10QSB 1 p15444_10qsb.txt SMALL BUSINESS QUARTERLY REPORT U.S. 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 quarter ended March 31, 2002 -------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required) 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 incorporation or organization) Identification No.) 84 West Santa Clara Street, San Jose, California 95113 ------------------------------------------------ ------------------- (Address of principal executive offices) (Zip code) Issuer's telephone number: (408) 938-3030 ----------------------------------------------------- (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 [ ] (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 3,429,839 shares of Common Stock as of May 3, 2002. HUMAN PHEROMONE SCIENCES, INC. INDEX
Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and December 31, 2001...........................................................................4 Consolidated Statements of Operations and Comprehensive Income /Loss (Unaudited) for the For the Three Months Ended March 31, 2002 and 2001.........................................................................5 Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2002 and 2001...................................................................6 Notes to Consolidated Financial Statements (Unaudited)..........................................7 Item 2. Management's Discussion and Analysis Management's Discussion and Analysis of Financial Condition and Results of Operations..........10 Item 3. Quantitative and Qualitative Disclosures about Market Risk......................................14 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ..............................................................15 SIGNATURES.......................................................................................................16
2 PART I FINANCIAL INFORMATION Item 1. Financial Statements 3 Human Pheromone Sciences, Inc. Consolidated Balance Sheets
March 31, December 31, (in thousands except share data) 2002 2001 ---------------------------------------------------------------------- -------- -------- (unaudited) Assets Current assets: Cash and cash equivalents $ 1,461 $ 1,355 Accounts receivable, net of allowances of $6,000 and $6,000 in 2002 and 2001, respectively 382 803 Inventories 406 378 Other current assets 195 31 -------- -------- Total current assets 2,444 2,567 Property and equipment, net 7 8 Product licenses 204 50 -------- -------- $ 2,655 $ 2,625 ======== ======== Liabilities, Convertible Redeemable Preferred Stock and Shareholders' Deficiency Current liabilities: Accounts payable $ 250 $ 230 Deferred income 315 315 Accrued professional fees 26 53 Accrued vacation 35 32 Accrued sales returns 44 44 Other accrued expenses 14 14 -------- -------- Total current liabilities 684 688 -------- -------- Commitments and Contingencies Convertible redeemable preferred stock: Preferred stock, issuable in series, no par value, 10,000,000 shares authorized, Series AA 1,433,333 convertible shares issued and outstanding at each date (total liquidation value $2,150) 2,146 2,146 Series BB 17,448 convertible shares issued and outstanding at each date (total liquidation value $1,745) 1,560 1,560 -------- -------- Total convertible redeemable preferred stock 3,706 3,706 -------- -------- Shareholders' deficiency: Common stock, no par value, 13,333,333 shares authorized, 3,429,839 shares issued and outstanding at each date 17,667 17,667 Accumulated deficit (19,334) (19,368) Foreign currency translation (68) (68) -------- -------- Total shareholders' deficiency (1,735) (1,769) -------- -------- $ 2,655 $ 2,625 ======== ========
See accompanying notes to consolidated financial statements. 4 Human Pheromone Sciences, Inc. Consolidated Statements of Operations and Comprehensive Income (unaudited)
Three months ended March 31, ---------------------------- (in thousands except per share data) 2002 2001 ----------------------------------------------------- ------- ------- Net revenue $ 642 $ 629 Cost of goods sold 237 226 ------- ------- Gross profit 405 403 ------- ------- Operating expenses: Research and development 80 85 Selling, general and administrative 291 295 ------- ------- Total operating expenses 371 380 ------- ------- Income from operations 34 23 ------- ------- Other income (expense): Interest income (net) 6 8 Amortization of intangibles (6) -- Other (expense) -- (1) ------- ------- Total other income -- 7 ------- ------- Net income available to common shareholders 34 30 Other comprehensive loss - translation adjustment -- (3) ------- ------- Comprehensive income $ 34 $ 27 ======= ======= Net income per common share-basic and fully diluted $ 0.01 $ 0.01 ======= ======= Weighted average common shares outstanding 3,430 3,430 Convertible redeemable preferred stock 1,706 1,604 ------- ------- Weighted average common shares outstanding - diluted 5,136 5,034 ======= =======
See accompanying notes to consolidated financial statements. 5 Human Pheromone Sciences, Inc. Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, ---------------------------- (in thousands) 2002 2001 -------------------------------------------------------- ------- ------- Cash flows from operating activities Net income $ 34 $ 30 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7 3 Changes in operating assets and liabilities: Accounts receivable 421 97 Inventories (28) 6 Other current assets (164) (82) Accounts payable and accrued liabilities (4) (21) ------- ------- Net cash provided by operating activities 266 33 ------- ------- Cash flows used in investing activities Acquisition of licenses (160) -- ------- ------- Cash flows from financing activities Proceeds from bank borrowings -- -- Repayment of bank borrowings -- -- Proceeds from issuance of convertible preferred -- -- stock ------- ------- Net cash provided by financing activities -- -- ------- ------- Effect of exchange rate changes on cash -- (3) ------- ------- Net increase in cash and cash equivalents 106 30 Cash and cash equivalents at beginning of period 1,355 982 ------- ------- Cash and cash equivalents at end of period $ 1,461 $ 1,012 ======= =======
