SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 June 30, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-21168
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-3253392
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
5 East 80th Street, New York, New York 10021
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(Address of principal executive offices)
(212) 717-6544
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(Registrant's Telephone Number, Including Area Code)
n/a
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
court. Yes [ ] No [ ] N/A
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of August 15, 2001: 19,991,952
-1-
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
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(unaudited) (Notes 1 and 3)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 69,400 $ 1,379,000
Accounts receivable 72,900 72,900
Inventories 720,900 747,100
Prepaid expenses and other current assets 80,500 296,900
Deferred financing costs 472,000 -
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Total Current Assets 1,415,700 2,495,900
PROPERTY AND EQUIPMENT - NET 202,300 244,100
SOFTWARE DEVELOPMENT COSTS - NET 156,800 261,400
PATENT COSTS - NET 530,800 581,100
NET ASSETS OF DISCONTINUED OPERATIONS - 1,000,000
OTHER ASSETS 306,600 331,700
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$ 2,612,200 $ 4,914,200
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses:
Attorneys and accountants $ 923,300 $ 458,900
Consultants 249,600 141,700
Trade 385,800 260,100
Severance payable 700,000
Reserve for notes payable (including
$341,000 payable to an affiliate) 760,000 -
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3,018,700 860,700
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LONG TERM DEBT:
Amount payable for purchase of Gordon - 653,000
- 653,000
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COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Class A, Par Value $.01 per share:
Authorized - 1,400,000 shares
Issued and outstanding - 1,380,000
shares at par value and redemption
value 13,800 13,800
13,800 13,800
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SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock 12,066,800 11,510,800
Common Stock, par value $.001 per share:
Authorized - 50,000,000 shares
Issued and outstanding - 19,991,952
(2001) and 19,033,308 (2000) shares 20,000 19,100
Capital in excess of par value 46,596,500 45,934,400
Accumulated deficit (59,103,600) (54,077,600)
Total Shareholders' Equity (Deficiency) (420,300) 3,386,700
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$ 2,612,200 $ 4,914,200
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See accompanying notes to consolidated financial statements
-2-
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
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2001 2000 2001 2000
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Revenues:
Sales $ - $ 41,100 $ - $ 79,800
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COSTS AND EXPENSES:
Cost of sales 6,100 - 26,900
Sales, marketing and trade show costs 9,600 533,300 253,400 1,170,700
Medical regulatory expenses 1,900 227,200 278,300 423,600
Research and development 149,600 380,200 454,700 674,900
Patent application costs 35,700 94,400 171,700 150,500
Compensation costs relating to (noncash)
options granted - 225,000 - 465,000
Provision for estimated payments for
terminated employees - - 1,000,000 -
General and administrative:
Compensation-Officers, employees and
consultants 250,000 395,300 654,300 739,700
Legal fees 45,800 250,900 200,200 438,300
Accounting fees 22,900 26,700 62,900 96,600
Rent and storage 96,100 78,900 188,500 157,000
Insurance 51,300 71,800 123,800 149,500
Repairs and maintenance 9,400 34,800 30,300 82,300
Depreciation and amortization 126,100 173,000 252,100 344,400
Taxes 20,400 20,000 56,200 44,500
Stock administrative fees 30,700 24,900 60,400 54,200
Public relations 700 52,800 40,200 112,700
Other 45,500 108,000 102,800 188,100
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895,700 2,703,300 3,929,800 5,318,900
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OPERATING LOSS (895,700) (2,662,200) (3,929,800) (5,239,100)
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OTHER INCOME(EXPENSE):
Interest income 45,000 2,800 89,800
Interest expense and non-cash
financing costs including $94,000
and $834,200 in non-cash OID costs
in 2001 and 2000, respectively (99,000) (300,800) (99,000) (1,197,400)
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(99,000) (255,800) (96,200) (1,107,600)
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LOSS FROM CONTINUING OPERATIONS (994,700) (2,918,000) (4,026,000) (6,346,700)
LOSS FROM DISCONTINUED OPERATIONS(Note3) (41,100) (1,000,000) (41,100)
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NET LOSS $ (994,700) $ (2,959,100) $ (5,026,000) $ (6,387,800)
============== ============== ============== ==============
NET LOSS TO COMMON STOCKHOLDERS:
