CXIA Commodore Applied Technologies Inc New (CE)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION

OVERVIEW

The Company is engaged in providing a range of environmental remediation and technical services to the public and private sectors related to (i) providing services related to environmental management for on-site and off-site identification, investigation remediation and management of hazardous, mixed and radioactive waste; and (ii) remediating contamination in soils, liquids and other materials and disposing of or reusing certain waste by-products.

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 the Company’s revenues, and such a reduction would materially affect operations.  However, management believes the Company’s existing client relationships will allow it to obtain new contracts in the future.  The Company has access to 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.  

The Company has identified three reportable segments in which it operates, based on the guidelines set forth in the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 131.  These segments are as follows:  

·

Commodore Advanced Sciences, Inc., which primarily provides various environmental sampling, analysis and data management services to government agencies on a lump sum and fixed cost basis;

·

Commodore Supplies Solutions, a division of Commodore Advanced Sciences, Inc, which sells testing, remediation and construction supplies to environmental and other customers; and

·

Commodore Solutions, Inc., which is commercializing technologies to treat mixed and hazardous waste through the Company’s SET technology, as described more fully in the Company’s filing of Form 10-K for the year ended December 31, 2006. While Commodore Solutions does not have any revenue or expense activities for the quarter ended September 30, 2007, the Company has multiple quotes and selling efforts currently under consideration by departments of the U.S. government which may re-invigorate this segment in late 2007 or early 2008.

During the first quarter, the Company entered into an agreement to purchase the equipment and subcontracting rights for two contracts from American Aquatics, Inc.  The Company also hired American Aquatics’ outstanding biological staff, who have extensive experience in evaluation of aquatic ecosystems and collection and identification of benthic macro-invertebrates.  The Company’s added capabilities include fish and aquatic insect collection, taxonomy and enumeration. Management considers this acquisition as a natural expansion of the Company’s environmental capabilities into the biological monitoring and ecological studies arena, adding a new dimension which will enable the Company to better serve the diverse needs of its clients. The Company now operates the only benthic laboratory in the eastern United States that is licensed and capable of handling aquatic samples that are potentially contaminated with radioactivity, while simultaneously processing uncontaminated samples.  The Company provides these sampling and laboratory services at Oak Ridge National Laboratory and at the Environmental Restoration Program at DOE’s Paducah, Kentucky site. During the quarter ended September 30, 2007, the Company secured one additional contract from an existing client and one new client for the services offered by this new addition for a total of approximately $20 thousand of annual revenue, and is engaging additional opportunities. While these are relatively small incremental additions, management feels that the strategic objectives of acquiring these new capabilities are beginning to net returns to the Company.

At the beginning of the second quarter, the Company entered into the business of selling supplies for sampling, testing and other uses to a variety of customers.  One person was added to the headcount and inventory to support this resale business was purchased.  This business shows promise, with revenues of $230 thousand in the quarter ended June 30, 2007, and $246 thousand in the quarter ended September 30, 2007, which represents an approximate revenue level at which this new operation will begin to contribute positive results at the income for operations line on the Statement of Operations in future quarters.  Management is carefully watching the growth of revenues with controlled expense, customer receivables, inventory and vendor payables performance to assure that this venture begins to yield favorable results in profitability and cash flows by the end of 2007.

8

During the first quarter of 2007, the Company entered into the Small Business (“SB”) filing format for its filing with the Securities and Exchange Commission.  This format allows different and more limited disclosure than filings made by the Company for previous years; for example, the SB format requires only two years of financial information in the annual Consolidated Statements of Operations and Consolidated Statements of Cash Flows, compared to three years disclosed in previous filings.

Changes in Corporate Governance

On August 1, 2007, James M. DeAngelis resigned from the positions of Director and Senior Vice President, Strategic Development of Commodore Applied Technologies, Inc. and its subsidiaries.  Mr. DeAngelis has accepted an executive position with a private venture capital firm.  

