UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2006
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 Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 308-5800
(Former Name, Former Address And Former Fiscal Year,
If Changed Since Last Report)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [ X ]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [ X ]
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 [ ]
i
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer (X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at May 15, 2006
---------------------------------- -------------------------------
Common Stock, $0.001 par value 7,948,217 shares
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ii
COMMODORE APPLIED TECHNOLOGIES, INC.
FORM 10-Q
INDEX
Page No.
PART 1. FINANCIAL INFORMATION..............................................4
Item 1. Condensed Consolidated Financial Statements
(unaudited).............................................................4
Condensed Consolidated Balance Sheets at March 31, 2006
and December 31, 2005.................................................4
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2006 and 2005............................6
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2006 and 2005............................7
Notes to Condensed Consolidated Financial Statements..................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................15
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................................24
Item 4. Controls and Procedures........................................24
PART II. OTHER INFORMATION................................................26
Item 1A. Risk Factors..................................................26
Item 6. Exhibits and Reports on Form 8-K...............................27
SIGNATURES.................................................................28
iii
PART I - FINANCIAL INFORMATION
ITEM 1: Condensed Consolidated Financial Statements (unaudited)
-------------------------------------------------------
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
March 31, December 31,
ASSETS 2006 2005
----------- -----------
Current Assets:
Cash and cash equivalents $ 295 $ 65
Accounts receivable, net 1,094 2,065
Prepaid assets and other current assets 94 139
----------- -----------
Total Current Assets 1,483 2,269
Property and equipment, net 148 148
----------- -----------
Total Assets $ 1,631 $ 2,417
=========== ==========
See notes to condensed consolidated financial statements.
4
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, except per share data)
March 31, December 31,
LIABILITIES AND 2006 2005
STOCKHOLDERS' DEFICIT ----------- ------------
Current Liabilities:
Accounts payable $ 1,103 $ 1,376
Related party payable 253 253
Line of credit -- 141
Notes payable, net 483 635
Other accrued liabilities 4,231 4,450
----------- ----------
Total Current Liabilities 6,070 6,855
Long -term debt, net of current portion 5,666 5,426
----------- -----------
Total Liabilities 11,736 12,281
Commitments and Contingencies
Stockholders' Deficit
Convertible Preferred Stock, Series H & J
Par value $0.001 per share, aggregate
liquidation value of $6,353 and $6,353 as of 1 1
March 31, 2006 and December 31, 2005,
respectively, 3% cumulative dividends for
Series H, 10% cumulative dividends for Series
J, 1,550,000 shares authorized, 1,188,302
shares and 1,188,302 shares issued and
outstanding as of March 31, 2006 and December
31, 2005, respectively.
Common Stock, par value $0.001 per share,
300,000,000 shares authorized, 7,948,217
and 7,948,217 issued and outstanding,
at March 31, 2006 and December 31, 2005, 8 8
respectively.
Additional Paid-in Capital 69,577 69,680
Accumulated Deficit (79,428) (79,290)
----------- -----------
(9,842) (9,601)
Treasury Stock, 171,875 shares (263) (263)
----------- -----------
Total Stockholders' Deficit (10,105) (9,864)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 1,631 $ 2,417
=========== ===========
See notes to condensed consolidated financial statements.
5
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, except per share data)
Three months ended
March 31, March 31,
2006 2005
----------- -----------
Contract revenues $ 2,236 $ 1,626
Costs and expenses:
Cost of sales 1,732 1,284
General and administrative 642 665
Depreciation and amortization -- 6
----------- -----------
Total costs and expenses 2,374 1,955
----------- -----------
loss from operations (138) (329)
----------- -----------
Other income (expense):
Gain on settlement of note payable
and accrued interest 151 --
Interest expense (151) (148)
----------- -----------
Net other income (expense) -- (148)
----------- -----------
Loss before income taxes (138) (477)
Income taxes - --
----------- -----------
Net loss (138) (477)
Dividends accrued to preferred stockholders (103) (67)
----------- -----------
Net loss applicable to common shareholders $ (241) $ (544)
=========== ===========
Loss per share - basic and diluted $ (.03) $ (.08)
=========== ===========
Weighted average shares outstanding (000's) 7,685 6,817
basic and diluted =========== ===========
See notes to condensed consolidated financial statements.
