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 September 30, 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 November 1, 1999
Total Pages: 13
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<TABLE>
HUMAN PHEROMONE SCIENCES, INC.
INDEX
<CAPTION>
Page
PART I
FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited) as of September 30, 1999
and December 31, 1998...........................................................................4
Statements of Operations (Unaudited) for the Three Months and Nine Months Ended
September 30, 1999 and 1998.....................................................................5
Condensed Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 1999 and 1998...............................................................6
Notes to Condensed Financial Statements (Unaudited).............................................7
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results of Operations...........8
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................................12
SIGNATURES.......................................................................................................13
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
<TABLE>
Human Pheromone Sciences, Inc.
Balance Sheets
<CAPTION>
September 30,
1999 December 31,
(unaudited) 1998
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 58,230 $ 76,696
Accounts receivable, net of allowances of $131,402 1,939,864 2,051,574
and $677,735 in 1999 and 1998, respectively
Inventory 2,737,489 2,894,541
Other current assets 154,238 113,635
------------ ------------
Total current assets 4,889,821 5,136,446
Property and equipment, net 23,919 58,596
------------ ------------
$ 4,913,740 $ 5,195,042
============ ============
Liabilities and shareholders' equity
Loan payable, bank $ 1,200,000 $ 773,534
Accounts payable 689,151 691,674
Accrued advertising 196,000 553,926
Accrued commissions 333,964 448,051
Other accrued expenses 324,258 318,228
------------ ------------
Total current liabilities 2,743,373 2,785,413
Shareholders' equity:
Convertible preferred stock, issuable in series,
no par value,
shares authorized, 1,446,842 and
1,439,333 shares issued and outstanding at
September 30, 1999 and
December 31, 1998, respectively 3,245,535 2,745,535
Common stock, no par value, 40,000,000 shares authorized,
3,429,839 shares issued and outstanding at September 30, 1999
and December 31, 1998, respectively 17,667,024
17,667,024
Accumulated deficit (18,704,835) (18,002,930)
Accumulated other comprehensive income:
Foreign currency translation (37,357) --
------------ ------------
Total shareholders' equity 2,170,367 2,409,629
------------ ------------
$ 4,913,740 $ 5,195,042
============ ============
<FN>
See accompanying notes.
</FN>
</TABLE>
4
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<TABLE>
Human Pheromone Sciences, Inc.
Statements of Operations
(unaudited)
<CAPTION>
Three months ended Nine months ended
------------------------------ ------------------------------
September 30, September 30,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 2,124,398 $ 2,312,805 $ 6,474,273 $ 7,581,223
Cost of goods sold 919,873 885,391 2,455,899 2,556,664
----------- ----------- ----------- -----------
Gross profit 1,204,525 1,427,414 4,018,374 5,024,559
Expenses:
Research and development 81,874 107,751 248,580 290,199
Selling, general and administrative 1,195,222 1,502,715 4,396,616 7,062,857
----------- ----------- ----------- -----------
Total expenses 1,277,096 1,610,466 4,645,196 7,353,056
----------- ----------- ----------- -----------
Loss from operations (72,571) (183,052) (626,822) (2,328,497)
Interest income 102 58 256 220
Interest (expense) (24,227) (16,658) (70,399) (38,127)
Other income (expense) 1,583 13,737 (4,940) 11,548
----------- ----------- ----------- -----------
Loss before income taxes (95,113) (185,915) (701,905) (2,354,856)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (95,113) $ (185,915) $ (701,905) $(2,354,856)
=========== =========== =========== ===========
Net loss per common share-basic $ (.03) $ (.05) $ (.20) $ (.69)
=========== =========== =========== ===========
Net loss per common share-
assuming dilution $ (.03) $ (.05) $ (.20) $ (.69)
=========== =========== =========== ===========
Weighted average shares used in calculation
of net loss per share 3,429,839 3,429,839 3,429,839 3,429,839
=========== =========== =========== ===========
Weighted average shares and equivalents,
if dilutive, used in calculation of net loss
per common share 3,429,839 3,429,839 3,429,839 3,429,839
=========== =========== =========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
5
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<TABLE>
Human Pheromone Sciences, Inc.
