<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from _______ to _______
Commission file number 0-21168
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
NEW YORK 13-3253392
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) 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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(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes ___ No ___ N/A
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: Common Stock: 7,621,713
Warrants: 2,941,215
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 6,513,100 $ 1,827,400
Accounts receivable, less allowance for doubtful
accounts of $10,000 in 1996 and $17,900 in 1995 232,100 315,700
Inventories 323,600 291,600
Prepaid expenses and other assets 105,600 98,800
------------ ------------
Total Current Assets 7,174,400 2,533,500
COLORMATE II UNITS, LESS ACCUMULATED
DEPRECIATION OF $23,700 (1996) AND $16,800 (1995) 676,300 683,200
PROPERTY AND EQUIPMENT, AT COST LESS ACCUMULATED
DEPRECIATION OF $137,200 (1996) AND $86,900 (1995) 304,300 210,600
OTHER ASSETS 31,000 62,600
------------ ------------
$ 8,186,000 $ 3,489,900
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - collateralized by equipment $ 11,200 $ 4,400
Notes payable to related party 332,500 341,700
Accounts payable and accrued expenses:
Attorneys and Accountants 271,200 107,400
Consultants 120,300 10,100
Trade 130,900 120,100
Security deposits 10,500 6,000
------------ ------------
Total Current Liabilities 876,600 589,700
------------ ------------
LONG TERM DEBT:
Notes payable - collateralized by equipment -- 10,000
COMMITMENTS AND CONTINGENCIES
REDEEMABLE CLASS A PREFERRED STOCK,
PAR VALUE $.01 PER SHARE:
Authorized - 1,400,000 Shares
Issued and outstanding - 1,380,000 Shares
At par and redemption value 13,800 13,800
------------ ------------
CLASS B PREFERRED STOCK, NO PAR VALUE
PER SHARE:
Authorized - 10,000,000 Shares
Issued and outstanding - 0 Shares -- --
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common Stock, par value $.001 per share:
Authorized - 50,000,000 shares
Issued and outstanding - 7,081,730 (1996)
and 4,661,936 (1995) shares 7,100 4,700
Capital in excess of par value 15,282,900 7,864,700
Accumulated deficit (7,994,400) (4,993,000)
------------ ------------
Total Stockholders' Equity 7,295,600 2,876,400
------------ ------------
$ 8,186,000 $ 3,489,900
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Lease, license and service contracts $ 1,500 $ 32,300 $ 66,100 $ 119,500
Sale of cosmetics and fashion swatch packs 700 800 100 1,800
Interest income 82,700 38,100 151,700 89,600
----------- ----------- ----------- -----------
84,900 71,200 217,900 210,900
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Costs of cosmetics and fashion swatch packs 400 400 500 1,300
Research and Development costs:
Compensation of officers and employees 121,400 87,300 361,600 212,800
Compensation of consultants 261,700 74,800 454,600 227,700
Other 1,000 1,800 3,700 8,900
Selling and Other:
Compensation of officers and employees 187,900 143,900 578,500 371,600
Compensation of consultants 78,100 43,000 177,800 180,100
Legal fees 60,100 33,700 284,200 152,600
Accounting fees 6,800 6,600 46,700 33,800
Patent application costs 85,700 46,100 168,700 102,900
Rent and storage 54,000 49,300 164,900 131,800
Legal Settlement 132,000 -- 132,000 --
Other:
Insurance 50,100 48,500 145,800 123,900
Travel & Entertainment 33,700 28,300 85,700 64,200
Payroll taxes 14,900 15,400 65,200 44,900
Stock administrative fees 6,500 3,400 49,000 22,700
Depreciation and amortization 24,800 14,700 156,800 36,500
General and administrative 87,200 113,800 286,100 258,000
Interest 42,300 7,300 59,000 22,200
Gain on sale of asset -- -- (1,500) (400)
----------- ----------- ----------- -----------
1,248,600 718,300 3,219,300 1,995,500
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(1,163,700) $ (647,100) $(3,001,400) $(1,784,600)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENTS
OUTSTANDING 5,432,824 4,661,936 5,777,479 4,088,109
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE $ (0.21) $ (0.14) $ (0.52) $ (0.44)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
-----------------------------------
Number of Capital in Excess Accumulated
Shares Outstanding Par Value of Par Value Deficit
------------------ ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Balances, December 31, 1995 4,661,936 $ 4,700 $ 7,864,000 $(4,993,000)
Nine Months Ended September 30, 1996:
Net Loss -- -- -- (3,001,400)
Exercise of stock options and warrants 648,785 600 3,028,300 --
Conversion of debentures into Common
Stock 1,771,009 1,800 4,110,000 --
Gain on account of "short swing" profits
under securities laws -- -- 280,600 --
----------- ----------- ----------- -----------
Balances, September 30, 1996 7,081,730 $ 7,100 $15,282,900 $(7,994,400)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(3,001,400) $(1,784,600)
Adjustments to Reconcile Net Loss to Net
