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, 2000
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[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (no fee required)
Commission file number 0-23544
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HUMAN PHEROMONE SCIENCES, INC.
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(Name of small business issuer in its charter)
California 94-3107202
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(State or other jurisdiction of incorporation (I.R.S. employee
or organization) Identification No.)
4034 Clipper Court, Fremont, California 94538
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (510) 226-6874
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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, 2000.
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (Unaudited)
and December 31, 1999...........................................................................3
Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the
Three Months Ended March 31, 2000 and 1999..................................................... 4
Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2000 and 1999...................................................................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...........7
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................................................11
SIGNATURES..................................................................................................12
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) 2000 1999
- ----------------------------------------------------------- -------- --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 177 $ 108
Accounts receivable, net of allowances of $297
and $338 in 2000 and 1999, respectively 931 2,050
Inventories 1,975 2,304
Other current assets 31 36
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Total current assets 3,114 4,498
Property and equipment, net 12 14
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$ 3,126 $ 4,512
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Liabilities and Shareholders' Equity
Current liabilities:
Bank borrowings $ 200 $ 900
Accounts payable 300 573
Accrued advertising 209 313
Accrued commissions 65 286
Other accrued expenses 338 374
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Total current liabilities 1,112 2,446
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Commitments and Contingencies
Shareholders' equity:
Preferred stock, issuable in series, no par value, 10,000,000
shares
authorized, 1,433,333 Series AA convertible shares issued
and outstanding at March 31, 2000 and December 31, 1999,
16,484 and 14,203 Series BB convertible shares issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively 3,556 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 (19,152) (18,847)
Foreign currency translation (57) (50)
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Total shareholders' equity 2,014 2,066
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$ 3,126 $ 4,512
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<FN>
See accompanying notes to consolidated financial statements
</FN>
3
Human Pheromone Sciences, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Three months ended March 31,
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(in thousands except per share data) 2000 1999
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Net sales ( including license fees of $252,000 and $77,000
in 2000 and 1999, respectively.) $ 1,533 $ 2,239
Cost of goods sold 546 779
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Gross profit 987 1,460
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Operating expenses:
Research and development 80 84
Selling, general and administrative 1,188 1,663
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Total operating expenses 1,268 1,747
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Loss from operations (281) (287)
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Other expense
Interest expense (22) (22)
Other (2) 2
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Total other expense (24) (20)
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Net loss available to common shareholders (305) (307)
Other comprehensive loss - translation adjustment (7) (37)
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Comprehensive loss $ (312) $ (344)
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Net loss per common share-basic and diluted $ (0.09) $ (0.09)
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Weighted average common shares outstanding 3,430 3,430
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<FN>
See accompanying notes to consolidated financial statements
</FN>
4
Human Pheromone Sciences, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31,
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(in thousands) 2000 1999
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Cash flows from operating activities
Net loss $ (305) $ (307)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 4 12
Changes in operating assets and liabilities:
Accounts receivable 1,119 358
Inventories 329 41
Other current assets 5 (79)
Accounts payable and accrued liabilities (634) (380)
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Net cash provided by (used in) operating activities 518 (355)
Cash flows from investing activities
Purchase of property and equipment (2) --
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Net cash used in investing activities (2) --
Cash flows from financing activities
Proceeds from bank borrowings 150 500
Repayment of bank borrowings (850) (374)
Proceeds from issuance of convertible preferred stock 260 300
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Net cash (used in) provided by financing activities (440) 426
Effect of exchange rate changes on cash (7) (37)
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Net increase in cash and cash equivalents 69 34
Cash and cash equivalents at beginning of period 108 77
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Cash and cash equivalents at end of period $ 177 $ 111
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<FN>
See accompanying notes to consolidated financial statements
</FN>
5
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
(unaudited)
March 31, 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 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
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, 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 March 31, 2000 consists of finished goods
inventory valued at $518,000, work in process of $164,000, and raw materials of
$1,293,000. At December 31, 1999, these balances were $662,000, $472,000 and
$1,170,000, respectively.
Capital Stock and Stock Options
On March 26, 2000 the Company sold 2,281 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 to purchase shares of common stock were
excluded from the computation of diluted earnings per share since their effect
would be antidilutive.
During the three months ended March 31, 2000 no common stock options
were granted and no issued options were exercised.
Subsequent Event
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, with guaranteed annual
minimum payments due to the Company. The license includes all territories
excluding the Far East, which the company retains. As part of the agreement,
Niche Marketing will also purchase the Company's applicable inventory for cash
between the date of the agreement and for a period of five months thereafter.
