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 March 31, 2002
--------------
[ ] 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
---------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. employee
incorporation or organization) Identification No.)
84 West Santa Clara Street, San Jose, California 95113
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (408) 938-3030
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(Former name or former address, if changed since last report)
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 May 3, 2002.
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 (Unaudited)
and December 31, 2001...........................................................................4
Consolidated Statements of Operations and Comprehensive Income
/Loss (Unaudited) for the For the Three Months Ended
March 31, 2002 and 2001.........................................................................5
Consolidated Statements of Cash Flows (Unaudited) for the Three Months
Ended March 31, 2002 and 2001...................................................................6
Notes to Consolidated Financial Statements (Unaudited)..........................................7
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition and Results of Operations..........10
Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................14
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ..............................................................15
SIGNATURES.......................................................................................................16
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
3
Human Pheromone Sciences, Inc.
Consolidated Balance Sheets
March 31, December 31,
(in thousands except share data) 2002 2001
- ---------------------------------------------------------------------- -------- --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,461 $ 1,355
Accounts receivable, net of allowances of $6,000
and $6,000 in 2002 and 2001, respectively 382 803
Inventories 406 378
Other current assets 195 31
-------- --------
Total current assets 2,444 2,567
Property and equipment, net 7 8
Product licenses 204 50
-------- --------
$ 2,655 $ 2,625
======== ========
Liabilities, Convertible Redeemable Preferred Stock and
Shareholders' Deficiency
Current liabilities:
Accounts payable $ 250 $ 230
Deferred income 315 315
Accrued professional fees 26 53
Accrued vacation 35 32
Accrued sales returns 44 44
Other accrued expenses 14 14
-------- --------
Total current liabilities 684 688
-------- --------
Commitments and Contingencies
Convertible redeemable preferred stock:
Preferred stock, issuable in series, no par value,
10,000,000 shares authorized,
Series AA 1,433,333 convertible shares issued and
outstanding
at each date (total liquidation value $2,150) 2,146 2,146
Series BB 17,448 convertible shares issued and outstanding
at each date (total liquidation value $1,745) 1,560 1,560
-------- --------
Total convertible redeemable preferred stock 3,706 3,706
-------- --------
Shareholders' deficiency:
Common stock, no par value, 13,333,333 shares authorized,
3,429,839 shares issued and outstanding at each date 17,667 17,667
Accumulated deficit (19,334) (19,368)
Foreign currency translation (68) (68)
-------- --------
Total shareholders' deficiency (1,735) (1,769)
-------- --------
$ 2,655 $ 2,625
======== ========
See accompanying notes to consolidated financial statements.
4
Human Pheromone Sciences, Inc.
Consolidated Statements of Operations and Comprehensive Income
(unaudited)
Three months ended March 31,
----------------------------
(in thousands except per share data) 2002 2001
- ----------------------------------------------------- ------- -------
Net revenue $ 642 $ 629
Cost of goods sold 237 226
------- -------
Gross profit 405 403
------- -------
Operating expenses:
Research and development 80 85
Selling, general and administrative 291 295
------- -------
Total operating expenses 371 380
------- -------
Income from operations 34 23
------- -------
Other income (expense):
Interest income (net) 6 8
Amortization of intangibles (6) --
Other (expense) -- (1)
------- -------
Total other income -- 7
------- -------
Net income available to common shareholders 34 30
Other comprehensive loss - translation adjustment -- (3)
------- -------
Comprehensive income $ 34 $ 27
======= =======
Net income per common share-basic and fully diluted $ 0.01 $ 0.01
======= =======
Weighted average common shares outstanding 3,430 3,430
Convertible redeemable preferred stock 1,706 1,604
------- -------
Weighted average common shares outstanding - diluted 5,136 5,034
======= =======
See accompanying notes to consolidated financial statements.
5
Human Pheromone Sciences, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31,
----------------------------
(in thousands) 2002 2001
- -------------------------------------------------------- ------- -------
Cash flows from operating activities
Net income $ 34 $ 30
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 7 3
Changes in operating assets and liabilities:
Accounts receivable 421 97
Inventories (28) 6
Other current assets (164) (82)
Accounts payable and accrued liabilities (4) (21)
------- -------
Net cash provided by operating activities 266 33
------- -------
Cash flows used in investing activities
Acquisition of licenses (160) --
------- -------
Cash flows from financing activities
Proceeds from bank borrowings -- --
Repayment of bank borrowings -- --
Proceeds from issuance of convertible preferred -- --
stock
------- -------
Net cash provided by financing activities -- --
------- -------
Effect of exchange rate changes on cash -- (3)
------- -------
Net increase in cash and cash equivalents 106 30
Cash and cash equivalents at beginning of period 1,355 982
------- -------
Cash and cash equivalents at end of period $ 1,461 $ 1,012
======= =======
See accompanying notes to consolidated financial statements.
