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, 2005
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[ ] 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
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(State or other jurisdiction of incorporation or organization) (I.R.S. employee 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: 4,151,954 shares of Common
Stock as of April 29, 2005.
1
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004 ....................................... 3
Statements of Operations (Unaudited) for the Three Months Ended
March 31, 2005 and 2004 ..................................................................................... 4
Statements of Cash Flows (Unaudited) for the Three Months Ended
March 31, 2005 and 2004 ..................................................................................... 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 ..................................................................................................... 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) 2005 2004
- ------------------------------------------------------------------------------------------------ -------- --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,095 $ 1,201
Accounts receivable, net of allowances of $5,000 at each date 72 259
Inventories, net 68 63
Other current assets 34 8
-------- --------
Total current assets 1,269 1,531
Property and equipment, net 15 17
-------- --------
$ 1,284 $ 1,548
======== ========
Liabilities, Convertible Redeemable
Preferred Stock and Shareholders' Equity
Current liabilities:
Accounts payable $ 75 $ 41
Accrued professional fees 44 58
Accrued employee benefits 37 35
Accrued sales returns 40 40
Accrued income tax 2 3
Other accrued expenses 14 18
-------- --------
Total current liabilities 212 195
-------- --------
Total liabilities
212 195
Commitments and Contingencies
Shareholders' equity:
Common stock, no par value, 13,333,333 shares authorized,
4,151,954 shares issued and outstanding at each date 20,809 20,809
Accumulated deficit (19,737) (19,456)
-------- --------
Total shareholders' equity 1,072 1,353
-------- --------
$ 1,284 $ 1,548
======== ========
<FN>
See accompanying notes to financial statements.
</FN>
3
Human Pheromone Sciences, Inc.
Statement of Operations
(unaudited)
Three months ended March 31,
----------------------------
(in thousands except per share data) 2005 2004
- --------------------------------------------------- ------- -------
Net revenue $ 126 $ 259
Cost of goods sold 41 40
------- -------
Gross profit 85 219
------- -------
Operating expenses:
Research and development 46 9
Selling, general and administrative 326 301
------- -------
Total operating expenses 372 310
------- -------
Loss from operations (287) (91)
Other income (expense):
Interest income, net 6 3
Other (expense) -- --
------- -------
Total other income 6 3
------- -------
Net loss
$ (281) $ (88)
======= =======
Net income (loss) per common share-
basic and fully diluted $ (0.07) $ (0.02)
======= =======
Weighted average common shares outstanding -
basic and fully diluted 4,152 4,105
======= =======
See accompanying notes to financial statements.
4
Human Pheromone Sciences, Inc.
Statements of Cash Flows
(unaudited)
Three months ended March 31,
----------------------------
(in thousands) 2005 2004
- ---------------------------------------------------- ------- ---------
Cash flows from operating activities
Net loss $ (281) $ (88)
Adjustments to reconcile net loss to net cash
provided or used by operating
activities:
Depreciation and amortization
2 1
Changes in operating assets and liabilities:
Accounts receivable 187 (94)
Inventories (5) 2
Other current assets (25) (24)
Accounts payable and accrued liabilities 16 (4)
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Net cash used in operating activities (106) (207)
Net cash provided by operations of assets sold -- (2)
Cash flows provided (used) in investing activities
Acquisition of property and equipment -- (6)
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Net cash used in investing activities -- (6)
Cash flows used in financing activities -- --
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Net cash used in financing -- --
------- --------
Net increase (decrease) in cash and cash equivalents (106) (215)
Cash and cash equivalents at beginning of period 1,201 1,950
------- --------
Cash and cash equivalents at end of period $ 1,095 $ 1,735
======= ========
See accompanying notes to financial statements.
5
Human Pheromone Sciences, Inc.
Notes to Financial Statements
(unaudited)
March 31, 2005
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 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 accounting principles generally
accepted in the United States of America 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, 2005 are not necessarily
indicative of the results that may be expected for the calendar year ending
December 31, 2005. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on Form 10-KSB for
the year ended December 31, 2004.
Revenue Recognition
Revenue is recorded at the time of merchandise shipment, net of
provisions for returns. The Company records revenues from sales, initiated by
sales agents, net of the sales commissions earned following the interpretative
guidance provided by FASB Emerging Issue Task Force (EITF) EITF No. 99-19
Reporting Revenue Gross as a Principal versus Net as an Agent. 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
and 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.
Inventories
Inventories are stated at the lower of cost (first in - first out
method) or market. A summary of inventories follows (in thousands):
March 31, December 31,
2005 2004
---- ----
Components (raw materials) $61 $62
Finished goods 24 18
Reserve for shrinkage and obsolescence (17) (17)
--- ---
$68 $63
=== ===
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" 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 months ended March 31, 2005
and 2004, options to purchase 140,000 and 70,000 shares of common stock,
respectively, were excluded from the computation of diluted earnings per share
since their effect would be antidilutive.
As of March 31, 2005 and 2004, the unaudited components of basic and diluted
earnings per share are as follows (all amounts are in thousands):
2005 2004
------- -------
Net income (loss) available to common shareholders $ (281) $ (88)
======= =======
Weighted-average common shares outstanding during the period 4,152 4,105
======= =======
Capital Stock and Stock Options
During the three months ended March 31, 2005 no common stock or
preferred stock was issued. During the quarter, no stock options under the 2003
Non-Employee Directors Stock Option Plan were granted, no issued options were
exercised and no stock options expired under the initial Non-Employee Directors
Stock Option Plan.
