SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1999
OR
[ ]TRANSITION REPORT PURSUANT O SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission file number 33-94884
COATES INTERNATIONAL, LTD.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2925432
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Highway 34 & Ridgewood Road, Wall Township, New Jersey 07719
(Address of Principal Executive Office) (Zip Code)
(732) 449-7717
(Registrant's telephone number including area code)
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.
Ye s X No
The number of shares of Registrant's Preferred Stock Series A, $0.001 par
value, outstanding as of June 30, 1999, was 6,572,424 shares.
1
<PAGE>
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Financial Statements (unaudited)
Condensed Balance Sheet
- June 30, 1999 3
Condensed Statements of Operations
- Three months and six months ended June 30, 1999 and 1998
and since inception 4
Condensed Statements of Cash Flows
- Six months ended June 30, 1999 and 1998
and since inception 5
Notes to The Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition 7-8
And Results of Operations
PART II - OTHER INFORMATION 9
SIGNATURES 10
FINANCIAL DATA SCHEDULE 11
2
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Condensed Balance Sheet
June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Assets
Current Assets
<S> <C>
Cash $ 8,685
Restricted cash 112,000
Prepaid insurance 2,321
--------------
Total Current Assets 123,006
--------------
Property, Plant and Equipment, Net of Accumulated Depreciation of $390,661 1,608,304
Other Assets
Mortgage Loan Costs, Net of Accumulated Amortization of $3,263 61,997
Deposit 2,500
--------------
Total Assets 1,795,807
==============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses 974,647
Accrued interest payable 106,559
Due to stockholders 22,300
--------------
Total Current Liabilities 1,103,506
--------------
Mortgage payable 900,000
--------------
Stockholders' Equity
Preferred stock,Series A, $.001 par value,14,000,000 shares authorized - voting,
non-cumulative convertible, 6,572,424 shares issued and outstanding 6,572
Common stock, $.001 par value, 20,000,000 shares authorized - no shares issued -
Additional paid-in capital 10,935,424
Deficit accumulated during the development stage (11,149,695)
--------------
Total Stockholders' Equity (Impairment) (207,699)
--------------
$ 1,795,807
Total Liabilities and Stockholders' Equity
==============
</TABLE>
See notes to the condensed financial statements.
3
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Condensed Statements of Operations
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
June 30,
1999
----------------
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------- ----------------
1999 1998 1999 1998
--------------- --------------- --------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenue $ - $ - $ - $ - $ 687,375
--------------- --------------- --------------- --------------- ----------------
Operating Expenses:
Research and development costs 10,325 68,044 56,574 56,674 2,555,553
Research and development costs -
related party 26,087 23,764 48,189 48,885 977,577
General and administrative
expenses 2,183 123,415 111,959 212,808 7,675,352
Depreciation and amortization
expense 8,947 - 37,527 1,606 406,267
--------------- --------------- --------------- --------------- ----------------
Total Operating Expenses 47,542 215,223 254,249 319,973 11,614,749
--------------- --------------- --------------- --------------- ----------------
Loss From Operations (47,542) (215,223) (254,249) (398,962) (10,927,374)
--------------- --------------- --------------- --------------- ----------------
Other Income (Expense):
Interest income 634 298 696 392 126,460
Interest expense (25,757) (3,781) (50,672) (7,381) (348,781)
--------------- --------------- --------------- --------------- ----------------
Total Other Income (Expense) (25,123) (3,483) (49,976) (6,989) (222,321)
--------------- --------------- --------------- --------------- ----------------
Net Loss $ (72,665) $ (218,706) $ (304,225) $ (405,951) $ (11,149,695)
=============== =============== =============== =============== ================
Loss Per Share $ (0.01) $ (0.03) $ (0.05) $ (0.06)
=============== =============== =============== ===============
Weighted Average Number of Shares
Outstanding 6,572,424 6,572,424 6,572,424 6,571,757
=============== =============== =============== ===============
</TABLE>
See notes to the condensed financial statements.