6
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2002
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 and marketing 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. In April 2000, the Company licensed the sale of its REALM fragrance
products through department and specialty stores across the United States and
selected international markets to Niche Marketing, Inc. The Company currently
sells its REALM fragrance lines through distributors in selected markets in
South East Asia, and licenses and sells its human pheromones for inclusion in
other companies products in exchange for supply revenues and/or royalties.
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 Item 310(b)
of Regulation S-B. 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 ended March 31, 2002 are
not necessarily indicative of the results that may be expected for the calendar
year ending December 31, 2002. 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, 2001.
Certain prior period balances have been reclassified to conform to the current
period presentation.
Revenue Recognition
Revenue is recorded at the time of merchandise shipment, net of
provisions for returns. License fees are earned over the license period
according to the terms of the license agreement and interpretative guidance
provided by Staff Accounting Bulletin (SAB) No. 101. The majority of the
Company's sales are to distributors and licensees, and these distributors and
licensees have no right to return products.
Inventories
Inventories are stated at the lower of cost (first in - first out
method) or market. The inventory at March 31, 2002 consists of finished goods
inventory valued at $108,000, work in process of $35,000, and raw materials of
$263,000. At December 31, 2001, these balances were $119,000, $36,000 and
$223,000, respectively.
License Fees
The Company capitalizes license fees paid for the rights to use new
pheromone discoveries, and rights for additional REALM and innerREALM sales
territories. License agreements that have a finite useful life are amortized
using the straight-line method over the life of the agreement. License
agreements for pheromones and products that are not yet for available for sale
are not subject to amortization in accordance with Statement of Financial
Accounting Standards No. 142: Goodwill and Other Intangible Assets.
7
The Company continually evaluates whether events or circumstances have
occurred that indicate the remaining estimated value of the license agreements
may not be recoverable. When factors indicate that the value license may be
impaired, the Company estimates the remaining value and reduces the license
agreement to that amount.
Income Taxes
The Company recorded no income tax provision in 2002 or 2001, due
primarily to a valuation allowance on deferred tax assets being recorded and the
expected utilization of net operating losses carried forward from prior years to
offset any significant tax liability. As of March 31, 2002, the Company's gross
deferred tax asset, which relates primarily to net operating losses carried
forward was $6,183,000. However, a full valuation allowance is provided for the
gross deferred tax asset as management could not determine whether its
realization is more likely than not.
Earnings Per Share
The Company calculates earnings (loss) per share in accordance with
SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaced the presentation of
primary and fully diluted earnings per share with the presentation of basic and
diluted earnings per share. Basic earnings per share excludes dilution and is
calculated by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share includes the potential dilutive effects that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock ("potential common stock") that would then share in the
earnings of the Company.
As of March 31, 2002 and 2001(unaudited), the components of basic
and diluted earnings per share are as follows (all amounts are in thousands):
2002 2001
------ ------
Net income available to common shareholders $ 34 $ 30
====== ======
Weighted-average common shares outstanding during the period 3,430 3,430
Incremental shares from assumed conversions of convertible
preferred stock 1,706 1,604
------ ------
Fully diluted weighted-average common shares and potential
commons stock (unaudited) 5,136 5,034
====== ======
Capital Stock and Stock Options
Outstanding options to purchase shares of common stock and potential
common shares issuable upon conversion of preferred stock are excluded from the
computation of diluted earnings per share since when the average stock price for
the period is less than the exercise price of outstanding options or when their
effect would be antidilutive.
During the three months ended March 31, 2002 no common or preferred
stock was issued, no common stock options were granted and no issued options
were exercised.
8
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and/or the normal operation of long-lived assets,
except for certain obligations of lessees. This statement is not applicable to
the Company.
In July 2001, the FASB issued SFAS NO. 141, Business Combinations. This
statement addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Bulleting ("ABP") Opinion No. 16, Business
Combinations, and SFAS No. 38, Accounting for Pre-Acquisition Contingencies of
Purchased Enterprises. All business combinations in the scope of this statement
are to be accounted for using one method, the purchase method. The provisions of
this statement apply to all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method for those business combinations is
prohibited. This statement also applies to all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001
or later. This statement is not applicable to the Company.
In July 2001, the FASB issued SFAS No, 142, Goodwill and Other
Intangible Assets. This statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. It is effective for fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been issued previously. This statement was not applicable to
the Company in 2001, and has been adopted for 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement replaces SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, the accounting
and reporting provisions of APB No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions, for the disposal of
a segment of a business, and amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The adoption of
SFAS No. 144 has not had a material impact, if any, on its financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. This statement rescinds SFAS No. 4, which required all gains and
losses from extinguishments of debt to be aggregated and if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No.
