US SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2001
Commission File Number: 0-27382.
HOT PRODUCTS, INC.COM
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(Exact name of small business as specified in its charter)
ARIZONA 86-0737579
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(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
7625 E. REDFIELD RD., SCOTTSDALE, ARIZONA 85260
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(Address of principal executive offices)
(480) 368-9490
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, 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
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity as of August 20, 2001 latest practicable date: 11,738,540 shares
of Common Stock, par value $0.01 per share.
Transitional Small Business Disclosure Format (Check one): Yes No X
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HOT PRODUCTS, INC.COM
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AND SUBSIDIARY
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Page
PART I FINANCIAL INFORMATION
Item 1 Financial Information
Consolidated Balance Sheet as of July 31, 2001 3
Consolidated Statements of Operations for the Three Months
Ended July 31, 2001 and July 31, 2000 4
Consolidated Statements of Cash Flows for the Three Months
Ended July 31, 2001 and July 31, 2000 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis 8
PART II OTHER INFORMATION
Item 1 Litigation 11
Item 2 Change in Securities 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security-Holders 11
Item 5 Other Information 11
Item 6 Exhibits & Reports on Form 8-K 11
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOT PRODUCTS, INC.COM
CONSOLIDATED BALANCE SHEET
(Unaudited)
JULY 31,
2001
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 40,339
Accounts receivable (net of $11,516 allowance) 10,436
Inventories 469,019
Prepaid expenses and other assets 28,591
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Total current assets 548,385
PROPERTY AND EQUIPMENT, net 34,668
OTHER ASSETS 30,909
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TOTAL ASSETS $ 613,962
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 414,987
Accrued Expenses 178,941
Customer Deposits 185,732
Notes Payable 89,940
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Total current liabilities 869,600
Contingent Liabilities and Disputed Payables 1,062,093.00
TOTAL LIABILITIES 1,931,693
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STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 33,332,747
shares authorized, 11,738,540 issued and outstanding 117,385
Paid in capital 18,010,718
Accumulated deficit (19,445,834)
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TOTAL STOCKHOLDERS' EQUITY (1,317,731)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 613,962
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3
The accompanying notes are an integral part of these financial statements
HOT PRODUCTS, INC.COM
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
JULY 31,
2001 2000
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NET SALES and ROYALTY REVENUES $ 106,958 $ 417,568
COST OF SALES 17,887 132,818
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Gross profit 89,071 284,750
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and benefits expense 101,838 122,006
Selling and promotion expense 6,053 16,620
Office and administrative 86,204 142,228
Research and development expense 396 14,064
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Total selling, general and administrative expenses 194,491 294,918
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LOSS FROM OPERATIONS (105,420) (10,168)
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OTHER (INCOME) AND EXPENSES
Gain on Disposal of Subsidiary (137,850)
Gain on Settlement of Lawsuit (300,000)
Interest expense and factoring charges 4,151 633
Other income (32,371) (27,231)
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Total other (income) (466,070) (26,598)
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NET INCOME $ 360,650 $ 16,430
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Basic income per common share $ 0.03 *
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Diluted income per common share $ 0.03 *
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Weighted average shares outstanding - Basic 11,457,000 5,613,539
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Weighted average shares - Diluted 11,498,595 5,647,761
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* less than $0.01
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The accompanying notes are an integral part of these financial statements
HOT PRODUCTS, INC.COM
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
JULY 31,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Profit $ 360,650 $ 16,439
Adjustments to reconcile net profit to net cash
provided by operating activities:
Depreciation and amortization 3,786 36,350
Noncash gain on disposal of Subsidiary (137,850)
Changes in assets and liabilities:
Accounts receivable (26,044) (121,519)
Inventories (2,195) (110,376)
Prepaid expenses and other current assets (103) (15,790)
Other assets 1,995 (400)
Accounts payable & Contingent liabilities (24,387) 183,988
Accrued liabilities and Customer Deposits (104,386) (190,699)
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Net cash (used in) provided by operating activities 71,466 (202,007)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,243)
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Net cash (used in) provided by investing activities (5,243)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Notes Payable 6,287 197,500
Payments on notes payable (32,679)
Payment of capital lease obligations (6,836) (2,157)
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Net cash (used in) provided by financing activities (33,228) 195,343
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INCREASE (DECREASE) IN CASH AND EQUIVALENTS 38,238 (11,907)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 2,101 14,751
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CASH AND EQUIVALENTS, END OF PERIOD $ 40,339 $ 2,844
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NONCASH OPERATING ACTIVITIES:
Issuance of common stock to reduce accrued Payroll $ 254,025
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Issuance of common stock to reduce contingent liability $ 59,500
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5
The accompanying notes are an integral part of these financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. INTERIM REPORTING
The accompanying unaudited Consolidated Financial Statements for Hot
Products inc.com have been prepared in accordance with the generally accepted
accounting principles for interim financial information and the instructions to
Form 10-QSB. 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 (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and cash flows for the periods
presented have been made. The results of operations for the three month period
ended July 31,2001 is not necessarily indicative of the operating results that
may be expected for the entire fiscal year ending April 30, 2002.
