SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number 0-21168
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
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(Exact Name of Registrant as Specified in Its Charter)
New York 13-3253392
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization Identification Number)
2500 Johnson Avenue, Riverdale, New York 10463
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(Address of principal executive offices)
(212) 717-6544
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(Registrant's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check whether the issuer (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 issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check whether the issuer 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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 20,989,550.
- i -
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC.
FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 2002
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements Page
Condensed Consolidated Balance Sheets as of
March 31, 2002 (unaudited) and December 31, 2001................2
Condensed Consolidated Statements of Operations
(unaudited) for the Three Months Ended
March 31, 2002 and 2001.........................................3
Condensed Consolidated Statements of Changes
in Stockholders' Equity (Deficiency) (unaudited)
for the three months ended March 31, 2002.......................4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the Three Months Ended March 31,
2002 and 2001...................................................5
Notes to Condensed Consolidated Financial
Statements (unaudited)..........................................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................9
Item 3 Quantitative and Qualitative Disclosure of Market Risk.........11
PART II OTHER INFORMATION..............................................11
Signatures................................................................13
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
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(unaudited)
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 73,000 $ 55,000
Accounts receivable 2,000 4,000
Inventories 350,000 350,000
Prepaid expenses and other current assets 28,000 38,000
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Total Current Assets 453,000 447,000
Property and equipment, net 139,000 155,000
Deferred financing costs 787,000 710,000
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$ 1,379,000 $ 1,312,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses:
Attorneys and accountants $ 1,105,000 $ 1,031,000
Consultants 470,000 469,000
Trade 289,000 276,000
Severance payable 725,000 725,000
Due to related parties 303,000 274,000
Notes payable 1,849,000 1,449,000
Notes payable - officer/stockholder 250,000 250,000
Advance from investor 25,000 25,000
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Total Current Liabilities 5,016,000 4,499,000
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COMMITMENTS AND OTHER MATTERS
SHAREHOLDERS' EQUITY (DEFICIENCY)
Preferred Stock 12,015,000 11,804,000
Common Stock: Authorized - 550,000,000 shares
$.001 par value; issued and outstanding 20,989,550 21,000 21,000
Additional paid-in capital 47,173,000 46,984,000
Accumulated deficit (62,846,000) (61,996,000)
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(3,637,000) (3,187,000)
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$ 1,379,000 $ 1,312,000
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See accompanying notes to condensed consolidated financial statements
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
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2002 2001
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Revenues:
Sales $ - $ -
COSTS AND EXPENSES:
Sales, marketing and trade show costs - 244,000
Medical regulatory expenses 3,000 276,000
Research and development 45,000 305,000
Patent application costs 23,000 136,000
Provision for estimated payments for
terminated employees - 1,045,000
General and administrative:
Compensation - Officers,
employees and consultants 120,000 404,000
Legal fees 47,000 154,000
Accounting fees 90,000 40,000
Rent and storage 23,000 92,000
Insurance 32,000 73,000
Repairs and maintenance 6,000 21,000
Depreciation and amortization 16,000 126,000
Taxes 8,000 27,000
Stock administrative fees 4,000 30,000
Public relations - 40,000
Other 33,000 66,000
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450,000 3,079,000
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OPERATING LOSS (450,000) (3,079,000)
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OTHER INCOME (EXPENSE):
Interest income - 3,000
Non-cash interest expense and financing costs (400,000) -
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(400,000) 3,000
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LOSS FROM CONTINUING OPERATIONS (850,000) (3,076,000)
LOSS FROM DISCONTINUED OPERATIONS (Note 3) - (540,000)
NET LOSS $ (850,000) $ (3,616,000)
============= ==============
NET LOSS TO COMMON STOCKHOLDERS:
LOSS FROM CONTINUING OPERATIONS $ (850,000) $ (3,076,000)
DEEMED DIVIDEND ON CONVERTIBLE PREFERRED STOCK 211,000 -
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LOSS FROM CONTINUING OPERATIONS TO
COMMON SHAREHOLDERS (1,061,000) (3,076,000)
LOSS FROM DISCONTINUED OPERATIONS (Note 3) - (540,000)
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NET LOSS TO COMMON STOCKHOLDERS $ (1,061,000) $ (3,616,000)
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 20,989,550 19,033,308