LOSS FROM CONTINUING OPERATIONS $ (994,700) $ (2,918,000) $ (4,026,000) $ (6,346,700)
DEEMED DIVIDEND FOR CLASS B, SERIES 2 AND 3
CONVERTIBLE PREFERRED STOCK 278,000 278,000 556,000 981,000
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LOSS FROM CONTINUING OPERATIONS TO
COMMON STOCKHOLDERS (1,272,700) (3,196,000) (4,582,000) (7,327,700)
LOSS FROM DISCONTINUED OPERATIONS(Note3) - (41,100) (1,000,000) (41,100)
-------------- -------------- -------------- --------------
NET LOSS TO COMMON SHAREHOLDERS $ (1,272,700) $ (3,237,100) $ (5,582,000) $ (7,368,800)
============== ============== ============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 19,538,268 16,183,925 19,285,788 15,907,169
============== ============== ============== ==============
BASIC AND DILUTED LOSS PER SHARE:
LOSS FROM CONTINUING OPERATIONS $ (0.07) $ (0.20) $ (0.24) $ (0.46)
LOSS FROM DISCONTINUED OPERATIONS - - (0.05) -
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NET LOSS TO COMMON STOCKHOLDERS $ (0.07 $ (0.20) $ (0.29) $ (0.46)
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See accompanying notes to consolidated financial statements
-3-
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
Common Stock
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Number of Capital in
Preferred Shares Excess of Par Accumulated
Stock Outstanding Par Value Value Deficit
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Balances, December 31, 2000 $ 11,510,800 19,033,308 $ 19,100 $ 45,934,400 $ (54,077,600)
Six Months Ended June 30, 2001:
Net Loss - - - - (5,026,000)
Issuance of common stock -
Gordon - 22,894 - 653,000 -
Issuance of common stock -
private investor - 935,750 900 (900) -
Warrants issued in connection
with bridge notes - - - 566,000 -
Deemed dividend on Class B,
convertible preferred stock 556,000 - - (556,000) -
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Balances, June 30, 2001 $ 12,066,800 19,991,952 $ 20,000 $ 46,596,500 $ (59,103,600)
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See accompanying notes to consolidated financial statements
-4-
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended June 30,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $(4,026,000) $(6,346,700)
Loss from discontinued operations (1,000,000) --
Adjustments to reconcile net loss to net cash flows
from operating activities:
Non-cash impairment charge and net change in net assets
of discontinued operations 1,000,000 --
Depreciation and amortization 252,100 344,400
Compensation cost relating to options granted to consultants -- 465,000
Non-cash interest and financing costs 94,000 834,200
Changes in operating assets and liabilities:
Accounts receivable -- 767,600
Inventories (26,100) (191,400)
Prepaid expenses and other assets 241,500 (25,000)
Accrued interest on senior convertible debentures -- 350,000
Accounts payable and accrued expenses 1,698,000 (41,600)
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Net cash flows from continuing operating activities (1,766,500) (3,843,500)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized patent costs -- (255,100)
Net cash used for investment in subsidiary -- (1,263,100)
Purchase of property and equipment (3,100) (61,900)
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Net cash flows from investing activities (3,100) (1,580,100)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net
of related costs -- 795,200
Proceeds (payments) of Notes payable 460,000 (12,800)
Net proceeds from the issuance of preferred stock and
warrants, net of costs -- 3,610,000
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Net cash flows from financing activities 460,000 4,392,400
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NET CHANGE IN CASH AND EQUIVALENTS (1,309,600) (1,031,200)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,379,000 2,790,400
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CASH AND EQUIVALENTS, END OF PERIOD $ 69,400 $ 1,759,200
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SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ -- $ 43,500
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Issuance of debt to pay accrued expenses $ 300,000 $ --
Issuance of stock to pay Gordon liability 653,000 --
Deemed dividends 556,000 981,000
See accompanying notes to consolidated financial statements
-5-
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation:
Nature of Report - The consolidated balance sheet at the end of the preceding
fiscal year has been derived from the audited consolidated balance sheet
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 and is presented for comparative purposes. All other financial
statements are unaudited. In the opinion of management, all adjustments, which
include only normal recurring adjustments necessary to present fairly the
financial position, results of operations and changes in cash flows, for all
periods presented have been made. The results of operations for interim periods
are not necessarily indicative of the operating results for the full year.