Common Stock
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Our shares of common stock are traded under the symbol HPIC on the Nasdaq
bulletin board market. We have completed and filed its 10K report for the year
ended April 30, 2001.
II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the accounts and
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activities of Hot Products, Inc.com and its wholly owned subsidiaries, SC&T
Europe, Limited (United Kingdom), and SC&T Asia, Limited (Hong Kong). All
significant inter-company transactions and balances have been eliminated in
consolidation. SC &T Europe was dissolved in July 2001. The resulting gain on
this dissolution is reported in these financial statements.
Cash and Cash Equivalents includes all short-term highly liquid investments that
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are readily convertible to known amounts of cash and have original maturities of
three months or less.
Inventories are stated at the lower of cost (first-in, first-out) or market.
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Allowances are made for returned inventory to reflect estimated net realizable
value of those items.
Property and Equipment are recorded at cost and depreciated on a straight-line
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basis over the estimated useful lives of the assets ranging from 3 to 10 years.
Depreciation expense is not recorded for tooling acquired and not yet been
placed in service.
Revenue Recognition - We recognize revenue when the product is shipped, and or
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paid for by the customer. We provide an allowance to reflect estimated returns
of product from customers and warranty costs. We receive royalty revenues on a
regular quarterly basis and recognize this revenue when received.
Research and Development - The costs for new product development are expensed as
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incurred.
Use of Estimates- The preparation of financial statements in conformity with
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generally accepted accounting principles requires management to make estimates
and assumptions which affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
6
Earnings Per Share - Earnings per share is calculated using the weighted average
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number of shares of common stock outstanding during the year. The Company has
adopted SFAS No. 128 Earnings Per Share.
Net Income Shares Per Share
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2001 2000 2001 2000 2001 2000
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Net Income $360,650 $16,430
BASIC EARNINGS PER SHARE:
Income available to
Common Shareholders $360,650 $16,430 11,457,000 5,613,539 $ 0.03 Less than $0.01
EFFECT OF DILUTED SECURITIES N/A N/A 41,595 34,222 Less than $0.01 Less than $0.01
DILUTED EARNINGS PER SHARE $360,650 $16,430 11,498,595 5,647,761 $ 0.03 Less than $0.01
Common equivalent shares of 2,688,918 and 2,747,251 related to stock options and
warrants outstanding at July 31, 2001 and 2000 respectively, are excluded from
the computation because the effect of inclusion would be anti-dilutive.
Segment and Geographic Information - The Company's revenue was generated from
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one primary geographic region, The United States. There were no material
operations in the Company's Asian subsidiary. At July 31, 2001, the Company
considers its products to fall within two segments, Peripheral Products and
Emergency-Survival products.
The following table outlines the breakdown of sales to unaffiliated customers.
Net Revenues
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2001 2000
Emergency-Survival $ 41,637 $ 720
Peripheral Products $ 65,321 $ 416,848
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$106,958 $ 417,568
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Net Income
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Emergency-Survival $ 26,758 $ 648
Peripheral Products $ 63,733 $ 256,855
Other $270,159 $(241,073)
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$360,650 $ 16,430
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The measurement of net income by segment is reconciled to the total net income
resulting primarily from general and administrative expenses and other income
that cannot be allocated directly to either segment.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The statements contained in this report on form 10-QSB that are not purely
historical are forward-looking statements within the meaning of the Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Act of 1934,
including statements regarding our "expectations", "anticipation", "intentions,"
"beliefs", or "strategies", regarding the future. Forward-looking statements
include statements regarding revenue, margins, expenses and earnings analysis
for the remainder of the fiscal year 2002 and thereafter; future products or
product development strategy; and liquidity and anticipated cash needs and
availability. All forward looking statements included in this document are based
on information available to us on the date of this report, and we assume no
obligation to update any such forward-looking statement. It is important to note
our actual results could differ materially from those in such forward-looking
statements.
