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
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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
HUMAN PHEROMONE SCIENCES, INC.______
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(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
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (408) 938-3030
46750 Fremont Boulevard, Suite 200, Fremont, CA 94538
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(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
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
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
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Gross profit 403 987
------- -------
Operating expenses:
Research and development 85 80
Selling, general and administrative 295 1,188
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Total operating expenses 380 1,268
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Income (loss) from operations 23 (281)
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Other income (expense):
Interest income (expense) 8 (22)
Other (expense) (1) (2)
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Total other income (expense) 7 (24)
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Net income (loss) available to common shareholders 30 (305)
Other comprehensive loss - translation adjustment (3) (7)
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$ 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
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Cash flows from investing activities
Purchase of property and equipment -- (2)
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Cash flows from financing activities
Proceeds from bank borrowings -- 150
Repayment of bank borrowings --
Proceeds from issuance of convertible preferred stock -- 260
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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
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$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
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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
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William P. Horgan
Chairman and Chief Executive Officer
Date: May 11, 2001 /s/ Gregory S. Fredrick
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Gregory S. Fredrick
Vice President Finance