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, 2003
[_] 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
[_]
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, 2003.
1
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (Unaudited)
and December 31, 2002 ........................................... 3
Consolidated Statements of Operations and Comprehensive
Income/Loss (Unaudited) for the For the Three Months
Ended March 31, 2003 and 2002 ................................... 4
Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 2003 and 2002 .................. 5
Notes to Consolidated Financial Statements (Unaudited) .......... 6
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 8
Item 3. Controls and Procedures ......................................... 15
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 16
SIGNATURES ................................................................ 17
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Human Pheromone Sciences, Inc.
Consolidated Balance Sheets
March 31, December 31,
(in thousands except share data) 2003 2002
-------- --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,533 $ 1,394
Accounts receivable, net of allowances of $70,000
in 2003 and 2002 59 249
Inventories, net 107 151
Assets to be sold 491 493
Other current assets 41 10
-------- --------
Total current assets 2,231 2,297
Property and equipment, net 4 5
Product licenses 50 50
-------- --------
$ 2,285 $ 2,352
======== ========
Liabilities, Convertible Redeemable Preferred Stock and
Shareholders' Deficiency
Current liabilities:
Accounts payable $ 183 $ 186
Liabilities associated with assets to be sold 321 330
Accrued professional fees 32 57
Accrued vacation 42 34
Other accrued expenses 19 19
-------- --------
Total current liabilities 597 626
-------- --------
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 (19,685) (19,581)
Foreign currency translation -- (66)
-------- --------
Total shareholders' deficiency (2,018) (1,980)
-------- --------
$ 2,285 $ 2,352
======== ========
See accompanying notes to consolidated financial statements.
3
Human Pheromone Sciences, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
Three months ended
March 31,
-------------------
(in thousands except per share data) 2003 2002
------- -------
Net revenue $ 218 $ 145
Cost of goods sold 65 39
------- -------
Gross profit 153 106
------- -------
Operating expenses:
Research and development 3 80
Selling, general and administrative 263 263
------- -------
Total operating expenses 266 343
------- -------
Income (loss) from operations (113) (237)
------- -------
Other income (expense):
Interest income (net) 3 5
Other (expense) -- --
------- -------
Total other income 3 5
------- -------
Income (loss) from on-going operations (110) (232)
Net income from assets to be sold 72 266
------- -------
Net income (loss) available to common shareholders (38) 34
Other comprehensive loss - translation adjustment -- --
------- -------
Comprehensive income (loss) $ (38) $ 34
======= =======
Net income (loss) per common share- basic
From on-going operations $ (0.03) $ (0.07)
From assets to be sold $ 0.02 $ 0.08
Net income (loss) $ (0.01) $ 0.01
Net income per common share-fully diluted
From on-going operations $ (0.03) $ (0.04)
From assets to be sold $ 0.02 $ 0.05
Net income (loss) $ (0.01) $ 0.01
Weighted average common shares outstanding 3,430 3,430
=======
Convertible redeemable preferred stock 1,706
-------
Weighted average common shares outstanding - diluted 3,430 5,136
======= =======
See accompanying notes to consolidated financial statements.
4
Human Pheromone Sciences, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three months ended
March 31,
--------------------
(in thousands) 2003 2002
------- -------
Cash flows from operating activities
Net income (loss) $ (38) $ 34
Net income from assets held for sale 72 266
------- -------
Net loss from on-going operations (110) (232)
Adjustments to reconcile net income to net cash
provided or used by operating activities:
Depreciation and amortization 1 1
Changes in operating assets and liabilities:
Accounts receivable 34 (2)
Inventories 43 (22)
Other current assets (29) (53)
Accounts payable and accrued liabilities (20) (4)
------- -------
Net cash used by on-going operating activities (81) (312)
------- -------
Net cash provided by assets held for sale 220 418
------- -------
Cash flows used in investing activities -- --
Cash flows from financing activities -- --
------- -------
Net increase in cash and cash equivalents 139 106
Cash and cash equivalents at beginning of period 1,394 1,355
------- -------
Cash and cash equivalents at end of period $ 1,533 $ 1,461
======= =======
See accompanying notes to consolidated financial statements.
5
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
(unaudited)
March 31, 2003
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. In April 2003 the
Company sold the REALM and innerREALM brands and trademarks to Niche Marketing
Group, Inc. The Company will continue to license and sell its human pheromone
products 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, 2003 are
not necessarily indicative of the results that may be expected for the calendar
year ending December 31, 2003. 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, 2002.
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, 2003 consists of finished goods
inventory valued at $12,000 and raw materials of $95,000. At December 31, 2002,
these balances were $14,000 and $137,000, respectively.