See accompanying notes to consolidated financial statements. 6 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements (unaudited) March 31, 2002 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 fragrance products through department and specialty stores across the United States and selected international markets to Niche Marketing, Inc. The Company currently sells its REALM fragrance lines through distributors in selected markets in South East Asia, and licenses and sells its human pheromones for inclusion in other companies products in exchange for supply revenues and/or royalties. Basis of Presentation The accompanying unaudited consolidated 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 months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2002. 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, 2001. 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 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 March 31, 2002 consists of finished goods inventory valued at $108,000, work in process of $35,000, and raw materials of $263,000. At December 31, 2001, these balances were $119,000, $36,000 and $223,000, respectively. License Fees The Company capitalizes license fees paid for the rights to use new pheromone discoveries, and rights for additional REALM and innerREALM sales territories. License agreements that have a finite useful life are amortized using the straight-line method over the life of the agreement. License agreements for pheromones and products that are not yet for available for sale are not subject to amortization in accordance with Statement of Financial Accounting Standards No. 142: Goodwill and Other Intangible Assets. 7 The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated value of the license agreements may not be recoverable. When factors indicate that the value license may be impaired, the Company estimates the remaining value and reduces the license agreement to that amount. Income Taxes The Company recorded no income tax provision in 2002 or 2001, 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, 2002, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,183,000. 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. Earnings Per Share The Company calculates earnings (loss) per share in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaced the presentation of primary and fully diluted earnings per share with the presentation of basic and diluted earnings per share. Basic earnings per share excludes dilution and is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the potential dilutive effects that could occur if securities or other contracts to issue common stock were exercised or converted into common stock ("potential common stock") that would then share in the earnings of the Company. As of March 31, 2002 and 2001(unaudited), the components of basic and diluted earnings per share are as follows (all amounts are in thousands):
2002 2001 ------ ------ Net income available to common shareholders $ 34 $ 30 ====== ====== Weighted-average common shares outstanding during the period 3,430 3,430 Incremental shares from assumed conversions of convertible preferred stock 1,706 1,604 ------ ------ Fully diluted weighted-average common shares and potential commons stock (unaudited) 5,136 5,034 ====== ======
Capital Stock and Stock Options Outstanding options to purchase shares of common stock and potential common shares issuable upon conversion of preferred stock are excluded from the computation of diluted earnings per share since when the average stock price for the period is less than the exercise price of outstanding options or when their effect would be antidilutive. During the three months ended March 31, 2002 no common or preferred stock was issued, no common stock options were granted and no issued options were exercised. 8 Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of long-lived assets, except for certain obligations of lessees. This statement is not applicable to the Company. In July 2001, the FASB issued SFAS NO. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Bulleting ("ABP") Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Pre-Acquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this statement are to be accounted for using one method, the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method for those business combinations is prohibited. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. This statement is not applicable to the Company. In July 2001, the FASB issued SFAS No, 142, Goodwill and Other Intangible Assets. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. It is effective for fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not been issued previously. This statement was not applicable to the Company in 2001, and has been adopted for 2002. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the accounting and reporting provisions of APB No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business, and amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The adoption of SFAS No. 144 has not had a material impact, if any, on its financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 updates, clarifies, and simplifies existing accounting pronouncements. This statement rescinds SFAS No. 4, which required all gains and losses from extinguishments of debt to be aggregated and if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-lease transactions. This statement also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. This statement is not applicable to the Company. 