OVERVIEW
In mid 1999 management made the critical decision to exit the retail PC and
Video gaming arenas we had been involved in for the previous five years. To
better reflect our new marketing and product direction, we also changed our
corporate name to Hot Products Inc.com to emphasize our new products we felt
were unique, innovative and HOT. We believed that this new name would have
greater indusrty appeal and benefit our decision to enter the Internet
E-Commerce arena. We remain committed to reaching profitability during our
Fiscal year 2002.
We identified new marketing opportunities that indicated higher growth
potential, greater profit capabilities that carried less competitive risk. We
developed an entire line of new product and aligned ourselves with a new
emerging technology platform for DVD Players and Set-Top Box Converters (cable
TV) called NUON. We identified four major new product categories that had
significant global market opportunities. The first three involved the Road
Emergency, (encompassing a unique 12 Volt DC battery charging product)
Automotive Survival and Outdoor Survival categories. We felt these products had
long term sales potential, and were suited for the expansive U.S. automotive
aftermarket channels that generates in excess of $150 billion in annual
revenues.
The fourth area focused on NUON. Based on our strong beliefs that the NUON
technology platform, developed by VM Labs Inc., represents a "home run"
potential in the global OEM and retail markets, we created an independent sales
and marketing division to support the dynamics of this new proprietary
technology. NUON is designed to enhance the entertainment value for both DVD
players and Set-Top Box Converters (cable TV). The DVD player and Set-Top
Converter arena is fast becoming a market of equal proportions to the automotive
after-market. HPIC believes over the next 3-5 years the NUON technology will be
found in over thirty five percent (DVD will ultimately replace all VHS players
systems) of all DVD players sold, and over 60% of all Set-Top Converter Boxes
shipped worldwide, and we are on the forefront of this potential global
explosion. We have significant future expectations for NUON, and are
aggressively supporting the development of numerous NUON peripheral and
accessory products.
Over the past year we have continued to slash costs and reduce operational
expenses wherever possible. Operational improvements coupled with our new
product development, marketing redirection and improved gross margins have
succeeded in reporting a respectable first quarter profit. These results further
acknowledge that we are on the right track and are gaining valuable ground
towards our sole objective of reaching profitability. Management feels
strongly we will continue to improve our performance during our second quarter.
8
Our new line of products is being well received in the marketplace and we
continue to explore new revenue channels, such as the Private Label arena, where
we have designed new products for some major Fortune 500 companies. We secured
the services of an industry veteran to establish a new sales rep network to
aggressively promote our non-NUON product lines into the market. Our NUON
products group had a tougher year than expected, as developer VM Labs Inc., did
not implement its business plan as expected. This lack of deployment by VM Labs
severely reduced our NUON revenue generation for both the retail and OEM
channels this year, however, we expect to pick up these revenues during our 2nd
and 3rd quarters. Industry demand for NUON remains strong, and new product
development has been maintained. Currently we represent the largest, global
supplier of NUON peripheral and accessory products.
As Korean electronics giant, Samsung Electronics readies itself for a Fall
European launch of its NUON DVD Players, we are in the final stages of
establishing for a strategic ECC distribution agreement with a formidable
European company for our entire line of NUON products.
OPERATING RESULTS FOR THE THREE MONTHS ENDED JULY 31, 2001 AND 2000.
NET SALES AND ROYALTY REVENUES
Net sales and royalty revenues for the three months ended July31, 2001 were
$106,958 compared to $417,568 for the three months ended July 31, 2000. Sales
from our Road Emergency and Power product lines increased to $41,637 for the
three months ended July 31, 2001 from $720 for the year ended July 31, 2000. The
decrease in sales for the three months ended July 31, 2001 is attributed to
decreased sales of old line products and NUON related products. The decrease in
sales for our NUON related product is a direct result of our initial sale to
Samsung Electronics for our NUON SNS 2000 controller in the first quarter of
last year, and slower than anticipated implementation of its business plan by VM
Labs, Inc.