Assets to be Sold
Assets to be sold primarily consist of accounts receivable, inventory
and product licenses sold to Niche Marketing Group on April 14, 2003. All
REALM(R) and innerREALM(R) financial activities have been classified as assets
to be sold as a result of the April 14, 2003 sale. Therefore reclassifications
of certain 2002 financial statement information has been made to present the
operating results from on-going operations on a comparable basis.
6
License Fees
The Company capitalizes license fees paid for the rights to use new
pheromone discoveries. 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.
Income Taxes
The Company recorded no income tax provision in 2003 or 2002, 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, 2003, the Company's gross
deferred tax asset, which relates primarily to net operating losses carried
forward was $6,410,000. 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, 2003 and 2002 (unaudited), the components of basic and
diluted earnings per share are as follows (all amounts are in thousands):
2003 2002
------- -------
Net income (loss) available to common shareholders $ (38) $ 34
======= =======
Weighted-average common shares outstanding during
the period 3,430 3,430
Incremental shares from assumed conversions of
convertible preferred stock 1,809 1,706
------- -------
Fully diluted weighted-average common shares and
potential commons stock (unaudited) 5,239 5,136
======= =======
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, 2003 no common or preferred
stock was issued, no common stock options were granted and no issued options
were exercised.
7
Recent Accounting Pronouncements
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 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.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No.
123. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require more prominent and more frequent disclosures in
financial statements about the effects of stock-based compensation. This
statement is effective for financial statements for fiscal years ending after
December 15, 2002. SFAS No. 148 will not have any impact on the Company's
financial statements as management does not have any intention to change to the
fair value method.
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.
8
Risk Factors
The Company's future results may be affected to a greater or lesser
degree by the following factors among others:
The Company has not had sustained profitable operations since 1997.
Since 1997, the Company has incurred losses from operations. However, effective
May 1, 2000 the Company refocused its business model based on product licensing
agreements. While the Company anticipates that this change in its business will
result in 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 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. Competition
from 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
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.
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 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.
9
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 its 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.
On April 14, 2003, the Company sold to Niche Marking Group, Inc. the
assets and worldwide ownership rights to the REALM Women, REALM Men and
innerREALM product lines. The Company will continue to focus operations on the
marketing of its patented technology to companies with established consumer
product franchises while directly managing the on-going development of
identified compounds for potential new products.
All REALM(R) and innerREALM(R) financial activities have been
classified as assets to be sold as a result of the April 14, 2003 sale.
Therefore reclassifications of certain 2002 financial statement information has
been made to present the operating results from on-going operations on a
comparable basis.
Three Months ended March 31, 2003 compared to the Three Months ended March 31,
2002
Net sales and revenues for the first quarter of 2003 were $218,000,
representing an increase of 50% from sales of $145,000 for the prior year's
quarter. The $103,000, or 104%, increase in license and supply revenues, from
customers utilizing the Company's technology as a components in their consumer
products, was the result of strong orders from established product lines. There
were not any sales of the Natural Attraction(R) products to the international
market as we were in the process of changing the bottles used for the line. We
will begin shipments with the new bottles in the second quarter.
Net sales for the quarters ended March 31, 2003 and 2002 were as
follows (in thousands).
2003 2002
---- ----
Markets:
License and Supply Revenues $202 $ 99
U.S. Retail & Distributor Markets 16 10
International Markets -- 36
---- ----
Net Sales $218 $145
==== ====
Gross profit for the quarter ended March 31, 2003 of $153,000 is 44%
higher than last years $106,000. As a percentage of sales, gross profit of 70%
was less than last years of 73% due to the lower product sales to the
international market.
Research and Development expenses for the first quarters of 2003 and
2002 were $3,000 and $80,000, respectively. As part of the Company's desire to
directly control all future research and development work the Company terminated
its relationships with its primary consultants in October 2002. The Company
incurred very minimal expenses in the first quarter of 2003 since its
independent research and development operations had not commenced.
Selling, general and administrative expenses of $263,000 were
consistent with last years first quarter expenses of $263,000. Selling, and
marketing and distribution expenses were $10,000 less than the prior year as a
result of decreased sales activities in the Southeast Asia markets. General and
administrative and facility costs were $10,000 more in the current year's
quarter primarily as a result of general cost increases since last year.
10
The Company earned $3,000 in net interest income in the current year
quarter and earned $5,000 in net interest income during the first quarter of
2002. The decrease is due to lower interest rates.
The Company recorded no income tax provision in 2003 or 2002, 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, 2003, the Company's gross
deferred tax asset, which relates primarily to net operating losses carried
forward was $6,410,000. 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 April 14, 2003 the Company sold to Niche Marking Group, Inc. the
assets and worldwide ownership rights to the REALM Women, REALM Men and
innerREALM product lines. The operating results form the assets sold have been
classified as assets to be sold and accounted for as a separate line item on the
financial statements. For the quarter ending March 31, 2003 income from the
assets to be sold was $72,000 which is less than last years $266,000. The
reduction was primarily due to no shipments to the international markets this
year as economic conditions in the far East have not improved.
