<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
--------------
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
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
New York 13-3253392
--------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
Identification Number)
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:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 16,711,192.
<PAGE> 2
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 1,865,600 $ 2,790,400
Accounts receivable-net 1,369,000 842,300
Inventories 2,358,200 1,171,800
Prepaid expenses and other current assets 265,600 129,200
------------ ------------
Total Current Assets 5,858,400 4,933,700
PROPERTY AND EQUIPMENT - NET 1,483,400 612,200
SOFTWARE DEVELOPMENT COSTS - NET 366,000 470,500
PATENT COSTS - NET 1,164,100 984,000
GOODWILL-NET 7,455,900 -
OTHER AMORTIZABLE ASSETS - NET 404,800 455,400
OTHER ASSETS 738,700 654,400
------------ ------------
$ 17,471,300 $ 8,110,200
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Amounts payable to related party $ 243,300 $ 256,100
Current portion of notes payable 363,200 -
Due to Factor 531,500 -
Accounts payable and accrued expenses:
Attorneys and accountants 488,500 394,600
Consultants 41,800 119,100
Trade 1,087,100 240,000
------------ ------------
Total Current Liabilities 2,755,400 1,009,800
------------ ------------
LONG TERM DEBT:
Note payable, net of current portion 2,759,400 -
Senior convertible debentures 5,000,000 4,165,800
Accrued interest on senior convertible debentures 845,800 495,800
Amounts payable for purchase of Gordon 653,000 -
------------ ------------
9,258,200 4,661,600
------------ ------------
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 and 3 Convertible Preferred Stock, No Par Value:
Authorized - 10,000,000 shares
Issued and outstanding - 65,000 and 40,000 shares in
2000 and 1999, respectively - $115 redemption value 4,861,700 2,928,700
------------ ------------
4,875,500 2,942,500
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIENCY)
Common Stock, par value $.001 per share:
Authorized - 50,000,000 shares
Issued and outstanding - 16,711,192 (2000)
and 15,539,117 (1999) shares 16,700 15,500
Capital in excess of par value 41,534,500 34,062,000
Accumulated deficit (40,969,000) (34,581,200)
------------ ------------
Total Shareholders' Equity (Deficiency) 582,200 (503,700)
------------ ------------
$ 17,471,300 $ 8,110,200
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 3
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 667,300 $ - $ 705,900 $ -
Other - 500 100 600
------------ ------------ ------------ ------------
667,300 500 706,000 600
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 492,600 - 513,400 -
Sales, marketing and trade show costs 533,300 660,000 1,170,700 1,201,900
Medical regulatory expenses 227,200 239,700 423,600 473,300
Research and development 416,300 261,400 711,000 429,300
Patent application costs 94,400 5,000 150,500 47,900
Compensation costs relating to options granted
to consultants (non cash) 225,000 248,000 465,000 488,000
General and administrative:
Compensation - Officers and employees 328,600 210,600 557,000 386,100
Consultants 115,800 72,800 231,800 151,000
Legal fees 250,900 304,200 438,300 552,100
Accounting fees 26,700 24,600 96,600 47,100
Rent and storage 78,900 74,500 157,000 148,400
Insurance 71,800 64,900 149,500 120,400
Travel and entertainment 30,200 9,800 47,100 16,500
Repairs and maintenance 34,800 29,300 82,300 55,700
Depreciation and amortization 173,000 31,300 344,400 57,900
Payroll taxes 21,900 19,000 42,300 33,000
Stock administrative fees 24,900 33,400 54,200 43,700
Public relations 52,800 56,400 112,700 101,000
Amortization of Goodwill 31,000 - 31,000 -
Other 105,900 87,800 173,200 182,500
------------ ------------ ------------ ------------
3,336,000 2,432,700 5,951,600 4,535,800
------------ ------------ ------------ ------------
OPERATING LOSS (2,668,700) (2,432,200) (5,245,600) (4,535,200)
------------ ------------ ------------ ------------
INTEREST INCOME (EXPENSE):
Interest income 45,000 52,700 89,800 83,700
Interest expense and non-cash financing costs (335,400) (1,513,200) (1,232,000) (1,519,800)
------------ ------------ ------------ ------------
(290,400) (1,460,500) (1,142,200) (1,436,100)
------------ ------------ ------------ ------------
NET LOSS $ (2,959,100) $ (3,892,700) $ (6,387,800) $ (5,971,300)
============ ============ ============ ============
