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 June 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
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
5 East 80th Street, New York, New York 10021
(Address of principal executive offices)
(212) 717-6544
(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: 6,275,524
Warrants: 2,951,215
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 7,359,800 $ 1,827,400
Accounts receivable, less allowance for doubtful accounts of $17,900
in 1996 and 1995 376,200 315,700
Inventories 324,000 291,600
Prepaid expenses 164,900 98,800
------------- -------------
Total Current Assets 8,224,900 2,533,500
COLORMATE II UNITS, LESS ACCUMULATED
DEPRECIATION OF $21,400 (1996) AND $16,800 (1995) 678,600 683,200
PROPERTY AND EQUIPMENT, AT COST LESS ACCUMULATED
DEPRECIATION OF $119,500 (1996) AND $86,900 (1995) 292,400 210,600
DEFERRED FINANCING COSTS, LESS ACCUMULATED
AMORTIZATION OF $92,500 (1996) 699,900 --
OTHER ASSETS 33,700 62,600
------------- -------------
$ 9,929,500 $ 3,489,900
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - collaterized by equipment $ 4,700 $ 4,400
Notes payable to related party 341,700 341,700
Accounts payable and accrued expenses:
Attorneys and Accountants 285,100 107,400
Consultants 8,800 10,100
Trade 155,200 120,100
Security deposits 6,000 6,000
------------- -------------
Total Current Liabilities 801,500 589,700
------------- -------------
LONG TERM DEBT:
Notes payable - collateralized by equipment 7,600 10,000
Debentures payable 4,375,000 --
------------- -------------
4,382,600 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 - 5,365,252 (1996)
and 4,661,936 (1995) shares 5,400 4,700
Capital in excess of par value 11,556,300 7,864,700
Accumulated deficit (6,830,100) (4,993,000)
------------- -------------
Total Stockholders' Equity 4,731,600 2,876,400
------------- -------------
$ 9,929,500 $ 3,489,900
============= =============
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Lease, license and service contracts $ 28,200 $ 33,500 $ 64,600 $ 87,200
Sale of cosmetics and fashion swatch packs (600) 400 (500) 1,000
Interest income 50,700 31,300 69,000 51,500
------------ ------------ ------------ ------------
78,300 65,200 133,100 139,700
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Costs of cosmetics and fashion swatch packs 100 300 100 900
Research and Development costs:
Compensation of officers and employees 125,800 80,600 250,800 125,500
Compensation of consultants 89,800 80,400 192,900 152,900
Other 500 2,300 2,700 6,400
Selling and Other:
Compensation of officers and employees 188,300 138,900 380,000 227,800
Compensation of consultants 55,000 67,700 99,700 137,100
Legal fees 100,600 57,900 224,100 125,400
Accounting fees 21,900 4,800 40,000 27,200
Patent application costs 61,900 39,600 83,000 50,400
Rent and storage 53,300 48,600 111,000 82,600
Other:
Insurance 44,700 47,200 96,400 75,400
Travel & Entertainment 30,700 21,900 51,900 36,000
Payroll taxes 17,700 18,800 50,300 29,500
Stock registration fees 35,000 9,600 42,600 19,400
Depreciation and amortization 114,700 11,200 132,000 21,800
General and administrative 73,400 75,600 139,300 144,400
Repairs and maintenance 29,600 -- 56,700 --
Interest 9,700 7,400 16,700 14,900
Gain on sale of asset -- (400) -- (400)
------------ ------------ ------------ ------------
1,052,700 712,400 1,970,200 1,277,200
------------ ------------ ------------ ------------
NET LOSS $ (974,400) $ (647,200) $ (1,837,100) $ (1,137,500)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND EQUIVALENT
OUTSTANDING 4,908,234 4,125,400 5,006,591 3,801,700
============ ============ ============ ============
NET LOSS PER SHARE $ (0.20) $ (0.16) $ (0.37) $ (0.30)
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
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 $ 7,864,700 $ (4,993,000)
Six Months Ended June 30, 1996:
Net Loss -- -- -- (1,837,100)
Exercise of options to purchase 65,000
shares at $2.50 per share 65,000 -- 162,500 --
Exercise of options to purchase 20,000
shares at $2.25 per share 20,000 -- 45,000 --
Exercise of warrants to purchase 75,000
shares at $2.50 per share 75,000 100 187,400 --
Exercise of warrants to purchase 343,785
shares at $5.00 per share 343,785 400 1,718,400 --
Exercise of warrants to purchase 115,000
