10QSB 1 p17101_10qsb.txt 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, 2003 [_] 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 [_] 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, 2003. 1 HUMAN PHEROMONE SCIENCES, INC. INDEX Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of March 31, 2003 (Unaudited) and December 31, 2002 ........................................... 3 Consolidated Statements of Operations and Comprehensive Income/Loss (Unaudited) for the For the Three Months Ended March 31, 2003 and 2002 ................................... 4 Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2003 and 2002 .................. 5 Notes to Consolidated Financial Statements (Unaudited) .......... 6 Item 2. Management's Discussion and Analysis Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................... 8 Item 3. Controls and Procedures ......................................... 15 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ................................ 16 SIGNATURES ................................................................ 17 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements Human Pheromone Sciences, Inc. Consolidated Balance Sheets
March 31, December 31, (in thousands except share data) 2003 2002 -------- -------- (unaudited) Assets Current assets: Cash and cash equivalents $ 1,533 $ 1,394 Accounts receivable, net of allowances of $70,000 in 2003 and 2002 59 249 Inventories, net 107 151 Assets to be sold 491 493 Other current assets 41 10 -------- -------- Total current assets 2,231 2,297 Property and equipment, net 4 5 Product licenses 50 50 -------- -------- $ 2,285 $ 2,352 ======== ======== Liabilities, Convertible Redeemable Preferred Stock and Shareholders' Deficiency Current liabilities: Accounts payable $ 183 $ 186 Liabilities associated with assets to be sold 321 330 Accrued professional fees 32 57 Accrued vacation 42 34 Other accrued expenses 19 19 -------- -------- Total current liabilities 597 626 -------- -------- 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 (19,685) (19,581) Foreign currency translation -- (66) -------- -------- Total shareholders' deficiency (2,018) (1,980) -------- -------- $ 2,285 $ 2,352 ======== ========
See accompanying notes to consolidated financial statements. 3 Human Pheromone Sciences, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited) Three months ended March 31, ------------------- (in thousands except per share data) 2003 2002 ------- ------- Net revenue $ 218 $ 145 Cost of goods sold 65 39 ------- ------- Gross profit 153 106 ------- ------- Operating expenses: Research and development 3 80 Selling, general and administrative 263 263 ------- ------- Total operating expenses 266 343 ------- ------- Income (loss) from operations (113) (237) ------- ------- Other income (expense): Interest income (net) 3 5 Other (expense) -- -- ------- ------- Total other income 3 5 ------- ------- Income (loss) from on-going operations (110) (232) Net income from assets to be sold 72 266 ------- ------- Net income (loss) available to common shareholders (38) 34 Other comprehensive loss - translation adjustment -- -- ------- ------- Comprehensive income (loss) $ (38) $ 34 ======= ======= Net income (loss) per common share- basic From on-going operations $ (0.03) $ (0.07) From assets to be sold $ 0.02 $ 0.08 Net income (loss) $ (0.01) $ 0.01 Net income per common share-fully diluted From on-going operations $ (0.03) $ (0.04) From assets to be sold $ 0.02 $ 0.05 Net income (loss) $ (0.01) $ 0.01 Weighted average common shares outstanding 3,430 3,430 ======= Convertible redeemable preferred stock 1,706 ------- Weighted average common shares outstanding - diluted 3,430 5,136 ======= ======= See accompanying notes to consolidated financial statements. 4 Human Pheromone Sciences, Inc. Consolidated Statements of Cash Flows (unaudited) Three months ended March 31, -------------------- (in thousands) 2003 2002 ------- ------- Cash flows from operating activities Net income (loss) $ (38) $ 34 Net income from assets held for sale 72 266 ------- ------- Net loss from on-going operations (110) (232) Adjustments to reconcile net income to net cash provided or used by operating activities: Depreciation and amortization 1 1 Changes in operating assets and liabilities: Accounts receivable 34 (2) Inventories 43 (22) Other current assets (29) (53) Accounts payable and accrued liabilities (20) (4) ------- ------- Net cash used by on-going operating activities (81) (312) ------- ------- Net cash provided by assets held for sale 220 418 ------- ------- Cash flows used in investing activities -- -- Cash flows from financing activities -- -- ------- ------- Net increase in cash and cash equivalents 139 106 Cash and cash equivalents at beginning of period 1,394 1,355 ------- ------- Cash and cash equivalents at end of period $ 1,533 $ 1,461 ======= ======= See accompanying notes to consolidated financial statements. 5 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements (unaudited) March 31, 2003 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. In April 2003 the Company sold the REALM and innerREALM brands and trademarks to Niche Marketing Group, Inc. The Company will continue to license and sell its human pheromone products 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, 2003 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2003. 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, 2002. 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, 2003 consists of finished goods inventory valued at $12,000 and raw materials of $95,000. At December 31, 2002, these balances were $14,000 and $137,000, respectively. Assets to be Sold Assets to be sold primarily consist of accounts receivable, inventory and product licenses sold to Niche Marketing Group on April 14, 2003. All REALM(R) and innerREALM(R) financial activities have been classified as assets to be sold as a result of the April 14, 2003 sale. Therefore reclassifications of certain 2002 financial statement information has been made to present the operating results from on-going operations on a comparable basis. 6 License Fees The Company capitalizes license fees paid for the rights to use new pheromone discoveries. 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. Income Taxes The Company recorded no income tax provision in 2003 or 2002, 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, 2003, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,410,000. 