Cash Flows From Operating Activities:
Depreciation and Amortization 158,600 36,500
Gains on Sale of Equipment (1,500) (400)
Changes in Operating Assets and Liabilities:
Accounts Receivable 83,600 (105,600)
Inventories (32,000) (10,700)
Prepaid Expenses and Other Assets (6,800) 19,800
Other Assets (31,000) (6,100)
Accounts payable and Accrued Expenses 284,800 (120,900)
Security deposits and unearned service contract
revenues -- 500
----------- -----------
Net Cash Flows From Operating Activities (2,545,700) (1,971,500)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of Property and Equipment -- 200
Purchases of Property and Equipment (144,000) (108,300)
----------- -----------
Net Cash Flows From Investing Activities (144,000) (108,100)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Issuance of Common Stock Net of
Related costs 7,387,800 3,864,100
Payments of Notes Payable From Related Parties (9,200) (97,300)
Notes Payable - Collateralized by Equipment (3,200) (2,900)
----------- -----------
Net Cash Flows From Financing Activities 7,375,400 3,763,900
----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS 4,685,700 1,684,300
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD 1,827,400 858,300
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 6,513,100 $ 2,542,600
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ 59,000 $ 28,100
=========== ===========
Income Taxes Paid $ -- $ --
=========== ===========
SUPPLEMENTAL NONCASH FLOW
INFORMATION
Loan From Officer Offset Against Due From
Officer -- $ 21,300
=========== ===========
Deferred Offering Costs Offset to Additional Paid
in Capital 554,903 $ 111,800
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
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 Form 10-KSB for the fiscal year
ended December 31, 1995 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 Form 10-KSB for the
fiscal year ended December 31, 1995.
Estimates and Uncertainties - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results, as determined at a later date, could differ from those estimates.
The Company's inventories are in excess of current requirements based on
the recent level of sales. The Company has not sold its new line of
cosmetics because the manufacturer has experienced difficulties in color
matching certain shades to be scientifically claimable for the Company's
scientifically color coordinated cosmetics line. The Company believes the
new cosmetics will be ready to ship in the fourth quarter of 1996 and is
currently seeking a national distributor to sell its cosmetics. Management
believes no loss will be incurred on the disposition of inventory. No
estimate can be made of a range of amounts of loss that are reasonably
possible should Management's expectations not be met.
Note 2 -- Commitments and Contingencies:
Business Risks -- 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 adequate revenues and/or outside financing.
Possible Impairment -- Depreciation on a straight-line basis over 5 years
commences upon initial rental of the Colormate II System units. The Company
continually evaluates the life and carrying amount of such equipment in
light of current conditions. Given present conditions, it is reasonably
possible that the Company's estimate that it will recover the carrying
amount from future operations may change in the near term, but the Company
currently believes it is more likely than not that writedown for impairment
will not be necessary. For assessing whether a writedown is necessary,
management compares the greater of the estimated undiscounted net future
revenues and a current appraisal with the carrying amount of this
specialized equipment.
Operating Difficulties -- Since 1989, the Company has incurred losses from
operations and net cash outflows from operations, and has owned Colormate
II units since June 1991 whose ultimate recoverability
5
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Note 2 -- Commitments and Contingencies (continued):
depends upon the Company's future marketing success. The Company expects to
license its patents and proprietary technology, rent its equipment and
market its related services and products to ultimately overcome these
difficulties.
In order to successfully lease Colormate II units and market related beauty
products and services as well as license its proprietary technology in the
future, the Company has obtained substantial financing. Management expects
the Company will have sufficient liquidity for at least one year, even if
no revenues from operations are generated. If the Company is able to
profitably market its Intellectual Properties, Colormate II System and
Products, the Company would use any cash flow obtained from operations, and
may seek additional debt or equity financing, to further support and expand
its operations. If the Company is not able to successfully market its
products and technologies, it may ultimately be unable to continue in
business.
