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 June 30, 2004
-------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number 0-23544
HUMAN PHEROMONE SCIENCES, INC.
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(Name of small business issuer in its charter)
California 94-3107202
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. employee Identification No.)
incorporation or organization)
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
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: 4,151,954 shares of Common
Stock as of July 23, 2004.
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003........................... 3
Statements of Operations (Unaudited) for the Three and Six Months Ended
June 30, 2004 and 2003......................................................................... 4
Statements of Cash Flows (Unaudited) for the Six Months Ended
June 30, 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 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
June 30, December 31,
(in thousands except share data) 2004 2003
-------- --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,473 $ 1,950
Accounts receivable, net of allowances of $4,000 at each date 79 38
Inventories, net 74 52
Other current assets 46 19
-------- --------
Total current assets 1,672 2,059
Property and equipment, net 22 9
-------- --------
$ 1,694 $ 2,068
======== ========
Liabilities, Convertible Redeemable Preferred Stock and Shareholders' Equity
Current liabilities:
Accounts payable $ 40 $ 23
Accrued professional fees 42 54
Accrued employee benefits 28 39
Accrued income tax 23 24
Other accrued expenses 28 33
-------- --------
Total current liabilities 161 173
-------- --------
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 December 31,
2003 (total liquidation value $150); none at June 30, 2004 -- 150
-------- --------
Total liabilities 161 323
Commitments and Contingencies
Shareholders' equity:
Common stock, no par value, 13,333,333 shares authorized, 4,151,954 and
4,105,116 shares issued and outstanding at each date, respectively 20,809 20,659
Accumulated deficit (19,276) (18,914)
-------- --------
Total shareholders' equity 1,533 1,745
-------- --------
$ 1,694 $ 2,068
======== ========
<FN>
See accompanying notes to financial statements.
</FN>
3
Human Pheromone Sciences, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
(unaudited)
Three months ended June 30, Six months ended June 30,
---------------------------- --------------------------
(in thousands except per share data) 2004 2003 2004 2003
------- ------- ------- ---------
Net revenues 149 61 408 279
Cost of goods sold 33 19 73 84
------- ------- ------- ---------
Gross profit 116 42 335 195
Operating Expenses:
Research and development 7 4 16 7
Selling, general and administrative 388 264 689 527
------- ------- ------- ---------
Total operating expenses 395 268 705 534
------- ------- ------- ---------
Loss from operations (279) (226) (370) (339)
Other income
Interest income (net) 4 5 7 8
Income tax benefit from on-going operations -- 33 -- 33
------- ------- ------- ---------
Loss from on-going operations (275) (188) (363) (298)
Net income from discontinued operations -- 7 -- 79
Net gain from sale of assets 1 1,226 1 1,226
------- ------- ------- ---------
Net income (loss) $ (274) $ 1,045 $ (362) $ 1,007
======= ======= ======= =========
Net income (loss) per common share - basic
From on-going operations $ (0.07) $ (0.05) $ (0.09) $ (0.08)
From discontinued operations $ 0.00 $ 0.00 $ 0.00 $ 0.02
From assets sold $ 0.00 $ 0.33 $ 0.00 $ 0.34
------- ------- ------- ---------
Net income (loss) $ (0.07) $ 0.28 $ (0.09) $ 0.28
======= ======= ======= =========
Net income (loss) per common share - diluted
From on-going operations $ (0.07) $ (0.04) $ (0.09) $ (0.06)
From discontinued operations $ 0.00 $ 0.00 $ 0.00 $ 0.02
From assets sold $ 0.00 $ 0.26 $ 0.00 $ 0.24
------- ------- ------- ---------
Net income (loss) $ (0.07) $ 0.22 $ (0.09) $ 0.20
======= ======= ======= =========
Weighted average common shares outstanding -basic 4,106 3,686 4,105 3,558
======= ======= ======= =========
Weighted average common shares outstanding -diluted 4,106 4,773 4,105 5,011
======= ======= ======= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
4
Human Pheromone Sciences, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30,
-------------------------
(in thousands) 2004 2003
------- -------
Cash flows from operating activities
Net loss from on-going operations $ (362) $ (298)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 3 2
Changes in operating assets and liabilities:
Accounts receivable (41) 41
Inventories (22) 40
Other current assets (27) (30)
Accounts payable and accrued liabilities (12) (79)
------- -------
Net cash used in on-going operating activities (461) (324)
Net cash provided by operations of assets sold -- 156
------- -------
Net cash used in operating activities (461) (168)
Cash flows provided by (used in) investing activities
Sale of Realm assets -- 1,342
Acquisition of fixed assets (16) (6)
------- -------
Net cash provided by (used in) investing activities (16) 1,336
Cash flows used in financing activities
Purchase of Series BB preferred stock -- (505)
------- -------
Net cash used in financing activities -- (505)
Net increase in cash and cash equivalents (477) 663
Cash and cash equivalents at beginning of period 1,950 1,394
------- -------
Cash and cash equivalents at end of period $ 1,473 $ 2,057
======= =======
See accompanying notes to financial statements.
