identified. The decrease in sales is due to the reduction in number
and dollar amount of client retainers and the absence of material lump-sum
settlements.
In the case of ASI, revenues were $1,087,000 for the three-month period
ended March 31, 2002 as compared with $1,223,000 for the three-month period
ended March 31, 2001. The revenues from ASI consisted of engineering and
scientific services performed for the United States government under a variety
of contracts, most of which provide for reimbursement of cost plus fixed fees.
Revenue under cost-reimbursement contracts is recorded under the percentage of
completion method as costs are incurred and include estimated fees in the
proportion that costs to date bear to total estimated costs. ASI has two major
customers, each of which represent more than 10% of total revenue. The combined
9
revenue for these two customers was $1,087,000 or 100% of total revenues for the
period ending March 31, 2002. Cost of sales were $814,000 for the period ending
March 31, 2002 compared to $809,000 for the period ending March 31, 2001.
In the case of Commodore Solution, Inc. ("Solution"), revenues were $0
for the period ended March 31, 2002 as compared with $102,000 for the period
ended March 31, 2001. The decrease is primarily due to the lack of feasibility
studies and commercial processing. Cost of sales was $0 for the period ended
March 31, 2002 compared to $103,000 for the period ended March 31, 2001. The
cost of sales is attributable to 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-month period ended March 31, 2002, the Company incurred
research and development costs of $77,000 as compared to $120,000 for the
three-month period ended March 31, 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 the three months ended March
31, 2002 were $1,338,000 as compared to $1,977,000 for the three months ended
March 31, 2001. This difference is primarily due to DRM's salaries and other
expenses.
Interest income was $3,000 for the three months ended March 31, 2002,
as compared to $13,000 for the three months ended March 31, 2001.
Interest expense for the three months ended March 31, 2002 was $231,000
as compared to $794,000 for the three months ended March 31, 2001. The decrease
in interest expense of $563,000 is primarily related to ceasing of amortization
of non-cash interest costs associated with the Company's purchase of 81% of DRM
on August 30, 2000 ($333,000), the amortization of non-cash interest costs
associated with the Brewer Promissory Note ($29,000), and the amortization of
non-cash interest costs associated with the Bridge Loan ($167,000).
LIQUITY AND CAPITAL RESOURCES
At March 31, 2002 and December 31, 2001 ASI had a $360,000 and $108,000
outstanding balance, respectively, on its revolving lines of credit.
For the three months ended March 31, 2002, the Company incurred a net
loss of $974,000 as compared to a net loss of $649,000 for the three months
ended March 31, 2001. For the period ended March 31, 2002, and for the years
ended December 31, 2001, 2000, and 1999, Applied has also experienced net cash
inflows (outflows) from operating activities of ($761,000), $1,907,000,
($2,002,000), and ($2,905,000). At March 31, 2002 the Company had working
capital deficit of $20,126,000 and shareholders' equity of $666,000.
During the three-month period ended March 31, 2002, the Company
converted 20,000 shares of Series F Convertible Preferred Stock for 1,360,544
10
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 May 20, 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.
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.
11
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
June 13, 2002.
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. In the event the Company
is unable to make such $14.5 million payment, when due, the pledgees may
foreclose on the DRM stock; in which event the Company would lose its entire
equity ownership in the DRM subsidiary.
The Company originally intended to meet its repurchase obligation to
the former shareholders of DRM by reacquiring their shares and selling those
shares to generate the cash necessary to meet the obligation; however, the
Company's ability to effect the repurchase obligation in this manner is heavily
dependent on the stock price of the Company's common stock at the time of the
repurchase. The Company was unable to meet its repurchase obligation by May 16,
2002. (See Subsequent Events section) At May 20, 2002, the closing price of the
Company's common stock on the American Stock Exchange, Inc. was $0.08 per share.
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. Excluding the Company's DRM
subsidiary, the Company's current monthly operating expenses exceed its cash
revenues by approximately $200,000. The continuation of the Company's operations
is dependent in the short term upon its ability to obtain additional financing
and, in the long term, to generate sufficient cash flow to meet its obligations
on a timely basis, to obtain additional financing as may be required, and
ultimately to attain profitability.
The Company's auditor's opinion on our fiscal 2001 financial statements
contains a "going concern" qualification in which they express doubt about the
Company's ability to continue in business, absent additional financing.
The Company currently is negotiating with a lender to obtain debt
financing, to supplement funds generated from operations, to meet the Company's
cash needs over the next 12 months. The Company intends to meet its long term
capital needs through obtaining additional contracts that will generate funds
from operations and obtaining additional debt or equity financing as necessary
or engaging in merger or sale transactions. There can be no assurance that such
sources of funds will be available to the Company or that it will be able to
meet its short or long term capital requirements.
12
NET OPERATING LOSS CARRYFORWARDS
The Company has net operating loss carryforwards (the "NOLs") of
approximately $31,000,000, which expire in the years 2010 through 2021. The
applicable tax laws that are in effect at the time such NOLs can be utilized
will limit the amount of NOLs that can be used in any one year. The Company has
determined a maximum of approximately $2.4 million of NOLs is available to be
used annually. 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 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not applicable.
13
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 - none.
14
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: May 20, 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)
15