SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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.
---------------------------------------------
(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 Identification Number)
Incorporation or Organization)
5 East 80th Street, New York, New York 10021
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(Address of principal executive offices)
(212) 717-6544
----------------
(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 November 14, 2001: 19,991,952
-1-
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2001 December 31, 2000
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(unaudited) (Notes 1 and 3)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 157,700 $ 1,379,000
Accounts receivable 72,900 72,900
Inventories 714,000 747,100
Prepaid expenses and other current assets 67,300 296,900
Subscriptions receivable 310,000 -
Deferred financing costs 680,500 -
---------------- ---------------
Total Current Assets 2,002,400 2,495,900
PROPERTY AND EQUIPMENT - NET 178,400 244,100
SOFTWARE DEVELOPMENT COSTS - NET 104,600 261,400
PATENT COSTS - NET 505,700 581,100
NET ASSETS OF DISCONTINUED OPERATIONS - 1,000,000
OTHER ASSETS 306,600 331,700
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$ 3,097,700 $ 4,914,200
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses:
Attorneys and accountants $ 1,021,100 $ 458,900
Consultants 385,600 141,700
Trade 294,300 260,100
Severance payable 700,000 -
Notes payable (including $325,000
payable to an affiliate) 1,260,000 -
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Total Current Liabilities 3,661,000 860,700
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LONG TERM DEBT:
Amount payable for purchase of Gordon - 653,000
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- 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, authorized 10,000,000 shares,
issued and outstanding 113,769 shares 12,344,800 11,510,800
Subscribed stock
(8,333,334 shares of common stock) 500,000
Common Stock, par value $.001 per share:
Authorized - 50,000,000 shares
Issued and outstanding -
19,991,952, (2001) and 19,033,308
(2000) shares 20,000 19,100
Capital in excess of par value 46,718,500 45,934,400
Accumulated deficit (60,160,400) (54,077,600)
---------------- ---------------
---------------- ---------------
Total Shareholders' Equity (Deficiency) (577,100) 3,386,700
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$ 3,097,700 $ 4,914,200
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See accompanying notes to consolidated financial statements
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------- -------------- ------------- --------------
Sales $ 6,000 $ 600 $ 6,000 $ 80,400
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COSTS AND EXPENSES:
Cost of sales - 100 - 27,000
Sales, marketing and trade show costs 28,100 496,400 281,500 1,667,100
Medical regulatory expenses 26,000 193,400 304,300 617,000
Research and development 142,500 283,400 597,200 958,300
Patent application costs 7,900 65,900 179,600 216,400
Compensation costs relating to (non cash) options granted - 225,000 - 690,000
Provision for estimated payments for terminated employees - - 1,000,000 -
General and administrative:
Compensation - Officers, employees and consultants 198,900 519,100 853,200 1,258,800
Legal fees 132,100 133,500 332,300 571,800
Accounting fees 20,700 17,500 83,600 114,100
Rent and storage 82,000 91,400 270,500 248,400
Insurance 47,300 74,900 171,100 224,400
Repairs and maintenance 17,600 40,800 47,900 123,100
Depreciation and amortization 101,300 194,500 353,400 538,900
Taxes 1,300 13,600 57,500 58,100
Stock administrative fees 20,000 11,600 80,400 65,800
Public relations 1,000 49,300 41,200 162,000
Other 25,200 120,200 128,000 308,300
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851,900 2,530,600 4,781,700 7,849,500
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OPERATING LOSS (845,900) (2,530,000) (4,775,700) (7,769,100)
------------- -------------- ------------- --------------
OTHER INCOME (EXPENSE):
Interest income - 21,800 2,800 111,600
Interest expense and non-cash financing costs
including $285,500 and $834,200 in non-cash OID
costs in 2001 and 2000, respectively (210,900) (181,800) (309,900) (1,379,200)
------------- -------------- ------------- --------------
(210,900) (160,000) (307,100) (1,267,600)
------------- -------------- ------------- --------------
LOSS FROM CONTINUING OPERATIONS (1,056,800) (2,690,000) (5,082,800) (9,036,700)
LOSS FROM DISCONTINUED OPERATIONS (Note 3) - (333,300) (1,000,000) (374,400)
------------- -------------- ------------- --------------
NET LOSS $ (1,056,800) $ (3,023,300) $ (6,082,800) $ (9,411,100)
============= ============== ============= ==============
NET LOSS TO COMMON STOCKHOLDERS:
LOSS FROM CONTINUING OPERATIONS $ (1,056,800) $ (2,690,000) $ (5,082,800) $ (9,036,700)
DEEMED DIVIDEND FOR CLASS B, SERIES 2 AND 3
CONVERTIBLE PREFERRED STOCK 278,000 278,000 834,000 1,259,000
------------- -------------- ------------- --------------
LOSS FROM CONTINUING OPERATIONS TO
COMMON STOCKHOLDERS (1,334,800) (2,968,000) (5,916,800) (10,295,700)
LOSS FROM DISCONTINUED OPERATIONS (Note 3) - (333,300) (1,000,000) (374,400)
------------- -------------- ------------- --------------
NET LOSS TO COMMON SHAREHOLDERS $ (1,334,800) $ (3,301,300) $ (6,916,800) $ (10,670,100)
