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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 0-16819
FRAGRANCENET.COM, INC.
(exact name of registrant as specified in its charter)
Delaware 5990 94-3054267
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
2070 Deer Park Avenue
Deer Park, New York 11729
(516) 242-3205
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JUNE 30, 2000
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Common Stock, par value 16,968,330
$ .01 per share
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Index
FRAGRANCENET.COM, INC.
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<CAPTION>
PAGE NUMBER
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Part I. Financial Information
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets at June 30, 2000
and March 31, 2000..................................................3
Consolidated Statements of Operations for the Three
Months Ended June 30, 2000 and June 30, 1999........................4
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2000 and June 30, 1999........................5
Notes to Consolidated Financial Statements..........................6-7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition....................7-9
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........10
Item 6. Exhibits and Reports on Form 8-K....................................11
Signatures......................................................................12
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2
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Item 1. Financial Statements
BALANCE SHEETS
<TABLE>
<CAPTION>
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June 30, 2000 March 31,
2000
(Unaudited)
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 227,503 283,433
Accounts receivable, net 25,672 22,049
Inventory 48,000 54,896
Prepaid expenses and other current assets 91,652 24,054
Total Current Assets 392,800 384,432
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Property and equipment, net 29,672 28,517
Intangible asset, net 6,750 6,875
Other assets 12,700 12,700
Total Assets $ 441,922 $ 432,524
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 503,554 $ 455,097
Deferred Revenue 22,215 20,387
Total Liabilities 525,769 475,484
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Stockholders' Defecit:
Common Stock, $.01 par value; 50,000,000 shares
Authorized, 16,968,330 shares issued and outstanding 169,683 169,683
Additional paid-in-capital 368,020 368,020
Accumulated deficit (621,550) (580,663)
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Total stockholders' deficit (83,847) (42,960)
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Total liabilities and stockholders' deficit $ 441,922 432,524
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See accompanying notes to the financial statements.
3
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STATEMENTS OF OPERATIONS
(Unaudited)
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<CAPTION>
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Three Months Ended June 30,
2000 1999
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<S> <C> <C>
Net Sales $ 1,786,561 $ 383,611
Cost of Sales 1,171,849 259,855
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Gross Profit 614,712 123,756
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Operating Expenses:
Selling and marketing 365,954 91,193
General and administrative 292,204 101,918
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Total Operating Expenses 658,158 193,111
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Loss From Operations (43,446) (69,355)
Interest Income 2,559 -
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Net Loss $ (40,887) $ (69,355)
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Basic and diluted net loss per share $ (0.00) $ (0.00)
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Weighted average number of common shares outstanding 16,968,330 15,195,140
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See accompanying notes to the financial statements.
4
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STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
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Three Months Ended June 30,
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net Loss $ (40,887) $ (69,355)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 3,308 3,151
Changes in:
Accounts receivable (3,623) --
Inventory 6,896 --
Prepaid expenses and other current (67,571) --
assets
Accounts payable 48,457 65,609
Deferred revenue 1,828 --
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Net cash used in operating activities (51,592) (595)
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Cash flows from investing activities:
Acquisition of property and equipment (4,338) --
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Net cash used in investing activities (4,338) --
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Net decrease in cash and cash equivalents (55,930) (595)
Cash and cash equivalents, beginning of period 283,433 85,095
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Cash and cash equivalents, end of period $ 227,503 84,500
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Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 550 380
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Cash paid during the period for interest $ 932 --
========= =========
</TABLE>
See accompanying notes to the financial statements.
5
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Notes to Unaudited Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions of Form 10-Q of Regulation S-X. Accordingly, they do
not include all the information and notes required by generally accepted
accounting principles for complete financial statements. For further
information, refer to the Company's financial statements for the year ended
March 31, 2000 and notes thereto included in the Company's annual report on Form
10-KSB. For the three months ended June 30, 2000 and 1999, 52% and 65% of
purchases were from one distributor.
2. Merger of TeleScents and FragranceNet.com, Inc.
On July 28, 1999, National Capital Management Corporation ("NCMC") entered into
an Agreement and Plan of Merger (the "Merger Agreement") to acquire TeleScents,
Inc., a New York corporation ("TeleScents"). Pursuant to the Merger Agreement,
NCMC issued to the shareholders of TeleScents an aggregate of 4,900,000 shares
of its common stock and an aggregate of 1,029,514 shares of its Series A
Preferred Stock (the "Preferred Stock"). The Preferred Stock was convertible
into common stock on a 1-for-10 basis at such time as the Certificate of
Incorporation of the Company was amended to increase the authorized shares of
common stock to a number of shares sufficient to effect the conversion. The
Preferred Stock had voting privileges on an "as converted" basis. Accordingly,
the shareholders of TeleScents, in the aggregate, held approximately 90% of the
total voting power of the Company's voting stock. The conversion of the
Preferred Stock into 10,295,140 shares of common stock occurred subsequent to
the Shareholders' meeting on November 16, 1999 where an amendment to the
Company's Certificate of Incorporation was approved to increase the authorized
shares of common stock from 6,666,666 to 50,000,000.
In connection with the Merger, the Company changed its name to
FragranceNet.com, Inc. and changed its ticker symbol to "FRGN".
The Company's acquisition of TeleScents was accounted for as a reverse
acquisition with TeleScents as the accounting acquirer, as the shareholders of
TeleScents gained voting control of the Company pursuant to the merger. The only
asset remaining in NCMC at the time of the merger was $437,703 of cash.
Accordingly, the reverse acquisition was accounted for as a recapitalization of
TeleScents with the issuance of shares of common stock to the pre-transaction
stockholders of FragranceNet.com in exchange for cash. For periods prior to the
business combination, the equity of the combined enterprise is the historical
equity of the accounting acquirer prior to the merger retroactively restated to
reflect the number of shares received in the business combination.
