<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number 0-21168
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
---------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 13-3253392
-------------------
(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
--------------
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
court. Yes / / No / / N/A
APPLICABLE ONLY TO CORPORATE ISSUERS:
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 15,535,481.
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q/A amends and restates in its entirety the
text of (i) Items 1 and 2 of Part I - Financial Information and (ii) Item 6 of
Part II - Other Information of the Company's Quarterly Report on Form 10-Q for
the third quarter ended September 30, 1999 which was filed with the Securities
and Exchange Commission on November 16, 1999.
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited) (Note 1)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $5,113,200 $3,929,800
Accounts receivable 253,200 92,300
Inventories 1,645,800 147,300
Prepaid expenses and other assets 50,400 81,800
---------- ----------
Total Current Assets 7,062,600 4,251,200
COLORMATE(Registered) UNITS -- 1,820,100
PROPERTY AND EQUIPMENT, NET 649,500 301,700
SOFTWARE DEVELOPMENT COSTS, NET 575,100 546,000
PATENT COSTS, NET 873,900 540,300
OTHER ASSETS 1,145,600 418,900
----------- ----------
$10,306,700 $7,878,200
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts payable to related party $ 279,500 $ 318,900
Accounts payable and accrued expenses:
Attorneys and accountants 209,400 673,000
Consultants 83,600 146,500
Trade 87,000 156,800
----------- ----------
Total Current Liabilities 659,500 1,295,200
----------- ----------
LONG TERM DEBT:
Accrued interest on senior convertible debentures 320,800 --
Senior convertible debentures 3,450,800 --
----------- ----------
3,771,600 --
----------- ----------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Class A, Par Value $.01 per share:
Authorized - 1,400,000 shares
Issued and outstanding - 1,380,000 shares
at par value and redemption value 13,800 13,800
Class B, Series 2 Convertible Preferred Stock, No Par
Value:
Authorized - 10,000,000 shares
Issued and outstanding - 40,000 shares in 1999
$115 redemption value 2,797,300 --
----------- ----------
</TABLE>
2
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<TABLE>
<S> <C> <C>
2,811,100 13,800
SHAREHOLDERS' EQUITY
Common Stock, par value $.001 per share:
Authorized - 50,000,000 shares
Issued and outstanding - 15,535,481 (1999)
and 15,452,442 (1998) shares 15,500 15,400
Capital in excess of par value 33,939,300 28,327,000
Accumulated deficit (30,890,300) (21,773,200)
----------- -----------
Total Shareholders' Equity 3,064,500 6,569,200
----------- -----------
$10,306,700 $ 7,878,200
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Sales $ 362,100 $ 46,200 $ 362,700 $ 46,400
Interest income 73,700 88,000 157,400 312,800
----------- ----------- ----------- -----------
435,800 134,200 520,100 359,200
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales 46,300 -- 46,300 --
Medical regulatory expenses 494,800 202,100 968,100 1,032,500
Patent application costs 35,100 59,000 83,000 186,300
Research and development costs 229,200 160,600 658,500 520,500
Compensation costs relating to options
granted to consultants (non cash) 248,000 197,400 736,000 615,400
Sales, marketing and promotion costs 568,400 310,100 1,794,500 715,300
General and administrative:
Compensation - Officers and employees 177,800 154,600 563,900 571,400
Consultants 78,400 71,500 229,400 193,500
Legal fees 205,700 401,800 757,800 730,000
Accounting fees 8,200 7,500 55,300 39,800
Rent and storage 74,000 72,200 222,400 192,300
Insurance 90,100 57,300 210,500 136,700
Travel and entertainment 68,600 19,600 85,100 74,700
Repairs and maintenance 30,500 38,500 86,200 64,000
Depreciation and amortization 138,800 28,500 196,700 103,000
Payroll taxes 11,300 10,500 44,300 45,400
Stock administrative fees 37,100 6,900 80,800 58,300
Employee benefit plan 0 24,300 1,700 131,500
Public relations 49,800 150,700 150,800 150,700
Other 65,800 59,700 222,400 154,500