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BASIC AND DILUTED LOSS PER SHARE:
LOSS FROM CONTINUING OPERATIONS $ (0.05) $ (0.16)
LOSS FROM DISCONTINUED OPERATIONS - (0.03)
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NET LOSS TO COMMON STOCKHOLDERS $ (0.05) $ (0.19)
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See accompanying notes to condensed consolidated financial statements
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Three Months Ended March 31, 2002
Common Stock
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Number of
Preferred Shares Additional Paid Accumulated
Stock Outstanding Par Value in Capital Deficit
------------ ----------- ----------- ------------- ------------
Balances, December 31, 2001 $ 11,804,000 20,989,550 $ 21,000 $ 46,984,000 $(61,996,000)
Three Months Ended March 31, 2000:
Net Loss -- -- -- (850,000)
Warrants issued with notes payable -- -- 400,000 --
Deemed dividend on convertible
preferred stock 211,000 -- -- (211,000) --
------------ -------------- ------------- ------------- ---------------
Balances, March 31, 2002 $ 12,015,000 20,989,550 $ 21,000 $ 47,173,000 $(62,846,000)
============ ============== ============= ============= ===============
See accompanying notes to condensed consolidated financial statements
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
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2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations $ (850,000) $ (3,076,000)
Loss from discontinued operations - (540,000)
Adjustments to reconcile net loss to
net cash flows from operating activities:
Non-cash impairment charge and net change
in net assets of discontinued operations - 540,000
Depreciation and amortization 16,000 126,000
Compensation cost relating to options
granted to consultants - -
Non-cash interest and financing costs 400,000 -
Changes in operating assets and liabilities:
Accounts receivable 2,000 -
Inventories - 30,000
Prepaid expenses and other assets 10,000 (131,000)
Accounts payable and accrued expenses 81,000 1,682,000
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Net cash flows from continuing
operating activities (341,000) (1,369,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,000)
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Net cash flows from investing activities (3,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) of notes payable and warrants 400,000
Financing costs (41,000)
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Net cash flows from financing activities 359,000
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NET CHANGE IN CASH AND EQUIVALENTS 18,000 (1,372,000)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 55,000 1,379,000
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CASH AND EQUIVALENTS, END OF PERIOD $ 73,000 $ 7,000
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SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Deemed dividends $ 211,000 $ 278,000
Warrants issued with notes payable $ 400,000
See accompanying notes to condensed consolidated financial statements
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CHROMATICS COLOR SCIENCES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation:
Nature of Report - The condensed 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, 2001 and is presented for comparative purposes. All other
condensed 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 condensed 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, 2001.
Note 2 - Commitments and Contingencies:
Business Risks - Since its formation in 1984, the Company has been principally
engaged in color science technology research and development and licensing
activities, seeking mass market applications for its proprietary technology and
instrumentation. The Company's business encompasses all of the risks inherent in
the establishment of a new business enterprise, including a limited operating
history with significant competition possessing substantially greater resources.
Current and future operations also depend upon the continued employment of
certain key executives, the ability to further commercialize its proprietary
technology and products and the Company's ability to obtain sufficient revenues
and outside financing.
Operating Difficulties - Since 1989, the Company has incurred losses from
operations and net cash outflows from operations. The Company expects to license
its patents and proprietary technology, sell its equipment and market its
related services and products to ultimately overcome these difficulties.
Although the Company has taken steps to substantially reduce personnel and
ongoing operating expenses, the Company expects that it will continue to incur
costs in connection with the required research and development on its new LED
instrument and technology, complete filings, administration and maintenance for
certain intellectual properties and regulatory requirements; supply updated
products and sales support to its medical distributor; complete FDA filings for
upgrades to its medical products, and explore the possibility of either
renegotiating its current distribution agreement for its medical products or
selling the exclusive rights to its medical products and technology. In the
event that the Company is successful in selling the rights to its medical
technology, then $1,200,000 of the currently outstanding notes payable will be
repaid from the first $1,200,000 of such proceeds. There can be no assurance the
Company will not continue to incur such losses or will ever generate revenues at
levels sufficient to support profitable operations.