Footnotes - Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission. These consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.
Note 2 - Commitments and Contingencies:
Business Risks - Since its formation in 1984, the Company has been principally
engaged in color science technology research and development and licensing
activities, seeking mass market applications for its proprietary technology and
instrumentation. The Company's business encompasses all of the risks inherent in
the establishment of a new business enterprise, including a limited operating
history with significant competition possessing substantially greater resources.
Current and future operations also depend upon the continued employment of
certain key executives, the ability to further commercialize its proprietary
technology and products and the Company's ability to obtain sufficient revenues
and outside financing.
Operating Difficulties - Since 1989, the Company has incurred losses from
operations and net cash outflows from operations. The Company expects to license
its patents and proprietary technology, sell its equipment and market its
related services and products to ultimately overcome these difficulties.
Although the Company has taken steps to substantially reduce personnel and
ongoing operating expenses, the Company expects that it will continue to incur
costs in connection with the required research and development on its new LED
instrument and technology, complete filings, administration and maintenance for
certain intellectual properties and regulatory requirements; supply updated
products and sales support to its medical distributor; complete FDA filings for
upgrades to its medical products, and explore the possibility of either
renegotiating its current distribution agreement for its medical products or
selling the exclusive rights to its medical products and technology. There can
be no assurance the Company will not continue to incur such losses or will ever
generate revenues at levels sufficient to support profitable operations.
The Company anticipates that it will continue to incur net losses for the
foreseeable future as expenses are incurred in implementing its long-term
business plan.
The Company is currently taking steps to improve operating results and has
initiated a plan to significantly reduce operating costs. The Company is
experiencing a major liquidity crisis and requires an immediate infusion of cash
to continue operations. The Company is seeking additional capital to facilitate
short-term liquidity and is currently reviewing various financing proposals. If
the Company is unable to obtain such short-term financing, or sell its assets to
obtain a cash infusion, it may be forced to seek protection from its creditors
in bankruptcy.
Even if the Company is successful in obtaining this short-term cash infusion,
the Company will require additional future financing to execute its business
plan. If the Company is not able to attract additional future financing,
generate significant revenue from operations and/or successfully market its
products and technologies, it may have to significantly curtail and/or cease
operations and be forced to seek protection from its creditors in bankruptcy.
-6-
In addition, on May 29, 2001, the Company received a determination letter from
the staff of the Nasdaq Stock Market that the Company fails to comply with the
net tangible assets/market capitalization/ net income requirement for continued
listing set forth in Nasdaq's Marketplace Rules 4310(c)(2)(B). Further, the
Company was notified by letter dated July 3, 2001 by the Hearings Department
that the net tangible assets deficiency would be considered a basis for
delisting at the Company's hearing before the Nasdaq Listing Qualifications
Panel (the "Panel") which took place on August 16, 2001. The net tangible
assets/market capitalization/ net income deficiency was a subject of the
Company's hearing. The Company's hearing has stayed the delisting of the
Company's securities pending the Panel's decision. NASDAQ has requested more
information from the Company. There can be no assurance that the Qualifications
Panel will grant the Company's request for continued listing.