Interest and financing costs (primarily non-cash) 923,700 7,200 2,443,500 20,500
----------- ----------- ----------- -----------
3,581,600 2,040,000 9,637,200 5,736,300
----------- ----------- ----------- -----------
NET LOSS $(3,145,800) $(1,905,800) $(9,117,100) $(5,377,100)
=========== =========== ============= ===========
NET LOSS TO COMMON STOCKHOLDERS:
NET LOSS $(3,145,800) $(1,905,800) $(9,117,100) $(5,377,100)
DEEMED DIVIDEND FOR CLASS B, SERIES 2
CONVERTIBLE PREFERRED STOCK 66,300 1,341,300
----------- -----------
NET LOSS TO COMMON STOCKHOLDERS $(3,212,100) $(1,905,800) $(10,458,400) $(5,377,100)
=========== =========== ============ ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 15,499,299 15,315,530 15,498,360 14,815,017
=========== =========== ============ ===========
BASIC AND DILUTED LOSS PER SHARE $(0.21) $(0.12) $(0.67) $(0.36)
====== ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements
4
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------
Number of Capital
Shares in Excess Accumulated
Outstanding Par Value of Par Value Deficit
----------- --------- ------------ -------
<S> <C> <C> <C> <C>
Balances, December 31, 1998 15,452,442 $15,400 $28,327,000 $(21,773,200)
Nine Months Ended September 30, 1999:
Net Loss -- -- -- (9,117,100)
Exercise of stock options and
warrants 83,039 100 371,200 --
Original issue discount on senior
convertible debentures (below
market conversion price) 3,575,000
Original issue discount on Class B,
convertible preferred stock
(warrants and below market
conversion price) 2,271,400
Deemed dividend on Class B,
convertible preferred stock (1,341,300)
Compensation cost relating to options
granted to consultants -- -- 736,000 --
----------- ------- ----------- ------------
Balances, September 30, 1999 15,535,481 $15,500 $33,939,300 $(30,890,300)
=========== ======= =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(9,117,100) $(5,377,100)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization 196,700 103,000
Compensation cost relating to options granted to consultants 736,000 615,400
Non-cash interest and financing costs 2,052,900 --
Changes in operating assets and liabilities:
Accounts receivable (246,200) --
Inventories (684,400) (200)
Prepaid expenses and other assets 31,400 10,900
Other assets (60,400) 8,600
Accounts payable and accrued expenses (190,200) 166,000
---------- ----------
Net cash flows from operating activities (7,281,300) (4,473,400)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs (81,400) (269,900)
Capitalized patent costs (355,500) (343,000)
Purchase of property and equipment (157,700) (72,500)
Purchase of ColorMate(Registered) Units and deposits thereon -- (830,800)
---------- ----------
Net cash flows from investing activities (594,600) (1,516,200)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of related costs 371,300 3,016,500
Proceeds (payments) of amounts payable to related party (39,400) 19,100
Proceeds from senior convertible debentures 5,000,000 --
Net proceeds from the issuance of preferred stock and warrants, net of costs 3,727,400 --
Payments of notes payable -- (3,700)
---------- ----------
Net cash flows from financing activities 9,059,300 3,031,900
---------- ----------
NET CHANGE IN CASH AND EQUIVALENTS 1,183,400 (2,957,700)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 3,929,800 9,225,400
---------- ----------
CASH AND EQUIVALENTS, END OF PERIOD $5,113,200 $6,267,700
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $59,000 $1,400
=======
Reclassification of ColorMate(Registered Trademark) Units $671,700 --
========
</TABLE>
See accompanying notes to consolidated financial statements
6
<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 Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and is presented for comparative purposes. All other financial
statements are unaudited. In the opinion of management, all adjustments, which
include only normal recurring adjustments necessary to present fairly the
financial position, results of operations and changes in cash flows, for all
periods presented have been made. The results of operations for interim periods
are not necessarily indicative of the operating results for the full year.
