UNITED STATES 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 quarterly period ended March 31, 2004
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[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (no fee required)
Commission file number 0-23544
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HUMAN PHEROMONE SCIENCES, INC.
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(Name of small business issuer in its charter)
California 94-3107202
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(State or other jurisdiction of (I.R.S. employee
incorporation or organization) Identification No.)
84 West Santa Clara Street, San Jose, California 95113
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (408) 938-3030
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Not applicable
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(Former name or former address, if changed since last report)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 4,105,116 shares of Common
Stock as of May 10, 2004.
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2004 (Unaudited) and December 31, 2003........................... 3
Statements of Operations (Unaudited) for the Three Months Ended
March 31, 2004 and 2003......................................................................... 4
Statements of Cash Flows (Unaudited) for the Three Months Ended
March 31, 2004 and 2003......................................................................... 5
Notes to Financial Statements (Unaudited) ...................................................... 6
Item 2. Management's Discussion and Analysis
Management's Discussion and Analysis of Financial Conditions and Results of Operations ......... 7
Item 3. Controls and Procedures.......................................................................... 11
PART II
OTHER INFORMATION
Item 5. Other Information................................................................................ 12
Item 6. Exhibits and Reports on Form 8-K ................................................................ 12
SIGNATURES........................................................................................................ 13
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Human Pheromone Sciences, Inc.
Balance Sheets
March 31, December 31,
(in thousands except share data) 2004 2003
- ---------------------------------------------------------------------------------- --------- ----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,735 $ 1,950
Accounts receivable, net of allowances of $4,000 at each date 132 38
Inventories, net 50 52
Other current assets 43 19
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Total current assets 1,960 2,059
Property and equipment, net 14 9
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$ 1,974 $ 2,068
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Liabilities, Convertible Redeemable Preferred Stock and Shareholders' Equity
Current liabilities:
Accounts payable $ 57 $ 23
Accrued professional fees 29 54
Accrued employee benefits 29 39
Accrued income tax 23 24
Other accrued expenses 29 33
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Total current liabilities 167 173
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Convertible redeemable preferred stock:
Preferred stock, issuable in series, no par value, 10,000,000 shares authorized,
Series AA 100,000 convertible shares issued and outstanding at each date
(total liquidation value $150) 150 150
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Total liabilities
317 323
Commitments and Contingencies
Shareholders' equity:
Common stock, no par value, 13,333,333 shares authorized, 4,105,116 shares
issued and outstanding at each date 20,659 20,659
Accumulated deficit (19,002) (18,914)
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Total shareholders' equity 1,657 1,745
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$ 1,974 $ 2,068
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<FN>
See accompanying notes to financial statements.
</FN>
3
Human Pheromone Sciences, Inc.
Statements of Operations Income (Loss)
(unaudited)
Three months ended March 31,
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(in thousands except per share data) 2004 2003
- ----------------------------------------------------------------------------------------------- -------- --------
Net revenue $ 259 $ 218
Cost of goods sold 40 65
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Gross profit 219 153
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Operating expenses:
Research and development 9 3
Selling, general and administrative 301 263
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Total operating expenses 310 266
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Income (loss) from operations (91) (113)
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Other income (expense):
Interest income (net) 3 3
Other (expense) -- --
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Total other income 3 3
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Net loss from on-going operations (88) (110)
Net income from operations sold -- 72
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Net loss $ (88) $ (38)
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Net income (loss) per common share- basic and fully diluted
From on-going operations $ (0.02) $ (0.03)
From operations sold -- 0.02
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Net loss $ (0.02) $(0 .01)
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Weighted average common shares outstanding basic and fully diluted 4,105 3,430
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<FN>
See accompanying notes to financial statements.
</FN>
4
Human Pheromone Sciences, Inc.
Statements of Cash Flows
(unaudited)
Three months
ended March 31,
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(in thousands) 2004 2003
- ---------------------------------------------------------- -------- --------
Cash flows from operating activities
Net loss from on-going operations $ (88) $ (110)
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 (94) 34
Inventories 2 43
Other current assets (24) (29)
Accounts payable and accrued liabilities (4) (20)
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Net cash used in on-going activities (207) (81)
Net cash provided by operations of assets sold (2) 220
Cash flows provided (used) in investing activities
Acquisition of fixed assets (6) --
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Net cash provided by investing activities (6) --
Cash flows used in financing activities -- --
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Net cash used in financing -- --
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Net increase in cash and cash equivalents (215) 139
Cash and cash equivalents at beginning of period 1,950 1,394
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Cash and cash equivalents at end of period $ 1,735 $ 1,533
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See accompanying notes to financial statements.
5
Human Pheromone Sciences, Inc.
Notes to Financial Statements
(unaudited)
March 31, 2004
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(R)
fragrance products and in April 2003 the Company sold the REALM and
innerREALM(R) brands and trademarks to Niche Marketing Group, Inc. The Company
strategic focus is now on expanding the market for its existing patented
pheromones to other consumer product and fragrance companies and to the
development of its internally developed brand of pheromone-based products under
the Natural Attraction(R) brand, and mood based products under the licensed
Demeter Natural Attraction label. The Company will seek to add to this group of
products with new, patented compounds that might be developed through the
research efforts that the Company is now directly managing.
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions 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, 2004 are
not necessarily indicative of the results that may be expected for the calendar
year ending December 31, 2004. 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, 2003.
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, 2004 consists of finished goods
inventory valued at $17,000 and raw materials of $33,000. At December 31, 2003,
these balances were $13,000 and $39,000, respectively.
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 available for sale are not subject to amortization in accordance with
Statement of Financial Accounting Standards No. 144: Accounting for the
Impairment or Disposal of Long-Lived 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.