Legal Proceedings - On January 16, 2001, a lawsuit was commenced against the
Company and Darby Macfarlane in the federal district court for the Southern
District of New York entitled Richard Sommers and Linda Sommers v. Chromatics
Color Sciences International, Inc. and Darby S. Macfarlane. The plaintiffs
allege that certain statements purportedly made by or on behalf of the Company
concerning the Company's success, the extent of use of the ColorMate (Registered
Trademark) System and the Company's cash flow constituted violations of Section
10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated
thereunder and Section 12(a)(2) of the Securities Act of 1933 as well as common
law claims alleging fraudulent misrepresentation, concealment and nondisclosure
and seek unspecified damages in an amount to be proven at trial. On March 1,
2001, the defendants moved to dismiss the complaint for failure to state a claim
upon which relief can be granted, for failure to plead fraud with requisite
particularity and for failure to comply with the statutory requirements for
federal securities fraud claims. No decision has been rendered by the court on
this motion. The defendants believe that the allegations of the complaint are
without merit and intend to vigorously defend this action.
Note 3 - Discontinued Operations:
On June 2, 2000, the Company purchased Gordon Laboratories, Inc. ("Gordon"). Due
to the recent financial results of Gordon and CCSI's inability to continue
funding Gordon, the Company decided to sell Gordon in the first quarter of 2001.
On July 3, 2001 the Company completed the sale of Gordon (see below). The
Company retains the right to repurchase Gordon within the one year anniversary
of July 3, 2001. Accordingly, results of this operation have been classified as
discontinued, and prior periods have been restated. The net assets of Gordon
were written-down to zero as of March 31, 2001.
In connection with the purchase of Gordon, the Company was required to issue
additional shares of its common stock to certain Gordon options holders on June
2, 2001 at a price of $6.29 per share. In accordance with this provision, the
Company issued 22,894 shares on July 3, 2001. The financial statements reflect
these shares as if they had been fully issued on June 2, 2001.
Net sales and loss from the discontinued operation are as follows:
Three months Six months Three months Six months
ended ended ended ended
June 30, 2001 June 30, 2000
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Net Sales $ 1,423,000 $ 2,590,000 $ 626,200 $ 626,200
Loss from discontinued operation $ 549,000 $ 1,000,000 $ 41,100 $ 41,100
Impairment cost (gain) $ (549,000)* $ 0 $ 0 $ 0
Net Loss from discontinued operation $ 0 $ 1,000,000 $ 41,100 $ 41,100
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* Note - Gordon's net assets were written-down to zero at March 31, 2001.
Losses subsequent to March 31, 2001 at Gordon had no effect on the
Company's financial statements.
-7-
Assets and liabilities from the discontinued operation were as follows:
December 31, 2000
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Current assets $ 1,821,500
Property and equipment/other assets $ 3,261,100
Current liabilities $ 4,082,600
Long-term liabilities $ 0
Net assets of discontinued operation $ 1,000,000
Sale of Gordon
On July 3, 2001, pursuant to the Share Subscription and Redemption Agreement,
dated as of June 19, 2001 (the "Purchase Agreement"), among the Company, Abilene
Investments Corp. ("Abilene"), GAC-Labs, LLC ("GAC- Labs" and collectively with
Abilene, the "Purchasers") and Gordon Acquisition Corp., a wholly-owned
subsidiary of the Company ("Gordon"), Gordon issued 200 shares of common stock,
par value $.001 per share, of Gordon ("Gordon Stock") to Abilene and 800 shares
of Gordon Stock to GAC-Labs for an aggregate purchase price of $1,000,000.
Simultaneously, the shares of Gordon Stock that were outstanding immediately
prior to the closing of this transaction, all of which were owned by the
Company, were redeemed for one dollar. In addition, the Company assigned to the
Purchasers its right, title and interest in the indebtedness of Gordon and/or
H.B. Gordon Manufacturing Co., Inc., its wholly-owned subsidiary, owed to the
Company in the ratio of 20% to Abilene and 80% to GAC-Labs.
As part of the same transaction, pursuant to the Purchase Option Agreement,
dated as of July 3, 2001 (the "Option Agreement"), among the Company, Abilene
and GAC-Labs, the Company was granted the option to purchase from the Purchasers
the shares of Gordon Stock issued to them and the indebtedness assigned to them
under the Purchase Agreement within one year for an aggregate purchase price of
$1,000,000 plus interest thereon at the rate of 14% per annum, subject to
reduction under certain conditions, as described below.