4
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
June 30,
1999
-----------------
Six Months Ended
June 30,
--------------------------------- -----------------
1999 1998
--------------- --------------- -----------------
(Unaudited) (Unaudited) (Unaudited)
--------------- --------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities $ (422,482) $ (422,170) $ (9,687,169)
--------------- --------------- -----------------
Cash Flows From Investing Activities (62,745) - (1,249,816)
--------------- --------------- -----------------
Cash Flows From Financing Activities
Proceeds from mortgage payable 900,000 460,539 1,400,000
Repayment of mortgage payable (500,000) (160,000) (660,000)
Payment for mortgage loan costs (65,343) - (112,104)
Proceeds of additional paid-in capital 115,342 168,037 2,797,741
Proceeds from issuance of stock - 129,000 7,488,148
Payment for treasury stock - - (30,000)
Proceeds from (repayment of) stockholder loans 29,338 (7,100) 61,885
Net Cash Provided by Financing Activities 479,337 590,476 10,945,670
--------------- --------------- -----------------
Net (Decrease) Increase in Cash (5,890) 168,306 8,685
Cash - Beginning of Periods 14,575 35,249 -
--------------- --------------- -----------------
Cash - End of Periods $ 8,685 $ 203,555 $ 8,685
=============== =============== =================
</TABLE>
See notes to the condensed financial statements.
5
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Notes to the Condensed Financial Statements
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Item 310 of Regulation
S-B. 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 three months and six months ended
June 30, 1999 and 1998 are not necessarily indicative of the results that
may be expected for the years ended December 31, 1999 and 1998,
respectively. The unaudited condensed financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 1998.
RELATED PARTY TRANSACTION
Subcontract Labor - The Company subcontracts its project expense (payroll,
insurance and supplies) from an entity in which George J. Coates is the sole
stockholder. During the six months ended June 30, 1999 and 1998, $48,189 and
$48,885, respectively, were paid for these services.
COMMITMENTS AND CONTINGENCIES
The Company is a defendant in various lawsuits incident to the ordinary
course of business which are not possible to determine the probable outcome
or the amount of liability, if any, under these lawsuits. However, in the
opinion of management, the disposition of these lawsuits will not have a
material adverse effect on the Company's financial position, results of
operations, or cash flows.
SUBSEQUENT EVENTS
On August 6, 1999, the Company entered into an agreement with Well to Wire
Energy Inc. (WTW) a Canadian corporation, whereby the Company is granting to
WTW the right to purchase an exclusive license for the use of the Coates
engine in connection with the conversion of natural gas to electricity in
the country of Canada and its territories. The cost of the license is
$5,000,000 and is payable $250,000 on August 16, 1999, $500,000 thirty days
after the successful validation of the Coates engine, and the balance
quarterly over the next four years. The Company retains the exclusive right
to manufacture both the Coates engine and generator components for sale to
WTW and the Company will also receive 5% of the gross profits which WTW
derives from all sources.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Coates International Ltd. ("CIL" or the "Company") is a Delaware corporation
organized in October 1991 by George J. Coates, as the successor in interest to a
Delaware corporation of the same name incorporated in August 1988 (the
"Predecessor Entity"). As a result of a dispute with certain former
employee-directors who claimed to own approximately nine percent of the
Predecessor Entity's outstanding capital stock, the Predecessor Entity was
reorganized in November 1991. Pursuant to the reorganization, all of the
Predecessor Entity's assets subject to liabilities were distributed to CIL, the
non-litigating stockholders of the Predecessor Entity became the stockholders of
CIL, and the Predecessor Entity was dissolved.
CIL has completed the basic development of a spherical rotary valve system (the
"Coates System"), the development of which was initiated by its founder, George
J. Coates, for use in internal combustion engines of all types. With respect to
the Coates System, seven applicable United States patents (the "Coates Patents")
have been issued to George J. Coates. CIL holds an exclusive license from George
J. Coates and his son Gregory Coates, to manufacture, sell and grant sub-
licenses with respect to products based on the Coates Patents, within all of the
countries, their territories and possessions, comprising North America, South
America and Central America (the "License Areas"). George J. Coates and Gregory
Coates have also agreed, as long as CIL remains independent and viable, not to
compete with CIL in the manufacture, assembly, use or sale of internal
combustion engines utilizing the technology falling within the scope of the
Coates Patents in the Licensed Areas, or to grant any other exclusive or
non-exclusive license in the Licensed Areas except through CIL. In addition,
George J. Coates and Gregory Coates have executed an agreement granting CIL the
right to retain any moneys including royalties received from Nicholson McLaren
or from Noble Motor Sport (manufacturer of Ascari racing cars) for manufacture,
sale, use or assembly of internal combustion engines anywhere in the world using
the technology falling within the scope of the Coates Patents.