In the event the Colormate II units and related proprietary technology are
not successfully leased/licensed and/or the products are not successfully
marketed in the future, the principal effect may be a substantial writedown
of the book value of such units.
Colormate II Systems -- Color measurement instruments and related items
("Proprietary Equipment") were funded by Avon Products, Inc. ("Avon") under
a license and were to be returned upon completion of the license period to
protect the Company's rights. At the inception of the Avon license, no
residual value was attributed to the Proprietary Equipment, due to the lack
of an ascertainable market for such equipment when separated from the rest
of the Colormate II Systems. Avon originally paid the Company approximately
$1,600,000 for 2,000 color measurement instruments components of the
Colormate II System. Related computer and other equipment ("Nonproprietary
Equipment") which, together with the Proprietary Equipment, were used by
Avon as units during the license period, were to be retained by Avon. Avon
originally advanced to the Company approximately $3,000,000 for the
nonproprietary equipment contained in such 2,000 units.
Due to missing and damaged units, Avon and the Company executed mutual
releases on June 24, 1991 with the principal effect that the Company
received 1,947 units of which 1,700 were useable. For accounting purposes,
the $700,000 estimated fair value of the Nonproprietary Equipment (based
upon an independent appraisal of two complete units with allowances for the
lack of a verifiable used equipment market, varying usage, the need for
refurbishment and similar factors) was considered a gain on receipt of
Colormate II units. The 1,700 useable units of Nonproprietary Equipment
were received in the form of (i) 1,400 complete units valued at $500 per
unit and (ii) 300 complete units in need of significant repair that were
assigned zero value. The principal components of each unit are Toshiba-1000
computers and Seiko printers, which were then three years old. No valuation
of the Proprietary portion of the units or of the 247 unusable units was
performed.
6
<PAGE>
Item 2. Management's Discussion and Analysis
The following is intended to update the information contained in the
Company's Form 10-KSB for the year ended December 31, 1995 and presumes that
readers have access to, and will have read, Management's Discussion and Analysis
contained in Form 10-KSB for the year ended December 31, 1995 (the "Form
10-KSB").
Except for the historical information contained herein, certain of the
matters discussed are forward-looking statements that involve material risks to
and uncertainties in the Company's business which may cause actual results to
differ materially from those anticipated by the statements made below. Such
risks and uncertainties include, among other things, the availability of any
needed financing, the Company's ability to implement its long range business
plan for various applications for its technologies, the impact of competition,
the obtaining of and compliance with regulatory approvals applicable to proposed
applications of the Company's technology, the management of growth, and other
risks and uncertainties that may be detailed from time to time in the Company's
reports filed with the Securities and Exchange Commission, including those set
forth in the Form 10-KSB.
Overview
Since inception, the Company has been principally engaged in the research
and development of the Intellectual Properties and the Colormate II System for
the application of scientific color measurement principles to the classification
of human skin and the classification and color-oriented organization of various
color sensitive consumer products such as cosmetics, hair color, hosiery,
fashion, print and textiles. The Company has also been engaged in test marketing
the Intellectual Properties, Colormate II System and Products in the beauty aid
and fashion industries, and marketing them in the cosmetics industry, and, in
cooperation with Mt. Sinai Hospital, New York, New York, has conducted research
and clinical tests of the Company's technologies for the detection and
monitoring of infant jaundice (the "Bilirubin Project"), as described below.
In 1995, the Company commenced implementation of its long-range plans to
exploit potential medical applications for its technology. In this regard, the
Company hired a new president, retained consultants and counsel in connection
with the preparation of FDA marketing clearance applications, and continued work
on the mass manufacture prototype for such medical applications.
The Company has incurred significant losses from operations since 1990 and
until the summer of 1994 was involved in significant litigation. The Company has
incurred research and development and marketing expenses as well as significant
operating losses and, prior to consummation of its initial public offering (the
"IPO") in February 1993 discussed below, had negative shareholders' equity. The
Company has not achieved significant operating revenues since the conclusion of
the Avon Project. The Company has owned Colormate II System Units since June
1991 the ultimate recoverability of which depends on the Company's future
marketing success. See Note 2 of Notes to Consolidated Financial Statements.