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, 2003 and 2002 (unaudited), the components of basic and diluted earnings per share are as follows (all amounts are in thousands): 2003 2002 ------- ------- Net income (loss) available to common shareholders $ (38) $ 34 ======= ======= Weighted-average common shares outstanding during the period 3,430 3,430 Incremental shares from assumed conversions of convertible preferred stock 1,809 1,706 ------- ------- Fully diluted weighted-average common shares and potential commons stock (unaudited) 5,239 5,136 ======= ======= 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, 2003 no common or preferred stock was issued, no common stock options were granted and no issued options were exercised. 7 Recent Accounting Pronouncements 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. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost, as defined, was recognized at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002 with earlier application encouraged. The Company does not expect adoption of SFAS No. 146 to have a material impact, if any, on its financial position or results of operations. In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 removes the requirement in SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. This statement requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. In addition, this statement amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include certain financial institution-related intangible assets. This statement is not applicable to the Company. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. This statement is effective for financial statements for fiscal years ending after December 15, 2002. SFAS No. 148 will not have any impact on the Company's financial statements as management does not have any intention to change to the fair value method. 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. 8 Risk Factors The Company's future results may be affected to a greater or lesser degree by the following factors among others: The Company has not had sustained profitable operations since 1997. Since 1997, the Company has incurred losses from operations. However, effective May 1, 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 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 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. Competition from 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 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. 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. 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 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. 9 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 its 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. On April 14, 2003, the Company sold to Niche Marking Group, Inc. the assets and worldwide ownership rights to the REALM Women, REALM Men and innerREALM product lines. The Company will continue to focus operations on the marketing of its patented technology to companies with established consumer product franchises while directly managing the on-going development of identified compounds for potential new products. All REALM(R) and innerREALM(R) financial activities have been classified as assets to be sold as a result of the April 14, 2003 sale. Therefore reclassifications of certain 2002 financial statement information has been made to present the operating results from on-going operations on a comparable basis. Three Months ended March 31, 2003 compared to the Three Months ended March 31, 2002 Net sales and revenues for the first quarter of 2003 were $218,000, representing an increase of 50% from sales of $145,000 for the prior year's quarter. The $103,000, or 104%, increase in license and supply revenues, from customers utilizing the Company's technology as a components in their consumer products, was the result of strong orders from established product lines. There were not any sales of the Natural Attraction(R) products to the international market as we were in the process of changing the bottles used for the line. We will begin shipments with the new bottles in the second quarter. Net sales for the quarters ended March 31, 2003 and 2002 were as follows (in thousands). 2003 2002 ---- ---- Markets: License and Supply Revenues $202 $ 99 U.S. Retail & Distributor Markets 16 10 International Markets -- 36 ---- ---- Net Sales $218 $145 ==== ==== Gross profit for the quarter ended March 31, 2003 of $153,000 is 44% higher than last years $106,000. As a percentage of sales, gross profit of 70% was less than last years of 73% due to the lower product sales to the international market. Research and Development expenses for the first quarters of 2003 and 2002 were $3,000 and $80,000, respectively. As part of the Company's desire to directly control all future research and development work the Company terminated its relationships with its primary consultants in October 2002. The Company incurred very minimal expenses in the first quarter of 2003 since its independent research and development operations had not commenced. Selling, general and administrative expenses of $263,000 were consistent with last years first quarter expenses of $263,000. Selling, and marketing and distribution expenses were $10,000 less than the prior year as a result of decreased sales activities in the Southeast Asia markets. General and administrative and facility costs were $10,000 more in the current year's quarter primarily as a result of general cost increases since last year. 10 The Company earned $3,000 in net interest income in the current year quarter and earned $5,000 in net interest income during the first quarter of 2002. The decrease is due to lower interest rates. The Company recorded no income tax provision in 2003 or 2002, 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, 2003, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,410,000. 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 April 14, 2003 the Company sold to Niche Marking Group, Inc. the assets and worldwide ownership rights to the REALM Women, REALM Men and innerREALM product lines. The operating results form the assets sold have been classified as assets to be sold and accounted for as a separate line item on the financial statements. For the quarter ending March 31, 2003 income from the assets to be sold was $72,000 which is less than last years $266,000. The reduction was primarily due to no shipments to the international markets this year as economic conditions in the far East have not improved. LIQUIDITY At March 31, 2003, the Company had cash of $1,533,000 with no outstanding bank borrowings and working capital of $1,634,000; at December 31, 2002, it had cash of $1,394,000 with no outstanding bank borrowings and working capital of $1,671,000. For the first quarter of 2003, net cash provided from all activities was $139,000. For the first quarter of 2002, net cash provided from all activities was $106,000. 