NET LOSS TO COMMON STOCKHOLDERS:
NET LOSS $ (2,959,100) $ (3,892,700) $ (6,387,800) $ (5,971,300)
DEEMED DIVIDEND FOR CLASS B, SERIES 2 AND 3
CONVERTIBLE PREFERRED STOCK 278,000 1,275,000 981,000 1,275,000
------------ ------------ ------------ ------------
NET LOSS TO COMMON SHAREHOLDERS $ (3,237,100) $ (5,167,700) $ (7,368,800) $ (7,246,300)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 16,183,925 15,499,299 15,907,169 15,483,039
============ ============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.20) $ (0.33) $ (0.46) $ (0.47)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
------------------------------
Number Capital
of Shares Par in Excess of Accumulated
Outstanding Value Par Value Deficit
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balances, December 31, 1999 15,539,117 $ 15,500 $ 34,062,000 $(34,581,200)
Six Months Ended June 30, 2000:
Net Loss - - - (6,387,800)
Exercise of Stock options and
warrants 132,880 200 295,000 -
Conversion of Class B, convertible
preferred stock into common
shares 238,473 200 1,162,800
Original issue discount on Class B,
Convertible preferred stock (warrants
and below market conversion price) 1,495,000
Deemed dividend on Class B,
convertible preferred stock (981,000)
Issuance of common stock - Gordon 721,231 700 4,535,800
Issuance of common stock - Other 79,491 100 499,900
Compensation costs relating to
options granted to consultants - - 465,000 -
------------ ------------ ------------ ------------
Balances, June 30, 2000 16,711,192 $ 16,700 $ 41,534,500 $(40,969,000)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(6,387,800) $(5,971,300)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 344,400 57,900
Amortization of Goodwill 31,000 -
Compensation costs relating to options granted to consultants 465,000 488,000
Non-cash financing costs 834,200 1,310,800
Changes in operating assets and liabilities:
Accounts receivable 767,600 (100)
Inventories (191,400) (719,100)
Prepaid expenses and other assets (25,000) (240,800)
Accrued interest on senior convertible debentures 350,000 145,800
Accounts payable and accrued expenses (541,600) 269,800
----------- -----------
Net cash flows from operating activities (4,353,600) (4,659,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs - (81,300)
Net cash used in purchase of Gordon (537,600) -
Capitalized patent costs (255,100) (291,200)
Purchase of property and equipment (61,900) (87,600)
----------- -----------
Net cash flows from investing activities (854,600) (460,100)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net
of related costs 795,200 343,200
Proceeds (payments) of amounts payable to related party (12,800) (18,900)
Proceeds from senior convertible debentures 5,000,000
Payment of Gordon Debt (609,000) -
Proceeds from Note payable 500,000 -
Net proceeds from the issuance of preferred stock and
warrants, net of costs 3,610,000 3,727,400
----------- -----------
Net cash flows from financing activities 4,283,400 9,051,700
----------- -----------
NET CHANGE IN CASH AND EQUIVALENTS (924,800) 3,932,600
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 2,790,400 3,929,800
----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD $ 1,865,600 $ 7,862,400
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest Paid $ 43,500 $ 32,000
=========== ===========
Issuance of common stock and amount payable for
purchase of Gordon $ 5,189,500
===========
Conversion of preferred stock into common stock $ 1,163,000
===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation:
Nature of Report - The consolidated balance sheet at the end of the preceding
fiscal year has been derived from the audited consolidated balance sheet
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999 and is presented for comparative purposes. All other financial
statements are unaudited. As discussed in Note 5, the Company's Financial
Statements now include the financial position and results of operations of
Gordon Laboratories, Inc. 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, 1999.
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. As discussed in Note 5, the Company acquired Gordon on
June 2, 2000. The acquisition of this Company encompasses all the risks and
difficulties in operating and managing a new acquisition.
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. In
addition, the Company expects to increase the revenues of the newly -acquired
company-Gordon to further overcome the above-mentioned difficulties.