6
Earnings (Loss) Per Share
The Company follows the provisions of SFAS No. 128, Earnings Per Share.
SFAS No. 128 provides for the calculation of "Basic" and Diluted" earning per
share. Basic earnings (loss) per share is computed using the weighted-average
number of common shares outstanding. Diluted earnings (loss) per share is
computed using the weighted-average number of common shares and dilutive common
shares outstanding during the period. For the three months ended March 31, 2004,
options to purchase 428,830 shares of common stock, and 46,338 shares of
convertible preferred stock were excluded from the computation of diluted
earnings per share since their effect would be antidilutive.
Capital Stock and Stock Options
During the three months ended March 31, 2004 no common or preferred
stock was issued, and no stock options were issued. During the quarter 20,000
stock options expired.
2. SEGMENT INFORMATION
Revenues by geographic markets for the quarters ended March 31, 2004
and 2003 were as follows:
2004 2003
---------------------------- ---- ----
Markets:
U.S Markets $218 $218
International Markets 41 --
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Net Sales $259 $218
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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.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial conditions and results of
operations are based upon our 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
7
making judgments. 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. 144: Accounting for the Impairment or Disposal of
Long-Lived 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.
Results of Operations
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. All REALM and innerREALM financial activities have
been classified as income from operations sold as a result of 2003 sale. The
Company's operations are focused 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.
Three Months ended March 31, 2004 compared to the Three Months ended March 31,
2003
Net revenue for the first quarter of 2004 were $259,000, representing
an increase of 19% from revenues of $218,000 for the prior year's quarter.
International revenues were $41,000 greater than the prior year as an initial
shipment to a new licensee was made this quarter and last year we were in the
process of changing bottles and were unable to make shipments to international
customers in the first quarter of 2003. Domestically, sales were consistent with
the prior year with increased pheromone sales offset by reduced sales of Natural
Attraction.
Net sales for the quarters ended March 31, 2004 and 2003 were as
follows (in thousands):
2004 2003
---------------------------- ---- ----
Markets:
U.S Markets $218 $218
International Markets 41 --
---- ----
Net Sales $259 $218
==== ====
Gross profit for the quarter ended March 31, 2004 of $219,000 is 43%
higher than last years $153,000. As a percentage of sales, gross profit of 84%
was more than last years of 70% due to the lower product costs, that the Company
obtained in 2003.
Research and Development expenses for the first quarters of 2004 and
2003 were $9,000 and $3,000, respectively. The Company incurred very minimal
expenses in the first quarter of 2004 since its independent research and
development operations had not commenced.
8
Selling, general and administrative expenses of $301,000 are $38,000
more than last years $263,000. Selling, and marketing and distribution expenses
were $35,000 more than the prior year as the Company is preparing to launch a
new product line of fragrances under the Demeter Natural Attraction(R) brand.
General and administrative and facility costs were $3,000 more in the current
year's quarter due to legal fees incurred for patent renewals.
The Company earned $3,000 in net interest income in both of the periods
reported.
The Company recorded no income tax provision in 2004 or 2003, 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, 2004, the Company's gross
deferred tax asset, which relates primarily to net operating losses carried
forward was $6,506,000. 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 from these product lines have
been classified as net income from operations sold assets to be sold and
accounted for as a separate line item on the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004, the Company had cash of $1,735,000 with no
outstanding bank borrowings and working capital of $1,793,000; at December 31,
2003, it had cash of $1,950,000 with no outstanding bank borrowings and working
capital of $1,886,000. For the first quarter of 2004, net cash used in on-going
activities was $207,000 compared to the prior years $81,000 and is the result of
a larger account receivable balance in 2004 as more sales occurred in March of
this year.
The Company's credit line with Mid-Peninsula Bank, which expires May 1,
2004, is expected to be renewed for another year.
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.
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, beginning
in May 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, it has not to date, and the Company's license
based business model may not be successful in the future.
The Company 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 with which they 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 fragrances and toiletries can be very
short. Changing fashions and fads can dramatically shift consumer preferences
and demands. Traditional fragrance companies introduce a new fragrance every
year or so. Changing fashions and new products may reduce the chance of creating
long-term brand loyalty to the Company's or its licensees/distributors product
lines.
9
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 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 royalty income and could
cause significant fluctuations in its quarterly results.
The Company may 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 and its distributors/licensees rely upon other companies to
manufacture its pheromones, supply components, and to blend, fill and package
its fragrance products. The Company and its distributors/licensees may not be
able to obtain or retain pheromones manufacturers, fragrance suppliers, or
component manufacturers on acceptable terms. This would adversely affect
operating results.
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Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Based on their
evaluation as of the end of the period covered by this Quarterly Report on Form
10-QSB, our chief executive officer and chief financial officer have concluded
that our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
Changes in Internal Control Over Financial Reporting. There were no
changes in our internal control over financial reporting identified in
connection with our evaluation that occurred during our first fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 5. Other Events
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None
Item 6. Exhibits and Reports on Form 8-K
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a. Exhibits
Exhibit 10.29 Lease Amendment between Registrant and Ernest
E. Pestana and Irene Pestana, dated May 5,
2004 for the Registrant's California offices
Exhibit 31.1 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act
Exhibit 31.2 Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act
Exhibit 32 Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C.
1350
b. Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant had duly caused this Report to be signed on behalf by the
undersigned thereunto duly authorized.
HUMAN PHEROMONE SCIENCES, INC.
Date: May 11, 2004 /s/ William P. Horgan
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William P. Horgan
Chairman and Chief Executive Officer
Date: May 11, 2004 /s/ Gregory S. Fredrick
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Gregory S. Fredrick
Chief Financial Officer
13