The Company anticipates that it will continue to incur net losses for the
foreseeable future as expenses are incurred in implementing its long-term
business plan.
The Company is currently taking steps to improve operating results and
has significantly reduced operating costs. The Company is experiencing a major
liquidity crisis and requires an immediate infusion of cash to continue
operations. The Company is seeking additional capital to facilitate liquidity
and is currently reviewing various financing proposals. If the Company is unable
to obtain such financing, or sell its assets to obtain a cash infusion, it may
be forced to seek protection from its creditors in bankruptcy.
Even if the Company is successful in obtaining this cash infusion, the Company
will require additional future financing to further execute its long range
business plan. If the Company is not able to attract additional future
financing, generate significant revenue from operations and/or successfully
market its products and technologies, it may have to significantly curtail
and/or cease operations and be forced to seek protection from its creditors in
bankruptcy.
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Legal Proceedings - On January 16, 2001, a lawsuit was commenced against the
Company and Darby Macfarlane in the federal district court for the Southern
District of New York entitled Richard Sommers and Linda Sommers v. Chromatics
Color Sciences International, Inc. and Darby S. Macfarlane. The plaintiffs
allege that certain statements purportedly made by or on behalf of the Company
concerning the Company's success, the extent of use of the ColorMate (Registered
Trademark) System and the Company's cash flow constituted violations of Section
10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated
thereunder and Section 12(a)(2) of the Securities Act of 1933 as well as common
law claims alleging fraudulent misrepresentation, concealment and nondisclosure
and seek unspecified damages in an amount to be proven at trial. On March 1,
2001, the defendants moved to dismiss the complaint for failure to state a claim
upon which relief can be granted, for failure to plead fraud with requisite
particularity and for failure to comply with the statutory requirements for
federal securities fraud claims. Oral argument was held before the Court in
January 2002 and the court entered an order granting the defendants' motion and
dismissing the case without prejudice, but with leave for the plaintiffs to
refile. A second amended complaint was filed in February 2002 and the defendants
intend to vigorously defend this action. The Company's financial statements do
not include any provision for the outcome of this matter.
Note 3 - Discontinued Operations
On June 2, 2000, the Company acquired the common stock and assumed certain debt
of 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 used to repay Gordon debt and 721,231 shares of the Company's
common stock, valued for financial reporting purposes at $6.29 per share, which
approximated the market value of the Company's common stock at the acquisition
date. An additional $653,000 was payable to the former shareholders of Gordon to
complete the purchase in the form shares of the Company's common stock. As a
result of a post closing adjustment the Company issued 22,894 shares of common
stock in 2001, valued at $144,000, in full consideration of the obligation and
the purchase price was reduced by $509,000. The acquisition was accounted for
under the purchase method of accounting for business combinations.
Due to the Company's deteriorating financial condition and inability to continue
to support Gordon's operations, the Company decided in early 2001 to sell
Gordon. On July 3, 2001, pursuant to the Share Subscription and Redemption
Agreement, dated as of June 19, 2001 (the "Purchase Agreement"), among the
Company, Abilene Investments Corp. ("Abilene"), GAC- Labs, LLC ("GAC- Labs" and
collectively with Abilene, the "Purchasers") and Gordon Acquisition Corp., a
wholly-owned subsidiary of the Company ("Gordon"), Gordon issued 200 shares of
common stock, par value $.001 per share, of Gordon ("Gordon Stock") to Abilene
and 800 shares of Gordon Stock to GAC-Labs for an aggregate purchase price of
$1,000,000. Simultaneously, the shares of Gordon Stock that were outstanding
immediately prior to the closing of this transaction, all of which were owned by
the Company, were redeemed for one dollar. In addition, the Company assigned to
the Purchasers its right, title and interest in the indebtedness of Gordon
and/or H.B. Gordon Manufacturing Co., Inc., its wholly-owned subsidiary, owed to
the Company in the ratio of 20% to Abilene and 80% to GAC-Labs.