The Board of Directors of Commodore Applied Technologies, Inc. elected three members to the Board and accepted the resignation of an existing board member, all actions effective November 1, 2007. The new members are Ted R. Sharp, who also serves as an executive officer of the Company, Jan C. Huly, and Thomas J. Colatosti.  Mr. Huly and Mr. Colatosti have no other affiliation with the Company and are independent board members. The Board reluctantly accepted Frank Coffman’s resignation from the Board, which was tendered at the request of his full-time employer in keeping with that company’s corporate policy to limit board membership and similar activities by members of its executive management.

Ted R. Sharp has served as the Company’s Chief Financial Officer since January 1, 2007.  He is a Certified Public Accountant in Washington and Idaho, and has a BBA in Accounting from Boise State University.  He has more than 25 years of experience in treasury management, internal financial controls, international business and management, U.S. Security and Exchange compliance and Corporate Governance.   Since 2003, he has been President of Sharp Executive Associates, Inc., a privately-held accounting firm providing Chief Financial Officer and Sarbanes-Oxley compliance services to clients.  Several of those clients have had international subsidiaries, for which Mr. Sharp has provided an array of services.  Prior to 2003, he worked for 14 years in positions of Chief Financial Officer, Managing Director of European Operations and Corporate Controller for Key Technology, Inc., a publicly-traded manufacturer of capital goods with headquarters in Walla Walla, Washington (KTEC on the Nasdaq microcap exchange). Mr. Sharp’s earlier career experiences included financial management positions in industry and service in the tax department of a regional accounting firm.

In 2006, Jan C. Huly retired as Lieutenant General in the U.S. Marine Corps with over thirty years of experience as a leader and administrator, holding such positions as Deputy Commandant, Plans, Policies and Operations, Washington DC from 2003 to 2006; Commanding General, Marine Corps Recruit Depot, San Diego, CA from 2000 to 2003; Director of Operations, U.S. Marine Corps, Washington DC from 1998 to 2000, and Deputy Commander, U.S. Marine Reserves, New Orleans, LA from 1996 to 1998.  Prior to 1996, Mr. Huly held several positions with the Marine Corps, variously responsible for operations and planning, security and force protection, recruiting and training, public relations, budgeting and programming, and human resources. He received a BS degree from the University of California, Berkeley and an MA degree from Central Michigan University.

Thomas J. Colatosti has been the President and Chief Executive Officer of American Security Ventures (ASV) since 2002. ASV provides strategic management services and capital resources to emerging and developing companies in the biometric and homeland security industries. Since August 2005, Mr. Colatosti has been President and Treasurer and a Director of Good Harbor Partners Acquisition Corp. Mr. Colatosti is also the Chairman of the Board of Directors and Co-CEO of BIO-Key International, Inc., an OTC Bulletin Board listed company that develops advanced biometric finger identification and wireless mobile technologies. Prior to founding American Security Ventures, from 1997 to May 2002, Mr. Colatosti was President and Chief Executive Officer of Viisage Technology, Inc., a Nasdaq listed company that provides biometric face-recognition technology and highly secure identification documents and systems. Before joining Viisage, from 1995 to 1997, Mr. Colatosti was President and Chief Executive Officer of CIS Corporation, a provider of software solutions for higher education. From 1973 until 1995, Mr. Colatosti worked at Digital Equipment Corporation (DEC), a large multinational computer company. As Vice President of the Government Systems Group, a billion dollar revenue division of DEC, he was responsible for all products and services to the federal government, aerospace, electronics and manufacturing industries. Mr. Colatosti also currently serves on the board of several privately held companies and non-profit organizations. He also served on the Board of Advisors of Saflink Corporation, a Nasdaq listed provider of software security solutions. Mr. Colatosti is a decorated Vietnam veteran. He received a B.S. and an M.B.A. from Suffolk University.

9

RESULTS OF OPERATIONS

Revenues for the three and nine months ended September 30, 2007 were $990 thousand and $2.6 million compared to $2.3 million and $6.3 million for the three and nine months ended September 30, 2006. Revenues for the most recent quarter were primarily from environmental remediation and scientific services performed for the United States government under two contracts similar to those in place in 2006.  The decrease in revenues is primarily the result of the revision of the Environmental Data Acquisition and Management contract (“EDAM”) by Bechtel Jacobs Company LLC of Oak Ridge, TN (“BJC”) to a lower total amount, due to (1) BJC performing more self-assessment tasks and (2) the removal of management of subcontracted laboratory activities from the contract. The latter modification to the contract resulted in less pass-through revenues to subcontractors, which were performed at little or no margin to the Company.  Additionally, the Company has seen a reduction of testing activities in recent quarters as government spending has been shifted toward support of the war in Iraq and continued recovery and rebuilding efforts resulting from Katrina and other significant natural disasters.