LIQUIDITY
At March 31, 2003, the Company had cash of $1,533,000 with no
outstanding bank borrowings and working capital of $1,634,000; at December 31,
2002, it had cash of $1,394,000 with no outstanding bank borrowings and working
capital of $1,671,000. For the first quarter of 2003, net cash provided from all
activities was $139,000. For the first quarter of 2002, net cash provided from
all activities was $106,000.
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 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 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.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation -
11
Transition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. This statement is effective for financial
statements for fiscal years ending after December 15, 2002. SFAS No. 148 will
not have any impact on the Company's financial statements as management does not
have any intention to change to the fair value method.
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.
Subsequent Event
On April 14, 2003 the Company sold to Niche Marketing the assets and
worldwide ownership rights to the REALM(R) Women, REALM(R) Men and inner
REALM(R) product lines. Included in the sale were all trademarks, trade names,
trade dress, goodwill and inventory. The following pro forma balance sheet and
income statement presents the effect that the sale of REALM(R) Women, REALM(R)
Men and inner REALM(R) product line would have had on the Company's March 31,
2003 operating results and on the balance sheet had the transaction been
completed during the current period.
12
Human Pheromone Sciences, Inc.
Consolidated Balance Sheet - Pro Forma
March 31, 2003
As Pro Forma
(in thousands except share data) reported Adjustments balance
-------- ----------- -------
Assets
Current assets:
Cash and cash equivalents $ 1,533 $ 1,291 $ 2,824
Accounts receivable, net of allowances of $70 59 186 245
Inventory, net 107 -- 107
Assets of discontinued operations 491 (491) --
Other current assets 41 -- 41
-------- -------- --------
Total current assets 2,231 986 3,217
Property and equipment, net 4 -- 4
Product licenses 50 -- 50
-------- -------- --------
$ 2,285 $ 986 $ 3,271
======== ======== ========
Liabilities, Convertible Redeemable Preferred Stock and
Shareholders' Deficiency
Current liabilities:
Accounts payable $ 183 $ $ 183
Liabilities for discontinued operations 321 (321) --
Accrued income taxes -- 122 122
Accrued professional fees 32 -- 32
Accrued vacation 42 -- 42
Other accrued expenses 19 -- 19
-------- -------- --------
Total current liabilities 597 (199) 398
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, total liquidation value $2,150; 2,146 -- 2,146
Series BB 17,448 convertible shares issued and
outstanding, 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 17,667 -- 17,667
Accumulated deficit (19,685) 1,185 (18,500)
-------- -------- --------
Total shareholders' deficiency (2,018) 1,185 (833)
-------- -------- --------
$ 2,285 $ 986 $ 3,271
======== ======== ========
13
Human Pheromone Sciences, Inc.
Consolidated Statements of Operations and
Comprehensive Income (Loss) - Pro Forma
Three months ending March 31, 2003
As Pro Forma
(in thousands except per share data) reported Adjustments balance
-------- ----------- -------
Net revenue, including license fees of $463 $ 218 $ -- $ 218
Cost of goods sold 65 -- 65
------- ------- -------
Gross profit 153 -- 153
------- ------- -------
Operating expenses:
Research and development 3 -- 3
Selling, general and administrative 263 -- 263
------- ------- -------
Total operating expenses 266 -- 266
------- ------- -------
Loss from operations (113) -- (113)
------- ------- -------
Other (expense) income
Interest income (expense) 3 -- 3
Other (expense) -- -- --
------- ------- -------
Total other income (expense) 3 -- 3
------- ------- -------
Net loss from on-going operations (110) -- (110)
Net income and net gain assets to be sold 72 1,185 1,257
------- ------- -------
Net income (loss) available to common shareholders $ (38) $ 1,185 $ 1,147
======= ======= =======
Net (loss) per common share-basic
From on-going operations $ (0.03) $ -- $ (0.03)
From discontinued operations $ 0.02 $ 0.35 $ 0.37
Net income (loss) $ (0.01) $ 0.35 $ 0.34
Net (loss) per common share-fully diluted
From continuing operations $ (0.02)
From discontinued operations $ 0.24
Net income (loss) $ 0.22
Weighted average common shares outstanding - basic 3,430 3,430
======= =======
Weighted average common shares outstanding - fully diluted 5,136
=======
14
Item 3. 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 99.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to U.S.C. 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: May 13, 2003 /s/ William P. Horgan
------------------------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: May 13, 2003 /s/ Gregory S. Fredrick
------------------------------------
Gregory S. Fredrick
Vice President Finance
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: May 13, 2003
/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: May 13, 2003
/s/ Gregory S. Fredrick
- ------------------------
Chief Financial Officer
19