6
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, except per share data)
Three months ended
March 31, March 31,
2006 2005
----------- -----------
Cash flows from operating activities:
Net loss $ (138) $ (477)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization -- 6
Gain on settlement of note payable
and accrued interest (151) --
Changes in assets and liabilities:
Accounts receivable, net 971 (1,095)
Prepaid assets 45 (1)
Accounts payable (273) 118
Other liabilities (225) 870
----------- -----------
Net cash provided by
(used in) operating
activities 229 (579)
----------- -----------
Cash flows from investing activities:
Purchase of equipment -- (44)
----------- -----------
Net cash used in investing
activities -- (44)
----------- -----------
Cash flows from financing activities:
Increase in (repayment of) line of credit (141) 154
Payment of notes and loans payable (98) --
Increase in notes and loans payable 240 467
----------- -----------
Net cash provided by financing
activities 1 621
----------- -----------
Increase (decrease) in cash 230 (2)
Cash and cash equivalents, beginning of period 65 15
----------- -----------
Cash and cash equivalents, end of period $ 295 $ 13
=========== ===========
See notes to condensed consolidated financial statements.
7
COMMODORE APPLIED TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2006
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 adjustments) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 2006 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2006.
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, 2005.
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 three months ended March 31, 2006, and
for the years ended December 31, 2005, 2004, and 2003, Applied incurred losses
of $138,000; $2,714,000, $2,404,000; and $2,957,000, respectively. The Company
has also experienced net cash inflows (outflows) from operating activities of
($1,337,000), ($1,532,000), and ($955,000), for the years ended December 31,
2005, 2004 and 2003 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.
Note B - Summary of Significant Accounting Policies
Allowance for Anticipated Losses on Contracts
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
March 31, 2006 and December 31, 2005, respectively. These allowances are
included in other accrued liabilities in the accompanying condensed consolidated
financial statements.
8
Consolidation
The condensed 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.
Stock-Based Compensation
The Company has established the 1998 Stock Option Plan, as amended (the
"1998 Plan"), and performance based stock options to executives outside of the
1998 Plan granted in 2003, for the award of stock options, and stock bonuses to
employees, executive officers, members of the Board of Directors and outside
consultants. The Compensation Committee of the Board of Directors has the
ability to determine the terms of the option, the exercise price, the number of
shares subject to each option, and the exercisability of the options.
Under the terms of the 1998 Plan, options generally expire 10 years
from the date of grant or within 90 days of termination. Options granted under
these plans generally vest at 25 percent after the completion of one year of
service and then 1/36 per month for the remaining three years and would be fully
vested at the end of four years. Pursuant to the terms of their grant
agreements, certain of the options granted under these plans may be subject to
accelerated vesting upon a change in control of the Company.
Under the terms of the performance based stock options to executives
outside of the 1998 Plan granted in 2003, options generally expire 5 years from
the date of grant or within 90 days of termination. Options granted under these
plans generally vest at grant date.
Prior to December 31, 2005, as permitted under Statement of Financial
Accounting Standards ("SFAS") No. 123, the Company accounted for its stock
option plans following the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock issued to
Employees," and related interpretations. Accordingly, no stock-based
compensation expense had been reflected in the Company's statements of
operations as all options granted had an exercise price equal to or greater than
the market value of the underlying common stock on the date of grant and the
related number of shares granted was fixed at that point in time.
In December 2004, the FASB issued SFAS No. 123(R), "Share Based
Payment." This statement revised SFAS No. 123 by eliminating the option to
account for employee stock options under APB No. 25 and requires companies to
recognize the cost of employee services received in exchange for awards of
equity instruments based on the grant-date fair value of those awards.
Effective January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123(R) using the modified prospective
application method. Under this transition method, the Company would have
recorded compensation expense on a straight-line basis for the three months
ended March 31, 2006, for: (a) the vesting of options granted prior to January
1, 2006 (based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123, and previously presented in the pro-forma
footnote disclosures), and (b) stock-based awards granted subsequent to January
1, 2006 (based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R)). In accordance with the modified prospective
application method, results for the three months ended March 31, 2005 have not
been restated.
9
There were no options granted in the three months ended March 31, 2006,
and all options granted prior to January 1, 2006 were fully vested prior to
January 1, 2006. As such, there was no compensation expense recorded for options
during the three month period ended March 31, 2006. Also, there were no options
granted during the three month period ended March 31, 2005.
Note C - Supplemental Cash Flow Information
During the three month period ended March 31, 2006, no shares of Series
J Preferred Stock were converted into shares of the Company's common stock.
