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 September 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 September 30, 1999, was
6,572,424 shares.
<PAGE>
COATES INTERNATIONAL, LTD.
[A DEVELOPMENT STAGE COMPANY]
INDEX
Page
Number
PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Condensed Balance Sheet
-September 30, 1999 3
Condensed Statements of Operations
- Nine months ended September 30, 1999 and 1998
and since inception 4
Condensed Statements of Cash Flows - Nine months ended
September 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 And Results of Operations 7-8
PART II - OTHER INFORMATION 9
SIGNATURES 10
FINANCIAL DATA SCHEDULE 11
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Condensed Balance Sheet
September 30, 1999
(Unaudited)
Assets
Current Assets
<TABLE>
<CAPTION>
<S> <C>
Cash $ 81,132
Restricted cash 112,000
Inventories 41,186
--------------
Total Current Assets 234,318
--------------
Property, Plant and Equipment, Net of Accumulated Depreciation of $396,661 1,559,123
Other Assets
Mortgage Loan Costs, Net of Accumulated Amortization of $6,526 58,734
Deferred costs 20,000
Deposit 2,500
--------------
Total Assets 1,874,675
==============
Liabilities and Stockholders' Equity
Current Liabilities
Mortgage payable, current portion 4,197
Accounts payable 976,313
Accrued interest payable 118,531
Deferred revenue 300,000
Due to stockholders 2,300
--------------
Total Current Liabilities 1,401,341
--------------
Mortgage payable, non-current portion 894,307
--------------
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 10,991,824
Deficit accumulated during the development stage (11,419,369)
--------------
Total Stockholders' Equity (Impairment) (420,973)
--------------
$ 1,874,675
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
September 30,
1999
---------------
Three Months Ended Nine Months Ended
September 30, September 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 16,035 74,783 72,609 210,446 2,571,588
Research and development costs -
related party - 23,627 48,189 72,512 977,577
General and administrative
expenses 196,338 171,247 308,297 384,055 7,871,690
Depreciation and amortization
expense 9,263 3,212 46,790 4,818 415,530
--------------- --------------- --------------- --------------- -----------------
Total Operating Expenses 221,636 272,869 475,885 671,831 11,836,385
--------------- --------------- --------------- --------------- -----------------
Loss From Operations (221,636) (272,869) (475,885) (671,831) (11,149,010)
--------------- --------------- --------------- --------------- -----------------
Other Income (Expense):
Interest income 173 432 869 824 126,633
Interest expense (48,211) (29,157) (98,883) (36,538) (396,992)
--------------- --------------- --------------- --------------- -----------------
Total Other Income (Expense) (48,038) (28,725) (98,014) (35,714) (270,359)
--------------- --------------- --------------- --------------- -----------------
$ $ $
Net Loss $ (269,674) (301,594) $ (573,899) (707,545) (11,419,369)
=============== =============== =============== =============== =================
Loss Per Share $ (0.04) $ (0.05) $ (0.09) $ (0.11)
=============== =============== =============== ===============
6,572,424 6,572,424 6,572,424 6,572,313
Weighted Average Number of Shares
Outstanding
=============== =============== =============== ===============
</TABLE>
4
See notes to the condensed financial statements.
<PAGE>
Coates International, Ltd.
(A Development Stage Company)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Period From
August 31,
1988 (Date of
Inception)
Through
September 30,
1999
-----------------
Nine Months Ended
September 30,
--------------------------------- -----------------
1999 1998
--------------- --------------- -----------------
(Unaudited) (Unaudited) (Unaudited)
--------------- --------------- -----------------
$ $
<S> <C> <C> <C>
Cash Flows From Operating Activities $ (428,120) (642,920) (9,692,807)
--------------- --------------- -----------------
Cash Flows From Investing Activities (19,564) - (1,206,635)
--------------- --------------- -----------------
Cash Flows From Financing Activities
Proceeds from mortgage payable 900,000 454,739 1,400,000
Repayment of mortgage payable (501,496) (160,000) (661,496)
Payment for mortgage loan costs (65,343) - (112,104)
Proceeds of additional paid-in capital 171,742 289,247 2,854,141
Proceeds from issuance of stock - 129,000 7,488,148
Payment for treasury stock - - (30,000)
Proceeds from (repayment of) stockholder loans 9,338 (8,524) 41,885
--------------- --------------- -----------------
Net Cash Provided by Financing Activities 514,241 704,462 10,980,574
--------------- --------------- -----------------
Net Increase in Cash 66,557 61,542 81,132
Cash - Beginning of Periods 14,575 35,249 -
--------------- --------------- -----------------
Cash - End of Periods $ 81,132 $ 96,791 $ 81,132
=============== =============== =================
</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 nine months ended
September 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 nine months ended September 30, 1999 and 1998,
$48,189 and $72,512, 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.
OTHER
On September 29, 1999, the Company entered into a license agreement with
Well to Wire Energy, Inc. (WTW) a Canadian corporation with gas and oil
operations, whereby the Company is granting to WTW an exclusive license
for the use of the Coates Engine in connection with the conversion of
natural gas to electricity in Canada. The licensing fee is $5,000,000 and
the Company also receives a royalty equal to 5% of the gross profit which
WTW derives from all sources. The Company also retains the exclusive right
to manufacturing both the engine and generator components for sale to WTW.
