U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
Amendment No. 1
(MARK ONE)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission file number 0-23544
EROX CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
California 94-3107202
- ------------------------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. employee 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. 10,289,488 shares of Common
Stock as of July 31, 1997.
Total Pages: 26
EROX CORPORATION
INDEX
Page
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited)
as of June 30, 1997
and December 31, 1996...........................................................................2
Statements of Operations (Unaudited)
for the Three Months and Six Months Ended
June 30, 1997 and 1996..........................................................................3
Statements of Cash Flows (Unaudited)
for the Six Months
Ended June 30, 1997 and 1996....................................................................4
Notes to Condensed Financial Statements (Unaudited).............................................5
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results of Operations...........6
PART II
OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders................................................9
Item 6. Exhibits and Reports on Form 8-K.................................................................9
SIGNATURES.......................................................................................................10
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
EROX CORPORATION
Condensed Balance Sheets
(unaudited)
June 30, December 31,
1997 1996
----------------- -----------------
(Restated)
Assets
Current assets:
Cash and cash equivalents $ 7,886 $ 2,059,084
Accounts receivable, net of allowances of $541,383 1,379,620 2,813,135
and $501,677 in 1997 and 1996, respectively
Inventory 4,806,498 2,906,517
Other current assets 94,253 74,414
----------------- -----------------
Total curren assets 6,288,257 7,853,150
Property and equipment, net 131,749 71,516
----------------- -----------------
$ 6,420,006 $ 7,924,666
================= =================
Liabilities and Shareholders' equity
Current liabilities:
Accounts payable $ 1,113,759 $ 1,218,741
Loan payable, bank 1,943,706 500,000
Other accrued expenses 1,488,881 876,320
----------------- -----------------
Total current liabilities 4,546,346 2,595,061
Commitments
- -
Shareholders' equity:
Convertible preferred stock, issuable in series, no par value,
10,000,000 shares authorized, no shares issued and outstanding - -
Common stock, no par value, 40,000,000 shares authorized,
10,289,488 and 10,156,905 shares issued and outstanding
at June 30, 1997 and December 31, 1996, respectively 17,667,023 17,374,734
Accumulated deficit (15,793,363) (12,045,129)
----------------- -----------------
Total shareholders' equity 1,873,660 5,329,605
----------------- -----------------
$ 6,420,006 $ 7,924,666
================= =================
<FN>
See accompanying notes
</FN>
EROX CORPORATION
Condensed Statements of Operations
(unaudited)
Three months ended June 30, Six months ended June 30,
----------------------------------------------------------------
1997 1996 1997 1996
--------------- --------------- -------------- --------------
(Restated) (Restated)
Net sales $ 3,817,542 $ 5,142,144 $ 8,913,831 $ 9,193,002
Cost of goods sold 981,957 1,451,520 1,889,643 2,511,362
------------ ------------ ------------ ------------
Gross profit 2,835,585 3,690,624 7,024,188 6,681,640
Expenses:
Research and development 73,086 78,269 164,856 161,306
Selling, general and administrative 6,677,523 3,515,559 10,584,801 6,372,716
------------ ------------ ------------ ------------
Total expenses 6,750,609 3,593,828 10,749,657 6,534,022
------------ ------------ ------------ ------------
Income (loss) from operations (3,915,024) 96,796 (3,725,469) 147,618
Interest income 491 206 12,471 12,828
Interest expense 34,285 1,023 36,828 2,459
Other income 918 3,624 2,392 1,627
------------ ------------ ------------ ------------
Income (loss) before taxes (3,947,900) 99,603 (3,747,434) 159,614
Provision/(benefit) for income taxes (9,983) -- 800 --
------------ ------------ ------------ ------------
Net income (loss) $ (3,937,917) $ 99,603 $ (3,748,234) $ 159,614
============ ============ ============ ============
Net income (loss) per share $ (0.38) $ 0.01 $ (0.37) $ 0.02
============ ============ ============ ============
Shares used in calculation of net income (loss) per share 10,284,323 10,499,030 10,252,966 10,375,896
============ ============ ============ ============
EROX CORPORATION
Statements of Cash Flows
(unaudited)
Six months ended June 30,
1997 1996
----------------- -----------------
(Restated)
Cash Flows from Operating Activities
Net income (loss) $(3,748,234) $ 159,614
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 31,695 65,824
Changes in operating assets and liabilities:
Accounts receivable 1,433,515 (934,481)
Inventory (1,899,981) (1,132,924)
Other current assets (19,839) 120,748
Accounts payable and accrued liabilities 507,579 697,751
----------- -----------
Net cash used in operating activities (3,695,265) (1,023,468)
Cash Flows from Investing Activities
Purchase of property and equipment (91,928) (50,953)
----------- -----------
Net cash used in investing activities (91,928) (50,953)
Cash Flows from Financing Activities
Proceeds from issuance of common stock 292,289 134,966
Proceeds from (payments on) bank borrowings 1,443,706 (500,000)
----------- -----------
Net cash provided by (used in) financing activities 1,735,995 (365,034)
Net decrease in cash and cash equivalents (2,051,198) (1,439,455)
Cash and cash equivalents at beginning of the period 2,059,084 2,186,828
----------- -----------
Cash and cash equivalents at end of the period $ 7,886 $ 747,373
=========== ===========
EROX Corporation
Notes to Condensed Financial Statements
(Unaudited)
June 30, 1997
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 six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 1997. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-KSB for the year ended December 31, 1996.
