10-Q 1 0001.txt FORM 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2000 ------------------ [ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required) Commission file number 0-23544 ------- HUMAN PHEROMONE SCIENCES, INC. ----------------------------------------------- (Name of small business issuer in its charter) California 94-3107202 ------------------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. employee) incorporation or organization Identification No.) 47650 Fremont Blvd. Suite 200, Fremont, California 94538 ---------------------------------------------------- ---------------------- (Address of principal executive offices) (Zip code) Issuer's telephone number: (510) 226-6874 Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 3,429,839 shares of Common Stock as of November 7, 2000. 1 HUMAN PHEROMONE SCIENCES, INC. INDEX
Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2000 (Unaudited) and December 31, 1999........................................................................4 Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three and Nine Months Ended September 30, 2000 and 1999..................................... 5 Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2000 and 1999 ...........................................................6 Notes to Consolidated Financial Statements (Unaudited).......................................7 Item 2. Management's Discussion and Analysis Management's Discussion and Analysis of Financial Condition and Results of Operations........9 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.............................................................13 SIGNATURES....................................................................................................14
2 PART I FINANCIAL INFORMATION Item 1. Financial Statements 3 Human Pheromone Sciences, Inc. Consolidated Balance Sheets
September 30, December 31, (in thousands except share data) 2000 1999 ------------------------------------------------------------------ -------- -------- (unaudited) Assets Current assets: Cash and cash equivalents $ 953 $ 108 Accounts receivable, net of allowances of $54 and $338 in 2000 and 1999, respectively 968 2,050 Inventories 368 2,304 Other current assets 51 36 -------- -------- Total current assets 2,340 4,498 Property and equipment, net 19 14 -------- -------- $ 2,359 $ 4,512 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Bank borrowings $ 0 $ 900 Accounts payable 119 573 Deferred revenue 94 0 Accrued advertising 24 313 Accrued commissions 5 286 Other accrued expenses 108 374 -------- -------- Total current liabilities 350 2,446 -------- -------- Commitments and Contingencies Shareholders' equity: Preferred stock, issuable in series, no par value, 10,000,000 sharesauthorized, 1,433,333 Series AA convertible shares issued and outstanding at September 30, 2000 and December 31, 1999, 18,159 and 14,203 Series BB convertible shares issued and outstanding at September 30, 2000 and December 31, 1999, respectively 3,706 3,296 Common stock, no par value, 13,333,333 shares authorized, 3,429,839 shares issued and outstanding on each date 17,667 17,667 Accumulated deficit (19,286) (18,847) Accumulated other comprehensive loss (78) (50) -------- -------- Total shareholders' equity 2,009 2,066 -------- -------- $ 2,359 $ 4,512 ======== ======== See accompanying notes to consolidated financial statements
4 Human Pheromone Sciences, Inc. Consolidated Statements of Operations and Comprehensive Loss (unaudited)
Three months ended Nine months ended -------------------- -------------------- September, 30 September 30, -------------------- -------------------- (in thousands except per share data) 2000 1999 2000 1999 ------- ------- ------- ------- Net product sales $ 219 $ 1,892 $ 1,974 $ 5,778 License and supply revenues 282 232 811 696 ------- ------- ------- ------- Net revenues 501 2,124 2,785 6,474 Cost of goods sold 170 920 856 2,456 ------- ------- ------- ------- Gross profit 331 1,204 1,929 4,018 Operating Expenses: Research and development 80 82 241 249 Selling, general and administrative 330 1,195 2,108 4,396 ------- ------- ------- ------- Total operating expenses 410 1,277 2,349 4,645 ------- ------- ------- ------- Loss from operations (79) (73) (420) (627) Other income and (expense) 0 Interest income (expense) 6 (24) (16) (70) Other income (expense) (6) 2 (4) (5) ------- ------- ------- ------- Total other income and (expense) -- (22) (20) (75) ------- ------- ------- ------- Net loss available to common shareholders (79) (95) (440) (702) Other comprehensive loss - translation adjustment (18) 11 (28) (37) ------- ------- ------- ------- Comprehensive loss $ (97) $ (84) $ (468) $ (739) ======= ======= ======= ======= ======= ======= ======= ======= Net loss per common share-basic and diluted $ (.02) $ (.03) $ (.13) $ (.20) ======= ======= ======= ======= Weighted average common shares outstanding 3,430 3,430 3,430 3,430 ======= ======= ======= ======= See accompanying notes to consolidated financial statements