Footnotes - Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted in accordance with the published rules and regulations of the
Securities and Exchange Commission. These consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
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. Estimates relate primarily to inventory
valuation and recoverability of the Company's tangible and intangible assets.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Note 2 - Commitments and Contingencies:
Business Risks - Since its formation in 1984, the Company has been principally
engaged in color science technology research and development and licensing
activities, seeking mass market applications for its proprietary technology and
instrumentation. The Company's business encompasses all of the risks inherent in
the establishment of a new business enterprise, including a limited operating
history with significant competition possessing substantially greater resources.
Current and future operations also depend upon the continued employment of
certain key executives, the ability to further commercialize its proprietary
technology and products and the Company's ability to obtain sufficient revenues
and/or outside financing.
Operating Difficulties - Since 1989, the Company has incurred losses from
operations and net cash outflows from operations. The Company expects to license
its patents and proprietary technology, sell its equipment and market its
related services and products to ultimately overcome these difficulties.
On July 30, 1997, the Company was granted clearance by the FDA for commercial
marketing of the ColorMate(Registered) TLc- BiliTest(Registered) System for the
non-invasive detection and monitoring of bilirubin infant jaundice in newborns
by health care professionals in hospitals, pediatricians' offices and by home
healthcare agencies. On June 7, 1999, the Company executed a renewable,
five-year agreement with Datex-Ohmeda, Inc. and its Ohmeda Medical Division
("DO") pursuant to which the Company appointed DO as the exclusive distributor
in the United States of the Company's ColorMate(Registered)
TLc-BiliTest(Registered) System for non-invasive monitoring of bilirubin infant
jaundice in the hospital market, the non-consumer home healthcare market (in
which the test is administered solely by a healthcare professional), the
pediatrician office market and clinics within all such markets. The agreement
also applies to the Company's disposable calibration standard
(TLc-Lensette(Trademark)) that is used to calibrate each measurement taken by
the ColorMate(Registered) TLc-BiliTest(Registered) System and provides that the
Company will share in the sales revenues for both products. Terms of the
agreement include annual minimum market penetration performance standards and
purchasing and placement of quantities for both the ColorMate(Registered)
TLc-BiliTest(Registered) System and the TLc- Lensette(Trademark) calibration
standard. Sales under the agreement commenced in July 1999.
The Company anticipates incurring significant additional expenditures related to
manufacturing expenses, parts order, insurance, regulatory compliance and
staffing and marketing expenses for the sales division as production and
distribution continues over the next year. Management expects that taking into
account existing resources, including the financings in April 1999 and June 1999
and the second closing of the preferred stock financing in the amount of $4.0
million contemplated by the agreement executed in connection with the June 1999
preferred stock financing (see Note 4), revenues from future sales of the
ColorMate(Registered) units, and payments received under the distribution
agreement, the Company will have sufficient liquidity at least until October
2000.
7
<PAGE>
Legal Proceedings - Three putative class actions were commenced against the
Company and certain of its officers and directors in the Southern District of
New York. The first two actions were commenced in June 1998 and are captioned
L.F. Monk v. Chromatics Color Sciences International, Inc., Darby S. Macfarlane,
Arthur Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98 CV 4111
(S.D.N.Y.) and Daniel R. Marquis v. Chromatics Color Sciences International,
Inc., Darby S. Macfarlane, Arthur Guiry and Leslie Foglesong, C.A. No. 98 CV
4335 (S.D.N.Y.). The third action was commenced in August 1998 and is captioned
Joseph Grunberg v. Chromatics Color Sciences International, Inc., Darby S.
Macfarlane, Arthur Guiry, David K. Macfarlane and Leslie Foglesong, C.A. No. 98
Civ. 5646 (S.D.N.Y.)
The complaints were consolidated pursuant to the Consolidation Order entered by
the Court in December 1998. A consolidated amended complaint in the matter now
captioned In re Chromatics Color Sciences International, Inc. Securities
Litigation, Consolidated Matter File No. 98 Civ. 4111 (SHS), was filed and
served in January 1999 (the "Action").