As part of the same transaction, pursuant to the Purchase Option Agreement,
dated as of July 3, 2001 (the "Option Agreement"), among the Company, Abilene
and GAC-Labs, the Company was granted the option to purchase from the Purchasers
the shares of Gordon Stock issued to them and the indebtedness assigned to them
under the Purchase Agreement within one year for an aggregate purchase price of
$1,000,000 plus interest thereon at the rate of 14% per annum, subject to
reduction under certain conditions, as described below.
Furthermore, the Company granted to the Purchasers one-year warrants (the
"Warrants") to purchase (i) an aggregate of 2,000,000 shares of common stock,
par value $.001 per share, of the Company ("CCSI Stock") at the exercise price
of $.50 per share, if the Company does not consummate a rights offering/ private
placement by the Company of its securities prior to the one year expiration of
such warrants, or alternatively (ii) an aggregate of 11,200,000 shares of CCSI
Stock at the exercise price of $.10 per share and 4,800,000 shares at $0.001 per
share, subject to price adjustment, if the Company consummates a rights
offering/private placement by the Company of its securities prior to the one
year expiration of such warrants and obtains shareholder approval with respect
to such rights offering/private placement by the Company of its securities and
such increase in warrants. The fair market value of the 2,000,000 warrants was
immaterial. If the alternative additional warrants are issued at a later date,
the fair market value of such warrants will be recorded as a further loss on the
disposal of Gordon.
If (i) pursuant to the Option Agreement the Company exercises its option to
purchase from the Purchasers the shares of Gordon Stock issued to them and the
indebtedness assigned to them under the Purchase Agreement, (ii) the Company has
not effected a reverse stock split of the CCSI Stock in a ratio greater than ten
to one, (iii) the Company has consummated a rights offering/private placement by
the Company of its securities and (iv) the market price of CCSI Stock exceeds
$1.00 per share
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for at least ten consecutive trading days from and after the date of exercise
under the Option Agreement, the Warrants will be subject to mandatory exercise.
In the event of such a mandatory exercise, the Company will accept as payment of
the aggregate exercise price the shares of Gordon Stock that the Purchasers
acquired under the Purchase Agreement, and the exercise price under the Option
Agreement will be reduced to one dollar. The Warrants are also subject to
mandatory exercise if (i) a registration statement filed by the Company with
respect to the shares of CCSI Stock issuable upon exercise of the Warrants has
been declared effective by the Securities and Exchange Commission, (ii) the
Company has not effected a reverse stock split of the CCSI Stock in a ratio
greater than ten to one, (iii) the Company has consummated a rights
offering/private placement by the Company of its securities and (iv) the market
price of CCSI Stock exceeds $1.00 per share for at least ten consecutive trading
days from and after the effective date of such registration statement. In the
event of such a mandatory exercise, the Company will accept payment of the
aggregate exercise price through the means of a broker's cashless exercise
transaction.
The Company does not intend to exercise its option to repurchase Gordon and has
not had any influence on Gordon's operations since the sale in July 2001. An
officer and director of the Company, who is a former shareholder and Chairman of
Gordon, has maintained the title of President of Gordon and provides limited
consulting to Gordon's new management. Additionally, certain of the Purchasers
are stockholders of the Company. The financial statements for 2000 have been
retroactively changed to reflect Gordon's net assets and operations as
discontinued operations. The net assets of Gordon were written down to
$1,000,000 as of December 31, 2000. As a result of a post closing adjustment to
the purchase price, an adjustment was made in 2001 to reduce goodwill and the
amount payable for the purchase of Gordon by $509,000. Gordon incurred a loss of
$540,000 during the three months ended March 31, 2001.
