10QSB 1 p18983_10-qsb.txt QUARTERLY REPORT 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 September 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 Identification No.) incorporation or organization) 84 West Santa Clara Street, San Jose, California 95113 ------------------------------------------------- -------------- (Address of principal executive offices) (Zip code) Issuer's telephone number: (408) 938-3030 Not applicable ------------------------------------------------------- (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 October 27, 2004. HUMAN PHEROMONE SCIENCES, INC. INDEX Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets as of September 30, 2004 (Unaudited) and December 31, 2003 ............................3 Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2004 and 2003 .....................4 Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2004 and 2003 .....................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 and Reports on Form 8-K ............................12 SIGNATURES ...................................................................13 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements Human Pheromone Sciences, Inc. Balance Sheets
September 30, December 31, (in thousands except share data) 2004 2003 -------------------------------- -------- -------- (unaudited) Assets Current assets: Cash and cash equivalents $ 1,363 $ 1,950 Accounts receivable, net of allowances of $6,000 and $4,000, respectively 93 38 Inventories, net 83 52 Other current assets 44 19 -------- -------- Total current assets 1,583 2,059 Property and equipment, net 20 9 -------- -------- $ 1,603 $ 2,068 ======== ======== Liabilities, Convertible Redeemable Preferred Stock and Shareholders' Equity Current liabilities: Accounts payable $ 66 $ 23 Accrued professional fees 48 54 Accrued employee benefits 34 39 Accrued income tax 2 24 Other accrued expenses 30 33 -------- -------- Total current liabilities 180 173 -------- -------- Convertible redeemable preferred stock: Preferred stock, issuable in series, no par value, 10,000,000 shares authorized, Series AA 100,000 convertible shares issued and outstanding at December 31, 2003 (total liquidation value $150); none at September 30, 2004 -- 150 -------- -------- Total liabilities 180 323 Commitments and Contingencies Shareholders' equity: Common stock, no par value, 13,333,333 shares authorized, 4,151,954 and 4,105,116 shares issued and outstanding at each date, respectively 20,809 20,659 Accumulated deficit (19,386) (18,914) -------- -------- Total shareholders' equity 1,423 1,745 -------- -------- $ 1,603 $ 2,068 ======== ======== See accompanying notes to financial statements.
3 Human Pheromone Sciences, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
Three months ended Nine months ended -------------------- ----------------- September 30, September 30, (in thousands except per share data) 2004 2003 2004 2003 -------------- --------------- -------------- --------------- Net revenues 300 227 708 506 Cost of goods sold 44 73 117 157 -------------- --------------- -------------- --------------- Gross profit 256 154 591 349 Operating Expenses: Research and development 27 11 43 18 Selling, general and administrative 364 276 1,053 803 -------------- --------------- -------------- --------------- Total operating expenses 391 287 1,096 821 -------------- --------------- -------------- --------------- Loss from operations (135) (133) (505) (472) Other income Interest income (net) 5 4 12 12 Other income (expense) (1) 20 (1) 20 -------------- --------------- -------------- --------------- Total other income and (expense) 4 24 11 32 Income tax benefit from on-going operations -- 1 -- 34 -------------- --------------- -------------- --------------- Loss from on-going operations (131) (108) (494) (406) Net income from discontinued operations -- -- -- 79 Net gain from sale of assets 21 (8) 22 1,218 -------------- --------------- -------------- --------------- Net income (loss) $ (110) $ (116) $ (472) $ 891 ============== =============== ============== =============== Net income (loss) per common share - basic From on-going operations $ (0.03) $ (0.03) $ (0.12) $ (0.11) From discontinued operations $ 0.00 $ 0.00 $ 0.00 $ 0.02 From assets sold $ 0.01 $ 0.00 $ 0.01 $ 0.33 -------------- --------------- -------------- --------------- Net income (loss) $ (0.02) $ (0.03) $ (0.11) $ 0.24 ============== =============== ============== =============== Net income (loss) per common share - diluted From on-going operations $ (0.03) $ (0.03) $ (0.12) $ (0.09) From discontinued operations $ 0.00 0.00 0.00 0.02 From assets sold $ 0.01 $ 0.00 $ 0.01 $ 0.26 -------------- --------------- -------------- --------------- Net income (loss) $ (0.02) $ (0.03) $ (0.11) $ 0.19 ============== =============== ============== =============== Weighted average common shares outstanding -basic 4,152 4,028 4,121 3,717 ============== =============== ============== =============== Weighted average common shares outstanding -diluted 4,152 4,028 4,121 4,731 ============== =============== ============== =============== See accompanying notes to consolidated financial statements.