Plaintiffs purport to bring the class action on behalf of all purchasers of the
common stock of the Company, between July 30, 1997 and June 9, 1998, seeking
damages for the alleged violation by defendants of Section 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78j(b), and Rule 10b-5 promulgated
thereunder, 17 C.F.R. ss.240.10b-5, and pursuant to Section 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. ss.78t(a), with respect to the
individual named defendants as "controlling persons." The complaint alleges that
the Company "embarked upon a scheme" to inflate the price of the Company's
Common Stock by making false and misleading statements concerning: (i) the new
and innovative nature of the Company's ColorMate(Registered)
TLc-BiliTest(Registered) System; (ii) the market size and revenue potential of
the ColorMate(Registered) TLc-BiliTest(Registered) System; and (iii) the
existence and status of negotiations with potential distributors of the
ColorMate(Registered) TLc-BiliTest(Registered) System. The allegations of the
complaint arise principally from a "report" prepared by Manuel I. Asensio of
Asensio & Company, Inc. that was disseminated at the close of the putative class
period.
Defendants have moved to dismiss the complaint, which motion is fully briefed
and is now pending before the court. Defendants believe that the claims asserted
against them are without merit and intend to vigorously defend this action. No
assurance can be given that the resolution of the Action and/or future actions
will not have a material adverse effect on the Company's results of operations
and liquidity. The Company has directors and officers insurance which may cover
a portion of the liability asserted in the Action. The Company is exploring its
legal remedies in respect to what it believes to be false allegations against
the Company made by short sellers of its stock; the Company expects to incur
significant expenses in this regard.
Note 3 - ColorMate(Registered) Units
As noted above, in June 1999 the Company entered into a distribution agreement
to sell ColorMate(Registered) TLc- BiliTest(Registered) Systems ("Systems") and
related TLc-Lensette(Trademark) calibration standards to DO. The agreement
called for the Company to provide a certain number of Systems to DO at no cost
until sold to serve as demo units to assist in the sales and marketing of the
Systems. The Company maintains title of certain of these Systems, while DO
obtains ownership of the other Systems. The Company has classified $264,600 in
property and equipment, representing the cost of the Systems for which it
maintains title, and has classified $407,100 in other assets, representing the
cost of the remaining Systems (intangible asset associated with obtaining the
agreement with DO). The amount classified in other assets is being amortized
over the life of the DO Agreement, 5 years. All amounts previously classified as
ColorMate(Registered) Units have been classified as inventory, fixed assets or
other assets. The fixed assets and other assets are being depreciated over a
five-year period.
Note 4 - Private Placements:
On April 15, 1999 the Company issued an aggregate of $5,000,000 14% senior
convertible debentures due April 15, 2002 (the "Debentures") in a private
placement. Payments of interest on the outstanding principal amount of the
Debentures are due on the earlier of the maturity date or upon any conversion of
the Debentures into the Company's Common Stock. The accrued interest may be paid
either in cash, shares of the Company's Common Stock or a combination of Common
Stock and cash, at the option of the Company.
The outstanding principal amount of the Debentures (together with accrued
interest thereon) is not convertible until after the first anniversary of the
closing (except for 20%, which was immediately convertible). At that time, the
Debentures are convertible into shares of Common Stock, at the option of the
holder or holders thereof, at the conversion price of $5.00. However, at any
time prior to April 14, 2000, such portion of the Debentures may be converted,
at the option of the holder or holders thereof, as shall result in the issuance,
upon such conversion, of not more than an aggregate of 200,000 shares of Common
Stock. Subject to applicable securities laws, the holder or holders of such
shares, in the aggregate, may only sell not more than an aggregate of 50,000
shares of such Common Stock issued upon such conversion during any one month
period ending prior to April 14, 2000. At any time after the 18 month
anniversary of the closing, the Company may prepay the entire amount of the
Debentures or any portion thereof for a prepayment price equal to the original
principal amount of the Debentures plus all accrued and unpaid interest. At any
time after the 18 month anniversary
8
<PAGE>
of the closing and prior to the Maturity Date, in the event the average closing
bid price (as reported on the Nasdaq SmallCap Market or such other principal
market or exchange on which the Common Stock is then traded) of the Company's
Common Stock for any 10 consecutive trading days equals or exceeds $10.29, the
Company can require conversion of the outstanding principal amount (together
with accrued interest) of the Debentures into Common Stock at a conversion price
of $5.00 per share. The Company filed a Form 8-K on April 30, 1999 relating to
the issuance of the Debentures. The Debentures resulted in an original issue
discount charge of approximately $3.6 million (representing the intrinsic value
of the below-market conversion price) which will be amortized over one year.