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 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. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost, as defined, was recognized at the date of an entity's commitment to an exit plan. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002 with earlier application encouraged. The Company does not expect adoption of SFAS No. 146 to have a material impact, if any, on its financial position or results of operations. In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS No. 147 removes the requirement in SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. This statement requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. In addition, this statement amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include certain financial institution-related intangible assets. This statement is not applicable to the Company. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - 11 Transition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. This statement is effective for financial statements for fiscal years ending after December 15, 2002. SFAS No. 148 will not have any impact on the Company's financial statements as management does not have any intention to change to the fair value method. 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 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. Subsequent Event On April 14, 2003 the Company sold to Niche Marketing the assets and worldwide ownership rights to the REALM(R) Women, REALM(R) Men and inner REALM(R) product lines. Included in the sale were all trademarks, trade names, trade dress, goodwill and inventory. The following pro forma balance sheet and income statement presents the effect that the sale of REALM(R) Women, REALM(R) Men and inner REALM(R) product line would have had on the Company's March 31, 2003 operating results and on the balance sheet had the transaction been completed during the current period. 12 Human Pheromone Sciences, Inc. Consolidated Balance Sheet - Pro Forma March 31, 2003
As Pro Forma (in thousands except share data) reported Adjustments balance -------- ----------- ------- Assets Current assets: Cash and cash equivalents $ 1,533 $ 1,291 $ 2,824 Accounts receivable, net of allowances of $70 59 186 245 Inventory, net 107 -- 107 Assets of discontinued operations 491 (491) -- Other current assets 41 -- 41 -------- -------- -------- Total current assets 2,231 986 3,217 Property and equipment, net 4 -- 4 Product licenses 50 -- 50 -------- -------- -------- $ 2,285 $ 986 $ 3,271 ======== ======== ======== Liabilities, Convertible Redeemable Preferred Stock and Shareholders' Deficiency Current liabilities: Accounts payable $ 183 $ $ 183 Liabilities for discontinued operations 321 (321) -- Accrued income taxes -- 122 122 Accrued professional fees 32 -- 32 Accrued vacation 42 -- 42 Other accrued expenses 19 -- 19 -------- -------- -------- Total current liabilities 597 (199) 398 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, total liquidation value $2,150; 2,146 -- 2,146 Series BB 17,448 convertible shares issued and outstanding, 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 17,667 -- 17,667 Accumulated deficit (19,685) 1,185 (18,500) -------- -------- -------- Total shareholders' deficiency (2,018) 1,185 (833) -------- -------- -------- $ 2,285 $ 986 $ 3,271 ======== ======== ========
13 Human Pheromone Sciences, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) - Pro Forma Three months ending March 31, 2003
As Pro Forma (in thousands except per share data) reported Adjustments balance -------- ----------- ------- Net revenue, including license fees of $463 $ 218 $ -- $ 218 Cost of goods sold 65 -- 65 ------- ------- ------- Gross profit 153 -- 153 ------- ------- ------- Operating expenses: Research and development 3 -- 3 Selling, general and administrative 263 -- 263 ------- ------- ------- Total operating expenses 266 -- 266 ------- ------- ------- Loss from operations (113) -- (113) ------- ------- ------- Other (expense) income Interest income (expense) 3 -- 3 Other (expense) -- -- -- ------- ------- ------- Total other income (expense) 3 -- 3 ------- ------- ------- Net loss from on-going operations (110) -- (110) Net income and net gain assets to be sold 72 1,185 1,257 ------- ------- ------- Net income (loss) available to common shareholders $ (38) $ 1,185 $ 1,147 ======= ======= ======= Net (loss) per common share-basic From on-going operations $ (0.03) $ -- $ (0.03) From discontinued operations $ 0.02 $ 0.35 $ 0.37 Net income (loss) $ (0.01) $ 0.35 $ 0.34 Net (loss) per common share-fully diluted From continuing operations $ (0.02) From discontinued operations $ 0.24 Net income (loss) $ 0.22 Weighted average common shares outstanding - basic 3,430 3,430 ======= ======= Weighted average common shares outstanding - fully diluted 5,136 =======
14 Item 3. Controls and Procedures Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. In addition, we reviewed our internal controls, and there have been no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation. 15 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - None Exhibit 99.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to U.S.C. 1350 16 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 13, 2003 /s/ William P. Horgan ------------------------------------ William P. Horgan Chairman and Chief Executive Officer Date: May 13, 2003 /s/ Gregory S. Fredrick ------------------------------------ Gregory S. Fredrick Vice President Finance 17 CERTIFICATIONS I , William P. Horgan, certify that: 1.I have reviewed this quarterly report on Form 10-QSB of Human Pheromone Sciences, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities , particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ William P. Horgan --------------------- Chairman and Chief Executive Officer 18 I, Gregory S. Fredrick, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Human Pheromone Sciences, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ Gregory S. Fredrick ------------------------ Chief Financial Officer 19