shares at $6.00 per share 115,000 100 690,000 --
Exercise of convertible debentures to
purchase 84,232 shares at
$7.42 per share 84,232 100 624,900 --
Exercise of convertible debentures to
purchase 299 shares at $9.28 per share 299 -- 2,800 --
Gain on account of "short swing" profit rules
under Section 16 of the Securities
Exchange Act of 1934 -- -- 260,600 --
------------- -------------- ------------- --------------
Balances, June 30, 1996 5,365,252 $ 5,400 $ 11,556,300 $ (6,830,100)
============= ============== ============= ==============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (1,837,100) $ (1,137,500)
Adjustments to Reconcile Net Loss to Net
Cash Flows From Operating Activities:
Depreciation and Amortization 132,000 21,800
Gains on Sale of Equipment -- (400)
Stock Issuance in Lieu of Interest Payments 2,700 --
Changes in Operating Assets and Liabilities:
Accounts Receivable (60,500) (80,800)
Inventories (32,400) (10,700)
Prepaid Expenses and Other Assets (66,100) 44,100
Other Assets 30,100 (22,900)
Accounts payable and Accrued Expenses 208,000 (154,900)
---------- ----------
Net Cash Flows From Operating Activities (1,623,300) (1,341,300)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of Property and Equipment -- 200
Purchases of Property and Equipment (114,300) (29,000)
---------- ----------
Net Cash Flows From Investing Activities (114,300) (28,800)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds From Issuance of Convertible Debentures 5,000,000 --
Proceeds From Exercise of Options 207,500 --
Proceeds From Exercise of Warrants 2,596,400 --
Short Swing Profits 260,600 --
Proceeds From Issuance of Common Stock Net of
Related costs -- 3,864,100
Payments of Notes Payable and Net Advances
From Related Parties -- (85,000)
Deferred Financing Costs (792,400) --
Notes Payable - Collateralized by Equipment (2,100) (1,900)
---------- ----------
Net Cash Flows From Financing Activities 7,270,000 3,777,200
---------- ----------
NET CHANGE IN CASH AND EQUIVALENTS 5,532,400 2,407,100
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD 1,827,400 858,300
---------- ----------
CASH AND EQUIVALENTS, END OF PERIOD $7,359,800 $3,265,400
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ 16,700 $ 1,044
========== ==========
Income Taxes Paid $ 16,141 $ --
========== ==========
SUPPLEMENTAL NON-CASH FLOW
INFORMATION
Loan From Officer Offset Against Due From
Officer -- $ 21,300
========== ==========
Deferred Offering Costs Offset to Additional Paid
in Capital -- $ 111,800
========== ==========
CONVERSION OF OUTSTANDING DEBT TO
COMMON STOCK $ 625,000 $ --
========== ==========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
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
depends upon the Company's future marketing success. The Company
expects to license its patents and
5
<PAGE>
Note 2 -- Commitments and Contingencies (continued):
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.
Litigation - In May 1994, the Company entered into a five year
distributorship agreement beginning in July 1994 with Perfect Look
Distribution, Ltd., ("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; thereafter the arrangement is non-exclusive
although the Company has agreed not to grant other distributors terms
more favorable than those provided to Perfect Look. 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. The
parties have discussed settlement of such litigation on a sporadic
basis. Perfect Look's minimum purchase obligations under the contract
are guaranteed by a principal of Perfect Look, which guarantee is
secured by a $150,000 cash escrow. Revenues from lease, license and
service contracts and accounts receivable for the six months ended and
as at June 30, 1996 include recognition of $30,000 of amounts held in
escrow to which the Company believes it is entitled. There can be no
assurances that the Company will actually receive the amount held in
escrow to which it believes it is entitled, that any settlement will be
entered into or that if it is that the Company will receive additional
revenue from Perfect Look in the future, that the Company will be
successful in its litigation against Perfect Look if no settlement is
reached, or that Perfect Look will not bring litigation against the
Company in respect of Perfect Look's alleged claims against the
Company.