Net sales and loss from the discontinued operation are as follows for the three
months ended March 31, 2001:
Net sales $ 1,167,000
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Loss from discontinued operation $ (540,000)
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Net assets of Gordon at December 31, 2000 were:
Cash $ 79,000
Accounts receivable 887,000
Inventory 896,000
Property and equipment 814,000
Other assets 2,705,000
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5,381,000
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Accounts payable and accrued expenses 1,234,000
Debt 3,147,000
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4,381,000
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Net assets $ 1,000,000
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Note 4 - Potential Common Shares
The Company has a substantial number of warrants, options and preferred shares
outstanding which may result in a substantial number of dilutive common shares
being issued in the future. See notes to consolidated financial statements in
the Company's December 31, 2001 annual 10-K filing.
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Note 5 - Notes payable
In the first quarter of 2002 the Company received $400,000 in connection with
the issuance of notes payable. The notes bear interest at 6% per annum and are
due in one year. In connection with the debt the Company issued an aggregate of
23,075,000 five year warrants with exercise prices of $0.02 to $0.10 per share.
Deferred financing costs were recorded for $400,000 in connection with the
warrants and $41,000 paid to a finder. Such costs are being charged to expense
over the term of the notes.
Note 6 - Subsequent Event
Subsequent to March 31, 2002, the Company received an additional $25,000 of
financing and issued notes payable and 1,250,000 warrants at $0.02 per share.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The Company incurred net losses from continuing operations of $850,000 and
$3,076,000 for the three months ended March 31, 2002 and 2001, respectively.
Loss per common share from continuing operations were $0.05 for 2002 and $0.16
for 2001. The reduction in net loss is primarily a result of the Company paring
back its expenses to preserve cash and the completion of the developmental stage
of its medical product, and a reduced impact from continued operations.
Sales, marketing and trade show costs were not incurred in 2002 primarily
attributable to Datex-Ohmeda, the Company's distributor, taking over these
responsibilities. The Company incurred $244,000 of Sales, marketing and trade
show costs in 2001.
Medical regulatory expenses were $3,000 in 2002 as compared to $276,000 in 2001.
The decrease was primarily attributable to Datex-Ohmeda, the Company's
distributor, assuming some of the regulatory expenses and the completion of the
majority of the expenses for FDA applications.
Research and development costs were $45,000 in 2002 as compared to $305,000 in
2001. The decrease in 2002 is primarily a result of the completion of the
majority of the work for FDA applications for upgrades to the TLc-BiliTest(R)
medical instrument in 2001, and pairing back expenses on further research and
development required on the LED instrument. The LED Instrument is a
significantly lower cost instrument made using low cost light emitting diodes
(LEDs) to measure color. This instrument allows the Company to offer lower cost
instruments for use in mass market applications where cost per instrument is
critical to mass marketing such as in the beauty industry for salons,
door-to-door or retail sales of cosmetics and hair color, for dentist offices,
or home use by the consumer.
In 2001, the Company recorded a provision for estimated payments for terminated
employees of $1,045,000.
General and administrative costs were $379,000 in 2002 as compared to
$1,073,000 in 2001.
Compensation - Officers, employees and consultants were $120,000 in 2002
compared to $404,000 in 2001. The decrease in these costs in 2002 is a result of
the reduction of personnel, including executive and senior level personnel to
pare back its expenses to preserve cash.
There were also significant decreases in legal fees, rent and storage,
insurance, depreciation and amortization and public relations.
Interest and financing costs were $400,000 in 2002 with no related cost in 2001.
The increase is due to the amortization of deferred finance costs.
Due to the sale of Gordon in 2001 the operations of Gordon, which was acquired
in June 2000, was retroactively treated as a discontinued operation. The loss
from discontinued operations in 2001 was $540,000 for the three month period
ended March 31, 2001.
Although the Company has substantially reduced personnel and ongoing operating
expenses, the Company expects that it will continue to incur costs in connection
with the required research and development on its new LED instrument and
technology, complete filings, administration and maintenance for certain
intellectual properties and regulatory requirements; supply updated products and
sales support to its medical distributor; complete FDA filings for upgrades to
its medical products, and explore the possibility of either renegotiating its
current distribution agreement for its medical products or selling the exclusive
rights to its medical products and technology.