2. SEGMENT INFORMATION
Revenues by geographic markets for the three months ended March 31,
2005 and 2004 were as follows:
Three months ending
March 31,
--------------------
2005 2004
---- ----
Markets:
U.S. Markets $ 47 $218
International Markets 79 41
---- ----
Net Sales $126 $259
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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.
7
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
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 financial
statements.
Revenue Recognition
Revenue is recorded at the time of merchandise shipment, net of
provisions for returns. The Company records revenues from sales, initiated by
sales agents, net of the sales commissions earned following the interpretative
guidance provided by FASB Emerging Issue Task Force (EITF) EITF No. 99-19
Reporting Revenue Gross as a Principal versus Net as an Agent. 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
and 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
The Company is engaged in the research, development, manufacturing and
marketing of consumer products containing synthetic human pheromones and other
mood enhancing compounds. The Company initiated commercial operations in late
1994 with a line of fine fragrances and toiletries. Licensing of the Company's
technology is currently the core business of the Company while directly managing
the on-going development of identified compounds for potential new products. The
Company's patented compounds are sold to licensed customers and included as
components in their fragranced consumer products. The Company also offers
private label manufacturing services for third party consumer product licensees.
Results of Operations
Three Months ended March 31, 2005 compared to the Three Months ended March 31,
2004
Net revenue for the first quarter of 2005 was $126,000, representing a
decrease of 51% from revenues of $259,000 for the prior year's quarter. Domestic
revenues decreased $171,000, a 78% reduction, from the prior year sales of
$218,000. The Company's domestic fourth quarter 2004 sales were $360,000, a
$228,000 or 173%, increase from the 2003 fourth quarter revenues. Domestic
customers seem to have altered their historical purchasing patterns which
resulted in increased sales in the last quarter of 2004 and decreased revenues
in the current period. Since the Company is not always aware of its customer's
manufacturing and marketing plans revenue fluctuations due to the customer
schedules will occur periodically. International revenues were $38,000 greater
than the prior year due to increased sales in the Asia and Latin America
markets.
Net revenues for the quarters ended March 31, 2005 and 2004 were as
follows (in thousands):
2005 2004
-----------------------------------------------------------
Markets:
U.S Markets $ 47 $218
International Markets 79 41
---- ----
Net Sales $126 $259
==== ====
Gross profit for the quarter ended March 31, 2005 of $85,000 is 63%
less than last years $219,000. As a percentage of sales, gross profit of 67% was
less than last years of 85% due to the reduced sales of higher margin products
during the quarter. As discussed above, the sales for the quarter were less than
the previous year due to an increased demand in the fourth quarter of 2004,
resulting in reduced gross profit and a larger percentage of sales with lower
gross margins.
8
Research and Development expenses for the first quarters of 2005 and
2004 were $46,000 and $9,000, respectively. The increase of the research
expenditures was the result of the Company inaugurating operations at the
University of Utah under the Research Agreement signed July 13, 2004. The
Company is now directly managing all research and development efforts from this
facility.
Selling, general and administrative expenses for the first quarter of
2005 of $326,000 are $25,000 more than last years first quarter expenses of
$301,000. Selling, and marketing and distribution expenses were $7,000 less than
the prior year as the Company did not launch a new product line in 2005 as it
did in 2004 thereby reducing advertising and related expenses. General and
administrative and facility costs were $32,000 more in the current year's
quarter due to continued investor relations program that began in 2004 and
increased payroll costs due to less vacation time used in the current year.
The Company earned $6,000 and $3,000 in net interest income in the
three months ended March 31, 2005 and 2004, respectively. The increase is due to
the rising interest rates.
The Company recorded no income tax provision in 2005 or 2004, 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, 2005, the Company's gross
deferred tax asset, which relates primarily to net operating losses carried
forward was $6,762,000. 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, the Company had cash of $1,095,000 with no
outstanding bank borrowings and working capital of $1,057,000. At December 31,
2004, it had cash of $1,201,000 with no outstanding bank borrowings and working
capital of $1,336,000. For the first quarter of 2005, net cash used in on-going
activities was $106,000 compared to the prior years $207,000 and is the result
of collections from the higher than usual accounts receivable balance at
December 31, 2004.
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 expired
on May 3, 2005, contains certain debt-to-equity and working capital covenants.
At March 31, 2005 the Company was in compliance with all of the covenants. As of
March 31, 2005 there were no amounts outstanding under this agreement. The
Company did not renew this credit line 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.
Management has begun reviewing optional sources of cash should the operational
requirements warrant additional funding.
9
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. 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's marketing strategy may not be successful. The Company may
not be able to establish and maintain the necessary sales and distribution
channels. Consumer product and traditional fragrance companies may choose not to
license or private label the Company's products.
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 develop new patentable compounds. The
Company's success substantially depends upon developing and obtaining patents
for new mood and sensory enhancing compounds. The Company requires that its
products be scientifically tested validating the human responses to the
compounds. The Company may not be successful in validating that the desired
human responses are obtained.
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 pheromone 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.
10
PART II
OTHER INFORMATION
Item 6. Exhibits
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
11
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 12, 2005 /s/ William P. Horgan
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William P. Horgan
Chairman and Chief Executive Officer
Date: May 12, 2005 /s/ Gregory S. Fredrick
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Gregory S. Fredrick
Chief Financial Officer
12