GROSS PROFIT
Our gross profit for the three months ended July 31, 2001 was $89,071 in
contrast to a gross profit of $284,750 for the three months ended July 31,
2000. Our gross margin on product sales increased to 62% for the three months
ended July 31, 2001 compared to 60% for the year ended July 31, 2000. The
increase in gross margin is directly attributable to decreased costs and higher
profit margins on new line products. Costs associated with our U.S. operations
have been greatly reduced and efficiencies realized. Gross profit margins can
be affected by several factors, including the product mix between our products,
with the anticipation that newer products will initially yield higher gross
profit margins. However, there can be no assurance higher margins will be
maintained over the life of the product.
PAYROLL AND PAYROLL TAXES
Our payroll and benefits expense decreased to $101,838 for the three months
ended July 31, 2001 compared to $122,006 for the three months ended July 31,
2000. This decrease in salaries and related expenses can be attributed to lower
salaries and reduced benefit costs. We are required to employ a base staff of
qualified personnel to maintain our operations. As we attain increased
profitable quarters our employee base will have to increase. We are
carefully planning for expansion, and when our sales volume increases we will
institute a plan of hiring, allowing for gradual growth that will not burden our
margins or threaten our profitability. Our current employee base is made up of a
dedicated group who has continued to show increased efficiencies and
productivity.
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SELLING AND PROMOTION
Our selling and promotion expenses decreased to $86,204 for the three months
ended July 31, 2001 from $142,228 for the same period ended July 31, 2000. This
decrease, $56,024, is a direct result of the change in our business model and
cost controls. We have ramped-up our promotional efforts for our new
Road-Emergency, Automotive and Outdoor Survival lines, however, due to a limited
advertising and promotional budget we have not been able to utilize all
promotional avenues necessary to promote our new products. Our management has
been careful in the amounts of promotional efforts for the current quarter.
Travel and trade show costs have also been reduced during the current period.
OFFICE AND ADMINISTRATION
Office and administrative expenses for the three months ended July 31, 2001 were
$86,204 compared to $142,228 for the three months ended July 31, 2000. This
decrease of $56,024 is attributed directly to extraordinary legal costs directly
related to the litigation against our former accounting firm. This will no
longer be a factor as the parties reached "an out of court settlement" during
July of this year. Efficiencies and cost reductions in equipment rental,
printing, postage and related costs also contributed to the reduction in office
and administrative costs for the current quarter.
RESEARCH AND DEVELOPMENT
Expenses related to research and development were $396 for the three months
ended July 31, 2001 compared to $14,064 for the three month period ended July
31, 2000. This represents a decrease of $13,668 as we already have incurred
research and development costs for many new products introduced over the past
year. Costs associated with the development of new products will increase in the
future as new products are refined or created. Our continued success requires
we make a concerted effort to develop new, innovative products to expand our
product mix. Our management has always made a commitment to research and
development and will continue to do so as required.
OTHER INCOME/EXPENSE
Other income increased to $466,070 for the three months ended July 31, 2001 from
other income of $27,231 for the same period ended July 31, 2000. Included in
this increase is a gain, $137,850, on the closure of our UK subsidiary. The
recorded gain on disposal was a result of recorded obligations that were
relieved through closure. Also included in other income is $300,000 from the
settlement of a lawsuit and a $32,371 gain on the settlement of an old
outstanding account payable. Interest and factoring costs increased to $4,151
for the three months ended July 31, 2001 compared to $633 for the same three
month period ended July 31, 2000.
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NET INCOME
Net income for the three months ended July 31, 2001 was $360,650 compared to
$16,430 for the three months ended July 31, 2000. This represents an increase
of $344,220 for the three months ended July 31, 2001 compared to the same period
last year. Total operating expenses for the three months ended July 31, 2001
were $194,491 compared to $294,918 for the three months ended July 31, 2000.
This represents a decrease of $100,427 for the three months ended July 31, 2001
from the same period ended July 31, 2000.
Our working capital deficit decreased to $321,215 for the three months ended
July 31, 2001 from a deficit of $665,896 for the three months ended July 31,
2000. This decrease is due to cost controls, and the closing of our UK
subsidiary. The comparison of our working capital deficit for the three months
ended July 31, 2001 and 2000 is affected by a reclassification of disputed
accounts payable to long-term liabilities. These items represent amounts we
dispute and which we feel we are not obligated to pay. Many of these amounts
are not disputed by our creditors and we feel can successfully negotiate much
reduced amounts, if not eliminate many of these debts.
