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, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission file number 0-23544
HUMAN PHERONONE SCIENCES, INC.
----------------------------------------------
(Name of small business issuer in its charter)
California 94-3107202
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. employee
incorporation or organization) Identification No.)
4034 Clipper Court, Fremont, California 94538
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (510) 226-6874
--------------
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [ X ] No
[ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 3,429,839 shares of Common
Stock as of May 10, 1999 (Post 1 for 3 reverse stock split effective April 13,
1999).
Total Pages: 13
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited) as of March 31, 1999
and December 31, 1998...........................................................................3
Statements of Operations (Unaudited) for the Three Months Ended
March 31, 1999 and 1998.........................................................................4
Condensed Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 1999 and 1998...................................................................5
Notes to Condensed 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................................................................10
SIGNATURES.......................................................................................................11
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Human Pheromone Sciences, Inc.
Balance Sheets
March 31,
1999 December 31,
(unaudited) 1998
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 110,927 $ 76,696
Accounts receivable, net of allowances 1,694,193 2,051,574
of $406,953 and $677,735 in 1999
and 1998, respectively
Inventory 2,853,180 2,894,541
Other current assets 192,532 113,635
------------ ------------
Total current assets 4,850,832 5,136,446
Property and equipment, net 46,331 58,596
------------ ------------
$ 4,897,163 $ 5,195,042
============ ============
Liabilities and shareholders' equity
Loan payable, bank $ 900,000 $ 773,534
Accounts payable 583,881 691,674
Accrued advertising 380,451 553,926
Accrued commissions 357,300 448,051
Other accrued expenses 310,078 318,228
------------ ------------
Total current liabilities 2,531,710 2,785,413
Shareholders' equity:
Convertible preferred stock,
issuable in series, no par value,
10,000,000 shares authorized,
1,445,716 and 1,439,333 shares
issued and outstanding at
March 31, 1999 and
December 31, 1998, respectively 3,045,535 2,745,535
Common stock, no par value, 40,000,000
shares authorized, 3,429,839 shares
issued and outstanding at March 31, 1999
and December 31, 1998, respectively 17,667,024 17,667,024
Accumulated deficit (18,310,059) (18,002,930)
Accumulated other comprehensive income:
Foreign currency translation (37,047) --
------------ ------------
Total shareholders' equity 2,365,453 2,409,629
------------ ------------
$ 4,897,163 $ 5,195,042
============ ============
See accompanying notes.
Human Pheromone Sciences, Inc.
Statements of Operations
(unaudited)
Quarter ended March 31,
-----------------------
----------- -----------
1999 1998
----------- -----------
Net sales $ 2,239,093 $ 3,363,161
Cost of goods sold 778,821 1,044,199
----------- -----------
Gross profit 1,460,272 2,318,962
Expenses:
Research and development 84,032 82,132
Selling, general and administrative 1,663,116 2,999,595
----------- -----------
Total expenses 1,747,148 3,081,727
----------- -----------
Loss from operations (286,876) (762,765)
Interest expense, net (22,457) (10,899)
Other income 2,203 594
----------- -----------
Loss before income taxes (307,130) (773,070)
Income taxes -- --
----------- -----------
Net loss $ (307,130) $ (773,070)
=========== ===========
Net loss per common share $ (.09) $ (.23)
=========== ===========
Weighted average shares used in
calculation of earnings per share 3,429,839 3,429,839
=========== ===========
See accompanying notes.
Human Pheromone Sciences, Inc.
Statements of Cash Flows
(unaudited)
Quarter ended March 31,
---------------------
1999 1998
----------- -----------
Cash flows from operating activities
Net loss $ (307,130) $ (773,070)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 12,265 15,125
Changes in operating assets and liabilities:
Accounts receivable 357,381 414,334
Inventory 41,361 205,885
Other current assets (78,897) (17,459)
Accounts payable and accrued liabilities (380,168) (125,964)
----------- -----------
Net cash used in operating activities (355,188) (281,149)
Cash flows from financing activities
Proceeds from bank borrowings 500,000 1,476,462
Repayment of bank borrowings (373,534) (1,410,000)
Proceeds from issuance of convertible
preferred stock 300,000 --
----------- -----------
Net cash provided by financing activities 426,466 66,462
Effect of exchange rate changes on cash (37,047) --
----------- -----------
Net increase/(decrease) in cash and cash equivalents 34,231 (214,687)
Cash and cash equivalents at beginning of the year 76,696 248,617
----------- -----------
Cash and cash equivalents at end of the year $ 110,927 $ 33,930
=========== ===========
See accompanying notes.
Human Pheromone Sciences, Inc.
