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, 2005
[ ] 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 29, 2005. 1
HUMAN PHEROMONE SCIENCES, INC.
INDEX
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2005 (Unaudited) and December 31, 2004 ............................. 3
Statements of Operations (Unaudited) for the Three and Six Months Ended
June 30, 2005 and 2004 ........................................................................... 4
Statements of Cash Flows (Unaudited) for the Three and Six Months Ended
June 30, 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
June 30, December 31,
(in thousands except share data) 2005 2004
- --------------------------------------------------------------------------- --------- --------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 803 $ 1,201
Accounts receivable, net of allowances of $3,000 and $5,000, respectively 81 259
Inventories, net 57 63
Other current assets 35 8
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Total current assets 976 1,531
Property and equipment, net 13 17
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$ 989 $ 1,548
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Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 38 $ 41
Accrued professional fees 55 58
Accrued employee benefits 25 35
Accrued sales returns 31 40
Accrued income tax 2 3
Other accrued expenses 14 18
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Total current liabilities 165 195
-------- --------
Total liabilities 165 195
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 (19,985) (19,456)
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Total shareholders' equity 824 1,353
-------- --------
$ 989 $ 1,548
======== ========
See accompanying notes to financial statements.
3
Human Pheromone Sciences, Inc.
Statements of Operations
(unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
(in thousands except per share data) 2005 2004 2005 2004
------- ------- ------- -------
Net revenues 131 149 257 408
Cost of goods sold 17 33 58 73
------- ------- ------- -------
Gross profit 114 116 199 335
Operating Expenses:
Research and development 48 7 94 16
Selling, general and administrative 319 388 645 689
------- ------- ------- -------
Total operating expenses 367 395 739 705
------- ------- ------- -------
Loss from operations (253) (279) (540) (370)
Other income
Interest income, net 5 4 11 7
------- ------- ------- -------
Loss from on-going operations (248) (275) (529) (363)
Net gain from sale of assets -- 1 -- 1
------- ------- ------- -------
Net loss $ (248) $ (274) $ (529) $ (362)
======= ======= ======= =======
Net loss per common share - basic and fully diluted
From on-going operations $ (0.06) $ (0.07) $ (0.13) $ (0.09)
From assets sold $ (0.00) $ (0.00) $ (0.00) $ (0.00)
------- ------- ------- -------
Net loss per common share - basic and fully diluted $ (0.06) $ (0.07) $ (0.13) $ (0.09)
======= ======= ======= =======
Weighted average common shares outstanding -basic and fully diluted 4,152 4,106 4,152 4,105
======= ======= ======= =======
See accompanying notes to financial statements.
4
Human Pheromone Sciences, Inc.
Statements of Cash Flows
(unaudited)
Six months ended June 30,
-------------------------
(in thousands) 2005 2004
- -------------------------------------------------------------------------------- -------- --------
Cash flows from operating activities
Net loss from ongoing operations $ (529) $ (363)
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 178 (41)
Inventories 6 (22)
Other current assets (26) (27)
Accounts payable and accrued liabilities (31) (12)
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Net cash used in operating activities (397) (462)
------- -------
Cash flows provided by (used in) investing activities
Acquisition of property and equipment (1) (16)
Sale of Realm assets -- 1
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Net cash used in investing activities (1) (15)
Cash flows used in financing activities -- --
------- -------
Net cash used in financing activities -- --
Net decrease in cash and cash equivalents (398) (477)
Cash and cash equivalents at beginning of period 1,201 1,950
------- -------
Cash and cash equivalents at end of period $ 803 $ 1,473
======= =======
See accompanying notes to financial statements.
5
Notes to Financial Statements
(unaudited)
June 30, 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 and six months ended June 30, 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):
June 30, December 31,
2005 2004
------ -------
Components (raw materials) $ 45 $ 62
Finished goods 30 18
Reserve for shrinkage and obsolescence (18) (17)
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$ 57 $ 63
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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 six months ended June 30, 2005 and
2004, options to purchase 140,000 and 80,000 shares of common stock,
respectively, were excluded from the computation of diluted earnings per share
since their effect would be antidilutive.
As of June 30, 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 $ (529) $ (362)
====== ======
Weighted-average common shares outstanding during the
period 4,152 4,105
====== ======
Capital Stock and Stock Options
During the three months ended June 30, 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 9,999 stock options expired under the initial Non-Employee
Directors Stock Option Plan.