Cost of revenues for the three and nine months ended September 30, 2007 were $638 thousand and $2.1 million compared to $2.1 million and $5.9 million for the three and nine months ended September 30, 2006  The decrease in cost of revenues was the natural result of the renewal of the EDAM contract at lower amounts as described above. The decreased contract revenue required decreased labor and supplies to perform revenue-producing activities. Revenues and associated expenses in relation to the EDAM contract are expected to be lower for calendar year 2007 when compared to 2006 as a result of the reduced backlog at the beginning of 2007.

Contracts of the Company may be subjected to audit by the DCAA. Anticipated losses on contracts are provided for by a charge to income during the period such losses are first identified. On January 25, 2007, the Company received a letter from the Department of Energy regarding a DCAA audit of a single contract of Commodore Applied Technologies for the period January 1995 through December 1999. The DCAA asserted that the Company incorrectly overbilled the Government for services rendered under contracts performed during said period. The Company had previously recorded a liability totaling $376 thousand (included in other accrued liabilities for the year ended December 31, 2006) as a reserve to settle any claims, including related legal fees and professional fees, that may be incurred related to this issue. The amount recorded was estimated based on an assessment of potential liability using an analysis of available information with respect to pending claims, historical experience and, where available, recent and current trends. During and subsequent to end of the quarter ended September 30, 2007, the audit being conducted by the DCAA neared its completion with sufficient conclusion to enable management to record the likely results.  Additional contract Revenues of $57 thousand and subcontractor Cost of Revenue of $147 thousand were recognized, resulting in an increase in the Loss from Operations of $90 thousand.  With the recognition of anticipated results, the previously recognized $376 thousand accrual was reversed, which more than sufficient to offset the likely results of the audit, resulting in $286 thousand decrease in Loss from Operations.  Final settlement should occur in the fourth quarter of 2007.

General and administrative expenses for the three and nine months ended September 30, 2007 were $350 thousand and $1.1 million compared to $345 thousand and $1.1 million for the three and nine months ended September 30, 2006. General and administrative costs include executive salaries and other corporate operating costs of the Company which are fixed in nature.      

Interest expense increased to $212 thousand and $599 thousand for the three and nine months ended September 30, 2007 from $167 thousand and $477 for the three and nine months ended September 30, 2006, an increase of 26%. This is the result of an increase in interest bearing debt, which includes $7.6 million in borrowings under the terms of the New Shaar Note and $201 outstanding under a commercial line of credit as of September 30, 2007.

For the three and nine months ended September 30, 2007, the Company incurred a net loss of $230 thousand and $1.3 million compared to a net loss of $338 thousand and $968 thousand for the three and nine months ended September 30, 2006.  The decrease in cost of revenues could not be accompanied by a commensurate decrease in general and administrative expenses, which are fixed in nature, and interest expense associated with the increase in interest bearing debt.  To attain profitability, the Company will be required to obtain significant new contracts, reduce expense levels or accomplish a combination of both.

10

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2007 and 2006 the Company had $201 and $344 thousand outstanding balance, respectively, on our two million dollar revolving line of credit secured by the Company’s receivables. The line of credit is collateralized by worthy receivables of Advanced Sciences.

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 $125 thousand at September 30, 2007.  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 thousand in loans that are currently due or are payable on demand as of September 30, 2007.  The Company is currently in negotiations with the holders of this debt to settle this debt with partial payment in the form of common stock and extended terms on the balance.  No agreement has been reached and the Company is currently in default on these loans.

