-----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, BMLkmqjYGt0WW4QnjzqWCfKgTMTtxaDBPeLzjxETnOaptLJfBMREhTF3ASX8mlSn XT38oCn0dEKWdgtWNXV0sg== 0000950005-99-000996.txt : 19991117 0000950005-99-000996.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950005-99-000996 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99753403 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 FORM 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 September 30, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required) Commission file number 0-23544 HUMAN PHERONONE 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.) 4034 Clipper Court, 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 1, 1999 Total Pages: 13 HUMAN PHEROMONE SCIENCES, INC. INDEX
Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets (Unaudited) as of September 30, 1999 and December 31, 1998...........................................................................4 Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 1999 and 1998.....................................................................5 Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 1999 and 1998...............................................................6 Notes to Condensed Financial Statements (Unaudited).............................................7 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 6. Exhibits and Reports on Form 8-K................................................................12 SIGNATURES.......................................................................................................13
2 PART I FINANCIAL INFORMATION Item 1. Financial Statements 3 Human Pheromone Sciences, Inc. Balance Sheets
September 30, 1999 December 31, (unaudited) 1998 ------------ ------------ Assets Current assets: Cash and cash equivalents $ 58,230 $ 76,696 Accounts receivable, net of allowances of $131,402 1,939,864 2,051,574 and $677,735 in 1999 and 1998, respectively Inventory 2,737,489 2,894,541 Other current assets 154,238 113,635 ------------ ------------ Total current assets 4,889,821 5,136,446 Property and equipment, net 23,919 58,596 ------------ ------------ $ 4,913,740 $ 5,195,042 ============ ============ Liabilities and shareholders' equity Loan payable, bank $ 1,200,000 $ 773,534 Accounts payable 689,151 691,674 Accrued advertising 196,000 553,926 Accrued commissions 333,964 448,051 Other accrued expenses 324,258 318,228 ------------ ------------ Total current liabilities 2,743,373 2,785,413 Shareholders' equity: Convertible preferred stock, issuable in series, no par value, shares authorized, 1,446,842 and 1,439,333 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 3,245,535 2,745,535 Common stock, no par value, 40,000,000 shares authorized, 3,429,839 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 17,667,024 17,667,024 Accumulated deficit (18,704,835) (18,002,930) Accumulated other comprehensive income: Foreign currency translation (37,357) -- ------------ ------------ Total shareholders' equity 2,170,367 2,409,629 ------------ ------------ $ 4,913,740 $ 5,195,042 ============ ============ See accompanying notes.
4 Human Pheromone Sciences, Inc. Statements of Operations (unaudited)
Three months ended Nine months ended ------------------------------ ------------------------------ September 30, September 30, ------------------------------ ------------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net sales $ 2,124,398 $ 2,312,805 $ 6,474,273 $ 7,581,223 Cost of goods sold 919,873 885,391 2,455,899 2,556,664 ----------- ----------- ----------- ----------- Gross profit 1,204,525 1,427,414 4,018,374 5,024,559 Expenses: Research and development 81,874 107,751 248,580 290,199 Selling, general and administrative 1,195,222 1,502,715 4,396,616 7,062,857 ----------- ----------- ----------- ----------- Total expenses 1,277,096 1,610,466 4,645,196 7,353,056 ----------- ----------- ----------- ----------- Loss from operations (72,571) (183,052) (626,822) (2,328,497) Interest income 102 58 256 220 Interest (expense) (24,227) (16,658) (70,399) (38,127) Other income (expense) 1,583 13,737 (4,940) 11,548 ----------- ----------- ----------- ----------- Loss before income taxes (95,113) (185,915) (701,905) (2,354,856) Income taxes -- -- -- -- ----------- ----------- ----------- ----------- Net loss $ (95,113) $ (185,915) $ (701,905) $(2,354,856) =========== =========== =========== =========== Net loss per common share-basic $ (.03) $ (.05) $ (.20) $ (.69) =========== =========== =========== =========== Net loss per common share- assuming dilution $ (.03) $ (.05) $ (.20) $ (.69) =========== =========== =========== =========== Weighted average shares used in calculation of net loss per share 3,429,839 3,429,839 3,429,839 3,429,839 =========== =========== =========== =========== Weighted average shares and equivalents, if dilutive, used in calculation of net loss per common share 3,429,839 3,429,839 3,429,839 3,429,839 =========== =========== =========== =========== See accompanying notes.