The Company has financed its operations through (i) private placements of
its securities, which generated an aggregate of $1,167,500 (including $620,400
from Darby Simpson Macfarlane) from 1988 through 1992 (excluding $775,000 in a
bridge financing effected in September and October 1992 (the "Bridge Financing")
which was repaid with proceeds of the IPO), (ii) collaborative research and
development arrangements with licensees, (iii) cash receipts from lease and
licensing agreements, which generated in the aggregate $8,386,200 from inception
through December 31, 1992, including $6,944,200 in the period from January 1,
1988 to December 31, 1992 (primarily attributable to the Avon Project), (iv)
loans from private investors and certain shareholders which aggregated $549,000
in 1991 and 1992 (excluding the Bridge Financing), (v) the IPO, (vi) the 1995
Private Placement discussed below and (vii) the 1996 Debenture Offering
described below. During the quarter ended September 30, 1996, the Company
received an aggregate of $25,000 from the exercise of warrants granted to the
Placement Agent of the 1995 Private Placement.
In February 1993, the Company completed the IPO consisting of 1,150,000
units, each unit consisting of one share of common stock, par value $.001 (the
"Common Stock"), and one redeemable Common Stock purchase warrant ("Warrant"),
each Warrant entitling the holder thereof to purchase one share of Common Stock
for $5.00
7
<PAGE>
per share. The Company received aggregate gross proceeds of $5,750,000 and
aggregate net cash proceeds of approximately $4,475,800 from the IPO. Such net
proceeds have been applied in full by the Company to marketing, licensing and
sales activities, including those through beauty salons, to acquire inventory,
to hire sales representatives and retain marketing consultants and to commence
other related operations.
From October 1994 to June 1995, the Company effected a private placement
offering (the "1995 Private Placement") of 1,800,000 shares of its Common Stock
(which has generated gross proceeds of $4,500,000, and net proceeds of
$3,729,800). The Common Stock was sold at a price of $2.50 per share. The
Company issued to the placement agent warrants to purchase an additional
1,800,000 shares at an exercise price of $2.50 per share. A registration
statement covering the resale of the shares sold in the 1995 Private Placement
and such warrant shares was declared effective on May 6, 1996. See "Liquidity
and Capital Resources" below for a discussion of the use of proceeds from the
1995 Private Placement.
On April 2, 1996, the Company received $2.5 million gross proceeds (before
deduction of transaction costs including $325,000 of finder's fees and expenses)
from the sale of its 3% convertible debentures due April 1, 1998 ("Debentures")
(the "1996 Debenture Offering"). The sale was made to foreign investors pursuant
to an exemption from the registration requirements of the Securities Act of
1933, as amended. On June 14, 1996, the Company received an additional $2.5
million gross proceeds (before deduction of transaction costs, fees and
expenses) from the sale of additional Debentures. The registration statement
("Registration Statement") covering the shares issuable upon conversion of the
Debentures was declared effective on May 6, 1996. No Debentures remain
outstanding, as all have been converted into Common Stock.
Substantially all of the Company's revenues in 1988, 1989 and 1990 were
derived under the Avon Agreement. The Company's total revenues decreased from
$963,700 to $480,000 to $12,600 in the fiscal years 1989, 1990 and 1991,
respectively. This decrease is primarily attributable to the cessation of
licensing and consulting fees and of orders for related swatch packs and
Chromaticity Studies in 1990 following commencement of the Avon litigation.
Since 1990 limited revenues have been derived from licenses, leases,
service contracts and Product sales to several beauty-related businesses,
testing and laboratory fees from potential licensees evaluating the Company's
technology, and from an exclusive licensing and lease contract with IMS
Cosmetics Inc. In fiscal year 1995 and for the nine months ended September 30,
the Company generated approximately 17% and 19%, respectively, of its revenues
from IMS. From December 31, 1990 until the IPO, the Company had been primarily
engaged in (a) pursuing the Company's litigation against Avon, (b) developing
and testing further applications of the Intellectual Properties and Colormate II
Systems, such as the clinical research studies for medical applications, and (c)
obtaining additional financing to support marketing of the Company's
Intellectual Properties, systems, Products and related services. In 1991, during
the Company's pursuit of the Avon litigation, the Company negotiated the return
from Avon of 1,947 of the 2,000 Colormate II Systems originally leased to Avon.