Furthermore, the Company granted to the Purchasers one-year warrants (the
"Warrants") to purchase (i) an aggregate of 2,000,000 shares of common stock,
par value $.001 per share, of the Company ("CCSI Stock") at the exercise price
of $.50 per share, if the Company does not consummate a rights offering/ private
placement by the Company of its securities prior to the one year expiration of
such warrants, or alternatively (ii) an aggregate of 11,200,000 shares of CCSI
Stock at the exercise price of $.10 per share and 4.8 million shares at $0.001
per share, subject to price adjustment, if the Company consummates a rights
offering/private placement by the Company of its securities prior to the one
year expiration of such warrants and obtains shareholder approval with respect
to such rights offering/private placement by the Company of its securities and
such increase in warrants. The fair market value of the 2 million warrants was
immaterial. If the alternative additional warrants are issued at a later date,
the fair market value of such warrants will be recorded as a further loss on the
disposal of Gordon.
If (i) pursuant to the Option Agreement the Company exercises its option to
purchase from the Purchasers the shares of Gordon Stock issued to them and the
indebtedness assigned to them under the Purchase Agreement, (ii) the Company has
not effected a reverse stock split of the CCSI Stock in a ratio greater than ten
to one, (iii) the Company has consummated a rights offering/private placement by
the Company of its securities and (iv) the market price of CCSI Stock exceeds
$1.00 per share for at least ten consecutive trading days from and after the
date of exercise under the Option Agreement, the Warrants will be subject to
mandatory exercise. In the event of such a mandatory exercise, the Company will
accept as payment of the aggregate exercise price the shares of Gordon Stock
that the Purchasers acquired under the Purchase Agreement, and the exercise
price under the Option Agreement will be reduced to one dollar. The Warrants are
also subject to mandatory exercise if (i) a registration statement filed by the
Company with respect to the shares of CCSI Stock issuable upon exercise of the
Warrants has been declared effective by the Securities and Exchange Commission,
(ii) the Company has not effected a reverse stock split of the CCSI Stock in a
ratio greater than ten to one, (iii) the Company has consummated a rights
offering/private placement by the Company of its securities and (iv) the market
price of CCSI Stock exceeds $1.00 per share for at least ten consecutive trading
days from and after the effective date of such registration statement. In the
event of such a mandatory exercise, the Company will accept payment of the
aggregate exercise price through the means of a broker's cashless exercise
transaction.
-8-
Note 4 - Issuance of Common Stock:
In connection with an "adjustable warrant" granted to a private investor in
2000, the Company issued 935,750 shares of its common stock to such investor as
a result of the first adjustment of such warrant which occurred on March 31,
2001.
In connection with the purchase of Gordon, the Company issued 22,894 of its
common shares in July 2001. See Note 3.
Note 5 - Employee termination payments
Since March 2001, the Company terminated many of its employees or has been
unable to pay many of its existing employees. Some of these employees have
employment contracts that provide for severance and other payments upon the
termination of employment or breach in such contracts. Accordingly, the Company
has recorded a $1,000,000 provision for the estimated exposure to these
employees for additional amounts due to them. As of June 30, 2001, $300,000 of
this provision has been utilized via payments by an officer of the Company. The
Company believes the remaining $700,000 accrual is reasonable.
Note 6 - Notes payable
During the quarter ended June 30, 2001 the Company received $760,000 through the
issuance of bridge notes ($300,000 resulted from the payment by an officer of
Company liabilities). The notes bear interest at a fixed rate of 10%
and are due in one year. In connection with the debt, the Company issued an
aggregate of 5 million warrants which vest immediately, have a five year life
and are exercisable at $0.10 per share. The fair market value of these warrants
amounted to $566,000 determined using the Black-Scholes option pricing model.
