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, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission file number 0-23544
HUMAN PHEROMONE SCIENCES, INC.
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(Name of small business issuer in its charter)
California 94-3107202
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(State or other jurisdiction of (I.R.S. employee
incorporation or organization) Identification No.)
47650 Fremont Blvd. Suite 200, Fremont, California 94538
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(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 7, 2000.
<PAGE>
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 (Unaudited)
and December 31, 1999.......................................... 3
Consolidated Statements of Operations and Comprehensive
Loss (Unaudited) for the Three and Six Months Ended
June 30, 2000 and 1999......................................... 4
Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended June 30, 2000 and 1999.................... 5
Notes to Consolidated Financial Statements (Unaudited)........... 6
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
2
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
Human Pheromone Sciences, Inc.
Consolidated Balance Sheets
<CAPTION>
June 30, December 31,
(in thousands except share data) 2000 1999
-------------------------------------------------------------------------------- -------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 761 $ 108
Accounts receivable, net of allowances of $38
and $338 in 2000 and 1999, respectively 1,185 2,050
Inventories 600 2,304
Other current assets 47 36
-------- --------
Total current assets 2,593 4,498
Property and equipment, net 9 14
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$ 2,602 $ 4,512
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Bank borrowings $ 0 $ 900
Accounts payable 88 573
Deferred revenue 188 0
Accrued advertising 83 313
Accrued commissions 0 286
Other accrued expenses 238 374
-------- --------
Total current liabilities 597 2,446
-------- --------
Commitments and Contingencies
Shareholders' equity:
Preferred stock, issuable in series, no par value, 10,000,000 shares
authorized, 1,433,333 Series AA convertible shares issued and outstanding at
June 30, 2000 and December 31, 1999, 17,010 and 14,203 Series BB convertible
shares issued and outstanding at June 30, 2000 and December 31, 1999,
respectively 3,606 3,296
Common stock, no par value, 13,333,333 shares authorized,
3,429,839 shares issued and outstanding on each date 17,667 17,667
Accumulated deficit (19,208) (18,847)
Accumulated other comprehensive loss (60) (50)
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Total shareholders' equity 2,005 2,066
-------- --------
$ 2,602 $ 4,512
======== ========
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
Human Pheromone Sciences, Inc.
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
(in thousands except per share data) 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net product sales $ 474 $ 1,724 $ 1,755 $ 3,886
License and supply revenues 277 387 529 464
------- ------- ------- -------
Net revenues 751 2,111 2,284 4,350
Cost of goods sold 140 757 686 1,536
------- ------- ------- -------
Gross profit 611 1,354 1,598 2,814
Operating Expenses:
Research and development 81 83 161 167
Selling, general and administrative 590 1,538 1,778 3,201
------- ------- ------- -------
Total operating expenses 671 1,621 1,939 3,368
------- ------- ------- -------
Loss from operations (60) (267) (341) (554)
Other income and (expense) 0
Interest (expense) 0 (24) (22) (46)
Other income (expense) 4 (9) 2 (7)
------- ------- ------- -------
Total other income and (expense) 4 (33) (20) (53)
------- ------- ------- -------
Net loss available to common shareholders (56) (300) (361) (607)
Other comprehensive loss - translation adjustment (3) (11) (10) (48)
------- ------- ------- -------
Comprehensive loss $ (59) $ (311) $ (371) $ (655)
======= ======= ======= =======
Net loss per common share-basic and diluted $ (.02) $ (.09) $ (.11) $ (.18)
======= ======= ======= =======
Weighted average common shares outstanding 3,430 3,430 3,430 3,430
======= ======= ======= =======
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
Human Pheromone Sciences, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<CAPTION>
Six months ended June 30,
-----------------------------
(in thousands) 2000 1999
-------------------------------------------------------------------------------- ------- -------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (361) $ (607)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 7 24
Provision for sales returns and allowances (300) (610)
Changes in operating assets and liabilities:
Accounts receivable 1,165 961
Inventories 1,704 234
Other current assets (11) (10)
Deferred revenue 188 --
Accounts payable and accrued liabilities (1,137) (367)
------- -------
Net cash provided by (used in) operating activities 1,255 (375)
Cash flows from investing activities
Purchase of property and equipment (2) --
------- -------
Net cash used in investing activities (2) --
Cash flows from financing activities
Proceeds from bank borrowings 150 900
Repayment of bank borrowings (1,050) (773)
Proceeds from issuance of convertible preferred stock 310 300
------- -------
Net cash (used in) provided by financing activities (590) 427
Effect of exchange rate changes on cash (10) (48)
------- -------
Net increase in cash and cash equivalents 653 4
Cash and cash equivalents at beginning of period 108 77
------- -------
Cash and cash equivalents at end of period $ 761 $ 81
======= =======
Cash paid for interest $ 24 $ 46
======= =======
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Human Pheromone Sciences, Inc. (the "Company") was incorporated in the
State of California in 1989 under the name of EROX Corporation. The Company
changed the name to Human Pheromone Sciences, Inc. in May 1998. The Company is
engaged in the research, development, manufacturing, marketing and licensing of
consumer products containing synthetic human pheromones as a component. The
Company initiated commercial operations in late 1994 with a line of fine
fragrances and toiletries.