5 Human Pheromone Sciences, Inc. Statements of Cash Flows (unaudited)
Nine months ended September 30, ------------------------------------ 1999 1998 ----------- ----------- Cash flows from operating activities Net loss $ (701,905) $(2,354,856) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 34,677 49,838 Changes in operating assets and liabilities: Accounts receivable 111,710 1,047,737 Inventory 157,052 268,039 Other current assets (40,603) 16,400 Accounts payable and accrued liabilities (468,506) 14,836 ----------- ----------- Net cash provided by (used in) operating activities (907,575) (958,006) Cash flows from investing activities Purchase of property and equipment -- (21,796) ----------- ----------- Net cash used in investing activities -- (21,796) Cash flows from financing activities Proceeds from bank borrowings 1,510,000 3,766,390 Repayment of bank borrowings (1,083,534) (3,009,000) Proceeds from issuance of convertible preferred stock 500,000 -- ----------- ----------- Net cash provided by (used for) financing activities 926,466 757,390 Effect of exchange rate changes on cash (37,357) -- ----------- ----------- Net increase/(decrease) in cash and cash equivalents (18,466) (222,412) Cash and cash equivalents at beginning of the year 76,696 248,617 ----------- ----------- Cash and cash equivalents at end of the period $ 58,230 $ 26,205 =========== =========== See accompanying notes.
6 Human Pheromone Sciences, Inc. Notes to Condensed Financial Statements (unaudited) September 30, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed 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 and nine months ended September 30, 1999 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 1999. These condensed financial statements should be read in conjunction with the Company's audited financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 1998. Inventory Inventories are stated at the lower of cost (first in - first out method) or market. The inventory at September 30, 1999 consists of finished goods inventory valued at $886,439 work in process of $370,998 and raw materials of $1,480,052. At December 31, 1998, these balances were $1,114,443, $264,599 and $1,515,499, respectively. Comprehensive Loss Comprehensive loss for the quarter ended September 30, 1999 was $84,857 compared to $185,915 for the quarter ended September 30, 1998. Comprehensive loss for the nine months ended September 30, 1999 was $739,262 compared to $2,354,856 for the nine months ended September 30, 1998. 7 Item 2. Management's Discussion and Analysis 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 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 more easily and effectively than the Company. 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 Company's marketing strategy may not be successful. The Company 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 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. Four companies, Federated Department Stores, The May Company, Dayton Hudson/Marshall Fields and Dillard Department Stores, own the majority of upper end department stores. Because of their market share, each company has significant power to determine the price and promotional terms that the Company must meet in order to sell its products in the company's 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 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 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. 8 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 Three Months ended September 30, 1999 as compared to the Three Months ended September 30, 1998 Net sales for the third quarter of 1999 were $2,124,398 representing a decrease of 8% from sales of $2,312,805 for the prior year's quarter. Revenue from the sale of its human pheromone products under the Company's initial supply agreement with Avon Products, Inc. contributed 11% of the current quarter's net sales. The revenue from the supply agreement sales helped offset a 34% decline of department store sales from last year's third quarter. This decline is consistent with the Company's stated goal for 1999 to more directly focus selling and marketing efforts in a reduced number of department stores which have the potential to be profitable partners in the Realm(R) fragrance business. Sales to secondary markets increased 15% compared to last years third quarter. In 1999 a U.S. distributor, which is considered a domestic customer of the Company, began selling to international markets previously being serviced directly by the Company, thereby causing a decrease in reported sales to international markets, and increased sales to domestic secondary markets. International shipments have also declined since pipeline sales were made into new markets in 1998; there were no