The fair market value of these warrants issued in connection with debt has been
recorded as deferred financing costs, is included in current assets, and is
being amortized over the life of the relative debt. For the six months ended
June 30, 2001, approximately $94,000 was charged to non-cash financing costs
relating to the amortization of the deferred financing costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company incurred losses from continuing operations of $994,700 and
$2,918,000 for the three months ended June 30, 2001 and 2000, respectively. For
the six months ended June 30, 2001 and 2000, the Company incurred losses from
continuing operations of $4,026,000 and $6,346,700, respectively. Loss per share
from continuing operations for the three months ended June 30, 2001 and 2000
were ($.07) and ($.20), respectively. Loss per share from continuing operations
for the six months ended June 30, 2001 and 2000 were ($.24) and ($.46),
respectively. The reduction in losses incurred from continuing operations is
primarily attributable to the Company's ability to reduce its operating costs in
accordance with its business plan.
The Company incurred losses from Discontinued Operations of $1,000,000 or ($.05)
per share for the six months ended June 30, 2001 and $41,100 or ($.0) per share
for the three and six months ended June 30, 2000 due to the decision to dispose
of the Gordon operation (See Note 3).
Sales, marketing and trade show costs were $9,600 and $253,400 for the three and
six months ended June 30, 2001 as compared to $533,300 and $1,170,700 in the
prior periods as the Company has substantially reduced its medical sales force
in 2001. Medical regulatory expenses were $1,900 and $278,300 for the three and
six months ended June 30, 2001 as compared to $227,200 and $423,600 in the prior
periods due to significant reductions in the second quarter of 2001 in FDA
filing costs relating to medical products and other regulatory requirements.
-9-
Research and development costs were $149,600 for the three months ended June 30,
2001 as compared to $380,200 for the three months ended June 30, 2000. The
decrease in research and development costs in the current period is primarily a
result of completion of certain milestones in development of the Company's
medical product. Research and development costs were $454,700 for the six months
ended June 30, 2001 as compared to $674,900 for the six months ended June 30,
2000. The decreased research and development costs for the six months ended June
30,2001 are primarily a result of the above-mentioned completion of milestones.
The Company recorded a provision for estimated payments for terminated employees
of $1,000,000 at March 31, 2001.
Compensation costs - Officers, employees and consultants were $250,000 for the
three months ended June 30, 2001 as compared to $395,300 for the three months
ended June 30, 2000. The decrease in these costs in the current period is a
result of the Company's significant decreases in personnel in 2001. Officers,
employees and consultants were $654,300 for the six months ended June 30, 2001
as compared to $739,700 for the six months ended June 30, 2000. The decreases
were caused by the same reasons.
Total General and administrative costs were $698,900 and $1,768,700 for the
three and six months ended June 30, 2001 as compared to $1,237,100 and
$2,407,300 in the prior periods. The decrease is primarily a result of cost
reductions initiated by the Company in 2001.
Interest and non-cash financing costs were $99,000 in the three and six months
ended June 30, 2001 as compared to $300,800 and $1,197,400 in the prior periods.
The decrease is primarily due to amortization of original issue discount on
senior convertible debentures, which was fully amortized in prior periods.
Deemed dividends on preferred stock were $278,000 and $556,000 in the three and
six months ended June 30, 2001 as compared to $278,000 and $981,000 in the prior
periods. The decrease for the six month period is due to an additional deemed
dividend from a new financing in the prior period, which did not occur in the
current period.
Although the Company has substantially reduced personnel and ongoing operating
expenses, the Company expects that if it is successful in raising the necessary
financing to continue operations, it will continue to incur costs in connection
with the required research and development for different market applications of
its new LED instrument and technology, complete filings, administration and
maintenance for certain intellectual properties and regulatory requirements;
supply updated products and sales support to its medical distributor; complete
FDA filings for upgrades to its medical products, and explore the possibility of
either renegotiating its current distribution agreement for its medical products
or selling the exclusive rights to its medical products and technology.
The Company anticipates that it will continue to incur net losses for the
foreseeable future as expenses are incurred in implementing its long-term
business plan.
LIQUIDITY AND CAPITAL RESOURCES
Current Assets were $1,415,700 at June 30, 2001 as compared to $2,495,900 at
December 31, 2000. This decrease is primarily attributable to a decrease in cash
due to the operating losses.
