-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T9nTWsznMu5tCu1SWWMLcJwamC8dFDB8aBI1IxYbrajvQUn4wlrYnc288DNf8zj0 4aSwGc139dtXsXjvoNHH+A== 0000950005-01-500151.txt : 20010516 0000950005-01-500151.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950005-01-500151 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUMAN PHEROMONE SCIENCES INC CENTRAL INDEX KEY: 0000878616 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 943107202 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-23544 FILM NUMBER: 1638555 BUSINESS ADDRESS: STREET 1: 4034 CLIPPER CT CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5102266874 FORMER COMPANY: FORMER CONFORMED NAME: EROX CORP DATE OF NAME CHANGE: 19940307 10QSB 1 p13683-10qsb.txt 10QSB 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 March 31, 2001 -------------- [ ] 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.) 84 West Santa Clara Street, San Jose, California 95113 - -------------------------------------------------- ----------------------- (Address of principal executive offices) (Zip code) Issuer's telephone number: (408) 938-3030 46750 Fremont Boulevard, Suite 200, Fremont, CA 94538 ----------------------------------------------------- (Former name or former address, if changed since last report) Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] (APPLICABLE ONLY TO 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 May 5, 2001. HUMAN PHEROMONE SCIENCES, INC.
INDEX Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2001 (Unaudited) and December 31, 2000............................................................................3 Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the Three Months Ended March 31, 2001 and 2000.......................................................4 Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2001 and 2000....................................................................5 Notes to Consolidated Financial Statements (Unaudited)...........................................6 Item 2. Management's Discussion and Analysis Management's Discussion and Analysis of Financial Condition and Results of Operations............8 PART II OTHER INFORMATION Item 3. Quantitative and Qualitative Diclosures about Market Risk........................................11 Item 6. Exhibits and Reports on Form 8-K ...............................................................12 SIGNATURES........................................................................................................13
1 PART I FINANCIAL INFORMATION Item 1. Financial Statements 2 Human Pheromone Sciences, Inc. Consolidated Balance Sheets
March 31, December 31, (in thousands except share data) 2001 2000 - ------------------------------------------------------------ -------- -------- (unaudited) Assets Current assets: Cash and cash equivalents $ 1,012 $ 982 Accounts receivable, net of allowances at each period 657 754 Inventories 341 347 Other current assets 187 105 -------- -------- Total current assets 2,197 2,188 Property and equipment, net 13 16 -------- -------- $ 2,210 $ 2,204 ======== ======== Liabilities, Convertible Redeemable Preferred Stock and Shareholders' Deficiency Current liabilities: Accounts payable $ 90 $ 85 Accrued professional fees 62 83 Accrued vacation 32 24 Other accrued expenses 67 60 Deferred income -- 20 -------- -------- Total current liabilities 251 272 -------- -------- Commitments and Contingencies Convertible redeemable preferred stock: Preferred stock, issuable in series, no par value, 10,000,000 shares authorized, Series AA 1,433,333 convertible shares issued and outstanding at each date (total liquidation value $2,150) 2,146 2,146 Series BB 17,448 convertible shares issued and outstanding at each date (total liquidation value $1,745) 1,560 1,560 -------- -------- Total convertible redeemable preferred stock 3,706 3,706 -------- -------- Shareholders' deficiency: Common stock, no par value, 13,333,333 shares authorized, 3,429,839 shares issued and outstanding at each date 17,667 17,667 Accumulated deficit (19,347) (19,377) Foreign currency translation (67) (64) -------- -------- Total shareholders' deficiency (1,747) (1,774) -------- -------- $ 2,210 $ 2,204 ======== ======== See accompanying notes to consolidated financial statements.