Restatement of Financial Statements
Prior to filling the form 10QSB for the third quarter of 1997, the
Company determined that its previously reported operating results and balance
sheet data for the three month and six month periods ended June 30, 1997
required adjustment. Revisions to these periods have been made as a result of
previously unknown chargebacks for cooperative advertising expenditures
applicable to the second quarter's operations of 1997 but not reported or
charged to the Company by department stores until the third quarter of 1997.
These charges result in the restatement of the Company's net loss as shown in
the table below:
Three Months Ended Six Months Ended
June 30 June 30
1997 1997 1997 1997
(Reported) (Restated) (Reported) (Restated)
Net (loss) $ (2,953,638) $ (3,937,917) $ (2,763,955) $ (3,748,234)
================ ================== ================= =================
Net (loss) per share $ (0.29) $ (0.38) $ (0.27) $ (0.37)
================ ================== ================= =================
Shares used in calculation
of (loss) per share 10,284,323 10,284,323 10,252,966 10,252,966
The financial statements included herein reflect this restatement.
Inventory
Inventories are stated at the lower of cost (first in - first out
method) or market. The inventory at June 30, 1997 consists of finished goods
inventory valued at $2,200,319, work in process of $350,725 and raw materials of
$2,255,454. At December 31, 1996, these balances were $1,188,882, $154,347 and
$1,563,288, respectively.
Net Income (Loss) Per Share
Net income per share is computed using the weighted average number of
shares of common stock outstanding and common equivalent shares from stock
options. The latter are excluded from the computation of net loss per share as
their effect is antidilutive.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Accounting Pronouncements
In February, 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted by the
Company on December 31, 1997. At that time, the Company will be required to
change the method currently used to compute earnings per share and restate all
prior periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. There is expected
to be no impact on primary earnings per share for either the three or six month
periods ended June 30, 1996 or June 30, 1997. The impact of Statement 128 on the
calculation of fully diluted earnings per share for these quarters is not
expected to be material.
Subsequent Events
On July 1, 1997, the Company renegotiated its Business Loan Agreement
with Mid Peninsula Bank of Palo Alto, California. The Company may borrow up to
$3.0 million at an interest rate equal to the bank's prime rate plus .75% with
borrowings secured primarily by the Company's trade receivables and inventory.
The agreement, which expires on April 1, 1998, contains certain debt-to-equity
and working capital covenants.
Subsequent to June 30, 1997, the Company reached an agreement to obtain
additional equity capital from affiliates of a current shareholder by issuing
1,433,333 shares of convertible preferred stock. This investment will provide
the Company with $2,150,000 in equity capital that will be used to reduce bank
borrowings and finance accounts receivable.
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 which include but are not limited to the acceptance of new
products, the credit risk associated with consolidation in the retail trade, the
costs of components and advertising associated with product retail roll-out and
new product introductions, supply constraints or difficulties, the impact of
competitive pricing or government regulation and the risk of diverted goods in a
slow retail environment. 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:
Competition: The prestige fragrance market is volatile and extremely
competitive. Consumer preferences and demands can shift dramatically reflecting
changes in fashion and current fads. There are numerous fragrance products which
are better known than the products marketed by the Company. There are also many
companies which have substantially greater resources than EROX and which have
the ability to invest heavily in new product development and introduction. The
Company can expect that its competitors will attempt to compete with the Company
through the introduction of new products and promotion of existing products.