2. RELATED PARTY TRANSACTION On March 1, 2002, the Company renewed a research and development agreement with Pherin Pharmaceuticals Corporation ("Pherin"), a company related by common shareholders, whereby Pherin supplies HPS with its required synthesized human pheromones and also provides to HPS research and development and scientific public relations services. This renewal has been extended to expire on February 28, 2003. The total expense incurred pursuant to the Company's research and development agreement with Pherin during the three months ended March 31, 2002 and 2001 was $60,000 in each year. 9 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. Risk Factors The Company's future results may be affected to a greater or lesser degree by the following factors among others: During the three months ended March 31, 2002, the Company has sustained its fourth quarterly operating profit during the last five quarters. Effective May 1, 2000, the Company refocused its business model based on product licensing agreements and recorded its first quarterly operating profit since 1997 on March 31, 2001. While the Company has returned to profitable operations there is no assurance that the Company's license based business model will be successful. The Company and/or Niche 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 and 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 a fragrance 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 REALM and innerREALM 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 Company's products. The Company or its distributors may not have sufficient funds to successfully market its products if the current marketing strategy is not successful. The current retail environment may cause pricing and promotional pressures. Five companies control the majority of the sales in the U. S. department store arena. Because of their market share, each company will have significant power to determine the price and promotional terms that the Company and its distributor/licensee, Niche, must meet in order to sell its products in the department stores. Upper end department stores face increasing competition by discount perfumeries, drug chains and lower priced department stores for sales of fragrances and cosmetics. To compete, upper end department stores have cut inventories, reduced co-op advertising, and increased promotions. These tactics may force the Company or its distributors to reduce its prices or increase the cost of its promotions. 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 quarterly operating results. 10 The Company 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 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 relies upon Pherin and other companies to manufacture its pheromones, supply components, and to blend, fill and package its fragrance products. The Company may not be able to obtain or retain pheromone manufacturers, fragrance suppliers, or component manufacturers on acceptable terms. If not, the Company may not be able to obtain commercial quantities of its products. This would adversely affect operating results. Results of Operations On April 24, 2000, the Company signed a multi-year licensing agreement for its REALM and innerREALM fragrance and toiletry products with Niche Marketing, Inc. ("Niche"), a newly formed affiliate of Northern Brands, Inc. Under the agreement, Niche will be responsible for the manufacture, marketing, selling and distribution of the REALM and innerREALM products in the United States and Internationally, excluding the Far East. Niche purchased the Company's applicable inventories and pays a royalty, with annual minimums, on sales of the current products and line extensions under the REALM and innerREALM brand names. During the term of the agreement, HPS will also sell Niche the pheromone components required for the manufacture of the products. Prior to this agreement, the Company recorded in is financial statements the revenues, costs and expenses directly attributable to the product sales to the U.S. Department stores and held the inventories, recorded the accounts receivable and reflected the accounts payable/accrued expenses attributable to the department store business. On March 8, 2002 the company reacquired from Niche Marketing, Inc. the rights to additional international territories. Three Months ended March 31, 2002 compared to the Three Months ended March 31, 2001 Net sales and revenues for the first quarter of 2002 were $642,000, representing an increase of 2% from sales of $629,000 for the prior year's quarter. The $118,000, or 39%, increase in sales to International markets in the current period is a result of the Company's focus on building its REALM business in Southeast Asia. License and pheromone revenues decreased by 36% to $204,000. for the quarter. This decrease was expected as none of the current licensees have introduced new products containing the patented pheromones, and no new licenses were signed during the quarter. Net sales for the quarters ended March 31, 2002 and 2001 were as follows (in thousands). 2002 2001 ---------------------------------------------------------- Markets: International Markets $422 $304 License and Supply Revenues 204 317 U.S. Retail & Distributor Markets 16 8 ---- ---- Net Sales $642 629 ==== ==== Gross profit for the quarter ended March 31, 2002 of $405,000 is comparable to last years $403,000. As a percentage of sales, gross profit of 63% was also comparable with last year of 64%. 