Basis of Presentation
The accompanying unaudited consolidated 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 and six months ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
calendar year ending December 31, 2000. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1999.
Inventories
Inventories are stated at the lower of cost (first in - first out
method) or market. The inventory at June 30, 2000 consists of finished goods
inventory valued at $349,000, work in process of $13,000, and raw materials of
$238,000. At December 31, 1999, these balances were $662,000, $472,000 and
$1,170,000, respectively.
Capital Stock and Stock Options
On June 30, 2000 the Company sold 526 shares of Series BB convertible
preferred stock for $50,000, net of issuance costs, to a current shareholder.
The sale enabled the Company's net equity to remain in compliance with the
NASDAQ Small Cap listing requirements. No assurances can be given that the
Company will remain in compliance with these listing requirements in the future.
On March 26, 2000 the Company sold 2,271 shares of Series BB
convertible preferred stock for $260,000, net of issuance costs, to a current
shareholder. The cash was used to reduce bank borrowings.
Outstanding options to purchase shares of common stock and certain
common stock equivalents were excluded from the computation of diluted earnings
per share since their effect would be antidilutive.
During the three months ended June 30, 2000 no common stock options
were granted and no issued options were exercised.
6
<PAGE>
License and Supply Revenue
On April 24, 2000 the Company entered into a multi-year agreement under
which it licensed its Realm(R) fragrance and toiletry brands to Niche Marketing,
Inc. in exchange for a royalty on Niche Marketing sales. The license includes
all territories excluding the Far East, which the company retains. The effective
date for this agreement was May 1, 2000.
The sale of the Company's patented pheromones to licensees are reported
when the license fee revenues are earned.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
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's marketing strategy may not be successful. The Company may
not be able to successfully complete negotiations for licensing its pheromone
technology. The Company may not be able to establish and maintain the necessary
sales and distribution channels. The Company may not have sufficient funds to
successfully market its products if the current marketing strategy is not
successful.
The Company and/or its licensees 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.
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 current retail environment may cause pricing and promotional
pressures. Five companies control the majority of the sales in the U. S.
department store arena. Because of their market share, each company will have
significant power to determine the price and promotional terms which the Company
and/or its licensees must meet in order to sell its products in the department
stores.
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 has reported operating losses in past years. No assurance
can be given that the Company will produce operating income in the future.
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.
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.
8
<PAGE>
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 pheromones
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, 2000 compared to the Three Months ended June 30,
1999
On April 24, 2000 the Company entered into a multi-year agreement under
which it licensed its Realm(R) fragrance and toiletry brands to Niche Marketing,
Inc. in exchange for a royalty on Niche Marketing sales, with guaranteed annual
minimum payments due to the Company. The license includes all territories
excluding the Far East, which the company retains. The effective date for this
agreement was May 1, 2000.
Net revenues for the second quarter of 2000 were $751,000 representing
a decrease of 64% from revenues of $2,111,000 for the prior year's quarter.
Approximately 86% of the decrease is due to the absence of Realm(R) product
sales for May and June, which was licensed to Niche Marketing. The license and
supply of pheromones under license agreements decreased by 28% to $277,000 for
the current year period. The decreased license and supply revenue is due to the
reduced requirements by Avon this year as reorder quantities were not expected
to match last years initial manufacturing requirements for the product launch of
Perceive(R) by Avon. The addition of the Realm(R) license to other royalty
income help offset the reduced Avon demand.
Net revenues for the quarters ended June 30, 2000 and 1999 were as
follows (in thousands).
--------------------------------------------------------------------------------
Markets 2000 1999
--------------------------------------------------------------------------------
U.S. Retail & Distributor Markets $ 379 $1,598
License and Supply Revenues 277 387
International Markets 95 126
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Net Revenues $ 751 $2,111
Gross profit for the quarter ended June 30, 2000 declined 55% to
$611,000 from $1,354,000 in the prior year due to the reduced sales volume. As a
percentage of sales gross profit of 81% was better than last year of 64%
reflecting the impact of the more profitable license and supply business.
Research and Development expenses for the second quarters of 2000 and
1999 were $81,000 and $83,000, respectively. These costs principally reflect
payments and costs under the Company's consulting agreements in this area.
Selling, general and administrative expenses decreased $948,000 to
$590,000 in the first quarter of 2000 from $1,538,000 in the first quarter of
1999. Advertising, selling, and marketing expenses were $749,000 less than the
prior year as the licensee of the Realm(R) brand began incurring these expenses
May 1,2000. Distribution expenses were reduced by $42,000, and general and
administrative costs were $157,000 lower in the current year's quarter. The
Company restructured the organization to reduce the overhead required to support
its efforts to focus on new product development, and license opportunities for
the patented pheromone technology.