============= ============== ============= ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 19,991,952 17,034,726 19,521,176 16,283,021
============= ============== ============= ==============
BASIC AND DILUTED LOSS PER SHARE:
LOSS FROM CONTINUING OPERATIONS $ (0.07) $ (0.17) $ (0.30) $ (0.63)
LOSS FROM DISCOUNTINUED OPERATIONS - (0.02) (0.05) (0.02)
------------- -------------- ------------- --------------
NET LOSS TO COMMON STOCKHOLDERS $ (0.07) $ (0.19) $ (0.35) $ (0.66)
============= ============== ============= ==============
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
----------------------------
Number Capital
Preferred of Shares Par in Excess of Accumulated
Stock Outstanding Value Par Value Deficit
--------------- --------------- ---------- --------------- ----------------
Balances, December 31, 2000 $ 11,510,800 19,033,308 $ 19,100 $ 45,934,400 $ (54,077,600)
Nine Months Ended September 30, 2001:
Net Loss - - - - (6,082,800)
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 966,000
Deemed dividend on Class B,
convertible preferred stock 834,000 (834,000)
--------------- --------------- ---------- --------------- ----------------
Balances, September 30, 2001 $ 12,344,800 19,991,952 $ 20,000 $ 46,718,500 $ (60,160,400)
=============== =============== ========== =============== ================
See accompanying notes to consolidated financial statements
-4-
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
---------------------------------
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $ (5,082,800) $ (9,036,700)
Loss from discontinued operations (1,000,000) (374,400)
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 1,000,000 374,400
Depreciation and amortization 353,400 538,900
Compensation cost relating to options granted to consultants - 690,000
Non-cash interest and financing costs 285,500 834,200
Changes in operating assets and liabilities:
Accounts receivable - 769,400
Inventories 33,100 (206,700)
Prepaid expenses and other assets 204,700 (162,700)
Accrued interest on senior convertible debentures - 525,000
Accounts payable and accrued expenses 1,840,300 262,500
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Net cash flows from continuing operating activities (2,365,800) (5,786,100)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized patent costs - (337,300)
Net cash used for investment in subsidiary - (1,937,000)
Purchase of property and equipment (5,500) (77,100)
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Net cash flows from investing activities (5,500) (2,351,400)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of subscribed stock, net
of related costs 190,000 3,672,700
Proceeds (payments) of notes payable and warrants 960,000 (256,100)
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 1,150,000 7,026,600
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NET CHANGE IN CASH AND EQUIVALENTS (1,221,300) (1,110,900)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 1,379,000 2,790,400
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CASH AND EQUIVALENTS, END OF PERIOD $ 157,700 $ 1,679,500
============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ - $ 20,300
============== ===============
Issuance of debt to pay accrued expenses $ 300,000 $ -
============== ===============
Issuance of stock to pay Gordon liability $ 653,000 $ -
============== ===============
Deemed dividends $ 834,000 $ 1,259,000
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Subscribed stock $ 310,000 $ -
============== ===============
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.
-6-
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
liquidity and is currently reviewing various financing proposals. If the Company
is unable to obtain such 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 cash infusion, the Company
will require additional future financing to further execute its long range
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 has previously received notifications from NASDAQ that its common
stock failed to comply with the $1.00 minimum bid price and $2,000,000 minimum
net tangible asset conditions required for coninued listing of the common stock
on the NASDAQ SmallCap Market. A hearing on the proposed delisting of the
Company's common stock was held on August 16, 2001. At that hearing the NASDAQ
Hearing Committee requested additional information regarding the Company's plans
to achieve compliance with the minimum net tangible asset requirement. To date,
NASDAQ has publicly announced a temporary suspension of all delisting
proceedings regarding the listing requirement for a $1 minimum per share price
in the aftermath of the September 11th attacks on the World Trade Center and the
Pentagon. Additionally, on October 30, 2001, NASDAQ has granted a temporary
exception to the Company to remain listed until November 30, 2001, pending the
Company's ability to be in compliance with the terms of the exception, including
the Net Tangible Asset requirement. There can be no assurance that the Company
will be in compliance with the terms of the exception and the Net Tangible Asset
requirement by November 30, 2001 or at any later date. If the Company is not in
compliance by November 30, 2001, then it's securities will be delisted from the
NASDAQ SmallCap Market. If the Company's securities should cease to be listed on
the NASDAQ SmallCap Market, they may continue to be listed on the OTC Bulletin
Board. The Company has requested that the Listing Council review this decision.