11 Research and Development expenses for the first quarters of 2002 and 2001 were $80,000 and $85,000, respectively. These costs principally reflect payments and costs under the Company's consulting agreements in this area. Selling, general and administrative expenses of $291,000 were consistent with last years first quarter expenses of $295,000. Selling, and marketing and distribution expenses were $17,000 more than the prior year as a result of increased sales activities in the Southeast Asia markets. General and administrative and facility costs were $21,000 lower in the current year's quarter primarily as a result of cost reduction efforts initiated since last year. The Company earned $6,000 in net interest income in the current year quarter and earned $8,000 in net interest income during the first quarter of 2001. The decrease is due to reduced interest rates. The fee paid to reacquire the Realm and innerRealm rights for international territories from Niche Marketing, Inc. is being amortized over the remaining term of the license agreement. The Company recorded no income tax provision in 2002 or 2001, 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, 2002, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,183,000. 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. On March 8, 2002, the Company and Niche Marketing, Inc. entered into an Amendment to the License Agreement and a Settlement Agreement under which the Company regained the rights to manufacture Realm products for sale to its Southeast Asia Distributors, repurchased the rights to sell Realm products in an Asian market previously licensed to Niche, released Niche from its obligation to manufacture REALM products for sale to the Company and withdrew a breach of contract notice against Niche in connection with Niche's failure to deliver product. In addition, Niche agreed to be responsible for any product returns or requests for credit for destroyed products by department stores. The Company recorded the license fee paid to Niche Marketing as a non-current asset and is amortizing the cost over the remaining life of the license with Niche Marketing. LIQUIDITY At March 31, 2002, the Company had cash of $1,461,000 with no outstanding bank borrowings and working capital of $1,760,000; at March 31, 2001, it had cash of $1,012,000 with no outstanding bank borrowings and working capital of $1,946,000. For the first quarter of 2002, net cash generated from operating activities was $266,000. For the first quarter of 2001, net cash generated from operating activities was $33,000. 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. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of long-lived assets, except for certain obligations of lessees. This statement is not applicable to the Company. In July 2001, the FASB issued SFAS NO. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Bulleting ("ABP") Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Pre-Acquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this statement are to be accounted for using one method, the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method for those business combinations is prohibited. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. This statement is not applicable to the Company. 12 In July 2001, the FASB issued SFAS No, 142, Goodwill and Other Intangible Assets. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. It is effective for fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not been issued previously. This statement was not applicable to the Company in 2001, and has been adopted for 2002. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the accounting and reporting provisions of APB No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business, and amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The adoption of SFAS No. 144 has not had a material impact, if any, on its financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 updates, clarifies, and simplifies existing accounting pronouncements. This statement rescinds SFAS No. 4, which required all gains and losses from extinguishments of debt to be aggregated and if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-lease transactions. This statement also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. This statement is not applicable to the Company. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial conditions and results of operations are based upon our consolidated 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 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 judgements. 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. 101. The majority of the Company's sales are to distributors and licensees, and these distributors and licensees have no right to return products. License Fees The Company capitalizes license fees paid for the rights to use new pheromone discoveries, and rights for additional REALM and innerREALM sales territories. License agreements that have a finite useful life are 13 amortized using the straight-line method over the life of the agreement. License agreements for pheromones and products that are not yet for available for sale are not subject to amortization in accordance with Statement of Financial Accounting Standards No. 142: Goodwill and Other Intangible Assets. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated value of the license agreements may not be recoverable. When factors indicate that the value license may be impaired, the Company estimates the remaining value and reduces the license agreement to that amount. Item 3A. Quantitative and Qualitative Disclosures about Market Risk Foreign Currency Exchange Risk. All of the Company's sales are denominated in U.S. dollars, and as a result the Company has little exposure to foreign currency exchange risk. The effect of an immediate 10% change in exchange rates would not have a material impact on the Company's future operating results or cash flows. 14 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - None Exhibit 10.25 Admendment to License and Purchase Agreement with Niche Marketing, Inc. dated March 8, 2002. 15 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. Registrant Date: May 10, 2002 /s/ William P. Horgan --------------------------------- ------------------------------------ William P. Horgan Chairman and Chief Executive Officer Date: May 10, 2002 /s/ Gregory S. Fredrick ------------------------------------ Gregory S. Fredrick Vice President Finance 16