The Company's existing Colormate II Systems were mass manufactured for Avon at a
manufacturing cost for parts of $4,600,000 (an average per unit cost for parts
of approximately $2,300) pursuant to the Avon Agreement; of such amount
$3,000,000 was applied to obtaining parts of the nonproprietary components and
$1,600,000 was applied to obtaining parts of the proprietary components of the
Colormate II System Units. However, there can be no assurance the Company will
be able to arrange for the mass manufacture of additional units at such cost,
and manufacture of limited quantities of the Colormate II System would be
significantly more expensive. The Company believes based on discussions with a
supplier of the components of its existing Colormate II System and published
price lists that the components of the Colormate II System can be purchased in
quantities of 1,000 or more at a significant discount to the individual part
price currently quoted by the suppliers, although there can be no assurance the
Company will be able to obtain such terms or order in such quantities.
The Company has applied a substantial portion of the proceeds from the 1995
Private Placement and a portion of the proceeds from the 1996 Debenture
Financing to begin implementation of its long range business plan to
commercialize its technologies for medical applications in diagnosing certain
diseases. Over the past year, the Company's Food and Drug Administration ("FDA")
and governmental regulatory consultants (in addition to legal counsel) have
developed and prepared a formal application, known as ss. 510(k) notification,
for submission to FDA requesting marketing clearance for the Company's Colormate
III(TM), a transcutaneous bilirubinometer. The Company's 510(k) notification was
filed with FDA on November 14, 1996.
8
<PAGE>
The Company is seeking FDA marketing clearance for use of the Colormate
III(TM) in the noninvasive monitoring of bilirubinemia in newborn babies. The
Company has conducted clinical trials of the Colormate III(TM)'s measurement
correlation with serum bilirubin concentration levels and clinicians' visual
estimates in babies of all races. The results of these trials, which in the
Company's opinion demonstrate a statistically significant correlation between
the Colormate III(TM)'s results and serum bilirubin concentration levels and
superior sensitivity at clinical decision levels to that of visual estimates,
have been submitted to FDA to support the 510(k) notification. Since the
Colormate III(TM) is noninvasive, the Company believes the device has the
ability to provide more frequent, enhanced clinical decision assistance without
subjecting neonates to traumatic invasive procedures. While the Company believes
that FDA will issue marketing rights to the Colormate III(TM) pursuant to its
510(k) notification, there can be no assurances that such marketing rights will
be granted by FDA. The Company is aware of competitors who have and are
marketing non-invasive procedures to measure bilirubin, and there can be no
assurance the Company will be successful in marketing the Colormate III(TM).
The Company's ability to generate revenues in the future will depend on its
success in marketing its Intellectual Properties, the related Chromaticity Study
capabilities, the Colormate II System and its Products. If such marketing is not
successful in the future, the principal effect may be a substantial write-down
of the book value of the Colormate II System Units and a substantial impairment
of the Company's capital resources and ability to obtain any future financing,
which would result in a substantial diminution in the value of an investment in
the Company. There can be no assurance the Company will be able to timely place
such units or identify alternative markets. See Notes 1 and 2 of Notes to
Financial Statements.
Results of Operations
The Company incurred net losses of $3,001,400 and $1,784,600 for the nine
month periods ended September 30, 1996 and 1995 respectively, as revenues
received have not been significant relative to the Company's expenses incurred
in implementing its business plan. The increase in such losses in the 1996
period as compared to the 1995 period is primarily attributable to the increase
in costs and expenses regarding regulatory applications, consulting fees for
proposed strategic alliances, compensation of officers, employees and
consultants, including in respect of research and development activities, patent
applications, legal fees (relating to the Company's financing activities,
regulatory applications and proposed strategic alliances) depreciation and
amortization relating principally to amortization of deferred financing costs
relating to the 1996 Debenture Financing, settlement of the Perfect Look
litigation and to the establishment of its Spokane, Washington engineering
office. These expense increases are primarily attributable to the Company
commencing implementation of its long range business plan to seek commercial
applications of its intellectual properties and technologies in the medical
field; the loss was partially offset by interest income attributable to proceeds
of the 1996 Debenture financing.
