CONFIDENTIAL, FOR USE OF COMMISSION ONLY
May 4, 2005
Via EDGAR, Facsimile and UPS Express
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Attn: Nili Shah
Mail Stop 0510
Re: Human Pheromone Sciences, Inc. Form 10-KSB for the fiscal year ended
December 31, 2004 filed March 30, 2005 (File No. 0-23544)
Ladies and Gentlemen:
This letter is in response to your letter dated April 22, 2005, which
sets forth the Staff's comments regarding the above referenced filing of Human
Pheromone Sciences, Inc. (the "Company"). For your convenience, the Staff's
comments are reproduced below in bold type and are followed by the Company's
response. The Company proposes to make additional disclosures in response to
certain of the Staff's comments in the Company's future filings and in such
cases the form of the proposed disclosures are described in the Company's
responses. Of course, the disclosure that will actually be given in a future
filing will be modified as necessary to reflect the particular facts and
circumstances present for the reported periods.
Set forth below are the Company's responses to the comments contained
in the Staff's letter:
1. MD&A
We note that your accounts receivable balance as of December
31, 2004 has increased 582% when compared to your balance as
of December 31, 2003, which significantly impacted your cash
flows used in operations. We further note that the net revenue
increased by 76% for fiscal year 2004 as compared to fiscal
year 2003 and that your receivable day sales outstanding has
increased to 54.6 days as of December 31, 2004 from 24.7 days
as of December 31, 2003. Due to the significant impact of your
receivables on your cash flows used in operations, your
historical cash flows used in operations, and the volatility
of timing in collecting accounts receivable, please provide
the following information, at a minimum, in future filings of
your Form 10-KSB and Forms 10-QSB.
The increase in our accounts receivable, which impacted our cash flows used
in operations, as well as the increase in net revenue and receivable day sales
outstanding is primarily a result of an increase in product shipments to two of
our largest customers in December 2004. Based on historical patterns these
orders would have been placed and shipped in the first quarter of 2005.
Because of the timing of these shipments to our customers, there was a
major increase in accounts receivable outstanding at December 31, 2004 as
compared with the prior year end. This factor also resulted in the significant
variance in the receivable day sales outstanding on December 31, 2004 as
compared with the year ended December 31, 2003. In addition, the percentage of
sales occurring in the last month of the quarter has increased from 25% of sales
in 2003 to 41% in 2004. This higher concentration of sales in the last month of
the quarter increases the receivable days outstanding. Since the calculation is
based on averages, it overstates the actual days that our receivables are
outstanding.
We advise the Staff that 98% of the accounts receivable outstanding at
December 31, 2004 was fully collected before our annual audit began. We extend
30 day terms to our largest customers, since they represent the highest level of
credit-worthiness; for other customers, especially those outside the United
States, we require payment in advance, and do not make shipments until we
receive payment.
o Historical sources of cash (e.g. operations, sale of REALM product
lines, financing, etc.)
In recent years, we raised our funding through sales of equity
or asset sales. As stated in the Risk Factor section of the
10-KSB, we have not sustained profitable operations since
1997. As liquidity circumstances require, we will expand
discussions of all sources of cash resources, including
historical sources and future requirements and potential
sources.
o Trends and uncertainties related to cash flows and liquidity.
For fiscal year 2004, you stated that you expected your 2004
sales to decline due to maturing fragrance lines with
shortening life cycles; however, your fiscal year 2004 sales
increased by 76%. Your results of operations and liquidity
discussion should provide a comprehensive analysis of known
trends and uncertainties related to revenue, including your
expectations of the impact of maturing product lines and new
operating focus of licensing your human pheromone patents on
future sales.
We sell our pheromones to companies involved in the worldwide
fragrance and ancillary consumer products markets. Most
industry market studies have shown that a product life cycle
is typically not more that three years. Our expectation was
based on that belief and on historical trends. We were
surprised by the increase in the customer orders. The apparent
increases in the business of our customers required additional
purchases of product by them. In the future, we will make
every reasonable effort for a small company to better evaluate
the needs of our clients, working with them, to more
adequately forecast our periodic sales. In the future we will
provide a comprehensive analysis of known trends and
uncertainties related to revenue, including our expectation of
the impact of maturing product lines and new operating focus
of licensing our human pheromone patents on future sales.
o Trends and uncertainties related to cash flows and liquidity.
Your gross profit margin increased to 81% in fiscal year 2004
as compared to 73% in fiscal year 2003 and your S G & A as a
percentage of net revenue decreased to 124% in fiscal year
2004 as compared to 164% in fiscal year 2003. Due to the
significance of the changes between periods presented, please
provide a comprehensive analysis of these significant trends.
For example, provide more specifics for why pheromone costs
decreased in fiscal 2004.
During late 2003, we altered sourcing arrangements to work
directly with the manufacturer, rather than going through a
third party. This resulted in a large reduction in cost of
goods and the improved gross margin. Also, profit margins
increased because of the increased sales of higher gross
margin products.
When the SGA relationship is so affected in the future, we
will provide reasons for such reduction in costs, in more
detail. Since we do not anticipate such a major increase in
net revenue in the future we would not anticipate this type of
reduction of expense as a percentage of net revenue. However,
if it recurs, we will provide a more detailed evaluation and
explanation.
o Detailed discussion and analysis regarding the trends and uncertainties
surrounding the collectibility of accounts receivable, including why
your day sales outstanding significantly increased when compared to the
prior period.
As discussed above, over 98% of our December 31, 2004 accounts
receivable was collected before our annual audit began. Our
stringent credit policies were discussed above. If we believe
there is an increase in uncertainty of collectibility of
accounts receivable, we will provide more detailed discussion.
o Detailed discussion and analysis regarding your ability to meet your
short-term and long-term cash requirements. Specifically, discuss how
you intend to generate or obtain cash (e.g., business operations, asset
sales, debt issuances, stock issuances, etc.) and how you intend to
maintain your operations.
In future discussions, we will expand the description of our
ability to meet our short-term and long-term cash
requirements. If it is determined that we need financing to
maintain operations, we will explore the options that we feel
are available to the Company, such as stock issuances.
The Company acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
o Staff comments or changes to disclosure in response to Staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under federal
securities laws of the United States.
Please acknowledge receipt of this letter by stamping the enclosed copy of
this letter and returning it in the postage-paid and return-addressed UPS
Express envelope provided.
If you have any questions regarding this response please contact me at
408-938-3030.
Very truly yours,
/s/ Gregory S. Fredrick
-----------------------
Gregory S. Fredrick
Chief Financial Officer
cc: William P. Horgan - Chairman and CEO