such pipeline sales in the 1999 quarter. Net sales for the quarters ended September 30, 1999 and 1998 were as follows: - -------------------------------------------------------------------------------- Markets 1999 1998 - -------------------------------------------------------------------------------- U.S. Markets $1,921,513 $2,026,618 International Markets 202,885 286,187 ---------- ---------- Net Sales $2,124,398 $2,312,805 Gross profit for the quarter ended September 30, 1999 decreased 16% to $1,204,525 from $1,427,414 in the prior year due to the sale of lower margin value sets this quarter. The Company offered to the department stores a lower priced Fall set to test consumer response to a lower price point. International gross profit is down 4% as we have started to sell lower margin sets into markets that have only purchased open stock products in the past. Research and Development expenses for the third quarters of 1999 and 1998 were $81,874 and $107,751 respectively. These costs principally reflect payments and costs under the Company's research contract with Pherin Pharmaceuticals. Operating expenses decreased $307,493 (20%), to $1,195,222 in the third quarter of 1999 from $1,502,715 in the third quarter of 1998. While $205,912 of this decrease was attributable to lower advertising, selling and marketing costs, decreased spending was also attained in facilities, and general and administrative areas. The 20% reduction in spending is the result of the Company's plan to execute a more focused sales and marketing strategy and a more focused expense budget. The third quarter results are consistent with the Company's 1999 sales and marketing plan that anticipated the decrease in sales and gross margin, with offsetting savings in operating areas. 9 The Company incurred $24,125 in net interest expense during the third quarter of 1999 compared to $16,600 net interest expense in 1998 due to higher average borrowings. Nine Months ended September 30, 1999 as compared to the Nine Months ended September 30, 1998 Net sales for the nine months ended September 30, 1999 were $6,474,273. This was a 15% decrease from net sales of $7,581,223 for the nine months of 1998. Revenue from the sale of the Company's human pheromones under a supply agreement with Avon Products, Inc. which commenced in 1999, and a 55% increase in sales for the secondary markets, catalog companies and direct marketing, offset a significant portion of the 70% decline in U.S. department store sales. The decline in the department store sales is attributable to the late 1998 reduction in the number of stores with whom the Company does business, and to the stated Company goal to focus on accounts that have the potential to be profitable partners. In 1999 a U.S. distributor, that is considered a domestic customer of the Company began selling to international markets previously being serviced directly by the Company, thereby causing a decrease in reported sales to the international markets. International shipments have also declined since pipeline sales were made into new markets in 1998; there were no such sales in 1999. Net sales for the nine months ended September 30, 1999 and 1998 are as follows: - -------------------------------------------------------------------------------- Class of Trade 1999 1998 - -------------------------------------------------------------------------------- U.S. Markets $6,019,961 $6,580,631 International Markets 454,312 1,000,592 ---------- ---------- Net Sales $6,474,273 $7,581,223 Gross profit for the nine months of 1999 declined 20% to $4,018,374 from $5,024,559 in 1998. The decrease is primarily the result of reduced sales volume, and the increased sales to the lower gross margin secondary sales channel. Research and Development expenses for the nine months of 1999 and 1998 were $248,580 and $290,199, respectively and are principally comprised of payments under the Company's contract with Pherin Corporation. Operating expenses decreased to $4,396,616 in the nine months ended September 30, 1999 from $7,062,857 in the period ended September 30, 1998. Selling, marketing and advertising accounted for $2,317,284 of the decrease with all operational areas also spending less in 1999 than in 1998. The reduced spending is consistent with the Company's 1999 sales and marketing plan that anticipated the decrease in sales and gross profit, with offsetting savings in operating expenses. The Company incurred $70,143 in net interest expense during the first nine months of 1999 compared to $37,907 net interest expense in 1998 due to higher average borrowings during the period. LIQUIDITY At September 30, 1999, the Company had a $3,000,000 line of credit, against which it had borrowed $1,200,000; its working capital was $2,146,448. At September 30, 1998 the Company had net borrowings of $1,305,390 and working capital of $2,002,985. For the first nine months of 1999, net cash used in operating activities was $907,575 compared to net cash used of $958,006 for the prior year's nine month period. Assuming the Company's activities proceed substantially as planned, the Company's line of credit, additional equity capital from preferred stock issuance, and anticipated revenues from product sales and technology licensing is expected to be adequate to meet its working capital needs over the next twelve months. Working capital requirements will primarily be for the supply of inventory and accounts receivable financing. 