The loss from operations of $60,000 was $207,000 less, a 78%
improvement over the 1999 second quarter operating loss of $267,000. The
Company's licensing of the Realm(R) Realm(R) brand, which was effective May 1,
2000, resulted in reduced net revenues but the significant savings in operating
expenses resulted in the reduced operating losses.
9
<PAGE>
The Company incurred no net interest expense during the second quarter
of 2000, and $24,000 in the second quarter of 1999. As a result of the licensee
agreement, and subsequent sale of inventory, the Company paid off the existing
bank line in April 2000.
Six Months ended June 30, 2000 as compared to the Six Months ended June 30, 1999
Net revenues for the six months ended June 30, 2000 were $2,284,000.
This was a 47% decrease from net revenues of $4,350,000 for the first half of
1999. The lack of Realm(R) brand products sales in May and June caused by the
May 1 effective date of the license agreement, accounted for 25% of the
decreased revenues for the first six months. For the first four months of the
year the Realm(R) revenues were down 22%for the comparable four months of 1999.
The license and supply revenues increased by $65,000 for the first six months of
2000 to $529,000. The Company realized six months of revenue in 2000 as compared
with 1999 which reflected the commencement of licensing revenue in March.
Net sales for the six months ended June 30, 2000 and 1999 are as
follows:
--------------------------------------------------------------------------------
Class of Trade 1999 1999
--------------------------------------------------------------------------------
U.S. Markets $1,532 $3,635
License and Supply Revenues 529 464
International Markets 223 251
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Net Sales $2,284 $4,350
Gross profit for the first half of 2000 declined 43% to $1,598,000 from
$2,814,000 in 1999. The decrease is the result of reduced sales volume. Gross
profit as a percentage of revenues improved to 70% compared to 65% in 1999, also
reflecting the impact of the more profitable license and supply business.
Research and Development expenses for the first half of 2000 and 1999
were $161,000 and $167,000, respectively and are principally comprised of
payments under the Company's contract with Pherin Corporation.
Selling, general and administrative expenses decreased to $1,778,000 in
the six months ended June 30, 2000 from $3,201,000 in the period ended June 30,
1999. Selling marketing and advertising accounted for $1,157,000 of the decrease
with all other operational areas spending less in 2000 than in 1999. The
reduction in operating expenses of $1,423,000 is directly related to the
Company's decision to license the Realm(R) brand and eliminate the expenses
associated with directly to distributing with the department store accounts.
The loss from operations decreased by $213,000 to $341,000 for the six
months ended June 30, 2000, from $554,000 in 1999. The Company's licensing of
the Realm(R) brand has resulted in reduced net revenues offset by savings in
operating expenses that have significantly reduced the operating losses. The
unprofitable department store sales channel has been eliminated and replaced
with a minimum royalty revenue source.
The Company incurred $22,000 in net interest expense during the first
half of 2000 compared to $46,000 net interest expense in 1999 due to the
repayment of the credit line borrowings in April 2000.
LIQUIDITY
At June 30, 2000, the Company had no outstanding borrowings, and
working capital was $1,996,000. At December 31, 1999 the Company had net
borrowings of $900,000 and working capital of $2,052,000. For the six months of
2000, net cash generated from operating activities was $1,255,000 compared to
$375,000 used in operating activities for the prior year's six months.
Accordingly, the Company had a net repayment of its line of credit of $900,000
in the first six months of 2000, while it had net additional borrowings of
$127,000 in the first half year of 1999.
10
<PAGE>
On July 1, 2000, the Company's Business Loan Agreement with
Mid-Peninsula Bank of Palo Alto, California (the "Bank") providing for a
continued line of credit expired. The Company may apply for a new credit line in
the future.
Assuming the Company's activities proceed substantially as planned, the
Company's cash proceeds from the license to Niche Marketing, license revenues
and anticipated revenues from product sales should be adequate to meet its
working capital needs over the next twelve months. Working capital requirements
will primarily be for research, product development and administrative costs.
Additional working capital may be required should the Company fail to
generate new products or new license revenues. Furthermore, additional working
capital may be required should the Company experience a greater than planned
success with its products, potential products, and research funding
requirements. Funds would be needed for inventory build, accounts receivable
financing and staffing purposes. If the Company fails to achieve revenues from
its 2000 marketing efforts, or if product development proves to be more capital
intensive than planned, the Company may require additional funding.
On June 30, 2000, the Company obtained $50,000 additional equity
capital from a current shareholder by issuing shares of convertible preferred
stock.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal
quarters of fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not entered into derivatives contracts either to hedge existing
risks or for speculative purposes. Accordingly, the Company does not expect
adoption of the new standard on January 1, 2001 to affect its financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements. SAB No. 101 summarizes certain of
the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SAB No. 101 is effective for all
transactions beginning with the second quarter of 2000. The Company has applied
SAB No. 101 where applicable.
11
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.21 Amendment to License Agreement with Niche
Marketing, Inc.
(b) Exhibit 27.01-Financial Data Schedule
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: August 14, 2000 /s/ William P. Horgan
------------------------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: August 14, 2000 /s/ Gregory S. Fredrick
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Gregory S. Fredrick
Vice President Finance
13