3. New Accounting Pronouncements
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In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). Among other provisions,
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It also requires that an entity
recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. SFAS No. 133 is effective
for financial statements for fiscal years beginning after June 15, 2000.
Management has not determined the effect, if any, of adopting SFAS No. 133.
In March 2000, FASB Interpretation No. 44 - "Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No.25" (FIN 44)
was issued. FIN 44 clarifies the application of APB 25 regarding the (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 does not address the
application of the fair value method of Statement No. 123. This Interpretation
is effective July 1, 2000, but certain conclusions in this Interpretation cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that this Interpretation covers events occurring during the period
after December 15, 1998, or January 12, 2000, but before the effective date on
July 1, 2000, the effects of applying this Interpretation are recognized on a
prospective basis from July 1, 2000. We believe the adoption of FIN 44 will not
have a significant effect on the Company's financial statements.
On December 3, 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 - "Revenue Recognition in Financial
Statements" (SAB No. 101). SAB No.101 provides the SEC staff's views on the
recognition of revenue. SAB No. 101 requires registrants to adopt the
accounting guidance contained therein by no later than the fourth quarter of
2000. Management of the Company does not believe that applying the accounting
guidance of SAB No. 101 will have a material effect on its financial position
or results of operations.
In the fourth quarter of fiscal 2000, the Company implemented the provisions of
EITF No. 00-14, "Accounting for Sales Incentives", and reflects its sales
incentives as a reduction of sales.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with the
financial statements and notes to the financial statements.
Results of Operations
The following table sets forth for the periods indicated certain financial
information derived from the Company's statements of operations. There can be no
assurance that trends in sales growth will continue in the future.
7
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Three Months Ended June 30, 2000 1999
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Net Sales $1,786,561 $ 383,611
Cost of Sales 1,171,849 259,855
Gross Profit 614,712 123,756
Total Selling, General and Administrative
Expenses 658,158 193,111
Loss from Operations (43,446) (69,355)
Other Income - Interest Income 2,559 -
Net Loss (40,887) (69,355)
Overview
The Company sells brand name fragrances and related products over the Internet
through a website located at www.fragrancenet.com. The Company purchases
products from 10 different suppliers and does not purchase the products until
they are ordered and paid for by the customer. Payment is made by credit card or
by check and goods are not shipped to the customer until the check clears and/or
authorization from the credit card company is obtained. The Company does not
carry any significant level of inventory and has no accounts receivable other
than amounts due from the credit card companies.
Net Sales
Net Sales for the quarter ended June 30, 2000 increased to $1,786,561 or 366%
over the comparable period in 1999 which was $383,611. The increase was due to
greater marketing efforts and an increased number of customers which resulted in
higher sales.
Cost of Sales
Cost of sales as a percentage of sales was 66% in the quarter ended June 30,
2000 and 68% in the quarter ended June 30, 1999. The decrease was primarily due
to obtaining better prices from suppliers.
Selling, General and Administrative Expenses
These expenses encompass the entire operations of the business from personnel
required to operate the office to website development and hosting of the
website. The expenses increased to $658,158 in the quarter ended June 30, 2000
compared to $193,511 in the June 30, 1999 quarter. As a percentage of sales
however, the expenses decreased from 50% at June 30, 1999 to 37% at June 30,
2000. This is the result of economies of scale that were effected by the
Company.
Net Loss
As a result of the Company's increased number of personnel, purchase of computer
hardware and software, aggressive actions to attract affiliates, customers and
custom scripting for the website the Company reduced the loss from operations to
$43,446 compared to $69,355 for the quarter ended June 30, 2000 and June 30,
1999, respectively.
Income Taxes
Due to the net loss, no income taxes were provided for either quarter.
8
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Liquidity, Capital Resources and Changes in Financial Condition
The Company's cash was sufficient to enable it to meet its cash requirements
during the quarter ended June 30, 2000. The main requirements for capital are to
acquire merchandise for sale over the Internet through the Company website, for
the maintenance of the website and for advertising and promotion to bring
consumers to the website. The decrease in cash and cash equivalents of $55,930
during the three months ended June 30, 2000 was primarily due to the Company's
operating loss during the period.
At June 30, 2000 the Company had a working capital deficit of $132,969 and cash
and cash equivalents of $227,503 as compared to a working capital deficit of
$98,260 and cash and cash equivalents of $84,500 at June 30, 1999. The Company
had a net loss from operations of $43,446 for the quarter ended June 30, 2000.
Forward Looking Statements
Certain statements contained in "Management's Discussion and Analysis of Results
of Operations and Financial Condition" concerning future prospects of the
Company and cash flow requirements are forward looking statements which may
involve known and unknown material risks, uncertainties and other factors not
under the Company's control including without limitation the need for additional
financing, the impact of competition, the management of growth, compliance with
applicable regulatory requirements, the Company's ability to implement its long
term business plan for acquiring complementary businesses, and the Company's
ability to enter into agreements with marketing or distribution partners, which
may cause actual results, performance and material achievements of the Company
to be materially different from the Company's expectations.
9
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no risks which are required to be disclosed.
10
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K: None
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2000 FRAGRANCENET.COM, INC.
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(Registrant)
Dated: August 14, 2000 By / s / JASON S. APFEL
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Jason S. Apfel
President and
Chief Executive Officer
Dated: August 14, 2000 By / s / DENNIS M. APFEL
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Dennis M. Apfel, Esq.
Chief Financial Officer
12
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INDEX TO EXHIBITS
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Exhibit Page
Number Description Number
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27 Financial Data Schedule 14
13