We are required to pay the costs of stocking, assembling and warehousing
inventory prior to receiving orders and payments from our customers. Typically
our customers do not pay us for our products until approximately 30 to 60 days
following delivery and billing. As a result, the receipt of cash from our
operations typically lags substantially behind the payment of the costs for
purchase and delivery of our products. We have been able to secure short-term
notes payable to help relieve the cash-flow burden experienced. The effects of
our 1997 de-listing by the NASDAQ has hampered our desired progress over the
past few years, however, we continue to forge ahead and look forward to a
significant year of improvement. At present we utilize factoring for some of our
accounts receivable, however, this form of financing does increase costs and
reduces working capital and profits. To fully implement our new business plan,
we will require additional working capital. We plan on utilizing factoring
arrangements to finance accounts receivable along with capital from operations
to finance inventory acquisition as sales increase from both the NUON and
Road-Emergency, Auto-Survival and Outdoor Survival divisions combined with other
financing opportunities as they become available to us.
BUSINESS OUTLOOK AND RISK FACTORS
HPIC OUTLOOK
We are seeing positive results from the introduction of our non-NUON products,
and look to a much improved revenue level from NUON itself. We are excited about
future revenue generation, and new orders from new customers. The Private Label
arena is opening new doors and new customers, some of which include Harley
Davidson, Polaris Industries, Redenvelope.com etc. We are pursuing other major
companies for Private Label opportunities and feel this area will be a
significant revenue contributor for us over the years to come. We are looking to
secure the services of a national PR-IR firm and look forward to issuing ongoing
press releases as new accounts and milestones are achieved.
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By posting a first quarter profit, we are excited about the future outlook for
us. Despite slower than expected technology developments by VM Labs, the NUON
division is progressing in a positive direction. We continue to develop our NUON
OEM channel business and we expect new and additional orders to be received over
the next 90-120 day period. We have five peripheral products in the market,
with a further four planned for introduction during the next two quarters.
Management is confident we can continue to improve the shareholder value through
reducing costs and increased revenues, and in conjunction with the necessary
operational funding required, we have a strong opportunity to reach
profitability during FY 2002.
RISK FACTORS
Through our restructuring, product marketing redirection, coupled with our
numerous OEM strategic alliances, we feel we are better protected against the
traditional risks and competitive factors. We openly admit risks do exist,
however, not to the same degree that we confronted during our days in the retail
PC and Video gaming arena.
With respect to our NUON division and our alliance with developer, VM Labs Inc.,
we have a "strategic license agreement" to develop and market products which
incorporate a "proprietary" technology. Unlike the PC and Video gaming arena,
where virtually every manufacturer, for a fee, can market PC, Sony, Nintendo or
Sega peripherals, only approved licensed partners of VM Labs, have access to the
NUON ASIC chip technology. The NUON ASIC chip technology is required to
manufacture NUON DVD, Set-Top Converters and peripheral products, which offer us
significant protection from traditional rogue competitors.
Our best defense against competitive attack on our Road Emergency, Auto and
Outdoor Survival categories remains in our ability to maintain our lead
position, breadth and depth of high quality product assortment, continued R & D,
coupled with our ability to ship orders in a timely manner. No competitive
products currently exist that come close to the caliber of products provided by
us. In the Automotive and Outdoor Survival retail arena's "Pre-Kitted and
Pre-Configured " products of the quality and diversity as offered by us do not
exist at retail. Each product is backed by a one-year warranty. We understand
competitors could make an attempt to imitate our lines, but we have a full year
head start and the logistics to "knock us off" has numerous barriers.
We believe our primary risk factors are in on our ability to receive product
deliveries in a timely manner and in securing ongoing operational capital.
Based on the size of the U.S. Automotive After Market channel, with annual sales
exceeding $150 billion, coupled with the emerging NUON market worldwide, we feel
HPIC has the ability to establish itself as a global brand provider of unique
and highly innovative Road Emergency, 12 V Battery, Auto-Survival, Outdoor
Survival and NUON peripheral products.
PART II - OTHER INFORMATION
ITEM I. LITIGATION
None to be reported
ITEM 2. CHANGES IN SECURITIES
None
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
None
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
SIGNATURE CAPACITY DATE
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HOT PRODUCTS, INC.COM
/s/ Chairman of the Board August 20, 2000
- ----------------------- and Chief Executive Officer
James Copland
/ Director of Finance August 20, 2000
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Ricky S. Greenberg
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