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 June 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 Identification No.)
incorporation or organization)
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 August 6, 1999
Total Pages: 13
1
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<TABLE>
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
----
<CAPTION>
<S> <C> <C> <C>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (Unaudited) as of June 30, 1999
and December 31, 1998...........................................................................4
Statements of Operations (Unaudited) for the Three Months and Six Months Ended
June 30, 1999 and 1998..........................................................................5
Condensed Statements of Cash Flows (Unaudited) for the Six Months
Ended June 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 4. Submission of Matter to Vote of Security Holders................................................12
Item 6. Exhibits and Reports on Form 8-K................................................................12
SIGNATURES.......................................................................................................13
</TABLE>
2
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
3
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<TABLE>
Human Pheromone Sciences, Inc.
Balance Sheets
<CAPTION>
June 30,
1999 December 31,
(unaudited) 1998
---------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 80,832 $ 76,696
Accounts receivable, net of allowances of $67,526 1,700,117 2,051,574
and $677,735 in 1999 and 1998, respectively
Inventory 2,660,609 2,894,541
Other current assets 123,468 113,635
---------------- -----------------
Total current assets 4,565,026 5,136,446
Property and equipment, net 34,555 58,596
---------------- -----------------
$ 4,599,581 $ 5,195,042
================ =================
Liabilities and shareholders' equity
Loan payable, bank $ 900,000 $ 773,534
Accounts payable 625,720 691,674
Accrued advertising 346,200 553,926
Accrued commissions 334,681 448,051
Other accrued expenses 337,756 318,228
---------------- -----------------
Total current liabilities 2,544,357 2,785,413
Shareholders' equity:
Convertible preferred stock, issuable in series, no par value,
10,000,000 shares authorized, 1,445,716 and 1,439,333 shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 3,045,535 2,745,535
Common stock, no par value, 40,000,000 shares authorized,
3,429,839 shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively
17,667,024 17,667,024
Accumulated deficit (18,609,722) (18,002,930)
Accumulated other comprehensive income:
Foreign currency translation (47,613) -
---------------- -----------------
Total shareholders' equity 2,055,224 2,409,629
---------------- -----------------
$ 4,599,581 $ 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 June 30, Six months ended June 30,
--------------------------- -------------------------
-------------- --------------- -------------- --------------
1999 1998 1999 1998
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 2,110,782 $ 1,905,257 $ 4,349,875 $ 5,268,418
Cost of goods sold 757,205 627,074 1,536,026 1,671,273
-------------- --------------- -------------- --------------
Gross profit 1,353,577 1,278,183 2,813,849 3,597,145
Expenses:
Research and development 82,674 100,316 166,706 182,448
Selling, general and administrative 1,538,278 2,560,547 3,201,394 5,560,142
-------------- --------------- -------------- --------------
Total expenses 1,620,952 2,660,863 3,368,100 5,742,590
-------------- --------------- -------------- --------------
Loss from operations (267,375) (1,382,680) (554,251) (2,145,445)
Interest income 90 106 154 162
Interest (expense) (23,651) (10,514) (46,172) (21,469)
Other (expense) (8,726) (2,783) (6,523) (2,189)
-------------- --------------- -------------- --------------
Loss before income taxes (299,662) (1,395,871) (606,792) (2,168,941)
Income taxes - - - -
-------------- --------------- -------------- --------------
Net loss $ (299,662) $ (1,395,871) $ (606,792) (2,168,941)
============== =============== ============== ==============
Net loss per common share-basic $ (.09) $ (.41) $ (.18) $ (.63)
============== =============== ============== ==============
Net loss per common share-
assuming dilution $ (.09) $ (.41) $ (.18) $ (.63)
============== =============== ============== ==============
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>
Six months ended June 30,
-------------------------
1999 1998
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (606,792) $ (2,168,941)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 24,041 29,612
Changes in operating assets and liabilities:
Accounts receivable 351,457 2,230,348
Inventory 233,932 190,978
Other current assets (9,833) 21,833
Accounts payable and accrued liabilities (367,522) (130,834)
----------------- -----------------
Net cash provided by (used in) operating activities (374,717) 172,996
Cash flows from investing activities
Purchase of property and equipment - (12,457)
----------------- -----------------
Net cash used in investing activities - (12,457)
Cash flows from financing activities
Proceeds from bank borrowings 900,000 2,495,296
Repayment of bank borrowings (773,534) (2,834,000)
Proceeds from issuance of convertible preferred stock 300,000 -
----------------- -----------------
Net cash provided by (used for) financing activities 426,466 (338,704)
Effect of exchange rate changes on cash (47,613) -
----------------- -----------------
Net increase/(decrease) in cash and cash equivalents 4,136 (178,165)
Cash and cash equivalents at beginning of the year 76,696 248,617
----------------- -----------------
Cash and cash equivalents at end of the period $ 80,832 $ 70,452
================= =================
<FN>
See accompanying notes.