In addition, the product life cycle of fragrances is shortening.
Traditional fragrance companies now introduce a new fragrance every one to two
years compared to every four to five years as in the past. This increase in
competing fragrances makes it difficult for any one fragrance to hold the
consumer's attention on a long-term basis. Although the Company believes the
inclusion of human pheromones as a component clearly differentiates its
products, other fragrances are competing for space with the Company's products
at both the store level and in print and media advertising.
Marketing: The failure to establish and maintain the necessary sales or
distribution channels could have a material adverse effect on the Company's
business. Although the Company believes its marketing strategy is the most cost
effective way to introduce its products, there can be no assurance that
broader-scale retail launches will be successful. The Company cannot guarantee
that retail outlets or catalogues will continue to carry the EROX products. If
the current strategy is unsuccessful, marketing of the Company's products would
require a new strategy and may require a significantly more expensive sales
effort for which the Company may not have sufficient funds.
Retail environment: Continued consolidation in the retail trade has led
to the emergence of four major retail players who control the major share of the
market. Federated Department Stores, The May Company, Dayton Hudson/Marshall
Fields and Dillard Department Stores now comprise the majority of U.S. better
priced department stores. This consolidation could lead to price and promotional
pressure and increased credit risk for the Company.
The major U.S. retailers are also moving away from the traditional
service oriented environment toward one that is based on "value pricing" and
self service. This change in emphasis away from trained sales personnel and
retailer support of manufacturer's products has created an environment that
values "newness" and price above quality and value. In light of these changes in
the retail environment, the Company may find it necessary to seek alternate
channels of distribution to sell their products.
Seasonality: Sales in the fragrance industry are generally seasonal,
with generally higher sales in the second half of the calendar year as a result
of increased demand for fragrance products in anticipation of and during
the Christmas holiday season. The anticipated seasonality of the Company's sales
could cause a significant variation in its quarterly operating results.
Patent protection: There can be no assurance that any patent or patent
application owned or controlled by the Company will continue to provide
commercially significant protection of the Company's technology or ensure that
the Company may not be determined to infringe valid patents of others. No
assurance can be given that others will not independently develop substantially
equivalent proprietary information or otherwise gain access to the Company's
trade secrets or that the Company can meaningfully protect its technology,
proprietary information or trade secrets.
Attraction and retention of key employees: The success of the Company's
future operations depends in large part on the Company's ability to recruit and
retain key employees and consultants with research, product development and
marketing experience, as well as other professionals who are in considerable
demand. There can be no assurance that the Company will be successful in
retaining or recruiting such key personnel.
Dependence on third parties for manufacturing: The Company does not
have facilities to manufacture its products and relies on Pherin to manufacture
its pheromones and third parties to supply components and to blend, fill and
package its fragrance products. The Company believes that such manufacturing
services are the most effective method of producing its products. Contract
fillers are used by the majority of the fragrance industry, and the Company has
no current plans to set up its own filling facilities. However, as with any
business that is not vertically integrated, if the Company is unable to obtain
or retain fragrance suppliers, component manufacturers or third party
manufacturing on acceptable terms, it may not be able to obtain commercial
quantities of its products, which would adversely affect results.
Results of Operations
Three Months ended June 30, 1997 as compared to the Three Months ended June 30,
1996
Net sales for the second quarter of 1997 were $3,817,542 compared to
$5,142,144 for the second quarter of 1996. Three factors were primarily
responsible for the decline: first, retailers began the year 1997 with higher
than expected overall fragrance inventories, second, 1997 witnessed the
beginning of an industry wide trend in department store retailing to increase
inventory turns from 3 to 6 times per year, and lastly, the industry has been
experiencing overall negative growth in the department store fragrance category.
These factors adversely affected the demand for the Company's products as
retailers adjusted fragrance stocks in-line with new inventory level directives
and delayed making purchases until chain-wide fragrance department inventories
achieved desired levels.
During the second quarter of 1996, the Company continued to open new
regional department stores. Castner Knott, Elder Beerman, McCrae's, Parisian's,
Profitt's, Von Maur, and Younkers were opened during the second quarter of 1996.