The Company anticipates that it will continue to incur new losses for the
foreseeable future as expenses are incurred in implementing its long-term
business plan.
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Liquidity and Capital Resources
Current Assets were $453,000 at March 31, 2002 as compared to $447,000 at
December 31, 2001. Current Liabilities were $5,016,000 at March 31, 2002 as
compared to $4,449,000 at December 31, 2001. The increase is primarily due to
increases in Bridge financing.
With respect to the Bridge financing received in 2001 and 2002 notes payable
totaling $2,099,000, are payable in one year and carry annual interest charges
of 6% to 14%.
As indicated in the Condensed Consolidated Statement of Cash Flows, the Company
continues to experience significant negative net cash flows from operating
activities. The 2002 net cash outflow from operating activities is primarily
attributed to the Company's net loss partially offset by non cash interest and
financing costs.
The Company lacks funds to continue its operations and business plan, including
funds and necessary personnel to complete research and development on its new
LED instrument and technology which it became aware of during its first mass
manufacturing process; complete filings, administration and maintenance for
certain intellectual properties and regulatory requirements and supply upgraded
products and sales support to its medical distributor. After completion of the
first mass manufacturing prototype of the LED Instrument, the first mass
manufacturing run of products was attempted. During this process, the batch to
batch variability of the light emitting diodes caused errors in accuracy of the
instruments. This can be corrected in a number of ways, including additional
calibration procedures, which require more research and development to complete.
Additional funding is required to complete this research and development. The
Company's inability to complete required filings, administration and maintenance
related to its intellectual property would result in the loss of these related
sections of its intellectual property.
The Company's current objective with regard to its medical business is to arrive
at acceptable revised terms of the existing agreement with the distributor or to
identify a strategic partner in the medical industry to whom the Company could
sell, for an up-front fee and ongoing royalty, the exclusive market rights to
the ColorMate(R) TLc-BiliTest(R) System.
The Independent Auditors' Reports on the December 31, 2001 and December 31, 2000
financial statements describe conditions that raise substantial doubt about the
Company's ability to continue as a going concern.
The Company's business plan is to maintain reduced operating costs while seeking
additional financing and attempting to either arrive at acceptable revised
business arrangements with its current medical distributor or to sell to a
strategic partner the exclusive rights to its medical technology for monitoring
infant jaundice for an up-front fee and ongoing royalties. If it is successful
in these efforts to raise funds for continued operations, then the Company plans
to hire new management, continue its research and development on the LED
instrument and implement its business plan for marketing its technology and
instruments to the beauty industry including cosmetics, fashion and hair color
markets.
The Company is experiencing a major liquidity crisis and requires an immediate
infusion of cash to continue operations. The Company is seeking additional
capital to facilitate liquidity and is reviewing various potential financings
proposals and has taken steps to significantly reduce costs. If the Company is
unable to obtain such financing, or sell its assets to obtain a cash infusion,
it may be forced to seek protection from its creditors in bankruptcy.
Even if the Company is successful in obtaining this cash infusion, the Company
will require additional future financing to further execute its long range
business plan. If the Company is not able to attract additional future
financing, generate significant revenue from operations and/or successfully
market its products and technologies, it may have to significantly curtail
and/or cease operations and be forced to seek protection from its creditors in
bankruptcy.
In August 2001, the Company retained Janssen Partners, Inc. to serve as its
placement agent in connection with an offering of 10,333,333 shares of common
stock and warrants to raise $620,000 in proceeds, of which $25,000 has been
subscribed to as of April 22, 2002. Attached to each share is a Series A Common
Stock Purchase Warrant which vests immediately, has a five-year life and is
exercisable at $0.10 per share after registration of the underlying shares. Upon
the exercise of each
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Series A Common Stock Purchase Warrant, the holder will receive a Series B
Common Stock Purchase Warrant which vests immediately, has a five-year life from
date of issuance and is exercisable at $0.15 per share after registration of the
underlying shares.