During the three month period ended March 31, 2005, the Company paid no
dividends on the Series J Preferred Stock conversions. The Company accrued
dividends on Series J Preferred Stock for the three month period ended March 31,
2006, of $97,076 which is included in Other Accrued Liabilities.
During the three month period ended March 31, 2006, no shares of Series
H Preferred Stock were converted into shares of the Company's common stock. The
Company accrued dividends on the Series H Preferred Stock for the three month
period ended March 31, 2006, of $6,000 which is included in Other Accrued
Liabilities.
10
Note D - Other Accrued Liabilities
Other accrued liabilities consist of the following:
March 31, December 31,
2006 2005
----------- ------------
(unaudited) (audited)
Compensation and employee benefits $ 2,005 $ 1,987
Accrued interest 749 694
Dividends payable 464 361
Loss Reserve 376 376
Subcontractors 331 724
Related party advances 185 185
Other 121 123
----------- -----------
$ 4,231 $ 4,450
=========== ===========
Note E - Segment Information
The Company has identified two 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 two
segments are as follows: (i) Commodore Advanced Sciences, Inc., which primarily
provides various engineering, legal, sampling, and public relations services to
Government agencies on a cost plus basis; and (ii) Commodore Solutions, Inc.,
which is commercializing technologies to treat mixed and hazardous waste.
11
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 March 31, 2006
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract Revenues $ 2,236 $ 2,236 $ -- $ --
Costs and expenses
Cost of Sales 1,732 1,732 -- --
Research and Development -- -- -- --
General and Administrative 642 386 4 252
Depreciation and Amortization -- -- -- --
--------- --------- --------- ----------
Total costs and expenses 2,374 2,118 4 252
--------- --------- --------- ----------
Income (Loss) from Operations (138) 118 (4) (252)
Gain on settlement of note
payable and accrued interest 151 54 -- 97
Interest Expense (151) -- -- (151)
--------- --------- --------- ----------
Income (Loss) before income taxes (138) 172 (4) (306)
Income taxes -- -- -- --
--------- --------- --------- ----------
Net Income (Loss) $ (138) $ 172 $ (4) $ (306)
========= ========= ========= ==========
Total Assets $ 1,631 $ 1,631 $ -- $ --
Expenditures for long-lived assets $ -- $ -- $ -- $ --
12
Three Months Ended March 31, 2005
Corporate
Advanced Overhead
Total Sciences Solution and Other
Contract Revenues $ 1,626 $ 1,609 $ 17 $ --
Costs and expenses
Cost of Sales 1,284 1,283 1 --
Research and Development -- -- -- --
General and Administrative 665 276 16 373
Depreciation and Amortization 6 6 - --
--------- --------- --------- ----------
Total costs and expenses 1,955 1,565 17 373
--------- --------- --------- ----------
Income (Loss) from Operations (329) 44 -- (373)
Interest Expense (148) -- -- (148)
--------- --------- --------- ----------
Income (Loss) before income taxes (477) 44 -- (521)
Income taxes -- -- -- --
--------- --------- --------- ----------
Net Income (Loss) $ (477) $ 44 $ -- $ (521)
========= ========= ========= ==========
Total Assets $ 1,501 $ 1,477 $ -- $ 24
Expenditures for long-lived assets $ 44 $ 42 $ -- $ 2
13
Note F - 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 6,029,463 and 6,100,297 shares of
common stock and preferred stock convertible into 18,883,145 and 17,471,483
shares of common stock as of March 31, 2006 and 2005, respectively, were not
included in the computation of Diluted EPS. The inclusion of the options and
convertible preferred stock would have been anti-dilutive, thereby decreasing
net loss per common share.
Note G - 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.
14
ITEM 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
Overview
The Company is engaged in providing a range of environmental services
to the public and private sectors related to (i) remediating contamination in
soils, liquids and other materials and disposing of or reusing certain waste
by-products by utilizing SET; and (ii) providing services related to,
environmental management for on-site and off-site identification, investigation
remediation and management of hazardous, mixed and radioactive waste.
