<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22291
COMMODORE SEPARATION TECHNOLOGIES, INC.
----------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 11-3299195
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3240 TOWN POINT DRIVE, SUITE 200
KENNESAW, GEORGIA 30144
----------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (770) 422-1518.
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
The number of shares the common stock outstanding at November 11, 1998 was
11,515,575.
<PAGE> 2
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheet -
September 30, 1998 and December 31, 1997. . . . . . . . . . . . . . . . . . . . 3
Condensed Statement of Operations -
Three months ended September 30, 1998 and 1997,
Nine months ended September 30, 1998 and 1997 and
Cumulative Amounts Since Inception
(November 15, 1995) to September 30, 1998 . . . . . . . . . . . . . . . . . . . 5
Condensed Statement of Cash Flows -
Nine months ended September 30, 1998 and
September 30, 1997 and Cumulative Amount Since
Inception (November 15, 1995) to September 30, 1998 . . . . . . . . . . . . . . 6
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 715 $ 4,951
Notes and advances to related parties 2 17
Restricted cash 210 88
Inventory 631 360
Prepaid assets and other current assets 1 41
------------ ------------
Total Current Assets 1,559 5,457
Property and equipment, net 1,494 1,036
Intangible assets, net 184 167
------------ ------------
Total Assets $ 3,237 $ 6,660
============ ============
</TABLE>
See notes to condensed financial statements.
3
<PAGE> 4
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEET -- (CONT'D)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND 1998 1997
STOCKHOLDERS' EQUITY ------------- ------------
(unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable $ 93 $ 405
Accrued liabilities 183 328
Due to related parties 367 262
Deposits - Contracts in progress 450 --
---------- ----------
Total Current Liabilities 1,093 995
Capital Lease Obligation 6 13
Stockholders' Equity:
Preferred stock, par value $0.001 per share,
10% non-cumulative, 5,000,000 shares
authorized, 600,000 shares issued and
outstanding 1 1
Common stock, par value $0.001 per share,
50,000,000 shares authorized, and
11,515,575 and 11,503,650 shares
issued and outstanding, respectively 12 11
Additional paid-in capital 11,363 11,638
Deficit accumulated during development stage (9,238) (5,998)
---------- ----------
Total stockholders' equity 2,138 5,652
---------- ----------
Total Liabilities and Stockholders' Equity $ 3,237 $ 6,660
========== ==========
</TABLE>
See notes to condensed financial statements.
4
<PAGE> 5
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED - DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNT SINCE
INCEPTION
THREE MONTHS ENDED NINE MONTHS ENDED (NOV. 15, 1995) TO
SEPT 30, SEPT 30, SEPT 30, SEPT 30, SEPTEMBER 30,
1998 1997 1998 1997 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Cost of sales $ 148 $ -- $ 649 $ 50 $ 649
Research and development 151 308 520 880 2,373
General and administrative 261 412 997 1,343 3,232
Depreciation and amortization 110 57 287 157 539
Corporate overhead expenses 141 614 529 1,319 2,144
Sales and marketing 105 121 370 172 651
Licensing fee -- -- -- -- 50
-------- -------- -------- -------- --------
Total costs and expenses 916 1,512 3,352 3,921 9,638
-------- -------- -------- -------- --------
Other income (expense):
Interest income 12 112 94 211 388
Interest expense -- -- -- (8) (14)
Other income 19 -- 19 -- 26
-------- -------- -------- -------- --------
Loss before income taxes (885) (1,400) (3,239) (3,718) (9,238)
Income tax expense -- -- -- -- --
-------- -------- -------- -------- --------
Net loss $ (885) $ (1,400) $ (3,239) $ (3,718) $ (9,238)
======== ======== ======== ======== ========
Net loss per share $ (.08) $ (.12) $ (.28) $ (.35)
======== ======== ======== ========
Number of weighted average shares
outstanding (000's) 11,516 11,125 11,514 10,643
======== ======== ======== ========
</TABLE>
See notes to condensed financial statements.