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 September
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 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.
Results of Operations for the Nine Months Ended September 30, 1999 and 1998
No revenues were recognized for the nine month periods ended September 30, 1999
and 1998. Total operating expenses for the nine months ended September 30, 1999
were $475,885 compared to $671,831 for the same period in 1998. The decrease was
attributed to an increase in depreciation and amortization of approximately
$42,000 offset by a decrease in general and administrative expenses
approximating $76,000 and a decrease in research and development costs of
approximately 162,000. The decrease in general and administrative expenses is
the result of 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.
7
<PAGE>
Total operating expenses for the three months ended September 30, 1999 were
$221,636 as compared with $272,869 for the same period in 1998. This decrease
was attributed largely to a decrease in research and development costs
approximating $82,000 offset by an increase in general and administrative
expenses of approximately $25,000.
Interest expense for the nine months ended September 30, 1999 was $98,883 as
compared to $36,538 for the same nine month period in 1998. This increase of
approximately $63,000 was due to a higher mortgage on the property in 1999. The
increase in interest expense of approximately $19,000 for the nine months ended
September 30, 1999 was attributed also to the higher mortgage.
The net loss for the nine months ended September 30, 1999 was $573,899 as
compared with a loss of $707,545 for the same period in 1998. Once again, the
main reason for this decrease was the reduction in the current year's general
and administrative expenses due to the forgiveness of debt coupled with the
decrease in research and development costs of approximately $82,000. The net
loss for the nine months ended September 30, 1999 was $269,674 as compared to a
net loss for the nine months ended September 30, 1998 of $301,594. This decrease
was due to a decrease in research and development costs of approximately $82,000
coupled with an increase in general and administrative expenses of approximately
$25,000 and an increase in interest expense of approximately $19,000. Total
losses since inception in August 1988 through September 30, 1999 amount to
$11,419,369.
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
reliance upon the exemption from applicable registration requirements 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 was 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 were to be returned and the private
offering would be terminated. The maximum number of shares offered was 750,000
at a price of $20.00 per share. Accordingly, the Company sought to raise a
minimum $3,000,000 and a maximum $15,000,000. After the expiration of the 90-day
offering period, the Company failed to achieve the acceptance of subscription
agreements for the minimum 150,000 Series A Preferred Shares and the offering
was terminated. On October 20, 1999, the Company recommenced its previous
private placement offering, under the same terms and conditions and began
qualifying this private placement under applicable blue sky regulations of the
several States. Assuming that this recommenced private offering is successful,
the proceeds will be used for, among other things, to facilitate the assembly
and production of the Company's rotary valve parts and engines. Management has
located a facility which would house the production and assembly operations and
become the corporate headquarters, while the existing building would
remain a research and development facility.
On September 29, 1999, the Company entered into a License Agreement with Well to
Wire Energy, Inc. ("WTW"), a Canadian corporation, whereby the Company granted
to WTW a license, exclusive in Canada, for the use of the Coates spherical
rotary valve system in connection with a natural gas fueled engine that
generates electricity. The licensing fee is $5,000,000 and the Company is also
to receive a royalty equal to 5% of the gross profits which WTW derives from all
sources. The Company, which retains the exclusive right to manufacture both the
engine and generator components for sale to WTW, received orders from WTW in
October 1999 totaling $41,000,000 comprising both cogeneration systems and
engines. The consummation of the license agreement with WTW and the finalization
of WTW's orders for the generator engines is contingent upon the successful
validation of the generator engine incorporating the Coates System.
The combination of the anticipated funds raised through the private offering and
the anticipated proceeds to be derived from the sale of the $5,000,000 license
to Well to Wire Energy Inc. following successful validation should more than
offset the general and administrative expenses for the twelve months ending
September 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
successful subscription amount will be achieved. Moreover, although management
is confident that its generator engine developed for WTW will achieve
operational validation, there can be no assurances that such operational
validation will be achieved.
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 September 30, 1999.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COATES INTERNATIONAL, LTD.
Date: November 15, 1999 By:/s/ George J. Coates
--------------------------------------------
George J. Coates, President and Chief Executive
Officer and Principal Financial Officer
coaQ9909
10
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jul-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 193,132
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 41,186
<CURRENT-ASSETS> 234,318
<PP&E> 1,955,784
<DEPRECIATION> 396,661
<TOTAL-ASSETS> 1,874,675
<CURRENT-LIABILITIES> 1,401,341
<BONDS> 898,504
0
6,572
<COMMON> 0
<OTHER-SE> (427,545)
<TOTAL-LIABILITY-AND-EQUITY> 1,874,675
<SALES> 0
<TOTAL-REVENUES> 869
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 475,885
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,883
<INCOME-PRETAX> (573,899)
<INCOME-TAX> 0
<INCOME-CONTINUING> (573,899)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (573,899)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