The Company estimates that research and development expenses (excluding
compensation expenses for officers, employees and long term consultants) for
fiscal 1996 will approximate $600,000 although there can be no assurance that
such expenses will not exceed that amount. Of such amount, approximately
$100,000 will be applied to completing the mass manufacture housing prototype
for the medical application of the Company's technology in the detection and
monitoring of infant jaundice and approximately $200,000 will be applied to
developing a smaller prototype version for such medical application,
approximately $100,000 will be applied to completing the hand-held, less
expensive version of the Colormate II system, approximately $100,000 will be
applied to fabricate molds for each of the foregoing prototypes, and
approximately $100,000 will be applied to the Company's ongoing research and
development efforts. There can be no assurance that such amounts will be
sufficient to accomplish completion of such projects.
A decrease in the Company's revenue from lease, license and service
contracts and the sale of cosmetics and swatch packs also contributed to the
increase in the 1996 nine month period net loss as compared to the 1995 nine
month period net loss. Such revenues decreased significantly as the Company has
begun implementation of its long range business plan for medical applications of
its technologies and during the Company's attempt to transition its business
strategy from selling its Products directly through commissioned sales
representatives to selling its Products through third party distributors (which
third party distribution has not yet effectively commenced). The Company has
also conducted and continues to conduct market studies and pilot tests (and
incur related additional expenses) in connection with the Company's marketing
efforts. The Company believes that sales in the 1996 nine month period were also
adversely affected by ongoing delays in manufacturing certain color shades of
the Company's
9
<PAGE>
new line of cosmetic products for its Colormate II system (which delays were
attributable to finalizing color formulations). The Company anticipates the new
cosmetics will be ready to ship in the first quarter of 1997 although there can
be no assurance of this.
Litigation - In May 1994, the Company entered into a five year
distributorship agreement beginning in July 1994 with Perfect Look Distribution,
Ltd. under which Perfect Look was to act through June 1996 as the exclusive
distributor (subject to certain exceptions) in the United Kingdom of the
Company's Colormate II System units and Products. On January 10, 1995, the
Company sued Perfect Look and its two principals (collectively "Perfect Look")
in New York State Supreme Court for breach of contract, seeking monetary damages
and injunctive relief. On September 26, 1996, the parties entered into a
Settlement Agreement whereby the Company received $7,513.00 and three Colormate
II units and related materials were returned to the Company. In connection with
the settlement of the Perfect Look litigation, the remaining escrow balance
recorded by the Company of $132,000 was eliminated, representing the $132,000
change in the income statement (the "Legal Settlement").
The Company receives payments from licensees, distributors or other sources
at various times during the year. Accordingly, these payments have had, and
payments that may be received in the future will have, a significant impact on
quarter-to-quarter comparisons inasmuch as the Company has not developed stable
sources of repeat revenues.
The Company anticipates that it will continue to incur substantial and
increasing net losses for the foreseeable future as increased expenses are
incurred in implementing its long-range business plan for medical applications
of its technologies and as revenues from the Company's existing activities in
the cosmetics, beauty aid and fashion areas are anticipated to continue to be
insignificant relative to its anticipated expenses in the foreseeable future.
Liquidity and Capital Resources
Assets increased by $4,640,900 in the first three quarters of 1996 as
compared to fiscal 1995. This increase is primarily attributed to an increase in
cash and cash equivalents attributable to the 1996 Debenture Financing and from
cash received from the exercise of the Company's publicly traded warrants.
Current liabilities increased by $286,900 in the first three quarters of 1996
compared to the comparable period in 1995, primarily attributable to increased
accounts payable to attorneys, accountants and consultants in connection with
the Company's financing, regulatory and strategic activities and consultants'
compensation for research and development.
As indicated in the Company's Statements of Cash Flows, the Company
continued to experience significant negative net cash flows from operating and
investing activities in the quarter ended September 30, 1996. The 1996 increase
in cash outflows from operating activities is primarily attributable to the
increase in the Company's net loss. Cash flows from financing activities during
the first three quarters of 1996 principally represent the receipt of $5,000,000
proceeds from the issuance of the Debentures, $3,028,300 from the exercise of
Warrants and certain of the Company's outstanding options and $260,600 of "short
swing" profits paid to the Company in accordance with the Securities Exchange
Act of 1934; cash flow from financing activities in the 1995 period primarily
reflects the 1995 Private Placement proceeds. In addition, in the quarter ended
September 30, 1996, the Company received $25,000 from the exercise of warrants
granted to the Placement Agent of the 1995 Private Placement.