The Company anticipates incurring substantially increased operating expenses as
it attempts to expand its marketing and sales activity, incur manufacturing
expenses for the ColorMate (Registered Trademark) TLc-BiliTest (Registered
Trademark) System and otherwise continues to implement its business plan,
including the medical application involving the monitoring of newborn
bilirubinemia (infant jaundice). There can be no assurance the Company will not
continue to incur such losses or will ever generate revenues at levels
sufficient to support profitable operations.
Legal Proceedings - On April 27, 2000, the United States District Court for the
Southern District of New York dismissed a shareholders class action lawsuit
filed in 1998 against the Company and four of its officers. The class action
suit had alleged that the defendants artificially inflated the price of the
Company's stock through false and misleading public statements. In the dismissal
6
<PAGE> 7
ruling issued by Judge Sidney H. Stein, the court found that plaintiffs had not
sufficiently specified the reasons that the statements were misleading and/or
failed to specify a reason that would be actionable under Section 10(b) of the
Securities Exchange Act of 1934.
Note 3 - Agreement with Datex-Ohmeda, Inc. and its Ohmeda Medical Division
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(R) TLc- BiliTest(R) System for noninvasive 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(TM)) that is used to calibrate each measurement taken by
the ColorMate(R) TLc- BiliTest(R) 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(R) TLc- BiliTest(R) System and
the TLc- Lensette(TM) calibration standard. Sales under the agreement commenced
in July 1999.
Note 4 - Private Placements:
Class B series 2 convertible preferred stock:
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
Class B, Series 2 convertible preferred stock issued on that date (the "Series 2
Shares") are convertible into shares of the Company's Common Stock at a price of
$6.29 per share, subject to adjustment for stock splits, combinations and
similar recapitalizations affecting the Company's Common Stock and in certain
circumstances including the issuance of shares of the Company's Common Stock.
The Series 2 Shares are redeemable in cash for an amount equal to $115 per
Series 2 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 Series 2 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 $9.44 per share. The Series 2 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 Series 2 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 the same private investor. An additional 50,000 warrants were issued to such
investor as compensation for services rendered in connection with the placement
of the Series 2 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 $6.29 per share, subject to adjustment in
the same circumstances as the Series 2 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 $12.58.
The private placement has resulted in a deemed dividend charge of approximately
7
<PAGE> 8
$3.2 million, resulting from a below market conversion price of preferred stock
($1,154,000), a $15 per share redemption premium and other costs ($800,000) and
the fair value (using Black Scholes method) of warrants issued in connection
with the private placement ($1,275,000). Of this amount, approximately $1.6
million had been charged through December 1999, $.6 million was converted into
the Company's Common Stock, $.3 million has been charged in the six months ended
June 30,2000 and $.7 million will be charged over the remaining redemption
period.
In the six months ended June 30, 2000, 15,000 Series 2 Shares were converted
into 238,473 shares of the Company's Common Stock.
Class B series 3 convertible preferred stock:
On February 11, 2000, the Company completed a private placement of 40,000 shares
of convertible preferred stock to the above private investor for aggregate
proceeds of $4 million. The Shares of Class B Series 3 convertible preferred
stock issued on that date (the "Series 3 Shares") are convertible into shares of
the Company's Common Stock at a price of $6.29 per share, subject to adjustment
for stock splits, combinations and similar recapitalizations affecting the
Company's Common Stock and in certain circumstances including the issuance of
shares of the Company's Common Stock. The Series 3 Shares are redeemable in cash
for an amount equal to $115 per Series 3 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 Series 3 Shares are subject to mandatory
conversion into shares of the Company's Common Stock at the Company's option at
any time after August 11, 2000 if the average closing bid price of the Company's
Common Stock for ten consecutive trading days equals or exceeds $9.44 per share.
The Series 3 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 Series 3 Shares on February 11, 2000 the Company also issued
an aggregate of 254,372 warrants to purchase shares of the Company's Common
Stock to the same private investor. An additional 50,000 warrants were issued to
such investor as compensation for services rendered in connection with the
placement of the Series 3 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 $6.29 per share, subject to
adjustment in the same circumstances as the Series 3 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 August 11, 2000 if the average closing
bid price of the Company's Common Stock measured over twenty consecutive trading
days equals or exceeds $12.58.