CIL has a short operating history, during which it has primarily devoted its
attention to developing the technology associated with the Coates System. During
such time CIL has also arranged for certain tests in order to evaluate the
effectiveness of the technology. CIL has also devoted much time attempting to
interest various persons and entities in acquiring sub-licenses to use the
technology.
CIL is currently manufacturing components for high performance automotive
engines modified with the Coates System on a limited basis at its Wall Township,
New Jersey, manufacturing facility. Except as may be set forth herein, CIL has
not sold any automotive engines or components during the quarter ended June 30,
1999. CIL has received numerous oral and written inquiries from potential
customers, expressing an interest in acquiring high performance automotive
racing engines modified with the Coates System. No assurances can be given that
these inquiries will result in binding sales orders. CIL intends to aggressively
pursue all inquiries with the goal of obtaining firm orders. CIL's ability to
generate revenues and achieve profitable operations is principally dependent
upon the execution of sub-license agreements with engine manufacturers and
retrofitters and upon the Company's successful marketing and sales of high
performance automotive, motorcycle and marine racing engines. Despite limited
success to date due principally to its lack of funding, CIL continues to
aggressively pursue the marketing of Coates System technology to potential sub-
licensees worldwide.
On August 2, 1999, the Company hired Robert J. Levin, CPA as Vice President of
Finance and Chief Financial Officer. Mr. Levin has been the CFO of a public
company and acted as a financial consultant to numerous other public and private
companies during the last ten years. Management is optimistic that Mr. Levin
will help facilitate the Company's move from the development stage to the
production stage. His duties include preparation of public filings, liaison to
independent accountants and attorneys, and responsibility for all financial
aspects of the Company.
On August 6, 1999, CIL entered into an agreement with Well to Wire Energy Inc.
(WTW), a Canadian corporation, whereby the Company is granting to WTW the right
to purchase an exclusive license for the use of the Coates engine in connection
with the conversion of natural gas to electricity in the country of Canada and
its territories. The cost of the license is $5,000,000 and is payable $250,000
on August 16, 1999, $500,000 thirty days after the successful validation of the
Coates engine, and the balance quarterly over the next four years. CIL retains
the exclusive right to manufacture both the Coates engine and generator
components for sale to WTW and CIL will also receive 5% of the gross profits
which WTW derives from all sources.
7
<PAGE>
Results of Operations for the Six Months and Three Months Ended June 30, 1999
and 1998
No revenues were recognized for the three months and six months ended June 30,
1999 and 1998. Total operating expenses for the six months ended June 30, 1999
were $254,249 compared to $319,973 for the same period in 1998. The decrease was
attributed to an increase in depreciation and amortization of approximately
$36,000 offset by a decrease in general and administrative expenses
approximating $101,000. This decrease is the result of a forgiveness of debt in
the current year approximating $90,000 which offset other period general and
administrative expenses. The forgiveness of debt was the result of settlements
in connection with certain legal fees and printing costs.
Total operating expenses for the three months ended June 30, 1999 were $47,542
as compared with $215,223 for the same period in 1998. This decrease was
attributed to the aforementioned forgiveness of debt in the current three month
period in addition to a decrease in research and development costs,
approximating $58,000.
Interest expense for the six months ended June 30, 1999 was $50,672 as compared
to $7,381 for the same three month period in 1998. This increase of
approximately $43,000 was due to a higher mortgage on the property in 1999,
coupled with a higher interest rate. The increase in interest expense of
approximately $22,000 for the three months ended June 30, 1999 was attributed
also to the higher mortgage and higher interest rate.
