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 September 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.
------------------------------
(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
-------------------------------------------------------
(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 October 27, 2004.
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of September 30, 2004
(Unaudited) and December 31, 2003 ............................3
Statements of Operations (Unaudited) for the Three and Nine
Months Ended September 30, 2004 and 2003 .....................4
Statements of Cash Flows (Unaudited) for the Nine
Months Ended September 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
September 30, December 31,
(in thousands except share data) 2004 2003
- -------------------------------- -------- --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,363 $ 1,950
Accounts receivable, net of allowances of $6,000 and $4,000, respectively 93 38
Inventories, net 83 52
Other current assets 44 19
-------- --------
Total current assets 1,583 2,059
Property and equipment, net 20 9
-------- --------
$ 1,603 $ 2,068
======== ========
Liabilities, Convertible Redeemable Preferred Stock and Shareholders' Equity
Current liabilities:
Accounts payable $ 66 $ 23
Accrued professional fees 48 54
Accrued employee benefits 34 39
Accrued income tax 2 24
Other accrued expenses 30 33
-------- --------
Total current liabilities 180 173
-------- --------
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 September 30, 2004 -- 150
-------- --------
Total liabilities 180 323
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 (19,386) (18,914)
-------- --------
Total shareholders' equity 1,423 1,745
-------- --------
$ 1,603 $ 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 Nine months ended
-------------------- -----------------
September 30, September 30,
(in thousands except per share data) 2004 2003 2004 2003
-------------- --------------- -------------- ---------------
Net revenues 300 227 708 506
Cost of goods sold 44 73 117 157
-------------- --------------- -------------- ---------------
Gross profit 256 154 591 349
Operating Expenses:
Research and development 27 11 43 18
Selling, general and administrative 364 276 1,053 803
-------------- --------------- -------------- ---------------
Total operating expenses 391 287 1,096 821
-------------- --------------- -------------- ---------------
Loss from operations (135) (133) (505) (472)
Other income
Interest income (net) 5 4 12 12
Other income (expense) (1) 20 (1) 20
-------------- --------------- -------------- ---------------
Total other income and (expense) 4 24 11 32
Income tax benefit from on-going operations -- 1 -- 34
-------------- --------------- -------------- ---------------
Loss from on-going operations (131) (108) (494) (406)
Net income from discontinued operations -- -- -- 79
Net gain from sale of assets 21 (8) 22 1,218
-------------- --------------- -------------- ---------------
Net income (loss) $ (110) $ (116) $ (472) $ 891
============== =============== ============== ===============
Net income (loss) per common share - basic
From on-going operations $ (0.03) $ (0.03) $ (0.12) $ (0.11)
From discontinued operations $ 0.00 $ 0.00 $ 0.00 $ 0.02
From assets sold $ 0.01 $ 0.00 $ 0.01 $ 0.33
-------------- --------------- -------------- ---------------
Net income (loss) $ (0.02) $ (0.03) $ (0.11) $ 0.24
============== =============== ============== ===============
Net income (loss) per common share - diluted
From on-going operations $ (0.03) $ (0.03) $ (0.12) $ (0.09)
From discontinued operations $ 0.00 0.00 0.00 0.02
From assets sold $ 0.01 $ 0.00 $ 0.01 $ 0.26
-------------- --------------- -------------- ---------------
Net income (loss) $ (0.02) $ (0.03) $ (0.11) $ 0.19
============== =============== ============== ===============
Weighted average common shares outstanding -basic 4,152 4,028 4,121 3,717
============== =============== ============== ===============
Weighted average common shares outstanding -diluted 4,152 4,028 4,121 4,731
============== =============== ============== ===============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
4
Human Pheromone Sciences, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended
September 30,
----------------------
(in thousands) 2004 2003
- -------------- ---- ----
Cash flows from operating activities
Net (loss) from on-going operations $ (494) $ (406)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 5 3
Changes in operating assets and liabilities:
Accounts receivable (55) (165)
Inventories (31) 82
Other current assets (25) (35)
Accounts payable and accrued liabilities 28 (92)
Deferred revenue 3
------- -------
Net cash used in on-going operating activities (572) (610)
------- -------
Net cash provided by operations of assets sold 1 153
------- -------
Net cash used in operating activities (571) (457)
Cash flows provided by (used in) investing activities
Sale of Realm assets -- 1,435
Acquisition of fixed assets (16) (7)
------- -------
Net cash provided by (used in) investing activities (16) 1,428
Cash flows used in financing activities
Purchase of Series BB preferred stock -- (505)
------- -------
Net cash used in financing activities -- (505)
Net increase (decrease) in cash and cash equivalents (587) 466
Cash and cash equivalents at beginning of period 1,950 1,394
------- -------
Cash and cash equivalents at end of period $ 1,363 $ 1,860
======= =======
See accompanying notes to financial statements.
5
Human Pheromone Sciences, Inc.
Notes to Financial Statements
(unaudited)
September 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 synthesized
human pheromones and 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 accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine
months ended September 30, 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 September 30, 2004 consists of finished
goods inventory valued at $13,000 and raw materials of $70,000. 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" earnings 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 nine months ended
September 30, 2004, options to purchase 140,001 shares of common stock,
respectively, were excluded from the computation of diluted earnings per share
since their effect would be antidilutive.