5 Human Pheromone Sciences, Inc. Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, --------------------- (in thousands) 2000 1999 -------- -------- Cash flows from operating activities Net loss $ (440) $ (702) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 10 35 Provision for sales returns and allowances (284) (551) Changes in operating assets and liabilities: Accounts receivable 1,366 663 Inventories 1,936 157 Other current assets (15) (41) Deferred revenue 94 -- Accounts payable and accrued liabilities (1,289) (469) -------- -------- Net cash provided by (used in) operating activities 1,378 (908) -------- -------- Cash flows from investing activities Purchase of property and equipment (15) -- -------- -------- Net cash used in investing activities (15) -- -------- -------- Cash flows from financing activities Proceeds from bank borrowings 150 1,510 Repayment of bank borrowings (1,050) (1,084) Proceeds from issuance of convertible preferred stock 410 500 -------- -------- Net cash (used in) provided by financing activities (490) 926 -------- -------- Effect of exchange rate changes on cash (28) (37) -------- -------- Net increase in cash and cash equivalents 845 (19) Cash and cash equivalents at beginning of period 108 77 -------- -------- Cash and cash equivalents at end of period $ 953 $ 58 ======== ======== Cash paid for interest $ 24 $ 46 ======== ======== See accompanying notes to consolidated financial statements 6 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements (unaudited) September 30, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Human Pheromone Sciences, Inc. (the "Company") was incorporated in the State of California in 1989 under the name of EROX Corporation. The Company changed the name to Human Pheromone Sciences, Inc. in May 1998. The Company is engaged in the research, development, manufacturing, marketing and licensing of consumer products containing synthetic human pheromones as a component. The Company initiated commercial operations in late 1994 with a line of fine fragrances and toiletries. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 1999. Inventories Inventories are stated at the lower of cost (first in - first out method) or market. The inventory at September 30, 2000 consists of finished goods inventory valued at $264,000, work in process of $13,000, and raw materials of $91,175. At December 31, 1999, these balances were $662,000, $472,000 and $1,170,000, respectively. Capital Stock and Stock Options On September 30, 2000 the Company sold 1,149 shares of Series BB convertible preferred stock for $100,000, net of issuance costs, to a current shareholder. The sale enabled the Company's net equity to remain in compliance with the NASDAQ Small Cap listing requirements. No assurances can be given that the Company will remain in compliance with these listing requirements in the future. On June 30, 2000 the Company sold 526 shares of Series BB convertible preferred stock for $50,000, net of issuance costs, to a current shareholder. The sale enabled the Company's net equity to remain in compliance with the NASDAQ Small Cap listing requirements. On March 26, 2000 the Company sold 2,271 shares of Series BB convertible preferred stock for $260,000, net of issuance costs, to a current shareholder. The cash was used to reduce bank borrowings. Outstanding options to purchase shares of common stock and certain common stock equivalents were excluded from the computation of diluted earnings per share since their effect would be antidilutive. During the three months ended September 30, 2000, 208,000 common stock options were granted, no issued options were exercised and options for 16,000 shares were cancelled in connection with employee terminations. 7 License and Supply Revenue On April 24, 2000 the Company entered into a multi-year agreement under which it licensed its Realm(R) fragrance and toiletry brands to Niche Marketing, Inc. in exchange for a royalty on Niche Marketing sales. The license includes all territories excluding the Far East, which the company retains. The effective date for this agreement was May 1, 2000. The sale of the Company's patented pheromones to licensees are reported when the license fee revenues are earned ratably based upon the sales of the licensee or, if miniumum royalties are provided for in the particular agreement, based on a guaranteed annual minimum payment due from the licensee on a straight line basis over the applicable twelve month period. 8 Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Except for the historical information contained in this discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to the Company's plans for sales growth and expansion into new channels of trade, expectations of gross margin, expenses, new product introduction, and the Company's liquidity and capital needs. These matters involve risks and uncertainties that could cause actual results to differ materially from the statements made. In addition to the risks and uncertainties described in "Risk Factors", below, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. These and other factors may cause actual results to differ materially from those anticipated in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Risk Factors The Company's future results may be affected to a greater or lesser degree by the following factors among others: The Company's marketing strategy may not be successful. The Company may not be able to successfully complete negotiations for licensing its pheromone technology. The Company may not be able to establish and maintain the necessary sales and distribution channels. The Company may not have sufficient funds to successfully market its products if the current marketing strategy is not successful. The Company and/or its licensees may not be able to effectively compete with larger companies or with new products. The prestige fragrance market is extremely