5
Human Pheromone Sciences, Inc.
Notes to Financial Statements
(unaudited)
June 30, 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's
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 and six months ended June 30,
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 potential 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 June 30, 2004 consists of finished goods
inventory valued at $18,000 and raw materials of $56,000. At December 31, 2003,
these balances were $13,000 and $39,000, respectively.
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 and six months ended June
30, 2004, options to purchase 80,001 shares of common stock, respectively, and
46,323 and 46,331 shares of convertible preferred stock, respectively, were
excluded from the computation of diluted earnings per share since their effect
would be antidilutive.
6
As of June 30, 2004 and 2003, the unaudited components of basic and diluted
earnings per share are as follows (all amounts are in thousands):
2004 2003
------- -------
Net income (loss) available to common shareholders $ (362) $ 1,007
======= =======
Weighted-average common shares outstanding during the period 4,105 3,558
Incremental shares from assumed conversions of convertible
preferred stock and stock options -- 1,453
------- -------
Fully diluted weighted-average common shares and potential
commons stock (unaudited) 4,105 5,011
======= =======
Capital Stock and Stock Options
The Company converted the remaining 100,000 shares of Series AA
Preferred Stock into 46,838 shares of common stock as required by the terms of
the offering. As of June 30, 2004 the Company has no Preferred Stock
outstanding. During the quarter 6,666 stock options expired and no stock options
were issued.
2. SEGMENT INFORMATION
Revenues by geographic markets for the three and six months ended June
30, 2004 and 2003 were as follows:
Three months ending Six months ending
June 30, June 30,
-------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Markets:
U.S Markets $132 $ 60 $350 $278
International Markets 17 1 58 1
---- ---- ---- ----
Net Sales $149 $ 61 $408 $279
==== ==== ==== ====
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
7
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 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. 104. The majority of the
Company's sales are to distributors and licensees, and these distributors and
licensees have no right to return products.
COMPANY OVERVIEW
On April 14, 2003, the Company sold to Niche Marking Group, Inc. the
assets and worldwide ownership rights to the REALM(R) Women, REALM Men and
innerREALM(R) 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.
On July 13, 2004 the Company signed a Research Agreement with the
University of Utah to conduct research and provide services. The five year
agreement, which became effective July 15, 2004, provides that the University
will provide professional research and services for specific research programs
mutually initiated by the Company and accepted by the University. While the
University shall own any inventions and improvements conceived or reduced to
practice from the work performed, the Company retains the exclusive option to
license any inventions or improvements conceived or reduced to practice and
market the products developed from the research results.
Results of Operations
Three Months ended June 30, 2004 compared to the Three Months ended
- -------------------------------------------------------------------
June 30, 2003
- -------------
Net revenues for the second quarter of 2004 were $149,000, representing
an increase of 144% from revenues of $61,000 for the prior year's quarter.
Domestically, revenues were $72,000 greater than the prior year, attributable to
the launch of the Demeter Natural Attraction(R) product line in April 2004, and
increased pheromone sales in the same quarter. International revenues were
$16,000 greater than the prior year and represents sales for both our Natural
Attraction products and private label manufacturing for a new licensee. The
increased international revenues is attributable to increased private label
sales in 2004 and reduced sales in 2003 due to manufacturing delays caused by
the conversion to new Natural Attraction bottles .
Net revenue for the quarters ended June 30, 2004 and 2003 were as
follows (in thousands):
2004 2003
---- ----
Markets:
U.S Markets $132 $ 60
International Markets 17 1
---- ----
Net Revenue $149 $ 61
==== ====
Gross profit for the quarter ended June 30, 2004 of $116,000 is 176%
higher than last year's gross profit of $42,000. As a percentage of sales, gross
profit of 77% was more than last year's of 68% due to lower product costs
realized in the current period.