Through September 30, 1999 the Company has amortized $2.0 million.
On June 15, 1999, the Company completed a private placement of 40,000 shares of
convertible preferred stock and warrants to purchase 220,690 shares of Common
Stock to a private investor for aggregate proceeds of $4 million. The shares of
convertible preferred stock issued on that date (the "Shares") are convertible
into shares of the Company's Common Stock at a price of $7.25 per share, subject
to adjustment for stock splits, combinations and similar recapitalizations
affecting the Company's Common Stock and to downward adjustment if the Company
issues or agrees to issue additional shares of the Company's Common Stock
(excluding options under the Company's option plan and certain other excluded
securities) at a price of less than $7.25 per share to the price at which the
Company issues or agrees to issue the lower-priced shares of the Company's
Common Stock or securities convertible or exchangeable for shares of the
Company's Common Stock. The Shares are redeemable in cash for an amount equal to
$115 per Share on the third anniversary of the date of initial issuance if not
sooner converted unless the Company elects in the Company's discretion to extend
the redemption date to the fifth anniversary of the date of initial issuance.
The Shares are subject to mandatory conversion into shares of the Company's
Common Stock at the Company's option at any time after December 15, 1999 if the
average closing bid price of the Company's Common Stock for ten consecutive
trading days equals or exceeds $10.88 per share. The Shares are not entitled to
any voting rights except as otherwise required by applicable law and are not
entitled to any dividend rights unless the Company elects to extend the
redemption date to the fifth anniversary of the date of initial issuance, in
which case dividends would accrue at the rate of 8% from and after the third
anniversary of the date of initial issuance which could be paid in shares of the
Company's Common Stock at the Company's option.
In addition to the Shares on June 15, 1999 the Company also issued an aggregate
of 220,690 warrants to purchase shares of the Company's Common Stock to a
private investor. An additional 50,000 warrants were issued to such investor as
compensation for services rendered in connection with the placement of the
Shares. The warrants issued on that date have a five-year term unless sooner
exercised. The warrants are exercisable for shares of the Company's Common Stock
at a price of $8.25 per share, subject to adjustment in the same circumstances
as the Shares described above and are subject to mandatory exercise into shares
of the Company's Common Stock at the Company's option at any time after December
15, 1999 if the average closing bid price of the Company's Common Stock measured
over twenty consecutive trading days equals or exceeds $16.50.
The Company also agreed to issue and sell an additional 40,000 shares of
convertible preferred stock and warrants to purchase 270,690 shares of the
Company's Common Stock to the same investor at a second closing.
The private placement has resulted in a deemed dividend charge of approximately
$3.0 million, resulting from a below market conversion price of preferred stock
($1,069,000), a $15 per share redemption premium ($600,000) and the fair value
(using Black Scholes method) of warrants issued in connection with the private
placement ($1,275,000), of this amount, approximately $1.3 million has been
charged through September 1999 and $1.7 million will be charged over the
redemption period.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The Company incurred net losses of $3,145,800 and $1,905,800 for the three month
periods ended September 30, 1999 and 1998, respectively and $9,117,100 and
$5,377,100 for the nine month periods ended September 30, 1999 and 1998
respectively. Revenues have not been significant relative to the Company's
expenses incurred in implementing its business plan. Loss per share increased by
$0.31 in the nine month 1999 period compared to the nine month 1998 period,
negatively impacted by a non-cash dividend charge due to private placement
financing costs of $1,341,300 and positively impacted by the increase of 683,343
weighted average number of shares outstanding attributed to the exercise of
options and warrants.