Notes to Condensed Financial Statements
(unaudited)
March 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the calendar
year ending December 31, 1999. 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, 1998.
Reverse Stock Split
The Company's shareholders approved a 1 for 3 reverse stock split
effective April 13, 1999. All share and per share amounts have been adjusted for
the effects of the reverse split for all periods presented.
Inventory
Inventories are stated at the lower of cost (first in - first out
method) or market. The inventory at March 31, 1998 consists of finished goods
inventory valued at $1,158,930 work in process of $245,323 and raw materials of
$1,448,927. At December 31, 1998, these balances were $1,114,443, $264,599 and
$1,515,499, respectively.
Comprehensive Loss
Comprehensive loss for the quarter ended March 31, 1999 was $344,177
compared to $773,070 for the quarter ended March 31, 1998.
Item 2. Management's Discussion and Analysis
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Except for the historical
information contained in this discussion and analysis of financial condition and
results of operations, the matters discussed herein are forward looking
statements. These forward looking statements include but are not limited to the
Company's plans for sales growth and expansion into new channels of trade,
expectations of gross margin, expenses, new product introduction, and the
Company's liquidity and capital needs. These matters involve risks and
uncertainties that could cause actual results to differ materially from the
statements made. In addition to the risks and uncertainties described in "Risk
Factors", below, these risks and uncertainties may include consumer trends,
business cycles, scientific developments, changes in governmental policy and
regulation, currency fluctuations, economic trends in the United States and
inflation. These and other factors may cause actual results to differ materially
from those anticipated in forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof.
Risk Factors
The Company's future results may be affected to a greater or lesser
degree by the following factors among others:
The Company may not be able to effectively compete with larger
companies or with new products. The prestige fragrance market is extremely
competitive. Many fragrance products are better known than the Company's
products and compete for advertising and retail shelf space. Many competitors
have significantly greater resources that will allow them to develop and
introduce new competing products or increase the promotion of current products.
The product life cycle of a fragrance can be very short. Changing
fashions and fads can dramatically shift consumer preferences and demands.
Traditional fragrance companies introduce a new fragrance every year or so.
Changing fashions and new products may reduce the chance of creating long term
brand loyalty to the Company's products.
The Company's marketing strategy may not be successful. The Company may
not be able to establish and maintain the necessary sales and distribution
channels. Retail outlets and catalogs may choose not to carry the Company's
products. The Company may not have sufficient funds to successfully market its
products if the current marketing strategy is not successful.
The current retail environment may cause pricing and promotional
pressures. Four companies, Federated Department Stores, The May Company, Dayton
Hudson/Marshall Fields and Dillard Department Stores, own the majority of upper
end department stores. Because of their market share, each company will have
significant power to determine the price and promotional terms which the Company
must meet in order to sell its products in the company's department stores.
Upper end department stores face increasing competition by discount
perfumeries, drug chains and lower priced department stores for sales of
fragrances and cosmetics. To compete, upper end department stores have cut
inventories, reduced co-op advertising, and increased promotions. These tactics
may force the Company to reduce its prices or increase the cost of its
promotions.
Seasonality in sales may cause significant variation in quarterly
results. Sales in the fragrance industry are generally seasonal with sales
higher in the second half of the year because of Christmas. This seasonality
could cause a significant variation in the Company's quarterly operating
results.
The Company not be able to protect its technology or trade secrets. The
Company's patents and patent applications may not protect the Company's
technology or ensure that the Company's technology does not infringe another's
valid patent. Others may independently develop substantially equivalent
proprietary information. The Company may not be able to protect its technology,
proprietary information or trade secrets.
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, 1999 as compared to the Three Months ended March
31, 1998
Net sales for the first quarter of 1999 were $2,239,093 representing a
decrease of 33% from sales of $3,363,161 for the prior year's quarter.
Approximately 11% of the decrease is due to the department stores the Company
ceased doing business with in late 1998. The remaining department store sales
decline was consistent with the Company's stated goal to more directly focus
selling and marketing efforts in a reduced number of department stores which
have the potential to be of profitable partners in the Realm(R) fragrance
business. International and secondary market shipments declined slightly since
pipeline sales were made into new markets in 1998; there were no such sales in
1999. During the quarter the Company realized is first revenue from the shipment
of its patented pheromones to its first licensee, a multi national cosmetics and
fragrance company.
Net sales for the quarters ended March 31, 1999 and 1998 were as
follows. In 1999 a U.S. distributor, which is considered a domestic customer of
the Company began selling to international markets previously being serviced
directly by the Company, thereby causing a decrease in reported sales to
international markets.