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. See Note 2 of Notes to
Financial Statements. 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,
6
<PAGE>
Note 2 -- Commitments and Contingencies (continued):
which were then three years old. No valuation of the Proprietary
portion of the units or of the 247 unusable units was performed.
Note 3 -- Convertible Debentures:
In 1996, the Company received $5 million gross proceeds (before
deduction of transaction costs including finder's fees and expenses)
from the sale of its 3% convertible debentures due April 1, 1998
("Debentures"). The sale was made to foreign investors pursuant to an
exemption from the registration requirements of the Securities Act of
1933, as amended.
The Debentures are convertible in $250,000 increments into Common Stock
at any time prior to April 1, 1998. The conversion price per share is
equal to 80% of the average of the closing bid prices of the Common
Stock as reported by NASDAQ over the five consecutive trading days
ending on the trading day immediately preceding the date the Company
receives the Debenture for conversion provided, (i) the conversion
price per share with respect to the shares issuable upon conversion of
the first $2.5 million of Debentures will not exceed $9.00 per share
and (ii) the conversion price per share with respect to the shares
issuable upon conversion of the second $2.5 million of Debentures, if
any, will not exceed $12.275 per share (pursuant to a formula which set
the price as the greater of $9.00 or the average of the closing bid
prices of the Common Stock as reported by NASDAQ over the five
consecutive trading days ending immediately prior to the effective date
of the Registration Statement). If the holders of the Debentures have
not effected conversion thereof into Common Stock by September 30,
1996, the Company can force conversion on notice to the holders thereof
and thereafter the Debentures will be void and reflect only the right
to receive such Common Stock upon conversion.
The Company has filed a registration statement covering the shares
issuable upon conversion of the Debentures, which registration
statement was declared effective on May 6, 1996. During the quarter
ended June 30, 1996, $625,000 of Debentures were converted into 84,232
shares of Common Stock at a conversion price of $7.42 per share and an
additional 299 shares were issued in respect of accrued interest at a
conversion price of $9.28. In addition, subsequent to the end of such
quarter and prior to August 7, 1996, $1,000,000 of Debentures were
converted into 364,964 shares of Common Stock at a conversion price of
$2.74 per share and an additional 2,214 shares were issued in respect
of accrued interest at a conversion price of $3.425, $1,000,000 of
Debentures were converted into 367,648 shares of Common Stock at a
conversion price of $2.72 per share and an additional 2,055 were issued
in respect of accrued interest at a conversion price of $3.40 and
$375,000 of Debentures were converted into 132,979 shares at a
conversion price of $2.82 per share an additional 428 shares were
issued in respect of accrued interest at a conversion price of $3.525.
An "Event of Default" under the Debentures is defined as (i) default in
the payment of principal or interest on the Debentures not cured for
five business days (ii) material misrepresentations in connection with
the Debentures and the related Subscription Agreement (iii) material
breach of the Company's obligations under the Debentures and/or
Subscription Agreement which remain uncured for five business days
following notice thereof (iv) the Company shall make an assignment for
the benefit of creditors or the Company shall apply for or consent to
the appointment of a trustee or liquidator or a trustee or liquidator
shall be appointed and not discharged in 60 days (v) the Company shall
initiate bankruptcy, reorganization, liquidation or insolvency
proceedings (or such proceeding brought against the Company is not
dismissed in 60 days) (vi) the Common Stock shall be delisted by or
suspended from trading on NASDAQ, and not relisted or restored to
trading within 15 days (vii) the Company shall default on the payment
of any material indebtedness for borrowed money beyond any applicable
grace period (viii) a judgment in excess of $100,000 is rendered
against the Company and not dismissed, bonded, stayed or discharged
within 30 days or (ix) the Company shall be a party to a merger or
consolidation in which it is not the surviving party or shall dispose
of all or substantially all of its assets or redeem more than a de
minimis amount of its outstanding shares of capital stock.
