HORGAN DRAFT OF NOVEMBER 5 W/SLGG CHANGES
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, 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.
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(Name of small business issuer in its charter)
California 94-3107202
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(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
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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 November 2, 2001.
1
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2001 (Unaudited)
and December 31, 2000............................................................................ 4
Consolidated Statements of Operations and Comprehensive Loss (Unaudited) for the
Three and Nine Months Ended September 30, 2001 and 2000.......................................... 5
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 2001 and 2000................................................................ 6
Notes to Consolidated Financial Statements (Unaudited)........................................... 7
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results of Operations........... 9
Item 3A. Quantitative and Qualitative Disclosures about Market Risk ..................................... 13
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................ 14
SIGNATURES........................................................................................................ 15
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
3
Human Pheromone Sciences, Inc.
Consolidated Balance Sheets
September 30, December 31,
(in thousands except share data) 2001 2000
- ---------------------------------------------------------------------- ----------------- --------------
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 1,092 $ 982
Accounts receivable, net of allowances of $132,000
and $125,000 in 2001 and 2000, respectively 931 754
Inventories, net 452 347
Other current assets 84 105
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Total current assets 2,559 2,188
Property and equipment, net 10 16
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$ 2,569 $ 2,204
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 220 $ 85
Accrued professional fees 35 83
Accrued advertising 13 13
Accrued vacation 40 24
Other accrued expenses 65 47
Deferred revenue 210 20
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Total current liabilities 583 272
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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
on each date; total liquidation value $2,150 2,146 2,146
Series BB 17448 convertible shares issued and outstanding
on each date; total liquidation value $1,745 1,560 1,560
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Total convertible redeemable preferred stock 3,706 3,706
Shareholders' deficiency:
Common stock, no par value, 13,333,333 shares
authorized, 3,429,839 shares
issued and outstanding on each date 17,667 17,667
Accumulated deficit (19,319) (19,377)
Accumulated other comprehensive loss (68) (64)
-------- --------
Total shareholders' deficiency (1,720) (1,774)
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$ 2,569 $ 2,204
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
4
Human Pheromone Sciences, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------- ------------------
(in thousands except per share data) 2001 2000 2001 2000
------- ------- ------- -------
Net revenues 724 501 1,912 2,785
Cost of goods sold 277 170 701 856
------- ------- ------- -------
Gross profit 447 331 1,211 1,929
Operating Expenses:
Research and development 86 80 251 241
Selling, general and administrative 352 330 921 2,108
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Total operating expenses 438 410 1,172 2,349
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Income (Loss) from operations 9 (79) 39 (420)
Other income and (expense)
Interest income (expense) 7 6 23 (16)
Other income (expense) 1 (6) (4) (4)
------- ------- ------- -------
Total other income and (expense) 8 -- 19 (20)
------- ------- ------- -------
Net income (loss) available to common shareholders 17 (79) 58 (440)
Other comprehensive loss - translation adjustment -- (18) (4) (28)
------- ------- ------- -------
Comprehensive income (loss) $ 17 $ (97) $ 54 $ (468)
======= ======= ======= =======
Net income (loss) per common share-basic and fully
diluted $ -- $ (.02) $ .02 $ (.13)
======= ======= ======= =======
Weighted average common shares outstanding 3,430 3,430 3,430 3,430
======= ======= ======= =======
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
5
Human Pheromone Sciences, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended
September 30,
-------------------
(in thousands) 2001 2000
- ------------------------------------------------------- ------- -------
Cash flows from operating activities
Net profit (loss) $ 58 $ (440)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 7 10
Provision for sales returns and allowances 7 (284)
Changes in operating assets and liabilities:
Accounts receivable (184) 1,366
Inventories (105) 1,936
Other current assets 21 (15)
Deferred revenue 190 94
Accounts payable and accrued liabilities 121 (1,289)
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Net cash provided by operating activities 115 1,378
Cash flows from investing activities
Purchase of property and equipment (1) (15)
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Net cash used in investing activities (1) (15)
Cash flows from financing activities
Proceeds from bank borrowings -- 150
Repayment of bank borrowings -- (1,050)
Proceeds from issuance of convertible preferred stock -- 410
------- -------
Net cash (used in) provided by financing activities -- (490)
Effect of exchange rate changes on cash (4) (28)
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Net increase in cash and cash equivalents 110 845
Cash and cash equivalents at beginning of period 982 108
------- -------
Cash and cash equivalents at end of period $ 1,092 $ 953
======= =======
Interest paid $ 3 $ 24
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<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
6
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
(unaudited)
September 30, 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, marketing and licensing of
consumer products containing synthetic human pheromones as a component. The
Company initiated commercial operations in late 1994 with a line of fine
fragrances and toiletries. In April 2000, the Company licensed the sale of its
REALM(R) fragrance products through department stores 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 and nine months ended September
30, 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 September 30, 2001 consists of finished
goods inventory valued at $199,000, work in process of $36,000, and raw
materials of $217,000. 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 September 30, 2001, the Company's gross
deferred tax asset, which relates primarily to net operating losses carried
forward was $6,655,000.