</FN>
</TABLE>
6
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Human Pheromone Sciences, Inc.
Notes to Condensed Financial Statements
(unaudited)
June 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 six months ended June
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.
Reverse Stock Split
The Company's shareholders approved a 1 for 3 reverse stock split
effective April 13, 1999. All share and per share amounts have been adjusted for
the effects of the reverse split for all periods presented.
Inventory
Inventories are stated at the lower of cost (first in - first out
method) or market. The inventory at June 30, 1999 consists of finished goods
inventory valued at $886,834 work in process of $238,388 and raw materials of
$1,535,387. 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 June 30, 1999 was $310,228
compared to $1,395,871 for the quarter ended June 30, 1998. Comprehensive loss
for the six months ended June 30, 1999 was $654,405 compared to $2,168,941 for
the six months ended June 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 June 30, 1999 as compared to the Three Months ended June 30,
1998
Net sales for the second quarter of 1999 were $2,110,782 representing
an increase of 11% from sales of $1,905,257 for the prior year's quarter. Sales
to secondary markets increased by 79% compared to the same quarter last year due
to increased demand from this segment of the business. Revenue from the sale of
its human pheromone products under its initial supply agreement with Avon
Products, Inc. contributed 18% of the current quarter's net sales. A 39% decline
of department store sales 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.
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. International shipments have also declined since pipeline
sales were made into new markets in 1998; there were no such pipeline sales in
1999. Net sales for the quarters ended June 30, 1999 and 1998 were as follows:
================================================================================
Markets 1999 1998
- --------------------------------------------------------------------------------
U.S. Markets $ 1,984,659 $ 1,580,844
International Markets 126,123 324,413
--------------- ---------------
Net Sales $ 2,110,782 $ 1,905,257
Gross profit for the quarter ended June 30, 1999 increased 6% to
$1,353,577 from $1,278,183 in the prior year due to higher sales resulting from
the supply agreement with Avon which began in 1999. Slight improvements in the
secondary and international margins were offset by decreased margins in the
department store business.
Research and Development expenses for the second quarters of 1999 and
1998 were $82,674 and $100,316, respectively. These costs principally reflect
payments and costs under the Company's research contract with Pherin
Pharmaceuticals.
Operating expenses decreased $1,022,269 to $1,538,278 in the second
quarter of 1999 from $2,560,547 in the second quarter of 1998. While $819,317 of
this decrease was attributable to lower advertising, selling and marketing
costs, all operational areas decreased. The 40% 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 second 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 spending.
The Company incurred $23,561 in net interest expense during the first
quarter of 1999 compared to $10,408 net interest expense in 1998 due to higher
average borrowings.