145 amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
This statement is not applicable to the Company.
2. RELATED PARTY TRANSACTION
On March 1, 2002, the Company renewed a research and development
agreement with Pherin Pharmaceuticals Corporation ("Pherin"), a company related
by common shareholders, whereby Pherin supplies HPS with its required
synthesized human pheromones and also provides to HPS research and development
and scientific public relations services. This renewal has been extended to
expire on February 28, 2003. The total expense incurred pursuant to the
Company's research and development agreement with Pherin during the three months
ended March 31, 2002 and 2001 was $60,000 in each year.
9
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:
During the three months ended March 31, 2002, the Company has sustained
its fourth quarterly operating profit during the last five quarters. Effective
May 1, 2000, the Company refocused its business model based on product licensing
agreements and recorded its first quarterly operating profit since 1997 on March
31, 2001. While the Company has returned to profitable operations there is no
assurance that the Company's license based business model will be successful.
The Company and/or Niche 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 REALM and innerREALM product lines.
The Company's marketing strategy may not be successful. The Company or
its distributors 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 or its distributors 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. 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 that the Company
and its distributor/licensee, Niche, must meet in order to sell its products in
the 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 or its distributors 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.
10
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.
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
On April 24, 2000, the Company signed a multi-year licensing agreement
for its REALM and innerREALM fragrance and toiletry products with Niche
Marketing, Inc. ("Niche"), a newly formed affiliate of Northern Brands, Inc.
Under the agreement, Niche will be responsible for the manufacture, marketing,
selling and distribution of the REALM and innerREALM products in the United
States and Internationally, excluding the Far East. Niche purchased the
Company's applicable inventories and pays a royalty, with annual minimums, on
sales of the current products and line extensions under the REALM and innerREALM
brand names. During the term of the agreement, HPS will also sell Niche the
pheromone components required for the manufacture of the products. Prior to this
agreement, the Company recorded in is financial statements the revenues, costs
and expenses directly attributable to the product sales to the U.S. Department
stores and held the inventories, recorded the accounts receivable and reflected
the accounts payable/accrued expenses attributable to the department store
business. On March 8, 2002 the company reacquired from Niche Marketing, Inc. the
rights to additional international territories.
Three Months ended March 31, 2002 compared to the Three Months ended March 31,
2001
Net sales and revenues for the first quarter of 2002 were $642,000,
representing an increase of 2% from sales of $629,000 for the prior year's
quarter. The $118,000, or 39%, increase in sales to International markets in the
current period is a result of the Company's focus on building its REALM business
in Southeast Asia. License and pheromone revenues decreased by 36% to $204,000.
for the quarter. This decrease was expected as none of the current licensees
have introduced new products containing the patented pheromones, and no new
licenses were signed during the quarter.
Net sales for the quarters ended March 31, 2002 and 2001 were as
follows (in thousands).
2002 2001
- ----------------------------------------------------------
Markets:
International Markets $422 $304
License and Supply Revenues 204 317
U.S. Retail & Distributor Markets 16 8
---- ----
Net Sales $642 629
==== ====
Gross profit for the quarter ended March 31, 2002 of $405,000 is
comparable to last years $403,000. As a percentage of sales, gross profit of 63%
was also comparable with last year of 64%.
11
Research and Development expenses for the first quarters of 2002 and
2001 were $80,000 and $85,000, respectively. These costs principally reflect
payments and costs under the Company's consulting agreements in this area.
Selling, general and administrative expenses of $291,000 were
consistent with last years first quarter expenses of $295,000. Selling, and
marketing and distribution expenses were $17,000 more than the prior year as a
result of increased sales activities in the Southeast Asia markets. General and
administrative and facility costs were $21,000 lower in the current year's
quarter primarily as a result of cost reduction efforts initiated since last
year.
The Company earned $6,000 in net interest income in the current year
quarter and earned $8,000 in net interest income during the first quarter of
2001. The decrease is due to reduced interest rates. The fee paid to reacquire
the Realm and innerRealm rights for international territories from Niche
Marketing, Inc. is being amortized over the remaining term of the license
agreement.
The Company recorded no income tax provision in 2002 or 2001, due
primarily to a valuation allowance on deferred tax assets being recorded and the
expected utilization of net operating losses carried forward from prior years to
offset any significant tax liability. As of March 31, 2002, the Company's gross
deferred tax asset, which relates primarily to net operating losses carried
forward was $6,183,000. However, a full valuation allowance is provided for the
gross deferred tax asset as management could not determine whether its
realization is more likely than not.