However the institution of a review will not operate as a stay of delisting
based on this decision.
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,
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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 Nine Months Three Months Nine Months
ended ended ended ended
Sep. 30, 2001 Sep. 30, 2001 Sep. 30, 2000 Sep. 30, 2000
---------------------------------------------------------------------------------
Net Sales $ 0 $ 2,590,000 $ 1,724,000 $ 2,350,200
Loss from discontinued operation $ 0 $ 1,000,000 $ 333,300 $ 374,400
Impairment cost (gain) $ 0 $ 0 $ 0 $ 0
Net Loss from discontinued operation $ 0 $ 1,000,000 $ 333,300 $ 374,400
* 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. Results for 2001 are through June 30, 2001 and do not reflect
results after the sale of Gordon.
Assets and liabilities from the discontinued operation were as follows:
December 31, 2000
---------------------
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
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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.
-9-
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 September 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 nine months ended September 30, 2001 the Company received $1,260,000
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 13 million warrants to investors and an additional 4 million
warrants to the finder. All of the warrants have a five year life and are
exercisable at $0.10 per share upon registration of the underlying shares. The
fair market value of these warrants amounted to $966,000 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 nine months ended September 30, 2001, approximately $285,500 was
charged to non-cash financing costs relating to the amortization of the deferred
financing costs.
Note 7 - Stock subscriptions
In August 2001, the Company retained Janssen Partners, Inc. to serve as its
placement agent in connection with an offering of 10,333,333 shares of common
stock and warrants to raise $620,000 in proceeds. Attached to each share is a
Series A Common Stock Purchase Warrant which vests immediately, has a five year
life and is exercisable at $0.10 per share after registration of the underlying
shares. Upon the exercise of each Series A Common Stock Purchase Warrant, the
holder will receive a Series B Common Stock Purchase Warrant which vests
immediately, has a five year life from date of issuance and is exercisable at
$0.15 per share after registration of the underlying shares. The offering will
expire upon the earlier of November 30, 2001 or the full subscription of the
offering. As of September 30, 2001, 8,333,334 shares of common stock have been
subscribed for in an aggregate amount of $500,000, of which $190,000 was
received in September 2001 and $310,000 included in
-10-
current assets as these amounts were received in October 2001 after required
shareholder approval for additional authorized shares was obtained October 31,
2001. In addition, 12,500,000 Series A Common Stock Purchase Warrants and
12,500,000 Series B Common Stock Purchase Warrant are issuable in connection
with the offering.
The Company is in the process of completing documentation including an
additional proxy to obtain stockholder approval for an additional proposed
private placement by the Company involving potential issuance of additional
shares of common stock by the Company in an aggregate amount in excess of 20% of
the Company's common stock outstanding immediately prior to such private
placement at a price per share less than the market value of the common stock.
On October 31, 2001, at a special shareholder meeting an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock, $.001 par value per share, from 50,000,000 to
550,000,000 was approved by the following votes: 18,110,383 for; 1,033,794
against; and 71,069 abstained. Additionally, an amendment to the Company's
Certificate of Incorporation to effect a one share for up to forty shares
reverse stock split of the Company's issued and outstanding shares of common
stock, as determined by the Company's Board of Directors was approved by the
following votes: 18,078,117 for; 1,052,519 against; and 84,550 abstained. Due to
NASDAQ's temporary suspension of all delisting proceedings regarding the listing
requirement for a $1.00 minimum per share price, the Company's Board of
Directors does not see the necessity to execute a reverse split in the Company's
common stock at this time, but reserves the right to reconsider this action at a
later date within time frames proposed in the Proxy which were approved by the
Company's shareholders at the October 31, 2001 Special Meeting of the
Shareholders.
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 $1,056,800 and
$2,690,000 for the three months ended September 30, 2001 and 2000, respectively.
For the nine months ended September 30, 2001 and 2000, the Company incurred
losses from continuing operations of $5,082,800 and $9,036,700, respectively.
Loss per share from continuing operations for the three months ended September
30, 2001 and 2000 were ($.07) and ($.17), respectively. Loss per share from
continuing operations for the nine months ended September 30, 2001 and 2000 were
($.30) and ($.63), 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 nine months ended September 30, 2001 and $374,400 or ($.02)
per share for the nine months ended September 30, 2000 due to the decision to
dispose of the Gordon operation (See Note 3).
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Sales, marketing and trade show costs were $28,100 and $281,500 for the three
and nine months ended September 30, 2001 as compared to $496,400 and $1,667,100
in the prior periods as the Company has substantially reduced its medical sales
force in 2001. Medical regulatory expenses were $26,000 and $304,300 for the
three and nine months ended September 30, 2001 as compared to $193,400 and
$617,000 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.