5
<PAGE> 6
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED-DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CUMULATIVE
AMOUNT SINCE
INCEPTION
NINE MONTHS ENDED (NOV 15, 1995) TO
SEPT 30, SEPT 30, SEPT 30,
1998 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,239) $ (3,718) $ (9,238)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 287 157 539
Issuance of common stock 25 -- 35
Changes in assets and liabilities:
Accounts payable (312) 222 93
Accrued liabilities (144) 57 183
Deposits - contracts in progress 450 -- 450
Restricted cash (122) -- (210)
Inventory (271) -- (631)
Accounts receivable -- 1 --
Receivables from related party 15 (20) (2)
Other assets 40 174 (1)
-------- -------- ----------
Net cash used in operating activities (3,271) (3,127) (8,782)
-------- -------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase and construction of equipment (735) (1,096) (2,020)
Acquisition of intangible assets (28) (84) (196)
-------- -------- ----------
Net cash used in investing activities: (763) (1,180) (2,216)
-------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and warrants -- 6,109 6,109
Proceeds from sale of preferred stock and warrants -- 4,978 4,978
Preferred stock dividend (300) (288) (738)
Borrowings (repayments) from/to stockholder 105 395 367
Collection of subscription receivable -- -- 15
Contributed capital -- -- 976
Increase(decrease) in capital lease obligation (7) 16 6
-------- -------- ----------
Net cash provided by (used in) financing activities (202) 11,210 11,713
-------- -------- ----------
Increase (decrease) in cash (4,236) 6,903 715
Cash at beginning of period 4,951 99 --
-------- -------- ----------
Cash, end of period $ 715 $ 7,002 $ 715
======== ======== ==========
</TABLE>
See notes to condensed financial statements.
6
<PAGE> 7
COMMODORE SEPARATION TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, 1998
Note A - Basis of Presentation
The accompanying unaudited condensed financial statements for Commodore
Separation Technologies, Inc. (a development stage company) ("the Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. The financial statement information was derived from
unaudited financial statements unless indicated otherwise. Accordingly, they do
not include all of the information and footnotes required by 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 nine month period ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
The accompanying unaudited condensed financial statements should be
read in conjunction with the Company's audited financial statements included in
the Company's Transition Report on Form 10-K for the period ended December 31,
1997.
The Company was incorporated on November 15, 1995, under the laws of
the state of Delaware. Effective February 29, 1996, the Company acquired the
rights to its proprietary separation technology and entered into a royalty
agreement with the inventor of the technology. Pursuant to these agreements, the
Company caused its then parent, Commodore Environmental Services, Inc.
("Environmental"), to issue 200,000 shares of Environmental common stock to the
inventor of the technology.
The Company is a process technology company which has developed and
intends to commercialize its separation technology and recovery system, known as
SLiM(TM). The Company believes SLiM(TM) is capable of effectively separating and
extracting various solubilized materials. The Company has not commenced planned
principal operations. As such, the Company is considered a development stage
company as defined in SFAS No. 7.
Effective December 2, 1996, Environmental transferred 100% of the
capital stock of the Company and notes receivable from the Company which
aggregated $976 to its then 65.9% owned subsidiary, Commodore Applied
Technologies, Inc. ("Applied") in exchange for cash and a warrant to purchase
shares of Applied common stock. Concurrent with this transaction, Applied
contributed the notes receivable from the Company as a capital contribution. The
transfer has been accounted for as a transaction between entities under common
control. Accordingly, the historical basis of Environmental's investment and the
net assets of the Company were not adjusted.
In April 1997, the Company completed an initial public offering of its
equity securities from which it received net proceeds of approximately $11.1
million. These funds were recorded as additional paid-in-capital by the Company.
This offering reduced Applied's equity ownership in the Company from 100 percent
to 87 percent.
7
<PAGE> 8
On July 28, 1997, the Company changed its fiscal year from June 30 to December
31.
Note B - Subsequent Events
On September 29, 1998, Applied announced a debt restructuring and
partial debt repayment. Applied announced that, subject to the receipt of a
fairness opinion, it intends to transfer its 87% ownership interest in the
Company to its creditor, Commodore Environmental Services, Inc. in consideration
for reduction in indebtedness of $1.25 million.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
The Company, organized in November 1995, has not generated material
revenues or profits to date, but will soon initiate commercial operations at two
locations. Since its inception, the Company has (1) developed a strategic
operating plan, (2) hired personnel to implement its operating plan, (3)
engineered and built commercial-scale, supported liquid membrane processing
units, (4) conducted on-site demonstrations for potential customers, and (5) has
entered into contracts for the lease of its products and technology.