The Company also doubled its presence in the California market by opening an
additional 45 doors of the Macy's West division of Federated Department Stores.
Also in the second quarter of 1996, opening orders were shipped to two
distributors in the Middle East. The comparison of sales for these periods is as
follows:
- -------------------------------------------------------------------------------
Class of Trade 1997 1996
- -------------------------------------------------------------------------------
US Department Store/Retail $ 3,495,408 $ 4,674,278
Duty Free and International 318,283 447,121
Direct Marketing 3,851 20,745
---------------- -----------------
Net Sales $ 3,817,542 $ 5,142,144
Gross margin increased 2 points in the first quarter of 1997 from the
prior year's quarter (to 74% in 1997 from 72% in 1996) due to the Company's
success at lowering cost of goods of the primary and secondary packaging of its
Realm(R) fragrance products. Overall gross margins have increased as the Company
has reduced costs on both in-line and promotional products. Future quarters may
have a different gross margin depending on the demand for promotional products
and the percentage of higher margin department store sales in comparison to
sales through third party distributors. Gross margin in the second quarter of
1996, reflected the Company's previous overall higher cost of goods structure.
Research and Development expenses for the second quarters of 1997 and
1996 were $73,086 and $78,269, respectively. These costs principally reflect
payments and costs under the Company's contract with Pherin Corporation.
Selling and marketing expenses increased to $6,031,420 (158% of sales)
in the three months ended June 30, 1997 from $3,171,093 (62% of sales) in the
period ended June 30, 1996. This dollar increase is the result of advertising
and promotional activities to support the launch of inner Realm(TM) and Realm
Women and Realm Men in domestic department store retailers. Many of these
expenditures had been committed to as far back as the fourth quarter of 1996,
and the Company was unable to change or alter these programs in the short term
when sales did not materialize to support these levels of expenditure.
Additionally, the Company subsequently received unanticipated chargebacks
against accounts receivable payments from many of its department store customers
that were not authorized within Company established procedures. The Company has
increased its controls on cooperative advertising expense authorization and
communicated these tightened policies to all employees, customers and suppliers.
During the second quarter of 1997, General and Administrative costs increased
due to headcount, consulting and legal expenditures. Clerical headcount
additions were made in the later half of 1996 to process the administrative
aspects of the Company's larger customer base. Up front legal costs were
incurred for foreign trademark and patent work to prepare for expansion into
additional foreign markets.
Interest income was $491 and $206 for the second quarters of 1997 and
1996, respectively. The Company paid $34,285 in interest expense in the second
quarter of 1997 on balances on its revolving bank line of credit. This compares
to $1,023 interest expense in the second quarter of 1996.
The provision for income taxes for the three months ended June 30, 1997
reflects a benefit of $9,983. This benefit effectively reverses the tax
provision recorded in the first quarter as a result of decreased estimated
pretax income for the year.
Six Months ended June 30, 1997 as compared to the Six Months ended June 30, 1996
Net sales for the six months ended June 30, 1997 were $8,913,831. This
was a 3% decrease over net sales of $9,193,002 for the first half of 1996, the
result of decreased purchases of fragrance products by its customers due to
inventory contraction policies imposed by the major department store chains.
During the first six months of 1997, the Company launched its second women's
fragrance, inner Realm. This fragrance was rolled out by a majority of the
Company's retailers including the Federated chains, Dillard Department Stores,
Mercantile and several independent local retailers. The Company did not achieve
anticipated levels of initial sell-in with the launch of inner Realm, in part
because its retail customers have initiated a process of decreasing overall
inventories to increase inventory turns from 3 per year to 6 per year. During
the first six months of 1997, the Company made its first shipments to a
distributor servicing alternative distribution channels.
- -------------------------------------- -----------------------------------------
Class of Trade 1997 1996
- -------------------------------------- -----------------------------------------
US Department Store/Retail $ 8,242,518 $ 8,619,982
Duty Free and International 662,471 523,123
Direct Marketing 8,842 49,897
---------------- ----------------
Net Sales $ 8,913,831 $ 9,193,002
Gross margin for the first half of 1997 was 79% compared to 73% for the
same period in 1996. This increase is the result of decreases in the Company's
cost of goods structure. The Company has aggressively sought new suppliers and
manufacturing processes in order to decrease the cost of its distinctive primary
packaging. These changes have resulted in more competitively costed products.