Research and development costs were $142,500 for the three months ended
September 30, 2001 as compared to $283,400 for the three months ended September
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 $597,200 for the
nine months ended September 30, 2001 as compared to $958,300 for the nine months
ended September 30, 2000. The decreased research and development costs for the
nine months ended September 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 $198,900 for the
three months ended September 30, 2001 as compared to $519,100 for the three
months ended September 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 $853,200 for the nine months ended
September 30, 2001 as compared to $1,258,800 for the nine months ended September
30, 2000. The decreases were caused by the same reasons.
Total General and administrative costs were $647,400 and $2,419,100 for the
three and nine months ended September 30, 2001 as compared to $1,266,400 and
$3,673,700 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 $210,900 and $309,900 in the three
and nine months ended September 30, 2001 as compared to $181,800 and $1,379,200
in the prior periods. The nine month 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 $834,000 in the three and
nine months ended September 30, 2001 as compared to $278,000 and $1,259,000 in
the prior periods. The decrease for the nine 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
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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 further 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 $2,002,400 at September 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 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.
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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 liquidity and is currently reviewing various financing
proposals and has taken steps to significantly reduce costs. If the Company is
unable to obtain such 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 cash infusion, the Company
will require additional future financing to further execute its long range
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.
In August 2001, the Company retained Janssen Partners, Inc. to serve as its
placement agent in connection with an offering of 10,333,333 shares of common
stock and warrants to raise $620,000 in proceeds. Attached to each share is a
Series A Common Stock Purchase Warrant which vests immediately, has a five year
life and is exercisable at $0.10 per share after registration of the underlying
shares. Upon the exercise of each Series A Common Stock Purchase Warrant, the
holder will receive a Series B Common Stock Purchase Warrant which vests
immediately, has a five year life from date of issuance and is exercisable at
$0.15 per share after registration of the underlying shares. The offering will
expire upon the earlier of November 30, 2001 or the full subscription of the
offering. As of September 30, 2001, 8,333,334 shares of common stock have been
subscribed for in an aggregate amount of $500,000, of which $190,000 was
received in September 2001 and $310,000 included in current assets as these
amounts were received in October 2001 after required shareholder approval for
additional authorized shares was obtained October 31, 2001. In addition,
12,500,000 Series A Common Stock Purchase Warrants and 12,500,000 Series B
Common Stock Purchase Warrant are issuable in connection with the offering.
The Company is in the process of completing documentation including an
additional proxy to obtain stockholder approval for an additional proposed
private placement by the Company involving potential issuance of additional
shares of common stock by the Company in an aggregate amount in excess of 20% of
the Company's common stock outstanding immediately prior to such private
placement at a price per share less than the market value of the common stock.
On October 31, 2001, at a special shareholder meeting an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock, $.001 par value per share, from 50,000,000 to
550,000,000 was approved by the following votes: 18,110,383 for; 1,033,794
against; and 71,069 abstained. Additionally, an amendment to the Company's
Certificate of Incorporation to effect a one share for up to forty shares
reverse stock split of the Company's issued and outstanding shares of common
stock, as determined by the Company's Board of Directors was approved by the
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following votes: 18,078,117 for; 1,052,519 against; and 84,550 abstained. Due to
NASDAQ's temporary suspension of all delisting proceedings regarding the listing
requirement for a $1.00 minimum per share price, the Company's Board of
Directors does not see the necessity to execute a reverse split in the Company's
common stock at this time, but reserves the right to reconsider this action at a
later date within time frames proposed in the Proxy which were approved by the
Company's shareholders at the October 31, 2001 Special Meeting of the
Shareholders.
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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
On September 13, 2001, the Company received Food and Drug Administration (FDA)
clearance of its 510(k) premarket application to commercially market its
upgraded Colormate(R) TLco BiliTest(R) System for non-invasive monitoring of
infant jaundice. The TLco BiliTest(R) System upgrade includes faster, more user
friendly test programs with many new or improved features requested by
healthcare providers, such as test result transfer capability to a central
server via the internet. This most recent FDA clearance also confirmed the
safety and effectiveness of the TLco BiliTest(R) System for infants of all races
and gestational ages before, during and after phototherapy, other than infants
with discoloration at a required measurement site. The Company believes these
features will provide a state-of-the art monitoring system for aiding physicians
and healthcare providers in monitoring bilirubin for newborn infants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
Reports on Form 8-K:
None.
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: November 14, 2001 By: /s/ Darby S. Macfarlane
-----------------------
Darby S. Macfarlane
Chairman and Chief Technology Officer
Date: November 14, 2001 By: /s/ Leslie Foglesong
--------------------
Leslie Foglesong
Asst. Treasurer and principal
accounting officer
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