Statements of Cash Flows
(unaudited)
<CAPTION>
Nine months ended September 30,
------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (701,905) $(2,354,856)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 34,677 49,838
Changes in operating assets and liabilities:
Accounts receivable 111,710 1,047,737
Inventory 157,052 268,039
Other current assets (40,603) 16,400
Accounts payable and accrued liabilities (468,506) 14,836
----------- -----------
Net cash provided by (used in) operating activities (907,575) (958,006)
Cash flows from investing activities
Purchase of property and equipment -- (21,796)
----------- -----------
Net cash used in investing activities -- (21,796)
Cash flows from financing activities
Proceeds from bank borrowings 1,510,000 3,766,390
Repayment of bank borrowings (1,083,534) (3,009,000)
Proceeds from issuance of convertible preferred stock 500,000 --
----------- -----------
Net cash provided by (used for) financing activities 926,466 757,390
Effect of exchange rate changes on cash (37,357) --
----------- -----------
Net increase/(decrease) in cash and cash equivalents (18,466) (222,412)
Cash and cash equivalents at beginning of the year 76,696 248,617
----------- -----------
Cash and cash equivalents at end of the period $ 58,230 $ 26,205
=========== ===========
<FN>
See accompanying notes.
</FN>
</TABLE>
6
<PAGE>
Human Pheromone Sciences, Inc.
Notes to Condensed Financial Statements
(unaudited)
September 30, 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 and nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the calendar year ending December 31, 1999. These condensed
financial statements should be read in conjunction with the Company's audited
financial statements and footnotes thereto included in the Company's annual
report on Form 10-KSB for the year ended December 31, 1998.
Inventory
Inventories are stated at the lower of cost (first in - first out
method) or market. The inventory at September 30, 1999 consists of finished
goods inventory valued at $886,439 work in process of $370,998 and raw materials
of $1,480,052. 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 September 30, 1999 was $84,857
compared to $185,915 for the quarter ended September 30, 1998. Comprehensive
loss for the nine months ended September 30, 1999 was $739,262 compared to
$2,354,856 for the nine months ended September 30, 1998.
7
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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
more easily and effectively than the Company.
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 has
significant power to determine the price and promotional terms that 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.
8
<PAGE>
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 pheromone
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 September 30, 1999 as compared to the Three Months ended
September 30, 1998
Net sales for the third quarter of 1999 were $2,124,398 representing a
decrease of 8% from sales of $2,312,805 for the prior year's quarter. Revenue
from the sale of its human pheromone products under the Company's initial supply
agreement with Avon Products, Inc. contributed 11% of the current quarter's net
sales. The revenue from the supply agreement sales helped offset a 34% decline
of department store sales from last year's third quarter. This decline is
consistent with the Company's stated goal for 1999 to more directly focus
selling and marketing efforts in a reduced number of department stores which
have the potential to be profitable partners in the Realm(R) fragrance business.
Sales to secondary markets increased 15% compared to last years third quarter.
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, and increased sales to domestic secondary markets.
International shipments have also declined since pipeline sales were made into
new markets in 1998; there were no such pipeline sales in the 1999 quarter. Net
sales for the quarters ended September 30, 1999 and 1998 were as follows:
- --------------------------------------------------------------------------------
Markets 1999 1998
- --------------------------------------------------------------------------------
U.S. Markets $1,921,513 $2,026,618
International Markets 202,885 286,187
---------- ----------
Net Sales $2,124,398 $2,312,805
Gross profit for the quarter ended September 30, 1999 decreased 16% to
$1,204,525 from $1,427,414 in the prior year due to the sale of lower margin
value sets this quarter. The Company offered to the department stores a lower
priced Fall set to test consumer response to a lower price point. International
gross profit is down 4% as we have started to sell lower margin sets into
markets that have only purchased open stock products in the past.
Research and Development expenses for the third quarters of 1999 and
1998 were $81,874 and $107,751 respectively. These costs principally reflect
payments and costs under the Company's research contract with Pherin
Pharmaceuticals.
Operating expenses decreased $307,493 (20%), to $1,195,222 in the third
quarter of 1999 from $1,502,715 in the third quarter of 1998. While $205,912 of
this decrease was attributable to lower advertising, selling and marketing
costs, decreased spending was also attained in facilities, and general and
administrative areas. The 20% reduction in spending is the result of the
Company's plan to execute a more focused sales and marketing strategy and a more
focused expense budget. The third quarter results are consistent with the
Company's 1999 sales and marketing plan that anticipated the decrease in sales
and gross margin, with offsetting savings in operating areas.
9
<PAGE>
The Company incurred $24,125 in net interest expense during the third
quarter of 1999 compared to $16,600 net interest expense in 1998 due to higher
average borrowings.
Nine Months ended September 30, 1999 as compared to the Nine Months ended
September 30, 1998
Net sales for the nine months ended September 30, 1999 were $6,474,273.