The dollar increase in net loss in the three and nine month 1999 periods as
compared to the three and nine month 1998 periods is primarily attributable to
the Company's continuing implementation of its long-range business plan to seek
commercial applications of its intellectual properties and technologies in the
medical field including an increase in costs regarding sales, marketing and
promotional costs, research and development, consulting and other related
expenses regarding regulatory compliance with respect to manufacturing and
distribution of its ColorMate(Registered) System, and non-cash financing costs
in connection with certain private placements.
9
<PAGE>
Although the Company anticipates that the future expenses regarding FDA
application costs and related patent application costs should be significantly
less than amounts incurred prior to receipt of the initial FDA marketing
clearance, the Company will continue to incur significant additional costs and
expenses in connection with FDA manufacturing and other regulations, state
regulatory requirements and foreign market clearances and other requirements. In
addition, the Company expects to incur significant expenses relating to
manufacturing expenses, products liability insurance, legal and regulatory
compliance, including QSR/GMP quality system substantial compliance, as well as
research and development for new potential applications and implementation of
the next phase of its efforts to successfully commercialize the medical
application of its technology (see "Liquidity and Capital Resources"). Further,
the Company anticipates significantly higher legal expenses in connection with
its defense of certain class action suits that have been brought against the
Company and as the Company explores all of its potential legal remedies.
In the first nine months of 1999, the Company focused its resources on
implementation of its long-range business plan for medical applications of its
technologies. Shipments of the ColorMate(Registered) TLc-BiliTest(Registered)
Systems and TLc-Lensette(Trademark) calibration standards commenced in the
third quarter of 1999 in accordance with the distribution agreement the Company
signed in June, 1999 with DO.
In April 1999, the Company's lease and license agreement with Nordstrom, Inc.
expired in accordance with its terms. The Company had granted Nordstrom a
license to use the ColorMate(Registered) System to formulate and recommend
Nordstrom's "C2O Color to Order" line of proprietary cosmetic products, which
were to be introduced and evaluated over a three-month period. That three-month
evaluation period terminated upon the expiration of the license agreement.
Revenues for the quarter ended September 30, 1999 were $435,800, an increase of
$301,600 or 224.7% from revenues of $134,200 for the quarter ended September 30,
1998. Revenues for the nine months ended September 30, 1999 were $520,100, an
increase of $160,900 or 44.8% from revenues of 359,200 for the nine months ended
September 30, 1998. The primary reason for the increase in revenues during the
1999 periods as compared to the corresponding 1998 periods is due to an increase
in sales partially offset by a decrease in interest income. As some products
were shipped for promotional use or shipped under a deferred payment until sold
by the distributor, the revenues for such products were not realized in this
quarter, and some are carried as other assets. See Note 3 to the Financial
Statements. Sales revenue for the nine months ended September 30, 1999 was
comprised primarily of TLc-Lensette(Trademark) calibration standards which were
shipped in the third quarter under the distribution agreement with DO. Sales
revenue for the corresponding 1998 period was primarily attributable to a
cosmetic study conducted by the Company.
For the three months ended September 30, 1999 medical regulatory expenses were
$494,800, an increase of $292,700 or 144.8% from medical regulatory expenses of
$202,100 for the three months ended September 30, 1998. Medical regulatory
expenses for the nine months ended September 30, 1999 were $968,100, a decrease
of $64,400 or 6.2% from medical regulatory expenses of $1,032,500 for the nine
months ended September 30, 1998. The primary reason for the decline in medical
regulatory expenses during the nine months ended September 30, 1999 as compared
to the corresponding 1998 period the completion of certain initial phases of
manufacturing, requiring extensive regulatory compliance, including ISO 9001 and
the GSR/GMP quality manufacturing system for FDA compliance.