The Company has experienced an increase in total assets for the nine months ended September 30, 2007. The majority of the increase was attributable to an increase in acquitted intangibles, included in other assets, related to the American Aquatics purchase in the first quarter and an increase in inventory and equipment attributable to CSS which commenced operations in the second quarter. The decrease in accounts receivable is due to the decreases in revenue contribution by Advanced Sciences from the EDAM contract in Oak Ridge, TN resulting from the renewal of that contract and a lower total revenue amount in the third quarter of 2006.    

The report of the Company’s independent registered public accounting firms on its fiscal 2005 and 2006 consolidated financial statements contains a “going concern” qualification in which they express substantial doubt about the Company’s ability to continue in business.  The Company currently requires additional cash to sustain existing operations and to meet current obligations and ongoing capital requirements.

As shown in the Consolidated Statement of Cash Flows for the nine months ended September 30, 2007 and 2006, the Company incurred losses of $1.6 million and $968 thousand, respectively.  The Company has also experienced net cash outflows from operating activities of $1.5 million for the nine months ended September 30, 2007 compared to net cash outflows from operating activities of $709 thousand for the nine months ended September 30, 2006.  The Company had net cash outflows from investing activities of $27, consisting of $17 thousand of purchases of equipment to support the new CSS supplies business and $10 thousand paid for purchased intangibles as part of the acquisition of certain assets and contract rights from American Aquatics, Inc. in January of 2007.  The Company also took on a total of $173 thousand in debt related to purchases of equipment and intangibles as part of this acquisition.  The remaining balance of this debt is due and payable within 12 months of the close of the September 2007 quarter.

The Company had net cash inflows from financing activities of $1.4 million for the nine months ended September 30, 2007 compared to $770 for the nine months ended September 30, 2006.  Cash inflows from borrowings of $1.5 million during the period ended September 30, 2007 were reduced by $108 thousand of payments on long-term debt and notes payable.  For the nine months ended September 30, 2006, cash inflows from long-term debt and notes payable of $970 thousand were reduced by $200 thousand of payments on long term debt and other obligations.

At September 30, 2007 and December 31, 2006, the Company had a stockholders’ deficit of $13.7 million and $12.1 million, respectively.  The Company’s net increase in stockholders’ deficit from December 31, 2006 to June 30, 2007 is primarily due to the losses incurred for the first three quarters of 2007.  At September 30, 2007 and December 31, 2006 the Company had working capital deficit of $6.4 million and $5.8 million, respectively.  The increase in the working capital deficit is mainly due to an increase in accrued interest on long term borrowings, preferred dividends payable, current portion of long term debt and deferred wages, which was offset by a decrease in accounts payable, loss contingency and other accrued liabilities.

The Company has significant interest, dividend and principal payments due within the 12 months following the quarter ended September 30, 2007, most of which is due to the Shaar Fund, either as interest or dividend payments.  To date, the Shaar Fund has been willing to extend the due dates of the payments on these instruments.  Should the Shaar Fund change its

11

position or call the interest, dividend and principal payments, the Company would be in default on these obligations and subject to possible collection or enforcement actions.

During the quarter ended September 30, 2007, the Company deferred an additional $47 thousand of compensation, representing a portion of the total compensation for certain of its executive officers.  At September 30, 2007, the Company had deferred a total of $2.0 million of compensation for three officers.

The Company has placed multiple quotes to perform services under contract with several U.S. Department of Energy installations.  To achieve long-term stability, profitability and positive cash flows from operations, the Company will need to secure significant additional contract revenues in the months following in 2007.

Stockholders’ Deficit

The principal balance of the New Shaar Note is $7.6 million as of September 30, 2007, compared with $6.5 million as of September 30, 2006, and remains unpaid as of October 31, 2007. Both the Note and associated accrued and unpaid interest are convertible into shares of the Company’s common stock, subject to maximum ownership limitations by the holder of the convertible note.

Cumulative unpaid dividends on all series of preferred stock are $1.1 million and $773 thousand at September 30, 2007 and 2006, respectively.  Both the dividend payable and the preferred stock are convertible into shares of the Company’s common stock, subject to maximum ownership limitations by the holder of the preferred shares.

On March 5, 2007, the Company issued 120,000 shares of common stock to an investor relations firm as part of a contract entered into in November 2006 for investor relations services.  The Company recognized $23 thousand of non-cash general and administrative expense as a result of this transaction.