This was a 15% decrease from net sales of $7,581,223 for the nine months of
1998. Revenue from the sale of the Company's human pheromones under a supply
agreement with Avon Products, Inc. which commenced in 1999, and a 55% increase
in sales for the secondary markets, catalog companies and direct marketing,
offset a significant portion of the 70% decline in U.S. department store sales.
The decline in the department store sales is attributable to the late 1998
reduction in the number of stores with whom the Company does business, and to
the stated Company goal to focus on accounts that have the potential to be
profitable partners.
In 1999 a U.S. distributor, that 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 the
international markets. International shipments have also declined since pipeline
sales were made into new markets in 1998; there were no such sales in 1999. Net
sales for the nine months ended September 30, 1999 and 1998 are as follows:
- --------------------------------------------------------------------------------
Class of Trade 1999 1998
- --------------------------------------------------------------------------------
U.S. Markets $6,019,961 $6,580,631
International Markets 454,312 1,000,592
---------- ----------
Net Sales $6,474,273 $7,581,223
Gross profit for the nine months of 1999 declined 20% to $4,018,374
from $5,024,559 in 1998. The decrease is primarily the result of reduced sales
volume, and the increased sales to the lower gross margin secondary sales
channel.
Research and Development expenses for the nine months of 1999 and 1998
were $248,580 and $290,199, respectively and are principally comprised of
payments under the Company's contract with Pherin Corporation.
Operating expenses decreased to $4,396,616 in the nine months ended
September 30, 1999 from $7,062,857 in the period ended September 30, 1998.
Selling, marketing and advertising accounted for $2,317,284 of the decrease with
all operational areas also spending less in 1999 than in 1998. The reduced
spending is consistent with the Company's 1999 sales and marketing plan that
anticipated the decrease in sales and gross profit, with offsetting savings in
operating expenses.
The Company incurred $70,143 in net interest expense during the first
nine months of 1999 compared to $37,907 net interest expense in 1998 due to
higher average borrowings during the period.
LIQUIDITY
At September 30, 1999, the Company had a $3,000,000 line of credit,
against which it had borrowed $1,200,000; its working capital was $2,146,448. At
September 30, 1998 the Company had net borrowings of $1,305,390 and working
capital of $2,002,985. For the first nine months of 1999, net cash used in
operating activities was $907,575 compared to net cash used of $958,006 for the
prior year's nine month period. Assuming the Company's activities proceed
substantially as planned, the Company's line of credit, additional equity
capital from preferred stock issuance, and anticipated revenues from product
sales and technology licensing is expected to 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.
10
<PAGE>
On July 23, 1999 and on August 11, 1999 the company obtained $100,000 additional
equity capital (total of $200,000 was received) from a current shareholder by
issuing shares of convertible preferred stock.
Additional working capital may be required should the Company fail to
generate consumer response levels as planned for in 1999. 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-up, 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. There is no certainty that such funding would be
available.
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 assessing 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 expected to be minimal.
The Company is continuing 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 the
Company has received assurances from its 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 the Company's material planning process and sales planning for the
remainder of the year. Failure to complete any necessary remediation by the Year
2000 may have a material adverse impact on the operations of the Company.
11
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company filed Form 8-K on September 30, 1999 reporting a change in
the Company's certifying accountants.
12
<PAGE>
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: November 11, 1999 /s/ William P. Horgan
------------------------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: November 11, 1999 /s/ Gregory S. Fredrick
------------------------------------
Gregory S. Fredrick
Vice President, Controller
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule Contains Summary Financial Information Extracted From Balance
Sheets and Statements of Income.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 58,230
<SECURITIES> 0
<RECEIVABLES> 2,071,266
<ALLOWANCES> (131,402)
<INVENTORY> 2,737,489
<CURRENT-ASSETS> 4,889,821
<PP&E> 799,867
<DEPRECIATION> (775,948)
<TOTAL-ASSETS> 4,913,740
<CURRENT-LIABILITIES> 2,743,373
<BONDS> 0
0
3,245,535
<COMMON> 17,667,024
<OTHER-SE> (18,742,192)
<TOTAL-LIABILITY-AND-EQUITY> 4,913,740
<SALES> 6,474,273
<TOTAL-REVENUES> 6,474,273
<CGS> 2,455,899
<TOTAL-COSTS> 4,396,616
<OTHER-EXPENSES> 248,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,399
<INCOME-PRETAX> (701,905)
<INCOME-TAX> 0
<INCOME-CONTINUING> (701,905)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (701,905)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
