U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 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.
------------------------------
(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
- ------------------------------------------------ ----------------------------
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (408) 938-3030
-----------------------------------------------------
(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 July 15, 2002.
1
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002 (Unaudited)
and December 31, 2001...........................................................................4
Consolidated Statements of Operations and Comprehensive Income / (Loss) (Unaudited)
for the Three and Nine Months Ended September 30, 2002 and 2001.................................5
Consolidated Statements of Cash Flows (Unaudited) for the Nine Months
Ended September 30, 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
Item 4. Controls and Procedures.........................................................................15
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ..............................................................16
SIGNATURES.......................................................................................................17
CERTIFICATIONS...................................................................................................18
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
3
Human Pheromone Sciences, Inc.
Consolidated Balance Sheets
September 30, December 31,
(in thousands except share data) 2002 2001
- -------------------------------------------------------------- -------- --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,114 $ 1,355
Accounts receivable, net of allowances of $27,000
and $6,000 in 2002 and 2001, respectively 213 803
Inventories 758 378
Other current assets 44 31
-------- --------
Total current assets 2,129 2,567
Property and equipment, net 5 8
Product licenses 167 50
-------- --------
$ 2,301 $ 2,625
======== ========
Liabilities, Convertible Redeemable Preferred Stock and
Shareholders' Deficiency
Current liabilities:
Accounts payable $ 125 $ 230
Deferred income 315 315
Accrued professional fees 40 53
Accrued vacation 38 32
Accrued sales returns -- 44
Other accrued expenses 16 14
-------- --------
Total current liabilities 534 688
-------- --------
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 (19,540) (19,368)
Foreign currency translation (66) (68)
-------- --------
Total shareholders' deficiency (1,939) (1,769)
-------- --------
$ 2,301 $ 2,625
======== ========
The accompanying notes are an integral part of these financial statements.
4
Human Pheromone Sciences, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
Three months ended Nine months ended
---------------------- -----------------------
September 30, 2002 September 30, 2002
---------------------- -----------------------
(in thousands except per share data) 2002 2001 2002 2001
------- ------ ------- -------
Net revenues 409 724 1,320 1,912
Cost of goods sold 133 277 421 701
------- ------ ------- -------
Gross profit 276 447 899 1,211
Operating Expenses:
Research and development 80 86 242 251
Selling, general and administrative 283 352 815 921
------- ------ ------- -------
Total operating expenses 363 438 1,057 1,172
------- ------ ------- -------
Income (Loss) from operations (87) 9 (158) 39
Other income and (expense)
Interest income (expense) 6 7 17 23
Other income (expense) (7) 1 (31) (4)
------- ------ ------- -------
Total other income and (expense) (1) 8 (14) 19
------- ------ ------- -------
Net income (loss) available to common shareholders (88) 17 (172) 58
Other comprehensive income - translation adjustment -- -- 2 (4)
------- ------ ------- -------
Comprehensive income (loss) $ (88) $ 17 $ (170) $ 54
======= ====== ======= =======
Net income (loss) per common share-basic and fully
diluted $ (.03) $ -- $ (.05) $ .02
======= ====== ======= =======
Weighted average common shares outstanding 3,430 3,430 3,430 3,430
======= ====== ======= =======
The accompanying notes are an integral part of these financial statements.
5
Human Pheromone Sciences, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended September 30,
-------------------------------
(in thousands) 2002 2001
- ------------------------------------------------------------ ------- -------
Cash flows from operating activities
Net profit (loss) $ (172) $ 58
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization 47 7
Provision for sales returns and allowances 21 7
Changes in operating assets and liabilities:
Accounts receivable 569 (184)
Inventories (380) (105)
Other current assets (13) 21
Deferred revenue -- 190
Accounts payable and accrued liabilities (154) 121
------- -------
Net cash provided (used) by operating activities (82) 115
Cash flows from investing activities
Purchase of property and equipment (1) (1)
Acquisition of licenses (160) --
------- -------
Net cash used in investing activities (161) (1)
Cash flows from financing activities
Proceeds from bank borrowings -- --
Repayment of bank borrowings -- --
Proceeds from issuance of convertible preferred stock -- --
------- -------
Net cash (used in) provided by financing activities -- --
Effect of exchange rate changes on cash 2 (4)
------- -------
Net increase in cash and cash equivalents (241) 110
Cash and cash equivalents at beginning of period 1,355 982
------- -------
Cash and cash equivalents at end of period $ 1,114 $ 1,092
======= =======
Interest paid $ 2 $ 3
======= =======
The accompanying notes are an integral part of these financial statements.
