<PAGE>
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 September 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)
<TABLE>
<S> <C> <C>
Delaware 5990 94-3054267
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
909 Motor Parkway
Haupauge, New York 11788
(631) 582-5204
(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
--- ---
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 SEPTEMBER 30, 2000
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Common Stock, par value 16,968,330
$.01 per share
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Index
FRAGRANCENET.COM, INC.
<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets at September 30, 2000 (unaudited)
and March 31, 2000........................................................................ 3
Unaudited Statements of Operations for the Three and Six
Months Ended September 30, 2000 and September 30, 1999.................................... 4-5
Unaudited Statements of Cash Flows for the Six
Months Ended September 30, 2000 and September 30, 1999.................................... 6
Notes to Financial Statements............................................................. 7-8
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition.................................................... 9-11
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 11
Item 6. Exhibits and Reports on Form 8-K........................................................... 12
Signatures.......................................................................................... 13
</TABLE>
2
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Item 1. Financial Statements
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 2000 and March 31, 2000
Assets 09/30/2000 3/31/00
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 211,665 283,433
Accounts receivable, net 67,830 22,049
Inventory 132,000 54,896
Prepaid expenses and other current assets 56,189 24,054
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Total current assets 467,684 384,432
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Property and equipment, net 26,553 28,517
Intangible asset, net 6,625 6,875
Other assets 14,780 12,700
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Total assets $ 515,642 432,524
========= ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 198,022 144,004
Accrued expenses 276,276 311,093
Deferred revenue 3,400 20,387
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Total liabilities 477,698 475,484
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Stockholders' equity (deficit):
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 (499,759) (580,663)
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Total stockholders' equity (deficit) 37,944 (42,960)
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Total liabilities and stockholders' equity (deficit) $ 515,642 432,524
========= =========
</TABLE>
See accompanying notes to financial statements.
3
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STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(unaudited)
Three months ended September 30, 2000 and September 30, 1999
2000 1999
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<S> <C> <C>
Net sales $ 1,505,508 688,213
Cost of sales 850,947 462,789
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Gross profit 654,561 225,424
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Operating expenses:
Selling and marketing 253,746 140,172
General and administrative 281,007 146,261
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Total operating expenses 534,753 286,433
Operating earnings (loss) 119,808 (61,009)
Interest income 1,983 2,419
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Net income (loss) $ 121,791 (58,590)
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Basic and diluted net income (loss) per share $ 0.01 $ 0.00
=========== ===========
Weighted average number of common shares outstanding 16,968,330 16,428,661
=========== ===========
</TABLE>
See accompanying notes to financial statements.
4
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STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
unaudited
Six months ended September 30, 2000 and September 30, 1999
2000 1999
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<S> <C> <C>
Net sales $ 3,292,069 1,071,824
Cost of sales 2,022,796 722,644
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Gross profit 1,269,273 349,180
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Operating expenses:
Selling and marketing 619,700 231,365
General and administrative 573,211 248,179
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Total operating expenses 1,192,911 479,544
Operating earnings (loss) 76,362 (130,364)
Interest income 4,542 2,419
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Net income (loss) $ 80,904 (127,945)
============ ============
Basic and diluted net income (loss) per share $ 0.00 $ (0.01)
============ ============
Weighted average number of common shares outstanding 16,968,330 15,815,270
============ ============
</TABLE>
See accompanying notes to financial statements.
5
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STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended September 30, 2000 and September 30, 1999
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 80,904 (127,945)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 6,552 6,630
Changes in assets and liabilities:
Accounts receivable (45,781) (35,645)
Inventory (77,104) (21,270)
Prepaid expenses and other assets (34,215) (10,083)
Accounts payable and accrued expenses 19,201 149,352
Deferred revenue (16,987) --
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Net cash used in operating activities (67,430) (38,961)
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Cash flows from investing activities:
Acquisitions of property and equipment (4,338) (3,822)
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Net cash used in investing activities (4,338) (3,822)
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Cash flows from financing activities:
Repayment of loans payable
-- (25,000)
Cash acquired pursuant to the merger of Fragrancenet.com, Inc.
and Telescents -- 500,000
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Net cash provided by financing activities -- 475,000
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Net increase (decrease) in cash and cash equivalents (71,768) 432,217
Cash and cash equivalents at beginning of period 283,433 77,669
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Cash and cash equivalents at end of period $ 211,665 509,886
========= =========
Supplemental disclosure of cash flow information:
Cash paid during period for income taxes $ 550 380
========= =========
Cash paid during period for interest $ 1,864 292
========= =========
</TABLE>
See accompanying notes to financial statements.
6
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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 six months ended September 30, 2000 and 1999, an aggregate of
63% and 87% of purchases were from two distributors, respectively.