The Company is contemplating issuing an additional proxy to obtain stockholder
approval for an additional proposed private placement by the Company involving
potential issuance of additional shares of common stock by the Company in an
aggregate amount in excess of 20% of the Company's common stock outstanding
immediately prior to such private placement at a price per share less than the
market value of the common stock.
On October 31, 2001, at a special shareholder meeting an amendment to the
Company's Certificate of Incorporation to increase the number of authorized
shares of common stock, $.001 par value per share, from 50,000,000 to
550,000,000 was approved. Additionally, an amendment to the Company's
Certificate of Incorporation to effect a one share for up to forty shares
reverse stock split of the Company's issued and outstanding shares of common
stock, as determined by the Company's Board of Directors was approved. Due to
the delisting of the Company's securities from NASDAQ SmallCap market, the
Company's Board of Directors does not see the necessity to execute a reverse
split in the Company's common stock at this time, but reserves the right to
reconsider this action at a later date within time frames proposed in the Proxy
which were approved by the Company's shareholders at the October 31, 2001
Special Meeting of the Shareholders.
Some of the information presented herein 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 including, among other things: (i) the inability of the
Company to resolve the current liquidity crisis, (ii) the inability of the
Company to secure additional financing, (iii) the failure of the Company to
implement its business plan for various applications of its technologies,
including medical and industrial technologies, (iv) government regulation and
(v) the loss of key personnel.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No disclosure is required under this Item 3.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On January 16, 2001, a lawsuit was commenced against the Company and Darby
Macfarlane in the federal district court for the Southern District of New York
entitled Richard Sommers and Linda Sommers v. Chromatics Color Sciences
International, Inc. and Darby S. Macfarlane. The plaintiffs allege that certain
statements purportedly made by or on behalf of the Company concerning the
Company's success, the extent of use of the ColorMate (Registered Trademark)
System and the Company's cash flow constituted violations of Section 10(b) of
the Securities Exchange Act of 1934 and SEC Rule 10b-5 promulgated thereunder
and Section 12(a)(2) of the Securities Act of 1933 as well as common law claims
alleging fraudulent misrepresentation, concealment and nondisclosure and seek
unspecified damages in an amount to be proven at trial. On March 1, 2001, the
defendants moved to dismiss the complaint for failure to state a claim upon
which relief can be granted, for failure to plead fraud with requisite
particularity and for failure to comply with the statutory requirements for
federal securities fraud claims. Oral argument was held before the Court in
January 2002 and the court entered an order granting the defendants' motion and
dismissing the case without prejudice, but with leave for the plaintiffs to
refile. A second amended complaint was filed in February 2002 and the defendants
intend to vigorously defend this action.
Item 2. Changes in Securities and Use of Proceeds.
None.
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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
On September 13, 2001, the Company received Food and Drug Administration (FDA)
clearance of its 510(k) premarket application to commercially market its
upgraded Colormate(R) TLc-BiliTest(R) System for non-invasive monitoring of
infant jaundice. The TLc-BiliTest(R) System upgrade includes faster, more user
friendly test programs with many new or improved features requested by
healthcare providers, such as test result transfer capability to a central
server via the internet. This most recent FDA clearance also confirmed the
safety and effectiveness of the TLc-BiliTest(R) System for infants of all races
and gestational ages before, during and after phototherapy, other than infants
with discoloration at a required measurement site. The Company believes these
features will provide a state-of-the art monitoring system for aiding physicians
and healthcare providers in monitoring bilirubin for newborn infants.
Item 6. Exhibits and Reports on Form 8-K.
Reports on Form 8-K:
None.
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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: May 20, 2002 By: /s/ Darby S. Macfarlane
-----------------------------------------
Darby S. Macfarlane
Chairperson of the Board
Date: May 20, 2002 By: /s/ Brian T. Fitzpatrick
-----------------------------------------
Brian T. Fitzpatrick
Acting Chief Executive Officer
and President
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