4 Human Pheromone Sciences, Inc. Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, ---------------------- (in thousands) 2004 2003 -------------- ---- ---- Cash flows from operating activities Net (loss) from on-going operations $ (494) $ (406) 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 (55) (165) Inventories (31) 82 Other current assets (25) (35) Accounts payable and accrued liabilities 28 (92) Deferred revenue 3 ------- ------- Net cash used in on-going operating activities (572) (610) ------- ------- Net cash provided by operations of assets sold 1 153 ------- ------- Net cash used in operating activities (571) (457) Cash flows provided by (used in) investing activities Sale of Realm assets -- 1,435 Acquisition of fixed assets (16) (7) ------- ------- Net cash provided by (used in) investing activities (16) 1,428 Cash flows used in financing activities Purchase of Series BB preferred stock -- (505) ------- ------- Net cash used in financing activities -- (505) Net increase (decrease) in cash and cash equivalents (587) 466 Cash and cash equivalents at beginning of period 1,950 1,394 ------- ------- Cash and cash equivalents at end of period $ 1,363 $ 1,860 ======= ======= See accompanying notes to financial statements. 5 Human Pheromone Sciences, Inc. Notes to Financial Statements (unaudited) September 30, 2004 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 with 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 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 and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2004. 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, 2003. 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 potential 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 September 30, 2004 consists of finished goods inventory valued at $13,000 and raw materials of $70,000. At December 31, 2003, these balances were $13,000 and $39,000, respectively. Earnings (Loss) Per Share The Company follows the provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 provides for the calculation of "Basic" and Diluted" earnings per share. Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted-average number of common shares and dilutive common shares outstanding during the period. For the three and nine months ended September 30, 2004, options to purchase 140,001 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive. As of September 30, 2004 and 2003, the unaudited components of basic and diluted earnings per share are as follows (all amounts are in thousands): 6
2004 2003 ----------- ----------- Net income (loss) available to common shareholders $ (472) $ 891 =========== =========== Weighted-average common shares outstanding during the period 4,105 3,717 Incremental shares from assumed conversions of convertible preferred stock and stock options -- 1,014 ----------- ----------- Fully diluted weighted-average common shares and potential common stock (unaudited) 4,105 4,731 =========== ===========
Capital Stock and Stock Options During the three months ended September 30, 2004 no common stock or preferred stock was issued. During the quarter options to purchase 60,000 shares of common stock under the 2003 Non-Employee Directors Stock Option Plan were granted, no issued options were exercised and 8,333 stock options expired under the initial Non-Employee Directors Stock Option Plan. 2. SEGMENT INFORMATION Revenues by geographic markets for the three and nine months ended September 30, 2004 and 2003 were as follows: Three months ending Nine months ending September 30, September 30, ------------------------ ------------------------ 2004 2003 2004 2003 ----------- ----------- ----------- ----------- Markets: U.S. Markets $ 278 $ 204 $ 628 $ 482 International Markets 22 23 80 24 ----------- ----------- ----------- ----------- Net Sales $ 300 $ 227 $ 708 $ 506 =========== =========== =========== =========== 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. 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 7 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 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. 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 On April 14, 2003, the Company sold to Niche Marking Group, Inc. the assets and worldwide ownership rights to the REALM(R) Women, REALM Men and innerREALM(R) product lines. All REALM and innerREALM financial activities have been classified as income from operations sold as a result of 2003 sale. The Company's operations are focused 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. On July 13, 2004 the Company signed a Research Agreement with the University of Utah to conduct research and provide services. The five year agreement, which became effective July 15, 2004, provides that the University will provide professional research and services for specific research programs mutually initiated by the Company and accepted by the University. While the University shall own any inventions and improvements conceived or reduced to practice from the work performed, the Company retains the exclusive option to license any inventions or improvements conceived or reduced to practice and market the products developed from the research results. Results of Operations Three Months ended September 30, 2004 compared to the Three Months ended September 30, 2003 Net revenues for the third quarter of 2004 were $300,000, representing an increase of 33% from revenues of $227,000 for the prior year's quarter. Domestically, revenues were $74,000 greater than the prior year, attributable to the Demeter Natural Attraction(R) product line which was launched in the second quarter of the current year and pheromone sales with a 20% increase over last years third quarter sales. International revenues were consistent with the prior year and represents sales for both our Natural Attraction products and private label manufacturing for a new licensee. The international revenues is attributable to both new and existing customers with an increasing private label preference. Net revenues for the quarters ended September 30, 2004 and 2003 were as follows (in thousands): 2004 2003 ---- ---- Markets: U.S Markets $ 278 $ 204 International Markets 22 23 ---------- ---------- Net Revenue $ 300 $ 227 ========== ========== Gross profit for the quarter ended September 30, 2004 