6
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 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 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 Company may
not be able to successfully complete negotiations for licensing its pheromone
technology.
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
must meet in order to sell its products in the companys' 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.
7
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 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 March 31, 2000 compared to the Three Months ended March 31,
1999
Net sales for the first quarter of 2000 were $1,533,000 representing a
decrease of 32% from sales of $2,239,000 for the prior year's quarter.
Approximately 46% of the decrease are due to the absence of sales to department
stores with whom the Company has ceased doing business. The remaining department
store and distributor sales shortfall from the prior year is attributable to a
reduction of inventories by the retailers and the delay of shipments of Father's
Day value sets in the current year. The sales of pheromones under license
agreements increased by 227% to $252,000 in the current year period.
Direct sales to international customers were consistent with the prior
year. Net sales for the quarters ended March 31, 2000 and 1999 were as follows
(in thousands).
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Markets 2000 1999
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U.S. Retail & Distributor Markets $1,153 $2,037
License and Supply Revenues 252 77
International Markets 128 125
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Net Sales $1,533 $2,239
Gross profit for the quarter ended March 31, 2000 declined 32% to
$987,000 from $1,460,000 in the prior year due to the reduced sales volume. As a
percentage of sales profit of 64% was comparable with last year of 65%.
Research and Development expenses for the first quarters of 2000 and
1999 were $80,000 and $84,000, respectively. These costs principally reflect
payments and costs under the Company's consulting agreements in this area.
Selling, general and administrative expenses decreased $475,000 to
$1,188,000 in the first quarter of 2000 from $1,663,000 in the first quarter of
1999. Advertising, selling, and marketing expenses were $408,000 less than the
prior year as the Company continued to focus on advertising efforts in the
remaining department store accounts and eliminated spending with non-profitable
accounts. General and administrative costs were $67,000 lower in the current
year's quarter as the Company continues its efforts to reduce these expenses.
The Company incurred $22,000 in net interest expense during the first
quarter of both years. During the first quarter of 2000, the Company decreased
its net borrowing position as compared to the same period in 1999, but interest
rates were higher.
8
LIQUIDITY
At March 31, 2000, the Company had outstanding borrowings of $200,000
against its $3,000,000 line of credit; and working capital was $2,002,000. At
December 31, 1999 the Company had net borrowings of $900,000 and working capital
of $2,052,000. For the first quarter of 2000, net cash generated from operating
activities was $518,000 compared to $355,000 used in operating activities for
the prior year's quarter. Accordingly, the Company had a net repayment of its
line of credit of $700,000 in the first quarter of 2000, while it had net
additional borrowings of $126,000 in the first quarter of 1999.
On March 24, 2000, the Company extended its Business Loan Agreement
with Mid-Peninsula Bank of Palo Alto, California (the "Bank") providing for a
continued line of credit. The Company may borrow up to $1,500,000 at an interest
rate equal to the Bank's prime rate plus 1.0% with borrowings secured primarily
by the Company's trade receivables and inventory. The agreement, which expires
on July 1, 2000, contains certain debt-to-equity and working capital covenants.
At March 31, 2000 the Company was in compliance with such covenants.
On April 24, 2000, the Company signed a multi-year license agreement
with Niche Marketing, Inc., an affiliate of Northern Brands, Inc., for the
Realm(R) and innerRealm(R) brand of products. Niche Marketing will purchase
applicable inventories and will pay the Company royalties, subject to annual
minimums, on the sale of current REALM products and line extensions under the
Realm brand names.
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 lower 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 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 March 26, 2000, the Company obtained $260,000 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
9
with the second quarter of 2000. The Company has not yet analyzed the impact, if
any, that SAB No. 101 will have on its financial statements.
Impact of Year 2000
The year 2000 issue is the result of computer programs being written
using two digits (rather than four) to define the applicable year. We believe
that all of our material systems are substantially year 2000 compliant. To our
knowledge, we have not experienced any significant problems as a result of year
200 issues. We will continue to monitor critical computer applications and those
of our suppliers and vendors throughout the year 2000 to ensure any latent risks
that may arise are addressed promptly.
10
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibit 10.19 Business Loan Agreement dated March 24, 2000
(b) Exhibit 10.20 License Agreement with Niche Marketing, Inc.
(c) Exhibit 27.01-Financial Data Schedule
11
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 12, 2000 /s/ William P. Horgan
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William P. Horgan
Chairman and Chief Executive Officer
Date: May 12, 2000 /s/ Gregory S. Fredrick
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Gregory S. Fredrick
Vice President Finance