The net loss for the six months ended June 30, 1999 was $304,225 as compared
with a loss of $405,951 for the same period in 1998. Once again, the main reason
for this decrease was the $90,000 reduction in the current year's general and
administrative expenses due to the forgiveness of debt. The net loss for the
three months ended June 30, 1999 was $72,665 as compared to a net loss for the
three months ended June 30, 1998 of $218,706. This decrease was due to a
decrease in research and development costs approximating $58,000 coupled with
the aforementioned forgiveness of debt which fell in this three month period.
Total losses since inception in August 1988 through June 30, 1999 amount to
$11,149,695.
Liquidity and Capital Resources
The Company's balance sheet and financial condition did not change materially
during the quarter. However, the losses experienced during this period affected
cash flow and, therefore, the Company's cash position . Cash on hand currently
is insufficient to guaranty an orderly retirement of liabilities unless their
due dates are extended.
On July 15, 1999, the Company commenced a private offering for the
placement of Series A Preferred Stock with certain institutional and
accredited investors in accordance with the exemption provided by Rule 506 (of)
Regulation D promulgated under the Securities Act of 1933. These securities are
being offered solely to accredited investors as that term is defined in Rule
501(a) of Regulation D. The Offering is structured, requiring that a minimum
of 150,000 shares be sold on a "best efforts, all or none basis" or all the
subscription funds held in escrow shall be returned and the private offering
would be terminated. The maximum number of shares offered is 750,000 at a price
of $20.00 per share. Accordingly, the Company seeks to raise a minimum
$3,000,000 and a maximum $15,000,000. Management is optimistic that at least
$10,000,000 will be raised based on the initial response to the offering by
interested parties. Assuming the offering is successful, the proceeds will be
used for, among other things, to finance equipment and labor to permit the
commencement of manufacturing and production. Management has located a facility
which would house the production operation and become the corporate
headquarters, while the existing building would remain a research and
development plant. Management believes that it can finalize negotiations to
purchase this property as soon as the aforementioned private offering is
complete.
The combination of funds raised through the private offering and proceeds
derived from the potential sale of the $5,000,000 license to Well to Wire
Energy Inc. should more than offset the general and administrative expenses for
the twelve months ending June 30, 2000 which are estimated at $100,000 per month
or $1,200,000. Although management is optimistic that at least the minimum of
$3,000,000 will be raised through the private offering, there can be no
assurances that this will be achieved. The closing of the sale of the
license to Well to Wire Energy Inc. is contingent upon the successful validation
of the Coates engine. Although management is confident that the Coates System
will achieve the validation requirements, there can be no assurances that the
engine results will be realized.
8
<PAGE>
PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
The response to this item can be found in the Company's annual report on Form
10-KSB, Item 3, for the year ended December 31, 1998, which is being
incorporated herein by reference to such report.
Item 2 CHANGES IN SECURITIES - None
Item 3 DEFAULTS ON SENIOR SECURITIES - None
-----------------------------
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES' HOLDERS - None
Item 5 OTHER INFORMATION - None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(b) The Company did not file any current reports on Form 8-K
during the quarter ended June 30, 1999.
9
<PAGE>
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.
COATES INTERNATIONAL, LTD.
Date: August 16, 1999 By: s/George J. Coates
---------------------------------------
George J. Coates, President and
Chief Executivel Officer
Date: August 16, 1999 By: s/Robert J. Levin
---------------------------------------
Robert J. Levin, Chief Financial Officer
coat10q.699
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
30, 1999 FINANCIAL STATEMENTS OF COATES INTERNATIONAL, LTD. AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000948426
<NAME> Coates International, Ltd.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Apr-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 120,685
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 123,006
<PP&E> 1,998,965
<DEPRECIATION> 390,661
<TOTAL-ASSETS> 1,795,807
<CURRENT-LIABILITIES> 1,103,506
<BONDS> 900,000
0
6,572
<COMMON> 0
<OTHER-SE> (207,699)
<TOTAL-LIABILITY-AND-EQUITY> 1,795,807
<SALES> 0
<TOTAL-REVENUES> 696
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 254,249
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,672
<INCOME-PRETAX> (304,225)
<INCOME-TAX> 0
<INCOME-CONTINUING> (304,225)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (304,225)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