10 On July 23, 1999 and on August 11, 1999 the company obtained $100,000 additional equity capital (total of $200,000 was received) from a current shareholder by issuing shares of convertible preferred stock. Additional working capital may be required should the Company fail to generate consumer response levels as planned for in 1999. Furthermore, additional working capital may be required should the Company experience a greater than planned success with its products, potential product line extensions, and department store marketing efforts. Funds would be needed for inventory build-up, accounts receivable financing and staffing purposes. If the Company fails to achieve revenues from its 1999 marketing efforts, or if expansion proves to be more capital intensive than planned, the Company may require additional funding. There is no certainty that such funding would be available. Impact of Year 2000 The Company has completed a comprehensive review of its internal computer systems to identify the issues expected to arise in connection with the Year 2000. The Company is in the process of reviewing the status of its customers and suppliers with regard to this issue and assessing the potential impact of non-compliance by such parties on the Company's operations. The Company utilizes a server-based system for its material management, manufacturing, EDI interface, and financial systems. Year 2000 compliant software upgrades from the vendors have been installed, and tested with satisfactory results. The total cost to upgrade and test the systems was less than $20,000. The Company has also completed its review of non-server based systems and equipment (telephone system, fax machines, and off-the-shelf software). This review found that hardware was Year 2000 compliant, and that only a few software titles contained non-compliant Year 2000 date calculation errors. These software titles will be upgraded to more recent Year 2000 compliant versions later in the year if it is determined that the software is still needed by the Company. The financial impact is expected to be minimal. The Company is continuing the process of determining the extent to which it may be impacted by third party systems, which may not be Year 2000 compliant. The Year 2000 computer issue creates risk for the Company from third parties with whom the Company deals on financial transactions. To date the Company has received assurances from its key customers, and suppliers that they will be Year 2000 compliant. While the Company is receiving reassurance from it's customers and suppliers, there can be no assurance that the systems of other companies that the Company deals with or on which the Company's systems rely on will be timely converted, or that any such failure to convert by another company could not have an adverse effect on the Company. Contingency plans for suppliers, or customers that may not be compliant are part of the Company's material planning process and sales planning for the remainder of the year. Failure to complete any necessary remediation by the Year 2000 may have a material adverse impact on the operations of the Company. 11 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K The Company filed Form 8-K on September 30, 1999 reporting a change in the Company's certifying accountants. 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: November 11, 1999 /s/ William P. Horgan ------------------------------------ William P. Horgan Chairman and Chief Executive Officer Date: November 11, 1999 /s/ Gregory S. Fredrick ------------------------------------ Gregory S. Fredrick Vice President, Controller 13 EX-27.01 2 FINANCIAL DATA SCHEDULE
5 The Schedule Contains Summary Financial Information Extracted From Balance Sheets and Statements of Income. 1 3-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 58,230 0 2,071,266 (131,402) 2,737,489 4,889,821 799,867 (775,948) 4,913,740 2,743,373 0 0 3,245,535 17,667,024 (18,742,192) 4,913,740 6,474,273 6,474,273 2,455,899 4,396,616 248,580 0 70,399 (701,905) 0 (701,905) 0 0 0 (701,905) (0.20) (0.20)
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