Earnings Per Share
Basic earnings per share is computed by dividing net income or loss by
the weighted average number of shares outstanding for the year. "Diluted"
earnings per share is computed by dividing net income or loss by the total of
the weighted average number of shares outstanding plus, if applicable, the
dilutive effect of outstanding stock options.
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Capital Stock and Stock Options
During the three months ended September 30, 2001, no common stock
options were granted and no issued options were exercised.
8
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Except for the historical
information contained in this discussion and analysis of financial condition and
results of operations, the matters discussed herein are forward looking
statements. These forward looking statements include but are not limited to the
Company's plans for sales growth and expansion into new channels of trade,
expectations of gross margin, expenses, new product introduction, and the
Company's liquidity and capital needs. These matters involve risks and
uncertainties that could cause actual results to differ materially from the
statements made. In addition to the risks and uncertainties described in "Risk
Factors", below, these risks and uncertainties may include consumer trends,
business cycles, scientific developments, changes in governmental policy and
regulation, currency fluctuations, economic trends in the United States and
inflation. These and other factors may cause actual results to differ materially
from those anticipated in forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof.
Risk Factors
The Company's future results may be affected to a greater or lesser
degree by the following factors among others:
During the nine months ended September 30, 2001, the Company has
sustained its first quarterly operating profits 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 nine
months of 2001, there is no assurance that the Company's license based business
model will be successful.
The Company and/or Niche Marketing 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 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, which the
Company and/or its U.S. distributor, Niche Marketing, 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 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.
9
The Company has reported operating losses in past years. No assurance
can be given that the Company will produce operating income in the future.
The Company may not be able to protect its technology or trade secrets.
The Company's patents and patent applications may not protect the Company's
technology or ensure that the Company's technology does not infringe another's
valid patent. Others may independently develop substantially equivalent
proprietary information. The Company may not be able to protect its technology,
proprietary information or trade secrets.
The Company may not be able to recruit and retain key personnel. The
Company's success substantially depends upon recruiting and retaining key
employees and consultants with research, product development and marketing
experience. The Company may not be successful in recruiting and retaining these
key people.
The Company relies upon other companies to manufacture its products.
The Company relies upon Pherin Pharmaceuticals, Inc. 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
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 its financial statements the revenues, costs
and expense directly attributable to the product sales to the U.S. Department
stores; the Company also maintained inventories, recorded the accounts
receivable and reflected the accounts payable/accrued expenses attributable to
the department store business. Accordingly, the data for the three and nine
months ended September 30, 2001 and the quarter ended September 30, 2000 does
not include this business while the data for the prior years nine months
reflects the department store operations for four months of the nine month
period, making some line-by-line comparisons between both periods difficult.
Three Months ended September 30, 2001 compared to the Three Months ended
September 30, 2000
Net sales and revenues for the three months ended September 30, 2001
were $724,000, representing a 45% increase from sales of $501,000 for the prior
year's quarter. This increase is due an increase in both pheromone sales and in
the sales of REALM fragrances lines to the oversees markets that the Company's
retained in its license agreement with Niche Marketing.
The Components of net revenues for the quarters ended September 30,
2001 and 2000 were as follows (in thousands).
- --------------------------------------------------------------------------------
Markets 2001 2000
- --------------------------------------------------------------------------------
U.S. Retail & Distributor Markets $ 5 $ 55
License and Supply Revenues 455 281
International Markets 264 165
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Net Revenues $ 724 $ 501
The increase in licensing and supply revenues is primarily a factor of
additional sales of pheromones to Niche Marketing for manufacture of the REALM
products under license. The growth in the sales to International markets is a
factor of our distribution agreements in South East Asia, which were not in
effect in the prior year.
10
The year 2000 international sales included sales to European REALM distributors
who are now customers of Niche Marketing.
Gross profit for the quarter ended September 30, 2001 increased 35% to
$447,000 from $331,000 in the prior year due to the increased revenue. As a
percentage of sales gross profit declined to 62% of sales as compared with 66%
in the prior year period. The decrease is due to higher costs associated with
the sale of REALM products to the South East Asia markets.
Research and Development expenses were $86,000 in the quarter ending
September 30, 2001 and $80,000 for the quarter ending September 31, 2000. These
costs principally reflect payments and costs under the Company's consulting
agreements with Pherin.
Selling, general and administrative expenses increased 7% to
$352,000 in the three months ended September 30, 2001 from $330,000 in the
period ended September 30, 2000. Distribution and facilities spending decreased
by $26,000, while general and administrative expenses spending increased by
$48,000 in 2001. An additional reserve of $86,000 was established in the quarter
for department store receivables that we have not been able to collect since the
licensing of the REALM product lines to Niche Marketing. We are continuing our
collection efforts and any recoveries will be recorded at that time of receipt.
The income from operations of $9,000 represented an $88,000 improvement
from the $79,000 loss incurred in the third quarter of 2000. The Company's
licensing of the Realm brand, which was effective May 1, 2000, resulted in
reduced net revenues and gross profit, but the significant savings in operating
expenses resulted in the favorable variance in operating income.