The Company is beginning to develop an operating history, but
operations have been limited to demonstrations at customers' facilities and
pilot-scale testing at the Company's Kennesaw facility. Until commercial
operations have been established, the Company is subject to all of the business
risks associated with a new enterprise, such as the risks of unforeseen capital
requirements, market acceptance, and competitive disadvantages against larger
and more established companies. During the period from November 15, 1995 (date
of inception) to September 30, 1998, the Company has incurred a net loss of
$9,238 and anticipates that it may continue to incur significant losses for the
foreseeable future. There is no assurance as to whether or when the Company will
generate material revenues or profits.
CONTRACTS. The Company was awarded its first commercial contract
(Hawkins Point) by Maryland Environmental Services in November 1997. In February
1998, the Company was awarded its second commercial (Dundalk Marine Terminal)
contract by Maryland Environmental Service. These two contracts have created a
$600 backlog. The Company has completed the installation of equipment at Hawkins
Point and is presently waiting on Maryland Environmental Service to finish
permit modifications before the equipment can go into full commercial operation.
The equipment for Dundalk marine Terminal has been constructed and the Company
is waiting for Maryland Environmental Service to complete its construction work
before installation can proceed.
9
<PAGE> 10
RESEARCH & DEVELOPMENT. The Company's R&D effort focuses on (1)
increasing membrane efficiency, (2) increasing the number of substances that can
be extracted using SLiM(TM) technology (e.g. specialty chemicals,
pharmaceuticals), and (3) characterizing customer waste streams to validate
legitimate sales targets.
OPERATIONS. The Company works with outside vendors to supply and
manufacture the SLiM(TM) equipment. Equipment is engineered, constructed, and
tested under the Company's supervision. The Company has excellent relations with
its vendors and foresees no supply problems. The installation effort at Hawkins
Point went smoothly and the Company anticipates no unusual problems during the
commissioning stage. The Company expects to install the SLiM(TM) equipment at
Dundalk Marine Terminal in December 1998 or January 1999.
RESULTS OF OPERATIONS
Three and Nine months Ended September 30, 1998 Compared to Three and Nine months
Ended September 30, 1997
In the three and nine months ended September 30, 1998, the Company
incurred $148 and $649 of cost of sales relating to the Port of Baltimore
contracts. These costs include labor and fringes, subcontractor costs, travel
costs and material purchases in connection with the start up operations of the
contracts. The Company has considered these costs to be non-recoverable and
therefore has recorded them in the quarter incurred.
For the three and nine months ended September 30, 1998, the Company
incurred $151 and $520 of research and development costs as compared to $308 and
$880 for the three and nine months ended September 30, 1997. The decrease is due
to reduced efforts in research and increased efforts to commercialize the
Company's technology. Research and development costs include salaries, wages and
other related costs of personnel engaged in research and development activities,
as well as contract services and equipment used in research and development
activities. Research and development costs are expensed when incurred.
General and administrative expenses for the three and nine months ended
September 30, 1998 were $261 and $997, as compared to $412 and $1,343 for the
three and nine months ended September 30, 1997. The decrease was primarily due
to certain costs incurred by the Company in conjunction with its IPO in April
1997 and relocation costs for employees not duplicated in 1998.
Sales and marketing expenses for the three and nine months ended
September 30, 1998 were $105 and $370, as compared to $121 and $172 for the
three and nine months ended September 30, 1997. The increase between nine month
periods is due to the Company's efforts to introduce its technology into the
marketplace.
10
<PAGE> 11
For the three and nine months ended September 30, 1998, the Company was
charged $141 and $529 by Applied as a management fee, as compared to $614 and
$1,319 for the three and nine months ended September 30, 1997. This fee
represents the Company's pro rata portion of expenses related to wages and
salaries, rent, and other administrative expenses related to its executive
offices in New York and its marketing office in Virginia. The decrease resulted
from lower allocated overhead expenses from Applied to the Company pursuant to a
change in the intercorporate services agreement between Applied and the Company.
Interest income was $12 and $94 for the three and nine months ended
September 30, 1998, as compared to $112 and $211 for the three and nine months
ended September 30, 1997. The decrease resulted from the continued use of the
proceeds of the Company's initial public offering since April 1997.