2. SEGMENT INFORMATION
Revenues by geographic markets for the three and six months ended June 30,
2005 and 2004 were as follows:
Three months ending Six months ending
June 30, June 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Markets:
U.S Markets $ 128 $ 132 $ 175 $ 350
International Markets 3 17 82 58
---------- ---------- ---------- ----------
Net Sales $ 131 $ 149 $ 257 $ 408
========== ========== ========== ==========
Item 2. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
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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 June 30, 2005 compared to the Three Months ended June 30,
2004
Net revenues for the second quarter of 2005 were $131,000, representing a
12% decrease from the prior year's revenues of $149,000. Domestically, revenues
were $4,000 less than the prior year, attributable to increased pheromone
reorders for the current quarter unable to offset the decreased revenues from
the Demeter Natural Attraction(R) product line. The Demeter Natural
Attraction(R) product line was launched in April 2004 and generated 36% of the
domestic revenues during the 2004 period which the Company did not expect to
maintain in 2005. Reorders revenues from existing customers were slightly better
than the previous year as the timing of the customers reorders continue to be
placed in a non-cyclical manner. International revenues were $14,000 less than
the prior year due to increased sales in the first three months of the year,
$38,000 more than the prior year.
Net revenue for the quarters ended June 30, 2004 and 2003 were as follows
(in thousands):
2005 2004
------ ------
Markets:
U.S Markets $ 128 $ 132
International Markets 3 17
------ ------
Net Sales $ 131 $ 149
====== ======
Gross profit for the quarter ended June 30, 2005 of $114,000 is 2% less
than last year's gross profit of $116,000. As a percentage of sales, gross
profit of 87% was more than last year's of 78%. The increased gross margin was
caused by a favorable sales mix of higher margin products for the current period
compared to last year's sales mix.
Research and Development expenses for the second quarters of 2005 and 2004
were $48,000 and $7,000, 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 and conducting all research and development efforts from this facility.
8
Selling, general and administrative expenses of $319,000 are $69,000 less
than last years $388,000. Selling, marketing and distribution expenses were
$61,000 less than the prior year as the Company did not spend at the same level
as in 2004 when the Company launched its Natural Attraction(R) from Demeter line
of fragrances in the U.S. marketplace. General and administrative and facility
costs decreased by $7,000, primarily as a result of a reduction in consulting
costs associated with 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 both of the
periods, respectively.
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 June 30, 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.
Six Months ended June 30, 2005 as compared to the Six Months ended June 30, 2004
Net revenues for the six months ended June 30, 2005 were $257,000. This was
a 37% decrease from net revenues of $408,000 for the first half of 2004.
Domestically, revenues were $175,000 less than the prior years $350,000. The
Company's domestic fourth quarter 2004 sales were $360,000, a $228,000, 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 $24,000 greater than the prior year
due to increased sales in the Asia and Latin America markets
Net revenues for the six months ended June 30, 2005 and 2004 were as
follows:
- ----------------------------------------- ------- -------- ------
Markets 2005 2004
- ----------------------------------------- ------- -------- ------
U.S Markets $ 175 $ 350
International Markets 82 58
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Net Revenues $ 257 $ 408
======= ======
Gross profit for the first half of 2005 decreased 41% to $199,000 from
$335,000 in 2004. The decrease is the result of the reduced sales due to the
customer ordering patterns noted above. Gross margin increased to 82% compared
to 77% in 2004 due to a favorable sales mix of higher margin products.
Research and Development expenses for the first half of 2005 and 2004 were
$94,000 and $16,000, 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 and conducting all research and development efforts from this facility.
Selling, general and administrative expenses for the first half of 2005
were $645,000 and $689,000 for the comparable period of 2004, a $44,000
reduction. Selling, marketing and distribution expenses are $68,000 less than
the prior year as the Company did not launch any new products lines in 2005 as
it did in 2004. General, administrative and facility expenses were $ 26,000 more
than last year primarily due to increased fees related to patent, audit and
consulting services.
The Company's cash balances generated $11,000 in net interest income during
the first half of 2005, as compared to $7,000 in 2004. The increase is due to
increased interest rates.
9
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2005, the Company had cash of $803,000 with no outstanding bank
borrowings and working capital of $811,000. 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 six months of 2005, net cash used in on-going
activities was $397,000 compared to the prior years $461,000 and is the result
of collections from the higher than usual accounts receivable balance at
December 31, 2004.
The Company did not renew its Business Loan Agreement with Mid-Peninsula
Bank of Palo Alto, California (the "Bank") which had been providing for a
revolving line of credit, secured primarily by the Company's trade receivables
and inventory. The agreement which expired on May 3, 2005 was never drawn upon
by the Company.
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. However,
management is reviewing additional sources of cash should the operational
requirements warrant additional funding and has hired an investment banking firm
to assist in this area.
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.
10
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
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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
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 8, 2005 /s/ William P. Horgan
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William P. Horgan
Chairman and Chief Executive Officer
Date: August 8, 2005 /s/ Gregory S. Fredrick
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Gregory S. Fredrick
Chief Financial Officer
13