3 Human Pheromone Sciences, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
Three months ended March 31, - ----------------------------------------------------------- ------------------ (in thousands except per share data) 2001 2000 ------- ------- Net sales ( including license fees of $325 and $245 in 2001 and 2000, respectively.) $ 629 $ 1,533 Cost of goods sold 226 546 ------- ------- Gross profit 403 987 ------- ------- Operating expenses: Research and development 85 80 Selling, general and administrative 295 1,188 ------- ------- Total operating expenses 380 1,268 ------- ------- Income (loss) from operations 23 (281) ------- ------- Other income (expense): Interest income (expense) 8 (22) Other (expense) (1) (2) ------- ------- Total other income (expense) 7 (24) ------- ------- Net income (loss) available to common shareholders 30 (305) Other comprehensive loss - translation adjustment (3) (7) ------- ------- $ 27 $ (312) ======= ======= $ .01 $ (0.09) ======= ======= Weighted average common shares outstanding - basic 3,430 3,430 Convertible redeemable preferred stock 1,604 -- ------- ------- Weighted average common shares outstanding - diluted 5,034 3,430 ======= =======
4 Human Pheromone Sciences, Inc. Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, ------------------ (in thousands) 2001 2000 ------- ------- Cash flows from operating activities $ 30 $ (305) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3 4 Changes in operating assets and liabilities: Accounts receivable 97 1,119 Inventories 6 329 Other current assets (82) 5 Accounts payable and accrued liabilities (21) (634) ------- ------- Net cash provided by operating activities 33 518 ------- ------- Cash flows from investing activities Purchase of property and equipment -- (2) ------- ------- Cash flows from financing activities Proceeds from bank borrowings -- 150 Repayment of bank borrowings -- Proceeds from issuance of convertible preferred stock -- 260 ------- ------- Net cash provided by financing activities -- 440 ------- ------- Effect of exchange rate changes on cash (3) (7) ------- ------- Net increase in cash and cash equivalents 30 69 Cash and cash equivalents at beginning of period 982 108 ------- ------- Cash and cash equivalents at end of period $ 1,012 $ 177 ======= ======= See accompanying notes to consolidated financial statements. 5 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements (unaudited) March 31, 2001 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 and marketing 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. In April 2000, the Company licensed the sale of its REALM fragrance products through department and specialty stores across the United States and selected international markets to Niche Marketing, Inc. The Company currently sells its REALM fragrance lines through distributors in selected markets in South East Asia, and licenses and sells its human pheromones for inclusion in other companies products in exchange for supply revenues and/or royalties. 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 months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2001. 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, 2000. Certain prior period balances have been reclassified to conform to the current period presentation. Inventories Inventories are stated at the lower of cost (first in - first out method) or market. The inventory at March 31, 2001 consists of finished goods inventory valued at $247,000, work in process of $16,000, and raw materials of $78,000. At December 31, 2000, these balances were $263,000, $13,000 and $71,000, respectively. Income Taxes The Company recorded no income tax provision in 2001 due primarily to a valuation allowance on deferred tax assets being recorded and the expected utilization of net operating losses carried forward from prior years to offset any significant tax liability. As of March 31, 2001, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,677,000. However, a full valuation allowance is provided for the gross deferred tax asset as management could not determine whether its realization is more likely than not. Capital Stock and Stock Options Outstanding options to purchase shares of common stock and potential common shares issuable upon conversion of preferred stock are excluded from the computation of diluted earnings per share since when the average stock price for the period is less than the exercise price of outstanding options or when their effect would be antidilutive. During the three months ended March 31, 2001 no common or preferred stock was issued, no common stock options were granted and no issued options were exercised. 6 2. SUBSEQUENT EVENT The Company entered into a new three year operating lease agreement for its office facility effective April 1, 2001. The lease provides for initial monthly payments of $5,036, subject to annual minimum increases based on the consumer price index, and the payment of common area maintenance fees. Annual minimum payments required under the lease are as follows: Year ended December 31, 2001 $45,300 2002 60,400 2003 60,400 2004 15,100 -------- $181,200 ======== 7 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: During the three months ended March 31, 2001, the Company has sustained its first quarterly operating profit since 1997. Effective May 1, 2000, the Company refocused its business model based on product licensing agreements. While the Company had profitable operations during the first quarter of 2001, there is no assurance that the Company's license based business model will be successful. The Company and/or Niche 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 REALM and innerREALM product lines. The Company's marketing strategy may not be successful. The Company or its distributors may not be able to establish and maintain the necessary sales and distribution channels. Retail outlets and catalogs may choose not to carry the Company's products. The Company or its distributors may not have sufficient funds to successfully market its products if the current marketing strategy is not successful. 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 that the Company and its distributor/licensee, Niche, must meet in order to sell its products in the department stores. Upper end department stores face increasing competition by discount perfumeries, drug chains and lower priced department stores for sales of fragrances and cosmetics. To compete, upper end department stores have cut inventories, reduced co-op advertising, and increased promotions. These tactics may force the Company or its distributors to reduce its prices or increase the cost of its promotions. 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 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 8 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. 