On March 8, 2002, the Company and Niche Marketing, Inc.
entered into an Amendment to the License Agreement and a Settlement Agreement
under which the Company regained the rights to manufacture Realm products for
sale to its Southeast Asia Distributors, repurchased the rights to sell Realm
products in an Asian market previously licensed to Niche, released Niche from
its obligation to manufacture REALM products for sale to the Company and
withdrew a breach of contract notice against Niche in connection with Niche's
failure to deliver product. In addition, Niche agreed to be responsible for any
product returns or requests for credit for destroyed products by department
stores. The Company recorded the license fee paid to Niche Marketing as a
non-current asset and is amortizing the cost over the remaining life of the
license with Niche Marketing.
LIQUIDITY
At March 31, 2002, the Company had cash of $1,461,000 with no
outstanding bank borrowings and working capital of $1,760,000; at March 31,
2001, it had cash of $1,012,000 with no outstanding bank borrowings and working
capital of $1,946,000. For the first quarter of 2002, net cash generated from
operating activities was $266,000. For the first quarter of 2001, net cash
generated from operating activities was $33,000.
Assuming the Company's activities proceed substantially as planned, the
Company's current cash position and projected results of operations for the next
twelve months are not expected to require additional outside financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development, and/or the normal operation of long-lived assets,
except for certain obligations of lessees. This statement is not applicable to
the Company.
In July 2001, the FASB issued SFAS NO. 141, Business Combinations. This
statement addresses financial accounting and reporting for business combinations
and supersedes Accounting Principles Bulleting ("ABP") Opinion No. 16, Business
Combinations, and SFAS No. 38, Accounting for Pre-Acquisition Contingencies of
Purchased Enterprises. All business combinations in the scope of this statement
are to be accounted for using one method, the purchase method. The provisions of
this statement apply to all business combinations initiated after June 30, 2001.
Use of the pooling-of-interests method for those business combinations is
prohibited. This statement also applies to all business combinations accounted
for using the purchase method for which the date of acquisition is July 1, 2001
or later. This statement is not applicable to the Company.
12
In July 2001, the FASB issued SFAS No, 142, Goodwill and Other
Intangible Assets. This statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. It is effective for fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been issued previously. This statement was not applicable to
the Company in 2001, and has been adopted for 2002.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement replaces SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of, the accounting
and reporting provisions of APB No. 30, Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions, for the disposal of
a segment of a business, and amends Accounting Research Bulletin No. 51,
Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The adoption of
SFAS No. 144 has not had a material impact, if any, on its financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. This statement rescinds SFAS No. 4, which required all gains and
losses from extinguishments of debt to be aggregated and if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No.
145 amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
This statement is not applicable to the Company.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial conditions and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements require managers to make
estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses and disclosures on the date of the financial
statements. On an on-going basis, we evaluate our estimates, including, but not
limited to, those related to revenue recognition and license fees. We use
authoritative pronouncements, historical experience and other assumptions as the
basis for making judgements. Actual results could differ from those estimates.
We believe that the following critical accounting policies affect our more
significant judgments and estimates in the preparation of our consolidated
financial statements.
Revenue Recognition
Revenue is recorded at the time of merchandise shipment, net of
provisions for returns. License fees are earned over the license period
according to the terms of the license agreement and interpretative guidance
provided by Staff Accounting Bulletin (SAB) No. 101. The majority of the
Company's sales are to distributors and licensees, and these distributors and
licensees have no right to return products.
License Fees
The Company capitalizes license fees paid for the rights to use new
pheromone discoveries, and rights for additional REALM and innerREALM sales
territories. License agreements that have a finite useful life are
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amortized using the straight-line method over the life of the agreement. License
agreements for pheromones and products that are not yet for available for sale
are not subject to amortization in accordance with Statement of Financial
Accounting Standards No. 142: Goodwill and Other Intangible Assets.
The Company continually evaluates whether events or circumstances have
occurred that indicate the remaining estimated value of the license agreements
may not be recoverable. When factors indicate that the value license may be
impaired, the Company estimates the remaining value and reduces the license
agreement to that amount.
Item 3A. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk. All of the Company's sales are denominated in
U.S. dollars, and as a result the Company has little exposure to foreign
currency exchange risk. The effect of an immediate 10% change in exchange rates
would not have a material impact on the Company's future operating results or
cash flows.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K - None
Exhibit 10.25 Admendment to License and Purchase Agreement with Niche
Marketing, Inc. dated March 8, 2002.
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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: May 10, 2002 /s/ William P. Horgan
- --------------------------------- ------------------------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: May 10, 2002 /s/ Gregory S. Fredrick
------------------------------------
Gregory S. Fredrick
Vice President Finance
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