Research and development costs were $229,200 for the three months ended
September 30, 1999, an increase of $68,600 or 42.7% from research and
development costs of $160,600 for the three months ended September 30, 1998. For
the nine months ended September 30, 1999 research and development costs were
$658,500, an increase of $138,000 or 26.5% from research and development costs
of $520,500 for the nine months ended September 30, 1998. The primary reason for
the increase in research and development costs during the 1999 periods as
compared to the corresponding 1998 periods is further research and development
during the 1999 periods relating to the manufacturing of the Company's
ColorMate(Registered) TLc-BiliTest(Registered) System and increased efforts to
further develop the LED mass manufacturing prototype in accordance with the
distribution agreement recently signed.
Compensation costs relating to options granted to consultants were $248,000 for
the three months ended September 30, 1999, an increase of $50,600 or 25.6% from
compensation costs relating to options granted to consultants of $197,400 for
the three months ended September 30, 1998. For the nine months ended September
30, 1999 compensation costs relating to options granted to consultants were
$736,000, an increase of $120,600 or 19.6% from compensation costs relating to
options granted to consultants of $615,400 for the nine months ended September
30, 1999. The consultants are third party specialists primarily engaged in
research and development, regulatory and financing activities on behalf of the
Company. Part of their compensation is paid in the form of stock options, which
are recorded as an expense based upon the fair value (using the Black Scholes
method) of such options. These options provide a benefit to the Company by
conserving its cash resources while providing the consultants with an
opportunity to participate in any appreciation in the value of the equity of the
Company.
Sales, marketing and promotion costs were $568,400 for the three months ended
September 30, 1999, an increase of $258,300 or 83.3% from sales, marketing and
promotion costs of $310,100 for the three months ended September 30, 1998. For
the nine months
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ended September 30, 1999 sales, marketing and promotion costs were $1,794,500,
an increase of $1,079,200 or 150.9% from sales, marketing and promotion costs of
$715,300 for the nine months ended September 30, 1998. The primary reasons for
the increase in sales, marketing and promotion costs during the 1999 periods as
compared to the corresponding 1998 periods were the commercial introduction of
the Company's ColorMate(Registered) TLc-BiliTest(Registered) System and the
addition of the Company's sales force at its medical division.
Interest and non-cash financing costs were $923,700 for the three months ended
September 30, 1999, an increase of $916,500 from interest and non-cash financing
costs of $7,200 for the three months ended September 30, 1998. For the nine
months ended September 30, 1999, interest and non-cash financing costs were
$2,443,500, an increase of $2,423,000 from interest and non-cash financing costs
for the nine months ended September 30, 1998. The primary reason for the
increase in interest and non-cash financing costs during the 1999 periods as
compared to the 1998 periods was the securing of financing by the Company
through senior convertible debentures, which resulted in a non-cash original
issue discount of $2,025,800 for the 1999 periods.
Liquidity and Capital Resources
At September 30, 1999 the Company had cash and cash equivalents of $5,113,200,
current assets of $7,062,600, working capital of $6,403,100, a current ratio of
10.71 to 1.0 and stockholders equity of $3,064,500. Cash and cash equivalents
increased by $1,183,400 from December 31, 1998 as a result of the private
placement financings consummated by the Company during the second quarter of
1999.
Cash used by operating activities for the nine months ended September 30, 1999
was $7,281,300, an increase of $2,807,900 from cash used by operating activities
of $4,473,400 for the nine months ended September 30, 1998. The primary reasons
for the increase in cash used by operating activities during the 1999 period as
compared to the 1998 period was a $1,079,200 increase in sales, marketing and
promotion costs, a $684,400 increase in inventory associated with the
introduction of the Company's ColorMate(Registered) TLc-BiliTest(Registered)
System, a $246,200 increase in accounts receivable and a $356,200 net decrease
in accounts payable. The Company collected $112,000 during the quarter ended
September 30, 1999, representing approximately 31% of revenues during the
quarter. The low percentage was a result of a significant portion of the sales
occurring in the last month of the quarter.