6
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
(unaudited)
September 30, 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 and nine months ended September
30, 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 September 30, 2002 consists of finished
goods inventory valued at $220,000, work in process of $86,000, and raw
materials of $452,000. At December 31, 2001, these balances were $119,000,
$36,000 and $223,000, respectively.
License Fees
The Company capitalizes license fees it pays 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.
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
7
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 September 30, 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 September 30, 2002 and 2001(unaudited), the components of
basic and diluted earnings (loss) per share are as follows (all amounts are in
thousands):
2002 2001
------- ------
Net income (loss) available to common shareholders $ (172) $ 58
======= ======
Weighted-average common shares outstanding during the period 3,430 3,430
Incremental shares from assumed conversions of convertible
preferred stock -- 1,655
------- ------
Fully diluted weighted-average common shares and potential
commons stock (unaudited) 3,430 5,085
======= ======
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 September 30, 2002 no common or preferred
stock was issued, common stock options to purchase 20,000 shares were granted
and no issued options were exercised.
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,
8
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. The Company implemented FAS No. 142 in the second quarter of fiscal
2002, at which time the Company determined that no impairment of intangible
assets have occurred.
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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. The Company does not expect adoption
of SFAS No. 146 to have a material impact, if any, on its financial position or
results of operations.
In October 2002, the FASB issued SFAS No. 147, " Acquisitions of
Certain Financial Institutions." SFAS No. 147 removes the requirement in SFAS
No. 72 and Interpretation 9 thereto, to recognize and amortize any excess of the
fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset.
This statement requires that those transactions be accounted for in accordance
with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." In addition, this
9
statement amends SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," to include certain financial institution-related intangible
assets. 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 September 30, 2002 and 2001 was $60,000 in each year.
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 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
10
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.
The Company is subject to economic downturns, specifically in the Asian
markets. Economic downturns can lead to a reduction in consumer spending which
could lead to reduced demand for products and could require additional
promotional expenditures.
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.
The Company may not be able to recruit and retain key personnel. The
Company's success substantially depends upon recruiting and retaining key
employees and consultants with research, product development and marketing
experience. The Company may not be successful in recruiting and retaining these
key people.
The Company relies upon other companies to manufacture its products.
The Company relies upon Pherin and other companies to manufacture its
pheromones, supply components, and to blend, fill and package its fragrance
products. The Company may not be able to obtain or retain pheromone
manufacturers, fragrance suppliers, or component manufacturers on acceptable
terms. If not, the Company may not be able to obtain commercial quantities of
its products. This would adversely affect operating results.
Results of Operations
Three Months ended September 30, 2002 compared to the Three Months ended
September 30, 2001
Net sales and revenues for the second quarter of 2002 were $409,000,
representing a decrease of 44% from sales of $724,000 for the prior year's
quarter. The $149,000, or 56%, decline in sales to International markets in the
current period is a result of a continued soft Southeast Asia market, and the
higher sales volume in 2001 was due to the initial launch into those markets
last year. The Company remains focused on building its REALM business in
Southeast Asia. License and pheromone revenues decreased by 43% to $259,000 for
the quarter. This decrease was expected as none of the current licensees have
introduced new products containing the patented pheromones. Discussions are
continuing with several companies at the present time with respect to new
licensing opportunities.
Net sales for the quarters ended September 30, 2002 and 2001 were as
follows (in thousands).
2002 2001
- --------------------------------------------------------------------------------
Markets:
International Markets $115 $264
License and Supply Revenues 259 455
U.S. Retail & Distributor Markets 35 5
---- ----
Net Sales $409 $724
==== ====
Gross profit for the quarter ended September 30, 2002 of $276,000 is
$171,000 less than last years $447,000. As a percentage of sales, gross profit
of 68% is greater than last years 62% due to the reduced product costs resulting
from the change in bottle manufacturers for the Asian market product.
Research and Development expenses for the third quarters of 2002 and
2001 were $80,000 and $86,000, respectively. These costs principally reflect
payments and costs under the Company's consulting agreements in this area.
11
Selling, general and administrative expenses of $283,000 were $69,000
less than last years third quarter expenses of $352,000. In the prior year the
Company recorded a one time net charge of $64,000 for potential department store
claims. Selling, and marketing and distribution expenses were $17,000 less than
the prior year as a result of decreased sales activities in the Southeast Asia
markets. General and administrative and facility costs, excluding last years net
adjustment, were $12,000 more in the current year's quarter a result of general
increases in costs since last year and a $10,000 increase to the allowance for
doubtful accounts reserve.