competitive. Many fragrance products are better known than the Company's products and compete for advertising and retail shelf space. Many competitors have significantly greater resources that will allow them to develop and introduce new competing products or increase the promotion of current products. The product life cycle of a fragrance can be very short. Changing fashions and fads can dramatically shift consumer preferences and demands. Traditional fragrance companies introduce a new fragrance every year or so. Changing fashions and new products may reduce the chance of creating long-term brand loyalty to the Company's products. The current retail environment may cause pricing and promotional pressures. Five companies control the majority of the sales in the U. S. department store arena. Because of their market share, each company will have significant power to determine the price and promotional terms which the Company and/or its licensees must meet in order to sell its products in the department stores. Seasonality in sales may cause significant variation in quarterly results. Sales in the fragrance industry are generally seasonal with sales higher in the second half of the year because of Christmas. This seasonality could cause a significant variation in the Company's quarterly operating results. The Company has reported operating losses in past years. No assurance can be given that the Company will produce operating income in the future. The Company may not be able to protect its technology or trade secrets. The Company's patents and patent applications may not protect the Company's technology or ensure that the Company's technology does not infringe another's valid patent. Others may independently develop substantially equivalent proprietary information. The Company may not be able to protect its technology, proprietary information or trade secrets. The Company may not be able to recruit and retain key personnel. The Company's success substantially depends upon recruiting and retaining key employees and consultants with research, product development and marketing experience. The Company may not be successful in recruiting and retaining these key people. 9 The Company relies upon other companies to manufacture its products. The Company relies upon Pherin and other companies to manufacture its pheromones, supply components, and to blend, fill and package its fragrance products. The Company may not be able to obtain or retain pheromones manufacturers, fragrance suppliers, or component manufacturers on acceptable terms. If not, the Company may not be able to obtain commercial quantities of its products. This would adversely affect operating results. Results of Operations Three Months ended September 30, 2000 compared to the Three Months ended September 30, 1999 Net revenues for the third quarter of 2000 were $501,000 representing a decrease of 76% from revenues of $2,124,000 for the prior year's quarter. The entire decrease is due to the absence of Realm(R) product sales for the quarter due to licensing of the Realm(R) product line to Niche Marketing effective May 1, 2000. The license and supply of pheromones under license agreements increased 21% to $282,000 for the current year period. The increased license and supply revenue is due to the Niche Marketing license revenue. Net revenues for the quarters ended September 30, 2000 and 1999 were as follows (in thousands). ------------------------------------------------------------------------ Markets 2000 1999 ------------------------------------------------------------------------ U.S. Retail & Distributor Markets $ 54 $ 1,689 License and Supply Revenues 282 232 International Markets 165 203 ------------ ----------- Net Revenues $ 501 $ 2,124 Gross profit for the quarter ended September 30, 2000 declined 73% to $331,000 from $1,204,000 in the prior year due to the reduced sales volume. As a percentage of sales, gross profit of 66% was better than last year of 57% reflecting the impact of the more profitable license and supply business. Research and Development expenses for the third quarters of 2000 and 1999 were $80,000 and $82,000, respectively. These costs principally reflect payments and costs under the Company's consulting agreements in this area. Selling, general and administrative expenses decreased $865,000 to $330,000 in the third quarter of 2000 from $1,195,000 in the third quarter of 1999. Advertising, selling, and marketing expenses were $765,000 less than the prior year as the licensee of the Realm(R) brand began incurring these expenses May 1,2000. Distribution expenses were reduced by $76,000, and general and administrative costs were $24,000 lower in the current year's quarter. The Company relocated during the current quarter to facilities that are better suited to the restructured organization, and consistent with the effort to reduce the overhead required to support its efforts to focus on new product development, and license opportunities for the patented pheromone technology. The Company incurred no net interest expense during the third quarter of 2000, and $24,000 in the third quarter of 1999. As a result of the licensee agreement, and subsequent sale of inventory, the Company paid off the outstanding balance on its bank line in April 2000. Nine Months ended September 30, 2000 as compared to the Nine Months ended September 30, 1999 Net revenues for the nine months ended September 30, 2000 were $2,785,000. This was a 57% decrease from