The Company incurred interest income of $7,000 during the third quarter
of 2001 as compared to $6,000 in the prior year period. While cash balances were
higher, the effective interest rate paid was lower in the current year.
Nine Months ended September 30, 2001 as compared to the Nine Months ended
September 30, 2000
Net revenues for the nine months ended September 30, 2001 were
$1,912,000. This was a 31% decrease from net revenues of $2,785,000 for the
first nine months of 2000. The lack of Realm brand products sales in the United
States as a result of the May 1, 2000 effective date of the license agreement
with Niche Marketing, accounted for a $1,532,000 reduction. License and supply
revenues increased by $306,000 for the first nine months of 2001 to $1,116,000
as a result of increased licensing and supply activities. Sales in International
markets increased by 95% to $755,000 as a result of the Company's efforts to
open the South East region to REALM fragrances, especially the success of the
Japanese market.
Net sales for the nine months ended September 30, 2001 and 2000 were as
follows:
- --------------------------------------------------------------------------------
Markets 2001 2000
- --------------------------------------------------------------------------------
U.S. Retail & Distributor Markets $ 41 $ 1,587
License and Supply Revenues 1,116 810
International Markets 755 388
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Net Sales $ 1,912 $ 2,785
Gross profit for the first nine months of 2001 declined 42% to
$1,211,000 from $1,929,000 in 2000. The decrease is the result of reduced sales
volume and one-time credits associated with the license to Niche Marketing in
May 2000. Gross profit as a percentage of revenues decreased to 63% compared to
69% in 2000 reflecting the impact of the larger gross margin retail product
sales (which excludes all sales and marketing expenses) versus the more
profitable license and supply business.
11
Research and Development expenses for the first nine months of 2001 and
2000 were $251,000 and $241,000, respectively, and are principally comprised of
payments under the Company's contract with Pherin Corporation.
Selling, general and administrative expenses dropped to $921,000 in the
nine months of 2001, a 56% reduction from the $2,108 reflected in the nine
months of last year. All categories of spending decreased, primarily as a result
of the licensing of the Company's REALM fragrance business in the New United
States and abroad.
The Company generated income from operations of $39,000 as compared to
a loss of $420,000 in the first nine months of 2000. The Company's licensing of
the Realm brand has resulted in reduced net revenues offset by savings in
operating expenses that have eliminated the operating losses. The unprofitable
department store sales channel has been replaced with a minimum royalty revenue
source.
The Company's cash balances generated $23,000 in net interest income
during the first nine months of 2001, as compared to $16,000 net interest
expense in 2000 due to the repayment of the credit line borrowings in April 2000
and positive cash in the first nine months of 2001. Miscellaneous expense of
$4,000 was incurred in both 2001 and 2000.
LIQUIDITY
At September 30, 2001, the Company had no outstanding bank borrowings,
and cash balances of $1,092,000, an increase of $110,000 compared to the balance
of $982,000 at December 31, 2000. Working capital increased to $1,976,000 at
September 30, 2001 from $1,916,000 at December 31, 2000.
Assuming the Company's activities proceed as planned, the Company's
cash proceeds from license revenues and anticipated revenues from product sales
should be adequate to meet its working capital needs over the next twelve
months. Working capital requirements will primarily be for research, product
development and administrative costs.
Additional working capital may be required should the Company fail to
generate new products or new license revenues. Furthermore, additional working
capital may be required should the Company experience a greater than planned
success with its products, potential products, and research funding
requirements. Funds would be needed for inventory, accounts receivable financing
and staffing purposes. If the Company fails to achieve revenues from its 2001
marketing efforts, or if product development proves to be more capital intensive
than planned, the Company may require additional funding.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS NO. 141, "Business Combinations."
This statement addresses financial accounting and reporting for business
combinations and supersedes Accounting Principles Bulleting ("ABP") Opinion No.
16, "Business Combinations," and SFAS No. 38, "Accounting for Pre-Acquisition
Contingencies of Purchased Enterprises." All business combinations in the scope
of this statement are to be accounted for using one method, the purchase method.
The provisions of this statement apply to all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method for those business
combinations is prohibited. This statement also applies to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001 or later. This statement is not applicable to the
Company.
In July 2001, the FASB issued SFAS No, 142, "Goodwill and Other
Intangible Assets." This statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, "Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. It is effective for fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years
beginning after
12
March 15, 2001, provided that the first interim financial statements have not
been issued previously. This statement is not applicable to the Company.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and/or the normal operation of long-lived assets,
except for certain obligations of lessees. This statement is not applicable to
the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement replaces SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," the accounting
and reporting provisions of APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions," for the disposal
of a segment of a business, and amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The Company does
not expect adoption of SFAS No. 144 to have a material impact, if any, on its
financial position or results of operations.
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.
13
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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None
14
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 9, 2001 /s/ William P. Horgan
-----------------------------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: November 9, 2001 /s/ Gregory S. Fredrick
-----------------------------------------
Gregory S. Fredrick
Vice President Finance
15