The Company has sustained losses of $885 and $3,239 for the three and
nine months ended September 30, 1998, as compared to $1,400 and $3,718 for the
three and nine months ended September 30, 1997. Substantially all of the
Company's losses are attributable to the prior emphasis on research and
development activities and the recent efforts to commercialize the Company's
technology.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of $465, as
compared to $4,462 as of December 31, 1997. The decrease in working capital is
primarily the result of the nine month loss of $3,239, purchase of equipment of
$735 and the payment of $300 in dividends on its preferred stock. This working
capital should fund the Company's operations through December 31, 1998. Before
that date, the Company will have to complete a financing to obtain the funds
necessary to reach commercial operating status. The Company is currently
evaluating various financing options.
The Company believes it has adequate capital resources to sustain its
operations into the fourth quarter of 1998, subject to factors which cannot be
predicted at this time and which may not be within the Company's control. While
the Company believes its capital requirements for the remainder of 1998 will be
met through the development of its business, the Company may be required to
obtain financing through external sources. There can be no assurance that such
financing will be available, or if available, that it will be on terms
satisfactory to the Company.
The Company announced that its Board of Directors has elected not to
pay the quarterly dividend on its publicly traded preferred stock for the
quarter ended September 30, 1998.
NET OPERATING LOSSES
The Company has net operating loss carryforwards which expire in the
years 2000 through 2011. The amount of and ultimate realization of benefit from
the net operating loss for income tax purposes is dependent, in part, upon the
tax laws in effect, future earnings of the Company, and other future events, the
effects of which cannot be determined.
A change in ownership of the Company may reduce the amount of loss allowable.
A full valuation allowance has been established because of the
uncertainty about whether the Company will realize the benefit of net operating
losses.
11
<PAGE> 12
FORWARD LOOKING STATEMENTS
The Company, or its executive officers and directors on behalf of the
Company, may from time to time make "forward-looking statements" within the
meaning of the Securities Act of 1933, as amended (the "Securities Act") and the
Securities Exchange Act of 1934, as amended (the "Exchange Act" and together
with the Securities Act, the "Acts"). The Company is filing this Quarterly
Report on Form 10-Q to avail itself of the safe harbor provided in the Acts with
respect to any such (i) forward-looking statements that may be contained in the
Company's reports and other documents filed with the Securities and Exchange
Commission under sections 13 or 15(d) of the Exchange Act and (ii) oral
forward-looking statements made by the Company's executive officers and
directors on behalf of the Company to the press, potential investors, securities
analysts and others. Such forward-looking statements could involve, among other
things, statements regarding the Company's intent, belief or expectation with
respect to (i) the Company's results of operations and financial condition, (ii)
the consummation of acquisition and financing transactions and the effect
thereof on the Company's business, and (iii) 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, 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 and would be based on
facts and conditions as they exist at the time such statements are made.
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; foreign and domestic competition; product demand and industry
pricing; cost of compliance with environmental regulations; and management's
estimates of niche market data. These risks and uncertainties could cause actual
results of the Company to differ materially from those projected or implied by
such forward-looking statements.
12
<PAGE> 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
The Company did not pay $150,000 Dividends due September 30, 1998 on
its preferred stock.
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 - 27.1 - Financial Data Schedule
(b) Reports on Form 8 - K
A report on form 8-K was filed by the Company on July 10, 1998
in connection with the resignation of Mr. Michael D. Fullwood
as an officer of the Company.
13
<PAGE> 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: NOVEMBER 11, 1998 COMMODORE SEPARATION TECHNOLOGIES, INC.
(REGISTRANT)
BY /s/ WILLIAM E. INGRAM
------------------------------------------
WILLIAM E. INGRAM - VICE PRESIDENT AND
CONTROLLER, (AS BOTH A DULY AUTHORIZED
OFFICER OF THE REGISTRANT AND THE
PRINCIPAL FINANCIAL OFFICER OR CHIEF
ACCOUNTING OFFICER OF THE REGISTRANT)
14
<PAGE> 15
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 715
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,929
<DEPRECIATION> (475)
<TOTAL-ASSETS> 3,237
<CURRENT-LIABILITIES> 1,094
<BONDS> 0
0
1
<COMMON> 12
<OTHER-SE> 2,126
<TOTAL-LIABILITY-AND-EQUITY> 3,237
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 649
<TOTAL-COSTS> 3,352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (94)<F1>
<INCOME-PRETAX> (3,239)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,239)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,239)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
<FN>
<F1>INTEREST INCOME
</FN>
</TABLE>