The Company has also created gift and promotional sets using cosmetic
modifications of its signature bottles. The lower cost of these sets has allowed
the Company to achieve targeted gross margins at the same time as providing a
perceived value to the consumer.
Research and Development expenses for the first half of 1997 and 1996
were $164,856 and $161,306, respectively and are principally comprised of
payments under the Company's contract with Pherin Corporation.
Selling and marketing expenses increased to $9,290,583 in the six
months ended June 30, 1997 from $5,658,489 in the period ended June 30, 1996. In
1997, the Company incurred expenses to launch its second women's fragrance:
inner REALM. Due to the differing advertising requirements of the Company's
department store customers, future advertising plans will be evaluated and
targeted to suit specific regional and consumer preferences. On going expenses
in the sales and marketing area are radio advertising and fragrance modeling to
support local in-store promotions and to support the REALM brand in general,
headcount and commissions. The Company's general and administrative expenses
increased due to additional headcount in distribution and accounting to support
the Company's larger customer base.
Interest income was $12,471 and $12,828 for the first half of 1997 and
1996, respectively. In 1997, the Company paid $36,828 in interest expense
related to advances under its bank line of credit. During the first half of
1996, the Company had interest expense of $2,459.
LIQUIDITY
At June 30, 1997, the Company had working capital of $1,741,911. Net
cash used in operating activities was $3,695,265 for the six months ended June
30, 1997.
On July 1, 1997, the Company renegotiated its Business Loan Agreement
with Mid-Peninsula Bank of Palo Alto, California. The Company may borrow up to
$3,000,000 at an interest rate equal to the bank's prime rate plus .75% with
borrowings primarily secured by the Company's trade receivables and inventory.
The agreement, which has a one year term, contains certain debt to equity and
working capital covenants. Under the terms of the renegotiated bank line, the
Company may borrow against both eligible accounts receivable and eligible
inventory. There were borrowings totaling $1,943,706 at June 30, 1997. Assuming
the Company's activities proceed substantially as planned and if there are no
new brand introductions, the Company's current cash, line of credit 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 the supply of inventory, staffing, product promotion and
training and accounts receivable financing.
If the Company fails to achieve significant revenues from its 1997
marketing efforts or if ongoing business proves to be more capital intensive
than planned or if the Company elects to develop and launch a new brand,
additional funding may be required. Furthermore, additional working capital may
be required should the Company experience a greater than planned success with
its retail distribution and new product development. In such instance, funds
would be needed for inventory build, accounts receivable financing and staffing
purposes. The Company has been presented with several opportunities to obtain
additional working capital from current investors.
Subsequent to June 30, 1997, the Company reached an agreement to obtain
additional equity capital from affiliates of a current shareholder by issuing
1,433,333 shares of convertible preferred stock. This investment will provide
the Company with $2,150,000 in equity capital that will be used to reduce bank
borrowings and finance accounts receivable.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
Registrant held its annual meeting of shareholders (the "Annual
Meeting") on May 15, 1997. At the Annual Meeting, the shareholders elected five
directors, Bernard I. Grosser, MD, William P. Horgan, Helen C. Leong, Robert
Marx and Michael V. Stern to serve until the next annual meeting and their
successors are elected.
The number of votes cast for, against or withheld, as well as the
number of abstention and broker non-votes as to each director are set forth
below:
Broker
For Against Abstained Non-Votes
--- ------- --------- ---------
Bernard I. Grosser, MD 8,639,193 15,700 0 0
William P. Horgan 8,639,193 15,700 0 0
Helen C. Leong 8,639,193 15,700 0 0
Robert Marx 8,636,893 18,000 0 0
Michael V. Stern 8,639,193 15,700 0 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.14 Business Loan Agreement dated July 1, 1997 E- 14
Exhibit 11-Statement re: Computation of Per Share Earnings E- 25
Exhibit 27.01-Financial Data Schedule E- 26
(b) The Company did not file any reports on Form 8-K during the three
months ended June 30, 1997.
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.
EROX CORPORATION
Registrant
Date: November 10, 1997 /s/ William P. Horgan
--------------------------------------------------
William P. Horgan
Chairman of the Board and Chief Executive Officer
Date: November 10, 1997 /s/ Maxine C. Harmatta
--------------------------------------------------
Maxine C. Harmatta
CFO, Vice President Finance and Administration