The private placement resulted in a deemed dividend charge of approximately $2.5
million, resulting from a below market conversion price of preferred stock
($445,000), a $15 per share redemption premium and other costs ($990,000) and
the fair value (using the Black Scholes method) of warrants issued in connection
with the private placement ($1,050,000). Of this amount, approximately $.7
million has been charged in the six months ended June 30,2000 and $1.8 million
will be charged over the remaining redemption period.
Note 5 - Acquisition:
On June 2, 2000, the Company acquired the Common Stock and certain debt of
Gordon Laboratories, Inc. ("Gordon"), a privately held formulator and
manufacturer of cosmetics, hair care and other personal care products. The
acquisition was for a purchase price of $609,000 in cash and approximately
721,000 shares of The Company's Common Stock, valued for financial reporting
purposes at $6.29 per share. The
8
<PAGE> 9
acquisition has been accounted for under the purchase method of accounting for
business combinations. Accordingly, the consolidated financial statements
include the results of operations of Gordon from the acquisition date. The
excess of the purchase price over the net assets acquired totaled approximately
$7,500,000 and has been classified as goodwill and is being amortized on a
straight-line basis over 20 years. The Company is in the process of obtaining an
appraisal to better allocate the purchase price. Any change in the allocation is
not expected to materially affect the financial statements.
In connection with the acquisition of Gordon, the Company includes in the
consolidated financial statements the debt of Gordon which principally includes
Debt due to Factor for the factored receivables of Gordon and a five year note
payable to a financial institution payable in monthly installments of
approximately $55,000, with an annual interest rate of 12.97%.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company as if the acquisition of
Gordon had taken place on January 1, 1999. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
the results of operations which actually would have resulted had the acquisition
occurred on January 1, 1999, or which may result in the future.
<TABLE>
<CAPTION>
Three Months Six Months Year
Ended Ended Ended
June 30, 2000 June 30, 2000 December 31, 1999
------------- ------------- -----------------
<S> <C> <C> <C>
Total Revenues $1,580,000 $3,194,000 $7,767,000
Net Loss (3,159,100) ($6,698,800) (13,270,000)
Net loss per share ($.21) ($.46) ($.91)
</TABLE>
Note 6 - Segment Information:
With the above-mentioned acquisition of Gordon, the Company now operates under
two business segments for financial reporting purposes. The Company identifies
operating segments based on, among other things, the way that the Company's
management organizes the components of the Company's business for purposes of
allocating resources and assessing performance. Segment revenues are generated
from the sale of CCSI technologies ("CCSI") and the manufacturing of cosmetics,
hair care and other personal care products ("Gordon"). The Company defines
segment profit as operating income before amortization of goodwill, interest
expense and income taxes. Summarized below are the Company's segment sales and
income (loss) by reportable segments for the three and six months ended June 30,
2000:
<TABLE>
<CAPTION>
CCSI Gordon Consolidated
----------- -------- ------------
<S> <C> <C> <C>
For the three months ended
June 30, 2000:
Revenues $ 41,100 $626,200 $ 667,300
Segment income (loss) ($2,662,200) $ 24,500 ($2,637,700)
Amortization of goodwill $ 31,000
Net interest expense $ 290,400
Loss before income taxes ($2,959,100)
For the six months ended
June 30, 2000:
Revenues $ 79,800 $626,200 $ 706,000
Segment income (loss) ($5,239,100) $ 24,500 ($5,214,600)
Amortization of goodwill $ 31,000
Net interest expense $1,142,200
Loss before income taxes ($6,387,800)
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C> <C>
Segment Assets $12,953,000 $5,672,200 $18,625,200
Elimination of
Intercompany balances $ 1,153,900
Assets per balance sheet $17,471,300
</TABLE>
Note 7 - Inventories:
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Raw Materials $1,270,400 $ 521,500
Work in process 308,500
Finished Goods 779,300 650,300
---------- ----------
$2,358,200 $1,171,800
---------- ----------
</TABLE>
Note 8 - Subsequent event:
On August 16, 2000, the Company sold 641,026 shares of its common stock to a
private investor at a price per share of $4.68 for gross proceeds of $3,000,000,
less fees and expenses ("first closing"). Additional shares of common stock may
be sold to such investor ("second closing") for gross proceeds of $1,000,000
upon the effectiveness of a registration statement filed by the Company on
behalf of such investor with the Securities and Exchange Commission for the
above 641,026 shares and certain other conditions. In connection with the above
transaction, the Company issued to the investor 150,000 warrants to purchase
common stock at an exercise price of $5.26 per share with an additional 50,000
warrants to be issued at the second closing. Pursuant to the purchase agreement
for the above transaction, the Company may be required to issue additional
shares of its common stock subject to certain conditions.