net revenues of $6,474,000 for the nine months of 1999. The decreased revenues are due to the lack of Realm(R) brand products sales since May 1, the effective date of the license agreement, and the 22% sales decrease recorded in the first four months of the year. The license and supply revenues increased by $114,000 for the first 10 nine months of 2000 to $810,000. The Company realized nine months of license and supply revenue in 2000 as compared with 1999 which reflected the commencement of licensing revenue in March. Net sales for the six months ended September 30, 2000 and 1999 are as follows: ------------------------------------------------------------------------- Markets 2000 1999 ------------------------------------------------------------------------- U.S. Retail & Distributor Markets $ 1,587 $ 5,324 License and Supply Revenues 810 696 International Markets 388 454 ----------- --------- Net Revenues $ 2,785 $ 6,474 Gross profit for the first nine months of 2000 declined 52% to $1,929,000 from $4,018,000 in 1999. The decrease is the result of reduced sales volume. Gross profit as a percentage of revenues improved to 69% compared to 62% in 1999, also reflecting the impact of the more profitable license and supply business. Research and Development expenses for the first half of 2000 and 1999 were $241,000 and $249,000, respectively and are principally comprised of payments under the Company's contract with Pherin Corporation. Selling, general and administrative expenses decreased to $2,108,000 in the nine months ended September 30, 2000 from $4,396,000 in the period ended September 30, 1999. Selling marketing and advertising accounted for $1,922,000 of the decrease with all other operational areas spending less in 2000 than in 1999. The reduction in operating expenses of $2,288,000 is directly related to the Company's decision to license the Realm(R) brand and eliminate the expenses associated with directly to distributing with the department store accounts. The loss from operations decreased by $207,000 to $420,000 for the nine months ended September 30, 2000, from $627,000 in 1999. The Company's licensing of the Realm(R) brand has resulted in reduced net revenues offset by savings in operating expenses that have significantly reduced the operating losses. The unprofitable department store sales channel has been eliminated and replaced with a minimum royalty revenue source. The Company incurred $16,000 of net interest expense during the first nine months of 2000 compared to $70,000 net interest expense in 1999 due to the repayment of the credit line borrowings in April 2000. LIQUIDITY At September 30, 2000, the Company had no outstanding borrowings, and working capital was $1,990,000. At December 31, 1999 the Company had net borrowings of $900,000 and working capital of $2,052,000. For the nine months of 2000, net cash generated from operating activities was $1,378,000 compared to $908,000 used in operating activities for the prior year's nine months. Accordingly, the Company had a net repayment of its line of credit of $900,000 in the first nine months of 2000, while it had net additional borrowings of $426,000 in the same period of 1999. On July 1, 2000, the Company's Business Loan Agreement with Mid-Peninsula Bank of Palo Alto, California (the "Bank") providing for a continued line of credit expired. The Company may apply for a new credit line in the future. Assuming the Company's activities proceed substantially as planned, the Company's cash proceeds from the license to Niche Marketing, license revenues and anticipated revenues from product sales should be adequate to meet its working capital needs over the next twelve months. Working capital requirements will primarily be for research, product development and administrative costs. Additional working capital may be required should the Company fail to generate new products or new license revenues. Furthermore, additional working capital may be required should the Company experience a greater than planned success with its products, potential products, and research funding requirements. Funds would 11 be needed for inventory build, accounts receivable financing and staffing purposes. If the Company fails to achieve revenues from its 2000 marketing efforts, or if product development proves to be more capital intensive than planned, the Company may require additional funding. On September 30, 2000, the Company obtained $100,000 additional equity capital from a current shareholder by issuing shares of convertible preferred stock. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001 to affect its financial statements. In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. SAB No. 101 summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB No. 101 is effective for all transactions beginning with the second quarter of 2000. The Company has applied SAB No. 101 where applicable. 12 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ------ -------------------------------- (a) Exhibit 27.01-Financial Data Schedule 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this Report to be signed on behalf by the undersigned thereunto duly authorized. HUMAN PHEROMONE SCIENCES, INC. Registrant Date: November 13, 2000 /s/ William P. Horgan ----------------------------------- William P. Horgan Chairman and Chief Executive Officer Date: November 13, 2000 /s/ Gregory S. Fredrick ----------------------------------- Gregory S. Fredrick Vice President Finance 143