9
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Six Months ended June 30, 1999 as compared to the Six Months ended June 30, 1998
Net sales for the six months ended June 30, 1999 were $4,349,875. This
was a 17% decrease from net sales of $5,268,418 for the first half 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 29% increase in sales
for the secondary markets, catalog companies and direct marketing, offset a
significant portion of the 44% 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 six months ended June 30, 1999 and 1998 are as follows:
================================================================================
Class of Trade 1999 1998
- --------------------------------------------------------------------------------
U.S. Markets $ 4,098,448 $ 4,533,071
International Markets 251,427 735,347
--------------- ---------------
Net Sales $ 4,349,875 $ 5,268,418
Gross profit for the first half of 1999 declined 22% to $2,813,849 from
$3,597,145 in 1998. The decrease is primarily the result of reduced sales
volume, in addition to the increased sales to the lower gross margin secondary
sales channel.
Research and Development expenses for the first half of 1999 and 1998
were $166,706 and $182,448, respectively and are principally comprised of
payments under the Company's contract with Pherin Corporation.
Operating expenses decreased to $3,201,394 in the six months ended June
30, 1999 from $5,560,142 in the period ended June 30, 1998. Selling marketing
and advertising accounted for $2,111,372 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 spending.
The Company incurred $46,018 in net interest expense during the first
half of 1999 compared to $21,307 net interest expense in 1998 due to higher
average borrowings during the period.
LIQUIDITY
At June 30, 1999, the Company had a $3,000,000 line of credit, against
which it had borrowed $900,000; its working capital was $2,020,670. At June 30,
1998 the Company had net borrowings of $209,296 and working capital of
$2,178,013. For the first six months of 1999, net cash used in operating
activities was $374,717 compared to net cash provided of $172,996 for the prior
year's six-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.
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
10
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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.
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 in the process of determining the extent to which it may
be impacted by third party systems, which may not be Year 2000 compliant. The
Year 2000 computer issue creates risk for the Company from third parties with
whom the Company deals on financial transactions. To date 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
second half of 1999. Failure to complete any necessary remediation by the Year
2000 may have a material adverse impact on the operations of the Company.
11
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PART II
OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
Registrant held a Special Meeting of shareholders on April 12, 1999. At
the Special Meeting, the shareholders voted on, and approved an amendment to the
Company's Articles of Incorporation to effect a one-for-three reverse stock
split of the Company's Common Stock.
<TABLE>
The number of votes cast for, against or withheld as well as the number
of abstention and broker non-votes as to the one-for-three reverse stock split
proposal are set forth below:
<CAPTION>
Proposal: For Against Abstained Broker
- --------- --- ------- --------- ------
Non-Votes
---------
<S> <C> <C> <C> <C>
Amend the Company's Articles of
Incorporation to effect a
one-for-three reverse stock of the 6,406,337 76,319 2,200 0
Company's Common Stock.
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
None
<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: August 10, 1999 /s/ William P. Horgan
------------------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: August 10, 1999 /s/ Gregory S. Fredrick
------------------------------
Gregory S. Fredrick
Vice President, Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule Contains Summary Financial Information Extracted From Balance
Sheets and Statements of Income
</LEGEND>
<CIK> 0000878616
<NAME> Human Pheromone Sciences, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 80,832
<SECURITIES> 0
<RECEIVABLES> 1,767,643
<ALLOWANCES> (67,526)
<INVENTORY> 2,660,609
<CURRENT-ASSETS> 4,565,026
<PP&E> 799,867
<DEPRECIATION> (765,312)
<TOTAL-ASSETS> 4,599,581
<CURRENT-LIABILITIES> 2,544,356
<BONDS> 0
0
3,045,535
<COMMON> 17,667,024
<OTHER-SE> (18,657,334)
<TOTAL-LIABILITY-AND-EQUITY> 4,599,581
<SALES> 4,349,875
<TOTAL-REVENUES> 4,349,875
<CGS> 1,536,026
<TOTAL-COSTS> 3,201,394
<OTHER-EXPENSES> 166,706
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,172
<INCOME-PRETAX> (606,792)
<INCOME-TAX> 0
<INCOME-CONTINUING> (606,792)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (606,792)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