-----------------------------------------------
Markets 1999 1998
-----------------------------------------------
U.S. Markets $2,113,789 $3,952,227
International Markets 125,304 410,934
---------- ----------
Net Sales $2,239,093 $3,363,161
Gross margin for the quarter ended March 31, 1999 declined 37% to
$1,460,272 from $2,318,962 in the prior year primarily due to the reduced sales
volume. Also contributing to the margin shortfall was an increased sales mix to
lower gross margin distribution and international sales channels, however these
sales do not require the large selling and advertising expenses that the higher
margin accounts incur.
Research and Development expenses for the first quarters of 1999 and
1998 were $84,032 and $82,132, respectively. These costs principally reflect
payments and costs under the Company's contract with Pherin Pharmaceuticals.
Operating expenses decreased $1,336,479 to $1,663,116 in the first
quarter of 1999 from $2,999,595 in the first quarter of 1998. While $1,292,055
of this decrease was attributable to lower advertising, selling and marketing
costs, all operational areas decreased. The 45% reduction in spending is the
result of the Company's plan to have a more focused sales and marketing
strategy, working with the department stores with the potential to be profitable
partners in our Realm(R) fragrance business. The first quarter results are
consistent with the Company's 1999 sales and marketing strategy that anticipated
the decrease in sales and gross margin, with offsetting savings in spending.
The Company incurred $22,457 in net interest expense during the first
quarter of 1999 compared to $10,899 net interest expense in 1998. During the
first quarter of 1999, the Company was in an increased net borrowing position as
compared to the same period in 1998.
LIQUIDITY
At March 31, 1999, the Company had borrowed $900,000 against its
$3,000,000 line of credit and working capital was $2,319,122. At December 31,
1998 the Company had net borrowings of $773,534 and working capital of
$2,351,033. For the first quarter of 1999, net cash used in operating activities
was $355,188 compared to $281,149 for the prior year's quarter. Assuming the
Company's activities proceed substantially as planned, the Company's 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 and accounts
receivable financing.
Additional working capital may be required should the Company fail to
generate anticipated consumer response levels at comparable levels to 1998.
Furthermore, additional working capital may be required should the Company
experience a greater than planned success with its products, potential product
line extensions, and department store marketing efforts. Funds would be needed
for inventory build, accounts receivable financing and staffing purposes. If the
Company fails to achieve revenues from its 1999 marketing efforts, or if
expansion proves to be more capital intensive than planned, the Company may
require additional funding.
On March 15, 1999, the Company renewed 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 $3,000,000 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
in April 1, 2000, contains certain debt-to-equity and working capital covenants.
On March 26, 1999, the Company obtained $300,000 additional equity
capital from a current shareholder by issuing shares of convertible preferred
stock.
Impact of Year 2000
The Company has completed a comprehensive review of its internal
computer systems to identify the issues expected to arise in connection with the
Year 2000. The Company is in the process of reviewing the status of its
customers and suppliers with regard to this issue and assess the potential
impact of non-compliance by such parties on the Company's operations.
The Company utilizes a server-based system for its material management,
manufacturing, EDI interface, and financial systems. Year 2000 compliant
software upgrades from the vendors have been installed, and tested with
satisfactory results. The total cost to upgrade and test the systems was less
than $20,000.
The Company has also completed its review of non-server based systems
and equipment (telephone system, fax machines, and off-the-shelf software). This
review found that hardware was Year 2000 compliant, and that only a few software
titles contained non-compliant Year 2000 date calculation errors. These software
titles will be upgraded to more recent Year 2000 compliant versions later in the
year if it is determined that the software is still needed by the Company. The
financial impact is minimal.
The Company is in the process of determining the extent to which it may
be impacted by third party systems, which may not be Year 2000 compliant. The
Year 2000 computer issue creates risk for the Company from third parties with
whom the Company deals on financial transactions. To date we have received
assurances from our the key customers, and suppliers that they will be Year 2000
compliant. While the Company is receiving reassurance from it's customers and
suppliers, there can be no assurance that the systems of other companies that
the Company deals with or on which the Company's systems rely on will be timely
converted, or that any such failure to convert by another company could not have
an adverse effect on the Company.
Contingency plans for suppliers, or customers that may not be compliant
are part of our material planning process and sales planning for the second half
of 1999. Failure to complete any necessary remediation by the Year 2000 may have
a material adverse impact on the operations of the Company.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.18 Business Loan Agreement dated March 15, 1999
Exhibit 27.01-Financial Data Schedule
(b) The Company filed Form 8-K January 28, 1999 containing an
Unaudited Balance Sheet as of December 31, 1999.
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 14, 1999 /s/ William P. Horgan
------------------------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: May 14, 1999 /s/ Gregory S. Fredrick
------------------------------------
Gregory S. Fredrick
Vice President, Controller