7
<PAGE>
Note 3 -- Convertible Debentures: (continued):
Upon an Event of Default, the holders of the Debentures may demand
immediate payment thereof in an amount equal to the product of (x) the
aggregate number of shares of Common Stock into which the Debenture is
convertible as of the date of such Event of Default and (y) the market
price (as that term is defined in the Debentures and which shall not
exceed $23.00 per share) of the Common Stock. In the event the Company
becomes obligated to effect such payment following an Event of Default,
the Company may not have sufficient funds to make such payment, and if
it is unable to raise such funds, will be forced to cease operations
and seek protection from its liabilities under applicable bankruptcy
laws.
Note 4 - Subsequent Events
In August 1996, the Company received $25,000 from the exercise of
warrants granted to the Placement Agent of the 1995 Private Placement.
Additionally, as of August 6, 1996, $3,000,000 of Debentures had been
converted into 954,819 shares of common stock.
8
<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.
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 individual applications for its technologies, impact of competition,
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 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").
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 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 which ultimate recoverability depends
on the Company's future marketing success. See Note 1 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 (which has generated gross
proceeds of $4,500,000, and net proceeds of $3,729,800) and (vii) the 1996
Debenture Offering described below. During the six months ended June 30, 1996,
the Company received an aggregate of $2,596,400 from exercise of its publicly
traded warrants and other warrants and $207,500 from the exercise of stock
options. In August 1996, the Company received $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
9
<PAGE>
warrant ("Warrant"), each Warrant entitling the holder thereof to purchase one
share of Common Stock for $5.00 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. 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 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.
The Debentures are convertible in $250,000 increments into Common Stock
at any time prior to April 1, 1998. The conversion price per share is equal to
80% of the average of the closing bid prices of the Common Stock as reported by
NASDAQ over the five consecutive trading days ending on the trading day
immediately preceding the date the Company receives the Debenture for conversion
provided, however, that (i) the conversion price per share with respect to the
shares issuable upon conversion of the first $2.5 million of Debentures will not
exceed $9.00 per share and (ii) the conversion price per share with respect to
the shares issuable upon conversion of the second $2.5 million of Debentures, if
any, will not exceed $12.275 per share (pursuant to a formula which set the
price as the greater of $9.00 or the average of the closing bid prices of the
Common Stock as reported by NASDAQ over the five consecutive trading days ending
immediately prior to the effective date of the Registration Statement). If the
holders of the Debentures have not effected conversion thereof into Common Stock
by September 30, 1996, the Company can force conversion on notice to the holders
thereof and thereafter the Debentures will be void and reflect only the right to
receive such Common Stock upon conversion. As of August 6, 1996, $3,000,000 of
Debentures had been converted into 954,819 shares of common stock.
An "Event of Default" under the Debentures is defined as (i) default in
the payment of principal or interest on the Debentures uncured for five business
days (ii) material misrepresentations in connection with the Debentures and the
related Subscription Agreement (iii) material breach of the Company's
obligations under the Debentures and/or Subscription Agreement which remain
uncured for five business days following notice thereof (iv) the Company shall
make an assignment for the benefit of creditors or the Company shall apply for
or consent to the appointment of a trustee or liquidator, or a trustee or
liquidator shall be appointed and not discharged within 60 days (v) the Company
shall initiate bankruptcy, reorganization, liquidation or insolvency proceedings
(or such proceeding brought against the Company is not dismissed within 60 days)
(vi) the Common Stock shall be delisted by or suspended from trading on NASDAQ,
and not relisted or restored to trading within 15 days (vii) the Company shall
default on the payment of any material indebtedness for borrowed money beyond
any applicable grace period (viii) a judgment in excess of $100,000 is rendered
against the Company and not dismissed, bonded, stayed or discharged within 30
days, or (x) the Company shall be a party to a merger or consolidation in which
it is not the surviving party or shall dispose of all or substantially all of
its assets or redeem more than a de minimis amount of its outstanding shares of
capital stock.