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<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company incurred net losses of $2,959,100 and $3,892,700 for the three
months ended June 30, 2000 and 1999, respectively. For the six months ended June
30, 2000 and 1999, the Company incurred net losses of $6,387,800 and $5,971,300,
respectively.
Revenues for the three months ended June 30, 2000 were $667,300 as compared to
$500 for the three months ended June 30, 1999. The increased revenues are
primarily a result of the acquisition of Gordon Laboratories, Inc. ("Gordon").
The revenues of Gordon are included in the consolidated financial statements of
the Company from the date of acquisition (June 2, 2000) through June 30, 2000.
Revenues for the six months ended June 30, 2000 were $706,000 as compared to
$600 for the six months ended June 30, 1999. The increased revenues for the six
months ended June 30, 2000 are primarily a result of the above-mentioned
acquisition of Gordon.
Cost of sales was $492,600 for the three months ended June 30, 2000 and $513,400
for the six months ended June 30, 2000. These amounts relate primarily to the
cost of sales for Gordon.
Research and development costs were $416,300 for the three months ended June 30,
2000 as compared to $261,400 for the three months ended June 30, 1999. The
increase in research and development costs in the current period is primarily a
result of the continuing implementation of the Company's long-term business plan
to seek commercial applications of its intellectual properties and technologies.
Research and development costs were $711,000 for the six months ended June 30,
2000 as compared to $429,300 for the six months ended June 30, 1999.The
increased research and development costs for the six months ended June 30,2000
are primarily a result of the above-mentioned continued implementation of the
Company's long-term business plan.
Compensation costs - Officers and employees were $328,600 for the three months
ended June 30, 2000 as compared to $210,600 for the three months ended June 30,
1999. The increase in these costs in the current period is a result of the
addition of executive and senior level personnel to implement the Company's
business plan. In addition, the current period results now include the
Compensation costs of Officers and employees due to the acquisition of Gordon.
Compensation costs - Officers and employees were $557,000 for the six months
ended June 30, 2000 as compared to $386,100 for the six months ended June 30,
1999.
Interest expense and non-cash financing costs were $335,400 in the three months
ended June 30, 2000 as compared to $1,513,200 in the prior period. The decrease
is mainly due to the reduction in the amortization of original issue discount on
the senior convertible debentures. Interest expense and non-cash financing costs
were $1,232,000 in the six months ended June 30, 2000 as compared to $1,519,800
in the prior period. The decrease is a result of the above-mentioned reduction
in original issue discount.
Deemed dividend for the Class B, series 2 and 3 convertible preferred stock was
$278,000 in the three months ended June 30, 2000 as compared to $1,275,000 in
the prior period. The decrease is mainly due to a reduced amortization of the
original issue discount costs incurred on the convertible preferred stock.
Deemed dividend for the Class B, series 2 and 3 convertible preferred stock was
$981,000 in the six months ended June 30, 2000 as compared to $1,275,000 in the
prior period due to the above-mentioned reduced amortization of original issue
discount.
The Company anticipates that it will continue to incur significant 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
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research and development for improved commercial products and for new potential
applications and marketing expenses for implementation of the next phase of its
efforts to successfully commercialize the medical application of its technology.
The Company anticipates significantly higher compensation expenses in connection
with increased hiring of executives and staff. The Company will also incur
additional expenses implementing additional testing and clinical trials of its
technologies for the possible monitoring of other chromogenic diseases.
The Company anticipates that it will continue to incur net losses for the
foreseeable future as increased expenses are incurred in implementing its
long-term business plan.
LIQUIDITY AND CAPITAL RESOURCES
Current assets increased to $5,858,400 at June 30,2000 as compared to $4,933,700
at December 31,1999. This increase is primarily attributable to an increase in
inventories due to the acquisition of Gordon partially offset by a decrease in
cash and equivalents.