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, formerly Advanced Sciences, Inc., a subsidiary acquired on
October 1, 1996, the Company has contracts with various government agencies and
private companies in the U.S. As some government contracts are funded in
one-year increments, there is a possibility for cutbacks as these contracts
constitute a major portion of Advanced Sciences' revenues, and such a reduction
would materially affect the operations. However, management believes 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 Financial Accounting
Standards Board's 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 at March 31, 2006. 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 $564,429 in loans
that are currently due or are payable on demand as of May 15, 2006. 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 2003, 2004 and 2005 financial statements contains a "going
concern" qualification in which they express substantial doubt about the
Company's ability to continue in business.
15
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
employees and 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 employees and 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 1999. 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.
16
RESULTS OF OPERATIONS
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
Revenues were $2,236,000 for the three months ended March 31, 2006,
compared to $1,626,000 for the three months ended March 31, 2005.
In the case of Advanced Sciences, revenues were $2,236,000 for the
period ended March 31, 2006 as compared with $1,609,000 for the period ended
March 31, 2005.
Overall, 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 on a fixed rate and a lump sum basis. Revenue
under these contracts is recorded as tasks under various work orders are
completed and the client approved invoice is submitted for payment. Advanced
Sciences has three major customers, each of which represents more than 10% of
total revenue. The combined revenue for these three customers was $2,236,000 or
100% of total revenues for the period ended March 31, 2006. Advanced Sciences'
cost of sales was $1,732,000 for the period ended March 31, 2006 compared to
$1,283,000 for the period ending March 31, 2005. 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 Solutions, Inc. ("Solution"), revenues were $0
for the period ended March 31, 2006 as compared with $17,000 for the period
ended March 31, 2005. Solution had no customers during the three-month period
ended March 31, 2006. Revenues, when recognized, are primarily from remediation
services performed for engineering and waste treatment companies in the U.S.
under a variety of contracts. There was $0 cost of sales for the three-month
period ended March 31, 2006 as compared to $1,000 for the period ended March 31,
2005. The cost of sales, when incurred, is attributable to selling 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.
General and administrative expenses for the three-month period ended
March 31, 2006 were $642,000 as compared to $665,000 for the three-month period
ended March 31, 2005. This difference is primarily due to less legal expenses.
In the case of Advanced Sciences, general and administrative costs
increased from $276,000 for the three-month period ended March 31, 2005 to
$386,000 for the three-month period ended March 31, 2006. This increase is
primarily due to the increased staffing and salaries with the administrative
staff associated with the eDAM contract. Solution incurred general and
administrative costs of $4,000 for the three-month period year ended March 31,
2006 as compared with $16,000 for the three-month period ended March 31, 2005.
This decrease was primarily due to the decrease in expenses associated with the
SET technology as there were no active contracts in the three month period ended
March 31, 2006. The remaining costs are associated with the rented space to
store the equipment necessary to utilize the SET technology.
17
Corporate general and administrative expenses that are not assigned
specifically to an operating segment decreased by $121,000, from $373,000 during
the three months ended March 31, 2005 to $252,000 during the three months ended
March 31, 2006. Approximately $62,000 of this decrease was a result of a
reclassification of salaries and wages to the Advanced Sciences operating
segment. Because of the increase in operations at Advanced Sciences, certain
administrative individuals have dedicated substantially all of their time to the
Advanced Sciences segment during the three months ended March 31, 2006. In
addition, because of the increase in operations at Advanced Sciences, the
allocation of utilities from general corporate to Advanced Sciences increased by
approximately $16,000, thus reducing the corporate general and administrative
expenses. Legal expenses also decreased by approximately $25,000 during the
three months ended March 31, 2006 as compared with the three months ended March
31, 2005. This is mainly due to the significant legal effort required in the
first quarter of 2005 to complete the Shaar Exchange Agreement as described more
fully below.
During the quarter ended March 31, 2006, the Company settled a note
payable that was due and payable in the principal amount of $254,000 to a vendor
for services provided from an earlier period. The settlement resulted in the
recording of a short term note payable, 0% interest, in the principal amount of
$200,000 to the vendor. The Company made the first of four payments of $50,000
on this short term note payable in March 2006. The settlement of this note
payable to the vendor had the effect of recognizing the reduction of a
historical recorded note payable by $54,000 (other income to Advanced Sciences)
and the reduction of historical accrued interest payable by $97,000 (other
income to Applied). These income amounts are included in Other Income and have
not arisen from the Company's normal base of operations.
Interest expense for the three months ended March 31, 2006 was $151,000
as compared to $148,000 for the three months ended March 31, 2005. The increase
in interest expense of $3,000 is primarily related to greater balances on the
Amended and Restated Shaar Note, and partially offset by lower balances on the
Company's line of credit.
OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements, such as financing or
variable interest entities, that either have, or are reasonably likely to have,
a current or future material effect on financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
18
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006 and December 31, 2005 Advanced Sciences had a $0 and
$141,000 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 March 31, 2006. 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 $564,429 in loans
that are currently due or are payable on demand as of May 15, 2006. 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 report of our independent registered public accounting firm on our
fiscal 2003, 2004 and 2005 consolidated financial statements contains a "going
concern" qualification in which they express substantial doubt about our ability
to continue in business. The Company currently requires additional cash to
sustain existing operations and to meet current obligations and ongoing capital
requirements.
For the three months ended March 31, 2006, and for the years ended
December 31, 2005, 2004, and 2003, Applied incurred losses of $138,000;
$2,714,000, $2,404,000; and $2,957,000, respectively. The Company has also
experienced net cash inflows (outflows) from operating activities of
($1,337,000), ($1,532,000), and ($955,000), for the years ended December 31,
2005, 2004 and 2003 respectively.
For the three-month period ended March 31, 2006, the Company converted
no shares of Series J Preferred into shares of the Company's common stock.
The Company has experienced a decrease in accounts receivable, net, as
of March 31, 2006 compared to the year ended December 31, 2005 amount. Accounts
receivable, net, as of December 31, 2005 was $2,065,000 as compared to
$1,094,000 as of March 31, 2006. The decrease in accounts receivable, net, is
due to (i) the collection of appreciable amounts of historical retainage on the
eDAM contract in Oak Ridge; and (iii) general timing differences in the
collection of the Company's accounts receivable. Approximately 90% of the
accounts receivable, net, figure will be collected within 45 days of the period
ended March 31, 2006. The remaining approximate 10% of the accounts receivable,
net, amounts are deemed retainage by the Company's main client, Bechtel Jacobs,
and is released to the Company on a periodic basis when the Company completes
certain work orders that the retainage has been applied to.
The Company recently settled a note payable that was due and payable in
the principal amount of $254,000 to a vendor for services provided from an
earlier period in the three month period ended March 31, 2006. The settlement
resulted in the recording of a short term note payable, 0% interest, in the
principal amount of $200,000 to the vendor. The Company made the first of four
payments of $50,000 on this short term Note payable in March 2006. The
settlement of this note payable to the vendor had the effect of recognizing the
reduction of a historical recorded note payable by $54,000 (other income to
Advanced Sciences) and the reduction of historical accrued interest payable by
$97,000 (other income to Applied). These income amounts are included in Other
Income and have not arisen from the Company's normal base of operations.
19
Certain prior-year amounts have been reclassified to conform to the
current year presentation.
For the three month period ended March 31, 2006, no shares of the
Company's Series J Preferred were converted into shares of the Company's common
stock. For the three month period ended March 31, 2006, the Company accrued all
dividends payable on the Series J Preferred Stock.
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. Effective October 1, 2005, 388,302 shares of Series I Preferred were
exchanged for 388,302 shares of Series J Preferred
For the Year ended December 31, 2005, the Company issued 439,206 shares
of the Company's common stock upon conversion of 7,000 shares of Series I
Preferred by the holders thereof. For the year ended December 31, 2005, the
Company paid no dividends on the Series I Preferred Stock. The Company accrued
dividends on the Series I Preferred for the year ended December 31, 2005 of
$183,696, which is included in Other Accrued Liabilities.
Effective October 1, 2005, the Company entered into an exchange
agreement with The Shaar Fund, LTD (the "New 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 388,302 shares of the
Series I Preferred (excluding all other accrued and unpaid dividends thereon)
for 388,302 shares of the Company's Series J Preferred.
For the year ended December 31 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. For the year ended December 31, 2005, the
Company paid no dividends on the Series H Preferred Stock. The Company accrued
dividends on Series H Preferred for the three month period ended March 31, 2006
of $6,000, which is included in Other Accrued Liabilities.
For the three month period ended March 31 2006, the Company converted
no shares of Series J Preferred and issued no stock with respect to accrued
dividends pertaining to the Series J Preferred. For the three month period ended
March 31, 2006, the Company paid no dividends on the Series J Preferred. The
Company accrued dividends on Series J Preferred for the three month period ended
March 31, 2006 of $97,076, which is included in Other Accrued Liabilities.