As of September 30, 2004 and 2003, the unaudited components of basic and diluted
earnings per share are as follows (all amounts are in thousands):
6
2004 2003
----------- -----------
Net income (loss) available to common shareholders $ (472) $ 891
=========== ===========
Weighted-average common shares outstanding during the period 4,105 3,717
Incremental shares from assumed conversions of convertible
preferred stock and stock options -- 1,014
----------- -----------
Fully diluted weighted-average common shares and potential common
stock (unaudited) 4,105 4,731
=========== ===========
Capital Stock and Stock Options
During the three months ended September 30, 2004 no common stock or
preferred stock was issued. During the quarter options to purchase 60,000 shares
of common stock under the 2003 Non-Employee Directors Stock Option Plan were
granted, no issued options were exercised and 8,333 stock options expired under
the initial Non-Employee Directors Stock Option Plan.
2. SEGMENT INFORMATION
Revenues by geographic markets for the three and nine months ended
September 30, 2004 and 2003 were as follows:
Three months ending Nine months ending
September 30, September 30,
------------------------ ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Markets:
U.S. Markets $ 278 $ 204 $ 628 $ 482
International Markets 22 23 80 24
----------- ----------- ----------- -----------
Net Sales $ 300 $ 227 $ 708 $ 506
=========== =========== =========== ===========
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 accounting principles generally accepted in the United States of
7
America. The preparation of financial statements require management 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 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 September 30, 2004 compared to the Three Months ended
September 30, 2003
Net revenues for the third quarter of 2004 were $300,000, representing
an increase of 33% from revenues of $227,000 for the prior year's quarter.
Domestically, revenues were $74,000 greater than the prior year, attributable to
the Demeter Natural Attraction(R) product line which was launched in the second
quarter of the current year and pheromone sales with a 20% increase over last
years third quarter sales. International revenues were consistent with the prior
year and represents sales for both our Natural Attraction products and private
label manufacturing for a new licensee. The international revenues is
attributable to both new and existing customers with an increasing private label
preference.
Net revenues for the quarters ended September 30, 2004 and 2003 were as
follows (in thousands):
2004 2003
---- ----
Markets:
U.S Markets $ 278 $ 204
International Markets 22 23
---------- ----------
Net Revenue $ 300 $ 227
========== ==========
Gross profit for the quarter ended September 30, 2004 of $256,000 is
66% higher than last year's gross profit of $154,000. As a percentage of sales,
gross profit of 85% was more than last year's of 68% due to lower product costs
realized in the current period.
Research and Development expenses for the third quarters of 2004 and
2003 were $27,000 and $11,000, respectively. The Company began research
activities during the current year quarter based on the July 15, 2004 Research
Agreement with the University of Utah.
8
Selling, general and administrative expenses of $364,000 are $88,000
more than last years $276,000. Selling, marketing and distribution expenses were
$53,000 more than the prior year as the Company incurred marketing and sales
promotion expenses for the Natural Attraction(R) from Demeter line of fragrances
in the U.S. marketplace which was launched in the second quarter of this year.
General and administrative and facility costs increased by $35,000, primarily as
a result of the Company's efforts to expand new investment potential and
increase its shareholder base.
The Company earned $5,000 and $4,000 in net interest income in each 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 September 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.
Nine Months ended September 30, 2004 as compared to the Nine Months ended
September 30, 2003
Net revenues for the nine months ended September 30, 2004 were
$708,000. This was a 40% increase from net revenues of $506,000 for the nine
months of 2003. Domestically, revenues were $146,000 greater than the prior year
with the launch of the Natural Attraction(R) from Demeter product line, an
increase in pheromone sales, somewhat offset by lower sales of the original
Natural Attraction products. International revenues were $56,000 greater than
the prior year as a result of higher sales to distributors of private label
products containing human pheromones.
Net revenues for the nine months ended September 30, 2004 and 2003 were
as follows:
Markets 2004 2003
------- ---- ----
U.S Markets $ 628 $ 482
International Markets 80 24
---------- ----------
Net Revenues $ 708 $ 506
========== ==========
Gross profit for the first nine months of 2004 increased 69% to
$591,000 from $349,000 in 2003. The increase is the result of the higher sales
levels, a favorable sales mix and reduced product costs. Gross margin increased
to 83% compared to 69% in 2003 as a result of the reduced product costs and
favorable sales mix.
Research and development expenses for the first nine months of 2004 and
2003 were $43,000 and $18,000, respectively. Effective July 15, 2004 the Company
completed a Research Agreement with the University of Utah and has begun
research activities from these facilities.
Selling, general and administrative expenses for the nine months of
2004 were $1,053,000 and $803,000 for the comparable period of 2003. Selling,
marketing and distribution expenses are $173,000 more than the prior year as the
Company incurred the expenses associated with the Demeter Natural Attraction
product line launched in the second quarter of 2004, and the Company continued
efforts to license its Natural Attraction brand. Administrative and facilities
expense were $ 77,000 more than last year primarily due to increased investor
relations costs and basic cost increases in other areas.
The Company's cash balances generated $12,000 in net interest income
during the first nine months of 2004 and 2003.
9
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, the Company had cash of $1,363,000 with no
outstanding bank borrowings. At December 31, 2003, it had cash of $1,950,000
with no outstanding bank borrowings. Net cash used in on-going activities for
the nine months of 2004 of $572,000 is slightly better than last years $610,000
despite the increased spending on sales and marketing.
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 September 30, 2004 the Company was in compliance with all but one of the
covenants for which the Company has received a waiver from the bank. As of
September 30, 2004 there were no amounts outstanding under this agreement.
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
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.
10
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 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: November 9, 2004 /s/ William P. Horgan
---------------------
William P. Horgan
Chairman and Chief Executive Officer
Date: November 9, 2004 /s/ Gregory S. Fredrick
-----------------------
Gregory S. Fredrick
Chief Financial Officer
13