2. Merger of TeleScents and FragranceNet.com, Inc.
The Company was formerly known as National Capital Management Corporation
("NCMC"), a publicly held shell company with no substantial business operations.
On July 28, 1999, 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") in
exchange for all the outstanding common stock of Telescents. 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 in substance a recapitalization of
TeleScents with the issuance of shares of common stock by Telescents 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.
7
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3. New Accounting Pronouncements
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.
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, as amended by SAB 101A, 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 for all periods presented
reflects its sales incentives as a reduction of sales.
4. Commitments
The Company entered into a five year operating lease agreement for its facility
of approximately 8,500 square feet. The lease commenced on September 1, 2000 at
a base rent of $6,300 per month and expires in 2005.
8
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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.
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<CAPTION>
Three Months Ended September 30 2000 1999
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<S> <C> <C>
Net Sales $ 1,505,508 $ 688,213
Cost of Sales 850,947 462,789
Gross Profit 654,561 225,424
Total Selling, General and Administrative Expenses 534,753 286,433
Income (Loss) from Operations 119,808 (61,009)
Other Income - Interest Income 1,983 2,419
Net Income (Loss) 121,791 (58,590)
Six Months Ended September 30 2000 1999
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Net Sales $ 3,292,069 $ 1,071,824
Cost of Sales 2,022,796 722,644
Gross Profit 1,269,273 349,180
Total Selling, General and Administrative Expenses 1,192,911 479,544
Income (Loss) from Operations 76,362 (130,364)
Other Income - Interest Income 4,542 2,419
Net Income (Loss) 80,904 (127,945)
</TABLE>
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 generally 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.
9
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Net Sales
Net Sales for the three months ended September 30, 2000 increased to $1,505,508
or 218% over the comparable period in 1999 which was $688,213. Net Sales for the
six months ended September 30, 2000 increased to $3,292,069 or 307% over the
comparable period in 1999 which was $1,071,824. The increases were due to
greater marketing efforts and an increased number of customers that resulted in
higher sales.
Cost of Sales
Cost of sales as a percentage of sales was 57% in the three months ended
September 30, 2000 and 67% in the comparable quarter in 1999. Cost of sales as a
percentage of sales was 61% for the six months ended September 30, 2000 and 67%
for the comparable period in 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 $534,753 for the three months ended September
30, 2000 compared to $286,433 in the September 30, 1999 quarter. The expenses
increased to $1,192,911 for the six months ended September 30, 2000 compared to
$479,544 for the comparable period in 1999. As a percentage of sales however,
for the three months ended September 30, 2000, the expenses decreased from 42%
at September 30, 1999 to 35% at September 30, 2000. For the six months ended
September 30, 2000 expenses as a percentage of sales decreased to 36% for the
period ended September 30, 2000 from 45% for the period ended September 30,
1999. This is the result of economies of scale that were effected by the
Company.
Net Income (Loss)
As a result of the Company's reduction of operating expenses as a percentage of
sales, coupled with the lowering of the cost of sales through better prices for
purchased products, the Company posted an operating profit of $119,808 for the
three months ended September 30, 2000 compared to a loss from operations of
$61,009 for the comparable period in 1999. Profit from operations for the six
month period ended September 30, 2000 was $76,372 compared to a loss of $130,364
for the comparable period in 1999.
Income Taxes
Due to the utilization of net operating loss carryforwards, no income taxes were
provided for the six months ended September 30, 2000.
Liquidity, Capital Resources and Changes in Financial Condition
At September 30, 2000 the Company had a working capital deficit of $10,014 and
cash and cash equivalents of $211,665 as compared to a working capital deficit
of $91,052 and cash and cash equivalents of $283,433 at March 31, 2000. The
Company's cash and cash equivalents were sufficient to enable it to meet its
cash requirements during the quarter ended September 30, 2000. The main
requirements for capital are for the acquisition of 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 $71,768 during the six months ended September 30,
2000 was primarily due to the Company's increase in inventory in preparation for
the next quarter holiday period. The Company entered into a five year operating
lease agreement for its facility of approximately 8,500 square feet, which lease
commenced September 1, 2000 at a base rent of $6,300 per month. We believe our
cash and cash equivalents and expected cash flow from operations will be
sufficient to meet our cash needs for the next 12 months.
10
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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, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no risks which are required to be disclosed.
11
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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
12
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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: November 8, 2000 FRAGRANCENET.COM, INC.
----------------------
(Registrant)
By /s/ JASON S. APFEL
----------------------------
Jason S. Apfel
President and
Chief Executive Officer
By /s/ DENNIS M. APFEL
----------------------------
Dennis M. Apfel, Esq.
Chief Financial Officer
13
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INDEX TO EXHIBITS
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Exhibit Page
Number Description Number
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27 Financial Data Schedule 15
14