of $256,000 is 66% higher than last year's gross profit of $154,000. As a percentage of sales, gross profit of 85% was more than last year's of 68% due to lower product costs realized in the current period. Research and Development expenses for the third quarters of 2004 and 2003 were $27,000 and $11,000, respectively. The Company began research activities during the current year quarter based on the July 15, 2004 Research Agreement with the University of Utah. 8 Selling, general and administrative expenses of $364,000 are $88,000 more than last years $276,000. Selling, marketing and distribution expenses were $53,000 more than the prior year as the Company incurred marketing and sales promotion expenses for the Natural Attraction(R) from Demeter line of fragrances in the U.S. marketplace which was launched in the second quarter of this year. General and administrative and facility costs increased by $35,000, primarily as a result of 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 each of the periods, respectively. The Company recorded no income tax provision in 2004 and an income tax benefit for 2003. No provision was recorded in 2004 due 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 September 30, 2004, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,506,000. However, a full valuation allowance is provided for the gross deferred tax asset as management can 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 from these product lines have been classified as net income from operations sold and accounted for as a separate line item on the financial statements. Nine Months ended September 30, 2004 as compared to the Nine Months ended September 30, 2003 Net revenues for the nine months ended September 30, 2004 were $708,000. This was a 40% increase from net revenues of $506,000 for the nine months of 2003. Domestically, revenues were $146,000 greater than the prior year with the launch of the Natural Attraction(R) from Demeter product line, an increase in pheromone sales, somewhat offset by lower sales of the original Natural Attraction products. International revenues were $56,000 greater than the prior year as a result of higher sales to distributors of private label products containing human pheromones. Net revenues for the nine months ended September 30, 2004 and 2003 were as follows: Markets 2004 2003 ------- ---- ---- U.S Markets $ 628 $ 482 International Markets 80 24 ---------- ---------- Net Revenues $ 708 $ 506 ========== ========== Gross profit for the first nine months of 2004 increased 69% to $591,000 from $349,000 in 2003. The increase is the result of the higher sales levels, a favorable sales mix and reduced product costs. Gross margin increased to 83% compared to 69% in 2003 as a result of the reduced product costs and favorable sales mix. Research and development expenses for the first nine months of 2004 and 2003 were $43,000 and $18,000, respectively. Effective July 15, 2004 the Company completed a Research Agreement with the University of Utah and has begun research activities from these facilities. Selling, general and administrative expenses for the nine months of 2004 were $1,053,000 and $803,000 for the comparable period of 2003. Selling, marketing and distribution expenses are $173,000 more than the prior year as the Company incurred the expenses associated with the Demeter Natural Attraction product line launched in the second quarter of 2004, and the Company continued efforts to license its Natural Attraction brand. Administrative and facilities expense were $ 77,000 more than last year primarily due to increased investor relations costs and basic cost increases in other areas. The Company's cash balances generated $12,000 in net interest income during the first nine months of 2004 and 2003. 9 LIQUIDITY AND CAPITAL RESOURCES At September 30, 2004, the Company had cash of $1,363,000 with no outstanding bank borrowings. At December 31, 2003, it had cash of $1,950,000 with no outstanding bank borrowings. Net cash used in on-going activities for the nine months of 2004 of $572,000 is slightly better than last years $610,000 despite the increased spending on sales and marketing. On April 26, 2004, the Company renewed its Business Loan Agreement with Mid-Peninsula Bank of Palo Alto, California (the "Bank") providing for a revolving line of credit. The Company may borrow up to $500,000 at an interest rate equal to the Bank's prime rate plus 0.75% with borrowings secured primarily by the Company's trade receivables and inventory. The agreement, which expires on May 3, 2005, contains certain debt-to-equity and working capital covenants. At September 30, 2004 the Company was in compliance with all but one of the covenants for which the Company has received a waiver from the bank. As of September 30, 2004 there were no amounts outstanding under this agreement. 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. 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, beginning 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 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 with which they 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 fragrances and toiletries 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 Company's or its licensees/distributors 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 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 royalty income and could cause significant fluctuations in its quarterly results. 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. 10 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 pheromones manufacturers, fragrance suppliers, or component manufacturers on acceptable terms. This would adversely affect operating results. Item 3. Controls and Procedures Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with our evaluation that occurred during our second fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 11 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 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 b. Reports on Form 8-K None 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: November 9, 2004 /s/ William P. Horgan --------------------- William P. Horgan Chairman and Chief Executive Officer Date: November 9, 2004 /s/ Gregory S. Fredrick ----------------------- Gregory S. Fredrick Chief Financial Officer 13