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 pheromone 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 On April 24, 2000, the Company signed a multi-year licensing agreement for its REALM and innerREALM fragrance and toiletry products with Niche Marketing, Inc. ("Niche"), a newly formed affiliate of Northern Brands, Inc. Under the agreement, Niche will be responsible for the manufacture, marketing, selling and distribution of the REALM and innerREALM products in the United States and Internationally, excluding the Far East. Niche purchased the Company's applicable inventories and pays a royalty, with annual minimums, on sales of the current products and line extensions under the REALM and innerREALM brand names. During the term of the agreement, HPS will also sell Niche the pheromone components required for the manufacture of the products. Prior to this agreement, the Company recorded in is financial statements the revenues, costs and expenses directly attributable to the product sales to the U.S. Department stores and held the inventories, recorded the accounts receivable and reflected the accounts payable/accrued expenses attributable to the department store business. Accordingly, the data for the three months ended March 31, 2001 would not include this business while the data for the prior year quarter would reflect the department store operations for the entire periode, making some line-by-line comparisons between both periods difficult. Three Months ended March 31, 2001 compared to the Three Months ended March 31, 2000 Net sales and revenues for the first quarter of 2001 were $629,000, representing a decrease of 59% from sales of $1,533,000 for the prior year's quarter. This decrease is due to the absence of sales to the U.S. department stores and selected overseas markets, the business licensed to Niche marketing in April 2000. The sales of pheromones under license agreements increased by 29% to $325,000 in the current year period. The $176,000, or 138%, increase in sales to International markets in the current period is a result of the Company's focus on building its REALM business in Southeast Asia. Net sales for the quarters ended March 31, 2001 and 2000 were as follows (in thousands). 2001 2000 - -------------------------------------------------------------------------------- Markets: U.S. Retail & Distributor Markets $ -- $ 1,153 License and Supply Revenues 325 252 International Markets 304 128 ------- --------- Net Sales $ 629 $ 1,533 ======= ========= Gross profit for the quarter ended March 31, 2001 declined by 59% to $403,000 from $987,000 in the prior year due to the reduced sales volume. As a percentage of sales, gross profit of 64% was comparable with last year of 64%. Research and Development expenses for the first quarters of 2001 and 2000 were $85,000 and $80,000, respectively. These costs principally reflect payments and costs under the Company's consulting agreements in this area. 9 Selling, general and administrative expenses decreased $893,000 to $295,000 in the first quarter of 2001 from $1,188,000 in the first quarter of 2000. Advertising, selling, and marketing expenses were $870,000 less than the prior year as a result of the license of the U.S. department store business in April 2000. General and administrative costs were $23,000 lower in the current year's quarter, primarily as a result of lower staffing levels. The Company earned $8,000 in net interest income in the current year quarter and incurred $22,000 in net interest expense during the first quarter of 2000. The Company had average cash balances of approximately $1,000,000 during the first quarter of 2001, while having outstanding borrowings under its line of credit in the prior year quarter. The Company recorded no income tax provision in 2001 due primarily to a valuation allowance on deferred tax assets being recorded and the expected utilization of net operating losses carried forward from prior years to offset any significant tax liability. As of March 31, 2001, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,677,000. However, a full valuation allowance is provided for the gross deferred tax asset as management could not determine whether its realization is more likely than not. LIQUIDITY At March 31, 2001, the Company had cash of $1,012,000 with no outstanding bank borrowings and working capital of $1,946,000; at March 31, 2000, it had outstanding borrowings of $200,000 against its $3,000,000 line of credit and working capital was $2,002,000. For the first quarter of 2001, net cash generated from operating activities was $33,000. For the first quarter of 2000, net cash generated from operating activities was $518,000. Assuming the Company's activities proceed substantially as planned, the Company's current cash position and projected results of operations for the next twelve months are not expected to require additional outside financing. 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, there was no material impact from the adoption of the new standard on January 1, 2001. In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which provides interpretive guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 must be applied to financial statements no later than the quarter ended September 30, 2000. There was no material impact from the application of SAB 101 on the Company's financial position, results of operations, or cash flows. In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25. FIN 44 clarifies the application of Opinion No. 25 for (a) the definition of an employee for purposes of applying Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 became effective July 2, 2000, but certain conclusions cover specific events that occur after either December 15, 1998, or January 12, 2000. FIN 44 did not have a material impact on the Company's financial position, results of operations, or cash flows. 10 Item 3A. Quantitative and Qualitative Disclosures about Market Risk Foreign Currency Exchange Risk. All of the Company's sales are denominated in U.S. dollars, and as a result the Company has little exposure to foreign currency exchange risk. The effect of an immediate 10% change in exchange rates would not have a material impact on the Company's future operating results or cash flows. 11 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - None 12 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: May 11, 2001 /s/ William P. Horgan ------------------------------------- William P. Horgan Chairman and Chief Executive Officer Date: May 11, 2001 /s/ Gregory S. Fredrick ------------------------------------- Gregory S. Fredrick Vice President Finance -----END PRIVACY-ENHANCED MESSAGE-----