The Company has applied a substantial portion of the proceeds from the 1995
Private Placement and a portion of the proceeds from the 1996 Debenture
Financing to begin implementation of its long range business plan to
commercialize its technologies for medical applications in diagnosing certain
diseases.
10
<PAGE>
In addition, the Company has applied such proceeds to the development of a mass
manufacture prototype for medical applications and development of a mass
manufacture prototype for hand-held Colormate II System Unit, salaries of new
personnel including a new president, salespersons and support staff marketing
expenses, working capital, additional prototype research and development and to
fund ongoing operations.
Management believes that if its proposed marketing plans for nonmedical
applications of its technology are successful, then it will generate revenues
from fees from the licensing of the Intellectual Properties and leasing of the
Colormate II System Units, sales of swatch packs, consulting fees, and sales of
cosmetics, although there can be no prediction or assurance as to which or
whether any of these potential revenue sources will be successful. Since
consummation of the IPO, the Company has commenced expanded marketing of its
Intellectual Properties, Products and Colormate II Systems in the beauty aid
industry; but to date immaterial revenues from such marketing have been
realized. In 1995 and for the first nine months of 1996 such licensing, leasing
and sales yielded an immaterial level of sales revenue, primarily because the
Company devoted its resources primarily to the Bilirubin Project. The Company
anticipates that initial penetration of the medical marketplace will be through
the use of specialized distributors, rather than a direct sales force.
If the Company is able to profitably market its Intellectual Properties,
Colormate II System and Products, the Company would use any cash flow obtained
from operations, and may seek additional debt or equity financing, to further
support and expand its operations. There can be no assurance that the Company
will not require additional funding. If the Company has not been able to attract
additional future financing at such point in time and/or successfully market its
products and technologies, it may have to cease operations.
11
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Litigation -- In May 1994, the Company entered into a five year
distributorship agreement beginning in July 1994 with Perfect Look under
which Perfect Look was to act through June 1996 as the exclusive
distributor (subject to certain exceptions) in the United Kingdom of the
Company's Colormate II System units and Products. On January 10, 1995, the
Company sued Perfect Look in New York State Supreme Court for breach of
contract, seeking monetary damages and injunctive relief. On September 26,
1996, the parties entered into a Settlement Agreement whereby the Company
received $7,513.00 and was three Colormate II units and related materials
were returned to the Company.
Item 2. Changes in Securities
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
(a) 15 - Letter on unaudited interim financial information
(b) Reports on Form 8-K
None
12
<PAGE>
EXHIBIT INDEX
Exhibit No. Document Page
----------- -------- ----
15 Letter on Unaudited Interim Financial Information 15
27 Financial Data Schedule 16
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
Date: November 11, 1996 /s/ Darby S. Macfarlane
-----------------------
Darby S. Macfarlane
Chief Executive Officer
Date: November 11, 1996 /s/Leslie Foglesong
-----------------------
Leslie Foglesong
Treasurer and Chief Financial and
Principal Accounting Officer
14
<PAGE>
Exhibit No. 15
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
We have reviewed the consolidated balance sheet of Chromatics Color Sciences
International, Inc. and subsidiary as of September 30, 1996 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the nine-month periods ended September 30, 1996 and 1995. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the year then ended, and in our report dated February 15,
1996, we expressed an unqualified opinion on those consolidated financial
statements, indicating that the financial statements were prepared on a going
concern basis that might not be appropriate due to significant operating losses.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1995, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
WISS & COMPANY, LLP
Livingston, New Jersey
October 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 6,513,100
<SECURITIES> 0
<RECEIVABLES> 242,100
<ALLOWANCES> (10,000)
<INVENTORY> 323,600
<CURRENT-ASSETS> 7,174,400
<PP&E> 1,141,500
<DEPRECIATION> (160,900)
<TOTAL-ASSETS> 8,186,000
<CURRENT-LIABILITIES> 876,600
<BONDS> 0
13,800
0
<COMMON> 7,100
<OTHER-SE> 7,288,500
<TOTAL-LIABILITY-AND-EQUITY> 8,186,000
<SALES> 100
<TOTAL-REVENUES> 217,900
<CGS> 0
<TOTAL-COSTS> 0<F2>
<OTHER-EXPENSES> 3,160,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,000
<INCOME-PRETAX> (3,001,400)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,001,400)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> 0 <F1>
<FN>
<F1> Effect would be antidilutive
<F2> Amounts are not material
</FN>
</TABLE>