As indicated in the Company's consolidated Statements of Cash Flows, the
Company continued to experience significant negative net cash flows from
operating and investing activities are the second quarter and first half of
2000.The 2000 cash outflows from operating activities is primarily attributable
to the Company's net loss (partially offset by depreciation and amortization
expense, non-cash compensation costs to consultants, non-cash interest and
financing costs and collections of accounts receivable.)
Cash outflows from investing activities are primarily attributable to the net
cash used in the purchase of Gordon. Cash flows from financing activities during
2000 principally represent $4,405,200 of proceeds from the issuance of common
stock, Convertible preferred stock and warrants, partially offset by the
repayment of Gordon debt.
The Company's primary source of liquidity in 2000 was the net proceeds from the
private placement of convertible preferred stock totaling $3,610,000. The
Company anticipates incurring significant additional expenditures related to
manufacturing expenses, parts order, insurance, regulatory compliance and
staffing as production and distribution continues. In addition to the equity
financing discussed in Note 8,the Company intends to seek additional debt or
equity financing to facilitate short-term liquidity and to further support and
expand its operations.
If the Company is not able to attract additional future financing, generate
significant revenue from operations and/or successfully market its products and
technologies, at such point in time, it may have to significantly curtail and/or
cease operations.
Some of the information presented in or incorporated by reference in this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions, within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No disclosure is required under this Item 3.
-----------------------------------------------
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 27, 2000, the United States District Court for the Southern District of
New York dismissed a shareholders class action lawsuit filed in 1998 against the
Company and four of its officers. The class action suit had alleged that the
defendants artificially inflated the price of the Company's stock through false
and misleading public statements. In the dismissal ruling issued by Judge Sidney
H. Stein, the court found that plaintiffs had not sufficiently specified the
reasons that the statements were misleading and/or failed to specify a reason
that would be actionable under Section 10(b) of the Securities Exchange Act of
1934.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
The Board of Directors of the Company appointed the Company's President and
Chief Operating Officer, Brian Fitzpatrick, Acting Chief Executive Officer, such
appointment to be effective on August 14, 2000. Darby Simpson Macfarlane, the
Company's current Chief Executive Officer, will continue with the Company as its
Chairperson and Chief Technology Officer.
The Board of Directors also approved expansion of the Board from the existing
five to seven members effective August 3, 2000. Mr.Fitzpatrick, along with James
Bergman, an investor in the Company, will fill these vacancies until there is
shareholder approval of the expanded slate of Directors at the next Annual
Shareholders Meeting.
The Company recently submitted a 510(k) pre-market application to the Food and
Drug Administration ("FDA") in connection with additional improvements to its
ColorMate(R) TLc-Bilitest (R) System. The Company has received a request for
additional information from the FDA reviewer, to which it is in the process of
preparing a response.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)
2.1 Agreement of Purchase and Sale, dated as of April 17,2000
(the "Purchase Agreement"), among the Company and the
shareholders and certain noteholders of Gordon Acquisition
Corp., as amended (incorporated by reference to Exhibits
2.1,2.2 2.3 and 2.4 to the Company's Current Report on Form
8-K filed June 19, 2000).
27.1 Financial Data Schedule.
Reports on Form 8-K:
(b) The Company filed one Current report on Form 8-K on June 19, 2000, in
which it disclosed the acquisition by the Company of Gordon Acquisition
Corp., a manufacturer of cosmetics, hair care and other personal care
products.
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document
----------- --------
<S> <C>
2.1
Agreement of Purchase and Sale, dated as of April
17,2000 (the "Purchase Agreement"), among the Company
and the shareholders and certain noteholders of Gordon
Acquisition Corp., as amended (incorporated by
reference to Exhibits 2.1,2.2 2.3 and 2.4 to the
Company's Current Report on Form 8-K filed June 19,
2000).
27.1 Financial Data Schedule.
</TABLE>
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
Date: August 18, 2000 By: /s/ Darby S. Macfarlane
---------------------------
Darby S. Macfarlane
Chief Executive Officer
Date: August 18, 2000 By: /s/ Frank Marchese
---------------------------
Frank Marchese
Chief Financial and Principal
Accounting Officer
15