Upon an Event of Default, the holders of the Debentures may demand
immediate payment thereof in an amount equal the product of (x) the aggregate
number of shares of Common Stock into which the Debenture is convertible as of
the date of such Event of Default and (y) the market price of the Common Stock.
In the event the Company becomes obligated to effect such payment following an
Event of Default, the Company will not have
10
<PAGE>
sufficient funds to make such payment, and if it is unable to raise such funds,
will be forced to cease operations and seek protection from its liabilities
under applicable bankruptcy laws.
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 six months ended June 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'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 $974,400 and $647,300 for the six
month periods ended June 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 compensation of officers and employees,
compensation of consultants for research and development activities, patent
applications, legal and accounting fees (relating to the Company's financing
activities and a proposed acquisition transaction) depreciation and amortization
relating principally to amortization of deferred financing costs relating to the
1996 Debenture Financing 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 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
11
<PAGE>
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 $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, $100,000 will be
applied to fabricate molds for each of the foregoing prototypes, and $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 net loss as compared to the 1995 net loss. Revenues from
the sale of the Company's products has decreased significantly 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), and as the Company has begun implementation of its long
range business plan for medical applications of its technologies. 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 period were also adversely
affected by ongoing delays in manufacturing certain color shades of the
Company's 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 fourth quarter of
1996 although there can be no assurance of this. In the quarter ended June 30,
1996, revenues from lease, license and service contracts includes $12,000
recognized from amounts held in escrow for the Company's benefit under its
arrangements with Perfect Look Distribution, Ltd. Approximately 31% and 22.5% of
the Company's revenues in fiscal 1995 and for the first two quarters of 1996
were attributable to recognition of such escrow funds. There can be no assurance
that the Company will actually receive any of the funds held in escrow. See Note
2 of notes to Financial Statements for a discussion of the Company's litigation
with Perfect Look.
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 $6,439,600 in the first two 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 its publicly traded warrants. Current
liabilities increased by $211,800 in the first two quarters of 1996 compared to
fiscal 1995, primarily attributable to increased accounts payable to attorneys
and accountants in connection with the Company's financing activities and
consultants' compensation for research and development. Long term debt increased
by $4,375,000, substantially all of which reflects the 1996 Debenture Financing.
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 June 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 quarter ended June 30, 1996 principally represent the receipt of $5,000,000
proceeds from the issuance of the Debentures, $2,106,800 from the exercise of
Warrants and certain of the Company's outstanding options and $177,000 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,
12
<PAGE>
in August 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 of the
1995 Private Placement to begin implementation of its long-range business plan
for commercialization of its technologies for medical applications in diagnosing
certain diseases. In this regard, the Company has hired FDA and governmental
regulatory consultants (in addition to legal counsel) to assist in obtaining
hospital and regulatory clearances for such medical applications and is
currently compiling its applications for FDA clearance and foreign regulatory
approvals of commercial use of its technology for the diagnosis and monitoring
of Bilirubin disease. 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
non-medical 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 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 six 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 accomplished through the
use of specialized distributors, rather than a direct sales force.
Without giving effect to the proceeds of the 1996 Debenture Offering,
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. 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.
The Company does not anticipate that the principal amount of the
Debentures or interest thereon will have any material adverse impact on its
financial condition, inasmuch as the Company expects, pursuant to the terms of
the transaction, that such Debentures (and interest) will be converted to Common
Stock prior to the maturity date of the Debentures. However, upon an Event of
Default under the Debentures (see "Overview" for a list of such Events of
Default) the holders thereof may demand immediate payment in an amount equal the
product of (x) the aggregate number of shares of Common Stock into which the
Debenture is convertible as of the date of such Event of Default and (y) the
market price of the Common Stock. In the event the Company becomes obligated to
effect such payment following an Event of Default, the Company will not have
sufficient funds to make such payment, and if it is unable to raise such funds
will be forced to cease operations and seek protection from its liabilities
under applicable bankruptcy laws.