The Company's primary source of liquidity during the nine months ended September
30, 1999 was the net proceeds from the private placements of convertible debt
and equity securities it consummated during the second quarter of 1999. As a
result of the Distribution Agreement the Company entered into with Datex-Ohmeda,
Inc. in June 1999 for the distribution of the Company's ColorMate(Registered)
TLc-BiliTest(Registered) System, the Company began to derive revenues from this
product during the third quarter of 1999. Management currently anticipates that
cash and cash equivalents, together with the anticipated revenues under the
Datex-Ohmeda Distribution Agreement and the financing in the amount of $4.0
million pursuant to the second closing contemplated by the agreement executed in
connection with the June 1999 preferred stock financing, will be adequate to
fund the Company's anticipated liquidity needs at least until October 2000,
although there can be no assurance of such result. If the revenues derived from
the Datex-Ohmeda Distribution Agreement are insufficient to fund the Company's
anticipated liquidity needs beyond October 2000, the Company will be required to
raise additional capital prior to that date to support its continued operations
through one or more offerings of its equity securities or securities convertible
into its equity securities, which may take the form of private placements or a
public offering, or through borrowings.
The Company has completed an assessment of its own internal computer systems and
software applications for purposes of determining their vulnerability to the
year 2000 issue and believes that such systems and applications are year 2000
compliant in all material respects. The Company has also received written
assurances regarding the year 2000 readiness of the principal third parties with
whom it has a relationship, consisting of its contract manufacturer, its
principal component parts vendors and distributor of its ColorMate(Registered
Trademark) TLC-BiliTest(Registered Trademark) System. Based on this assessment
and these assurances, management of the Company has not developed a contingency
plan for addressing any year 2000 problems and believes that the most reasonably
likely year 2000 scenario will involve minor and transitory problems with third
parties that are not material to the Company's operations.
The total costs associated with the Company's Year 2000 compliance are not
expected to result in the Company's liquidity decreasing in any material way.
However, satisfactory remediation of Year 2000 issues is dependent upon many
factors, some of which are not completely within the Company's control. The
Company's current estimates of the impact of Year 2000 compliance on its
liquidity do not include costs that may result from the failure of third parties
with whom the Company has a material relationship to be Year 2000 compliant.
Should the Company's internal systems or systems of one or more significant
third parties fail to achieve Year 2000 compliance, the Company's liquidity
could be materially adversely affected.
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements" within the
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meaning of the Private Securities Litigation Reform Act of 1995. Although the
Company believes that its expectations are based on reasonable assumptions,
within the bounds of its knowledge of its business and operations, there can be
no assurance that actual results will not differ materially from its
expectations. Factors that could cause actual results to differ from
expectations include: (i) the inability of the Company to secure additional
financing, (ii) the failure of the Company's manufacturing and distribution
partners to perform their obligations, (iii) government regulation and (iv) the
loss of key personnel.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
3.1 Restated Articles of Incorporation of the Company, as amended (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for
the three months ended June 30, 1999, filed on August 23, 1999).
3.2 By-Laws of the Company (incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form S-1 (File No. 33-54256), filed on
November 5, 1992, as amended).
27.1 Financial Data Schedule (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the three months ended September 30, 1999,
filed on November 16, 1999).
During the three month period ended September 30, 1999, the Company filed one
Current Report on Form 8-K on July 1, 1999, which disclosed the private
placement of convertible preferred stock and warrants on June 15, 1999.
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: January 20, 2000 By: /s/ Darby S. Macfarlane
---------------------------------------
Darby S. Macfarlane
Chief Executive Officer
Date: January 20, 2000 By: /s/ Leslie Foglesong
---------------------------------------
Leslie Foglesong
Treasurer and Chief Financial
and Principal Accounting Officer
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