The Company earned $7,000 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 conservatively amortized over the remaining initial
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 September 30, 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.
Nine Months ended September 30, 2002 as compared to the Nine Months ended
September 30, 2001
Net revenues for the nine months ended September 30, 2002 were
$1,320,000. This was a 31% decrease from net revenues of $1,912,000 for the
first nine months of 2001. License and supply revenues decreased by $425,000
from the first nine months of 2001 to $691,000 as a result of decreased
licensing and supply activities to Avon Products in 2002. Sales in International
markets decreased by 26% to $555,000 as a result of the sluggish economy in the
South East Asia region, and the fact that Realm was still being launched into
the Japanese market in the second quarter of 2001.
Net sales for the nine months ended September 30, 2002 and 2001 were as
follows:
- --------------------------------------------------------------------------------
Markets 2002 2001
- --------------------------------------------------------------------------------
International Markets $ 555 $ 755
License and Supply Revenues 691 1,116
U.S. Retail & Distributor Markets 74 41
------ ------
Net Sales $1,320 $1,912
Gross profit for the first nine months of 2002 declined 26% to $899,000
from $1,211,000 in 2001. The decrease is the result of reduced sales volume.
Gross profit as a percentage of revenues increased to 68% compared to 63% in
2002 as a result of the highly profitable licensing business representing a
larger percentage of sales.
Research and Development expenses for the first nine months of 2002 and
2001 were $242,000 and $251,000, respectively, and are principally comprised of
payments under the Company's contract with Pherin Corporation.
Selling, general and administrative expenses for the first nine months
of 2002 were $815,000 and $921,000 for the comparable period of 2001. Year to
date operating expenses have been reduced in all areas when compared to 2001
spending, with selling, marketing and distribution reduction of $14,000,
facilities of $19,000 less than last year, and general and administrative
expenses are down by $41,000.
The Company's cash balances generated $17,000 in net interest income
during the first nine months of 2002, as compared to $23,000 in 2001. The
decrease is due to reduced interest rates. Miscellaneous expense of $31,000 was
incurred in 2002 as compared with $4,000 of in the same period of 2001. The
amortization of licenses accounts for the majority of the expense in 2002.
LIQUIDITY
12
At September 30, 2002, the Company had cash of $1,114,000 with no
outstanding bank borrowings; at September 30, 2001, it had cash of $1,092,000
with no outstanding bank borrowings, this represents an increase of 2%. For the
nine months of 2002, net cash used in operating activities was $82,000. For the
first nine months of 2001, net cash generated from operating activities was
$115,000.
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.
On May 20, 2002, the Company signed a new Business Loan Agreement with
Mid-Peninsula Bank of Palo Alto, California (the "Bank") providing for a
revolving line of credit. The Company may borrow up to $500,000 at an interest
rate equal to the Bank's prime rate plus 0.75% with borrowings secured primarily
by the Company's trade receivables and inventory. The agreement, which expires
on May 3, 2003, contains certain debt-to-equity and working capital covenants.
At September 30, 2002 the Company was in compliance with such covenants.
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
13
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.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. The Company does not expect adoption
of SFAS No. 146 to have a material impact, if any, on its financial position or
results of operations.
In October 2002, the FASB issued SFAS No. 147, " Acquisitions of
Certain Financial Institutions." SFAS No. 147 removes the requirement in SFAS
No. 72 and Interpretation 9 thereto, to recognize and amortize any excess of the
fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible asset.
This statement requires that those transactions be accounted for in accordance
with SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." In addition, this statement amends SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," to include
certain financial institution-related intangible assets. 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 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.
14
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.
Item 4. Controls and Procedures
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic SEC
reports. It should be noted that the design of any system of controls is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
15
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K - None
- ------- ---------------------------------------
Exhibit 10.28 Certification Pursuant to 18 U.S.C. Section 1350
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant had duly caused this Report to be signed on behalf by the
undersigned thereunto duly authorized.
HUMAN PHEROMONE SCIENCES, INC.
Registrant
Date: November 14, 2002 /s/ William P. Horgan
---------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: November 14, 2002 /s/ Gregory S. Fredrick
-----------------------
Gregory S. Fredrick
Chief Financial Officer
17
CERTIFICATIONS
I ,William P. Horgan, certify that:
1.I have reviewed this quarterly report on Form 10-QSB of Human
Pheromone Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities , particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ William P. Horgan
- ---------------------
Chairman and Chief Executive Officer
18
I, Gregory S. Fredrick, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Human
Pheromone Sciences, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Gregory S. Fredrick
- -----------------------
Chief Financial Officer
19