13
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Litigation -- The Company entered into a distribution agreement on May
6, 1994 with Perfect Look Distributors, Ltd. relating to leasing the
Company's Colormate II System units and distributing the Company's
Products in the United Kingdom. On January 10, 1995, the Company sued
Perfect Look Distributors, Ltd. and two of its principals (collectively
"Perfect Look") in New York State Supreme Court for breach of contract,
seeking monetary damages and injunctive relief. The parties have
discussed settlement of such litigation on a sporadic basis. There can
be no assurances any settlement will be entered into or that if a
settlement is reached that the Company will receive additional revenue
from Perfect Look in the future, that the Company will be successful in
its litigation against Perfect Look if no settlement is reached, or
that Perfect Look will not bring litigation against the Company in
respect of Perfect Look's alleged claims against 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
The Company's Annual Meeting, having been adjourned on May 20, 1996 was
held on May 31, 1996. At that meeting, Darby S. Macfarlane, David
Kenneth Macfarlane and Leslie Foglesong were elected to serve as
directors of the Company. The results of the vote were:
For Against Withhold
--- ------- --------
Darby S. Macfarlane 3,961,081 0 0
David Kenneth MacFarlane 3,961,081 0 0
Leslie Foglesong 3,961,081 0 0
A vote was also held for an increase in the number of shares subject to
the Company's Stock Option Plan from 1,000,000 to 2,000,000. The
results of the vote were:
For Against Abstain Not Voted
--- ------- ------- ---------
3,661,657 188,001 5,600 105,823
A vote was also held to amend the Company's Certificate of
Incorporation to authorize (a) an increase in the number of authorized
shares of Common Stock from 25,000,000 to 50,000,000; (b) an increase
in the number of authorized shares of Preferred Stock from 1,400,000 to
11,400,000; and (c) the designation of such additional 10,000,000
shares of Preferred Stock as Class B Preferred Stock. The results of
the vote were:
For Against Abstain Not Voted
--- ------- ------- ---------
3,689,512 165,246 500 105,823
14
<PAGE>
A vote was also held to ratify the selection of Wiss & Company, LLP as
auditors for the year ending December 31, 1996. The results of the vote
were:
For Against Abstain
--- ------- -------
3,933,681 21,900 5,500
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
The Company's Current Reports on Form 8-K dated April 9, 1996
and May 14, 1996 heretofore filed by the Company with the
Commission, are incorporated by reference in this Form 10-QSB.
15
<PAGE>
EXHIBIT INDEX
Exhibit No. Document Page
15 Letter on Unaudited Interim Financial Information 17
27 Financial Data Schedule 18
16
<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: August 12, 1996 /s/ Darby S. Macfarlane
-----------------------
Darby S. Macfarlane
Chief Executive Officer
Date: August 12, 1996 /s/Leslie Foglesong
---------------------------------
Leslie Foglesong
Treasurer and Chief Financial and
Principal Accounting Officer
17
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 June 30, 1996 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the six-month periods ended June 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
July 25, 1996
18
<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> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,359,800
<SECURITIES> 0
<RECEIVABLES> 394,100
<ALLOWANCES> (17,900)
<INVENTORY> 324,000
<CURRENT-ASSETS> 8,224,900
<PP&E> 1,111,900
<DEPRECIATION> (140,900)
<TOTAL-ASSETS> 9,929,500
<CURRENT-LIABILITIES> 801,500
<BONDS> 4,375,000
13,800
0
<COMMON> 5,400
<OTHER-SE> 4,726,200
<TOTAL-LIABILITY-AND-EQUITY> 9,929,500
<SALES> (500)
<TOTAL-REVENUES> 133,100
<CGS> 0
<TOTAL-COSTS> 1,953,500
<OTHER-EXPENSES> 1,953,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,700
<INCOME-PRETAX> (1,837,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,837,100)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> 0
<FN>
<F1> Offer should be antidilutive
<F2> Amounts are not material
</TABLE>
