10-Q 1 b313146_10q.txt QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended June 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number 0-16819 FRAGRANCENET.COM, INC. (exact name of registrant as specified in its charter) Delaware 5990 94-3054267 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or Classification Code Number) Identification No.) organization) 909 Motor Parkway Hauppauge, 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 JUNE 30, 2001 ----- ---------------------------- Common Stock, par value 16,968,330 $.01 per share Index FRAGRANCENET.COM, INC.

ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS June 30, 2001 and March 31, 2001

See accompanying notes to unaudited consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

See accompanying notes to unaudited consolidated financial statements 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

See accompanying notes to unaudited consolidated financial statements 5 Notes to Unaudited Consolidated 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 for 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, 2001 and notes thereto included in the Company's Annual Report on Form 10-KSB. For the three months ended June 30, 2001 and 2000, an aggregate of 45% and 52%, respectively, of purchases were from one distributor. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. 2. New Accounting Pronouncements In April 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, establishes standards for the recognition and measurement of derivatives and hedging activities. The adoption of SFAS 133 did not have a material effect on the Company's consolidated results of operations or financial position. In July 2001 the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. SFAS No. 141 applies to all business combinations initiated after June 30, 2001. SFAS No. 142 is effective for fiscal years beginning after March 31, 2001. The Company adopted the provisions of each statement on April 1, 2001. The adoption of these accounting standards did not have a material effect on the Company's consolidated results of operations or financial position; however, impairment reviews may result in future periodic write-downs. 3. 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 and expires in 2005. Rent expense relating to this operating lease amounted to approximately $21,048 for the three months ended June 30, 2001. 6 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. Overview The Company sells brand name fragrances and related products over the Internet through a website located at www.fragrancenet.com. The Company purchases products from 10 different suppliers and does not purchase the products until they are ordered and paid for by the customer. Payment is made by credit card or by check and goods are not shipped to the customer until the check clears and/or authorization from the credit card company is obtained. The Company does not carry any significant level of inventory and has no accounts receivable other than amounts due from the credit card companies. Revenues Revenues for the quarter ended June 30, 2001 were approximately the same as in the comparable period in 2000. The failure to achieve the same level of increase as in past quarters is due to the general downturn in e-commerce. Cost of Sales Cost of sales as a percentage of sales was 63% in the quarter ended June 30, 2001 and 66% in the quarter ended June 30, 2000. 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. General and administrative expenses increased to $402,559 in the quarter ended June 30, 2001 compared to $292,204 in the June 30, 2000 quarter, primarily due to higher rent and personnel costs. Selling and marketing expenses decreased to $300,235 in the quarter ended June 30, 2001 compared to $365,954 in the June 30, 2000 quarter, primarily due to lower marketing cost. Net Loss As a result of the Company's increased salaries, purchase and installation of computer hardware and software, aggressive actions to attract affiliates, customers and custom scripting for the website, the Company's loss from operations was $42,982 for the quarter ended June 30, 2001 as compared to a loss of $43,446 for the quarter ended June 30, 2000. Income Taxes Due to the pre-tax loss, no income taxes were provided for either quarter. Liquidity, Capital Resources and Changes in Financial Condition The Company's cash was sufficient to enable it to meet its cash requirements during the quarter ended June 30, 2001. The main requirements for capital are to acquire merchandise for sale over the Internet through the Company website, for the maintenance of the website and for advertising and promotion to bring consumers to the website. The decrease in cash and cash equivalents of $19,010 during the three months ended June 30, 2001 was due to the Company's operating loss during the period and purchase of computer hardware. At June 30, 2001 the Company had a working capital deficit of $108,467 and cash and cash equivalents of $165,427, as compared to a working capital deficit of $132,969 and cash and cash equivalents of $227,503 at June 30, 2000. The Company believes that cash on hand and cash flows from operations will be sufficient to meet the Company's projected funding requirements for the next twelve months. 7 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of FragranceNet.com, Inc. to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, financial condition and results of operations, including, among others, rapid technological and other changes in the market we serve, our numerous competitors and the few barriers to entry for potential competitors, the short-term nature of many of our contracts, the seasonality and quarterly variations we experience in our revenue, our uncertain revenue growth, our ability to attract and retain qualified personnel, our ability to expand our infrastructure and manage our growth, and our ability to identify, finance and integrate acquisitions, among others. If any of these risks or uncertainties materialize, or if any of the underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statements made by us. FragranceNet.com, Inc. undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has no risks which are required to be disclosed. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 8 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 13, 2001 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 Chief Financial Officer 9

FRAGRANCENET COM INC 10-Q