Research and Development expenses for the second quarters of 2004 and
2003 were $7,000 and $4,000, respectively. The Company incurred very minimal
expenses during both periods since its independent research and development
operations had not commenced. Effective July 15, 2004 the Company's recently
8
completed Research Agreement with the University of Utah became effective.
Research and development spending has been limited pending the execution of this
agreement with the University.
Selling, general and administrative expenses of $388,000 are $124,000
more than last years $264,000. Selling, marketing and distribution expenses were
$85,000 more than the prior year as the Company initiated a program to introduce
its Natural Attraction(R) from Demeter line of fragrances in the U.S.
marketplace. Sales and marketing expenses incurred in the current quarter
exceeded the initial customer's shipments. General and administrative and
facility costs increased by $36,000, primarily as a result of the Company's
efforts to expand new investment potential and increase its shareholder base.
The Company earned $4,000 and $5,000 in net interest income in both of
the periods, respectively.
The Company recorded no income tax provision in 2004 and an income tax
benefit for 2003. No provision was recorded in 2004 due 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 June 30, 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 can 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 and accounted for as a
separate line item on the financial statements.
Six Months ended June 30, 2004 as compared to the Six Months ended June 30, 2003
- --------------------------------------------------------------------------------
Net revenues for the six months ended June 30, 2004 were $408,000. This
was a 46% increase from net revenues of $279,000 for the first half of 2003.
Domestically, revenues were $72,000 greater than the prior year with the launch
of the Natural Attraction(R) from Demeter product line, increased pheromone
sales and lower sales of the original Natural Attraction(R) products.
International revenues were $57,000 greater than the prior year as a result of
higher sales to distributors of private label products.
Net revenues for the six months ended June 30, 2004 and 2003 were as
follows:
2004 2003
---- ----
Markets
U.S Markets $350 $278
International Markets 58 1
---- ----
Net Revenues $408 $279
==== ====
Gross profit for the first half of 2004 increased 71% to $335,000 from
$195,000 in 2003. The increase is the result of the higher sales levels, a
favorable sales mix and reduced product costs. Gross margin increased to 82%
compared to 70% in 2003 as a result of the reduced product costs.
Research and Development expenses for the first half of 2004 and 2003
were $16,000 and $7,000, respectively. Effective July 15, 2004 the Company's
recently completed Research Agreement with the University of Utah became
effective. Research and development spending has been limited pending the
execution of this agreement with the University.
Selling, general and administrative expenses for the first half of 2004
were $689,000 and $527,000 for the comparable period of 2003. Selling, marketing
and distribution expenses are $120,000 more than the prior year as the Demeter
Natural Attraction product line was launched in April 2004 and the Company began
efforts to license the Natural Attraction brand. Selling, administrative and
facilities expense were $ 41,000 more than last year primarily due to increased
investor relation costs and general cost increases.
The Company's cash balances generated $8,000 in net interest income
during the first half of 2004, as compared to $9,000 in 2003. The decrease is
due to reduced cash balances.
9
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, the Company had cash of $1,473,000 with no
outstanding bank borrowings. At December 31, 2003, it had cash of $1,950,000
with no outstanding bank borrowings and working capital of $1,886,000. Net cash
used in on-going activities for the second quarter of 2004 of $254,000 is
consistent with last years $243,000.
On April 26, 2004, the Company renewed its 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, 2005, contains certain debt-to-equity and working capital covenants.
At June 30, 2004 the Company was in compliance with such covenants and had no
amounts outstanding under this agreement.
The Company converted the remaining 100,000 shares of Series AA
Preferred Stock into 46,838 shares of common stock as required by the terms of
the offering. As of June 30, 2004 the Company has no Preferred Stock
outstanding.
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 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.
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
10
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.
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 second fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
11
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Exhibits
Exhibit 10.30 Promissory Note with Mid-Peninsula Bank dated
April 26, 2004
Exhibit 10.31 Research Agreement with University of Utah
effective July 15, 2004
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
12
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: August 11, 2004 /s/ William P. Horgan
-------------------------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: August 11, 2004 /s/ Gregory S. Fredrick
-------------------------------------
Gregory S. Fredrick
Chief Financial Officer
13