As indicated in the Consolidated Statement of Cash Flows, the Company continues
to experience significant negative net cash flows from operating activities. The
2001 net cash outflow from operating activities is primarily attributed to the
Company's net loss partially offset by depreciation and amortization expense and
increases in accounts payable.
The Company lacks funds to continue material aspects of its operations and
business plan, including funds and necessary personnel to complete research and
development on its new LED instrument and technology recently required during
its first mass manufacturing process; complete filings, administration and
maintenance for certain intellectual properties and regulatory requirements;
supply upgraded products and sales support to its medical distributor; and
complete FDA regulatory filings for upgrades to its medical products.
The Company's current objective with regard to its medical business is to arrive
at acceptable revised terms of the existing agreement with the distributor or to
identify a strategic partner in the medical industry to whom the Company
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could sell, for an up-front fee and ongoing royalty, the exclusive market rights
to the ColorMate(R) TLc-BiliTest(R) System.
The Independent Accountants' Report on the December 31, 2000 financial
statements indicates the Company has incurred recurring losses for the last
several years, including $19,464,400 in 2000 and has experienced significant
problems and delays exploiting its primary technology (medical equipment). In
addition, the Company's subsidiary, Gordon, defaulted on its debt services
obligations and the lender demanded payment of the entire debt, which totaled
$2,714,700 at December 31, 2000. The Independent Accountants' Report states that
these matters raise substantial doubt about the Company's ability to continue as
a going concern. Gordon has subsequently been sold. See Note 3.
The Company is experiencing a major liquidity crisis and requires an immediate
infusion of cash to continue operations. The Company is seeking additional
capital to facilitate short-term liquidity and is currently reviewing various
financing proposals and has taken steps to significantly reduce costs. If the
Company is unable to obtain such short-term financing, or sell its assets to
obtain a cash infusion, it may be forced to seek protection from its creditors
in bankruptcy.
Even if the Company is successful in obtaining this short-term cash infusion,
the Company will require additional future financing to execute its business
plan. If the Company is not able to attract additional future financing,
generate significant revenue from operations and/or successfully market its
products and technologies, it may have to significantly curtail and/or cease
operations and be forced to seek protection from its creditors in bankruptcy.
The Company is currently negotiating proposals for financing the Company. Such
proposals require negotiation of warrants to purchase the Company's stock and
are subject to satisfactory completion of due diligence, negotiation, execution
and delivery of definitive agreements by and between the parties, and compliance
with NASDAQ listing requirements.
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions, within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include, among other things:
(i) the inability of the Company to resolve the current liquidity crisis, (ii)
the inability of the Company to secure additional financing, (iii) the failure
of the Company to implement its business plan for various applications of its
technologies, including medical and industrial technologies, (iv) government
regulation and (v) the loss of key personnel.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No disclosure is required under this Item 3.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 16, 2001, a lawsuit was commenced against the Company and Darby
Macfarlane in the federal district court for the Southern District of New York
entitled Richard Sommers and Linda Sommers v. Chromatics Color Sciences
International, Inc. and Darby S. Macfarlane. The plaintiffs allege that certain
statements purportedly made by or on behalf of the Company concerning the
Company's success, the extent of use of the ColorMate (Registered Trademark)
System and the Company's cash flow constituted violations of Section 10(b) of
the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder
and Section 12(a)(2) of the Securities Act of 1933 as well as common law claims
alleging fraudulent misrepresentation, concealment and nondisclosure and seek
unspecified damages in an amount to be proven at trial. On March 1, 2001, the
defendants moved to dismiss the complaint for failure to state a claim upon
which relief can be granted, for failure to plead fraud with requisite
particularity and for failure to comply with the statutory requirements for
federal securities fraud claims. No decision has been rendered by the court on
this motion. The defendants believe that the allegations of the complaint are
without merit and intend to vigorously defend this action.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K:
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
Date: August 20, 2001 By: /s/ Darby S. Macfarlane
------------------------
Darby S. Macfarlane
Chairman and Chief Technology Officer
Date: August 20, 2001 By: /s/ Leslie Foglesong
Leslie Foglesong
Asst. Treasurer and principal
accounting officer
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