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
125,000 shares of the Company's common stock at an exercise price of $0.57. The
current principal balance of the Weiss Group Note is $252,397 as of March 31,
2006 and remains unpaid as of May 15, 2006.
Effective February 14, 2004, the members of the Weiss Group Note
voluntarily cancelled all issued warrants to purchase 75,000 shares at an
exercise price of $1.00 per share of the Company's common stock in connection
with the Weiss Group Note.
20
Effective February 15, 2004, the Company issued warrants to purchase
125,000 shares of its common stock at an exercise price of $0.57 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.
Mr. Blum, a director of the Company, provided 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 March
31, 2006 and remains unpaid as of May 15, 2006.
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 500,000 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 200,000 shares of the Company's common stock at an exercise price of
$0.20 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.
Effective as of October 1, 2005, the Company authorized the issuance of
550,000 shares of Series J Convertible Preferred Stock ("Series J 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 J Preferred shall have the following rights, privileges, and
limitations:
a) The conversion feature shall be exercisable immediately.
b) The conversion price of the Series J 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 $0.50 per share or less than $0.05 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 J 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 March 31, 2006, to the
Holders of record of shares of the Series J Preferred Stock.
f) The Company has reserved 40,000,000 shares of its common stock for
the conversion of the Series J Preferred and the Amended New Shaar
Convertible Note.
Effective as of October 1, 2005, the Company entered into an exchange
agreement with The Shaar Fund, LTD (the "New Shaar Exchange Agreement"). Under
terms of the New 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 I Preferred (excluding all other accrued and
unpaid dividends thereon) for 388,302 shares of the Company's Series J
Preferred.
21
Effective as of October 1, 2005, Shaar and the Company have agreed to
amend the New Shaar Convertible Note (the "Amended New Shaar Convertible Note").
The Amended New Shaar Convertible Note shall have the following rights,
privileges, and limitations:
a) The Amended 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
Amended 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 $0.50 per share or less than
$0.05 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 Amended New Shaar Convertible Note may not be prepaid by the
Company prior to the Maturity Date.
i) The Company has reserved 40,000,000 shares of its common stock for
the conversion of the Amended New Shaar Convertible Note and the
Series J Preferred.
The current principal balance of the New Shaar Note is $5,666,233 as of
March 31, 2006 and remains unpaid as of May 15, 2006.
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.
22
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 $39,000,000 as of December 31, 2005, which expire in the years
2010 through 2025. 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.
23
Further, the Company's business is subject to a number of risks and
uncertainties that would affect any such forward-looking statements. These risks
and uncertainties include, but are not limited to:
o the Company's critical need for additional cash to sustain
existing operations and meet existing obligations and capital
requirements (the Company's auditor's opinion on our fiscal 2003,
2004 and 2005 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
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
summarized, and reported within the required time periods, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure.
As required by Rule 13a-15(b) under the Exchange Act, we conducted an
evaluation, under the supervision of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures as of March 31, 2006. Based on their evaluations as of March 31,
2006, the chief executive officer and chief financial officer of the Company
have concluded that the Company's disclosure controls and procedures (as defined
24
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.
Management has taken steps to correct any material weaknesses that were
identified in Company's fiscal 2005 10K report filed April 18, 2006 ("2005
Annual Report") on form 10K for the period ended December 31, 2005 with respect
to analyzing debt and equity instruments to identify potential embedded
derivatives and any required accounting entries and disclosures pertaining to
embedded derivatives.
(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.
25
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 1A. Risk Factors
Investing in our securities involves a material degree of risk. Before
making an investment decision, you should carefully consider the risk factors
set forth below as well as other information we include or incorporate by
reference in this annual report and the additional information in the other
reports we file with the U.S. Securities and Exchange Commission ("SEC").
For a complete list of the risk factors concerning an investment in our
Company, please see the Risk Factors section in the Company's fiscal 2005 10K
report filed April 18, 2006 ("2005 Annual Report"). There have been no material
changes in the risk factors listed in the annual report nor have there been any
additional risk factors recognized or deleted from this list in the 2005 Annual
Report.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
Not applicable.
26
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 February 8,
2006, regarding a press release issued by the Company announcing
the 2006 Chairman's Letter by CEO Shelby T. Brewer.
2. The Company filed a Current Report on Form 8-K, dated April 18,
2006, regarding a press release issued by the Company announcing
its fiscal 2005 year end earnings.2.
[THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
27
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 22, 2006 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)
28