10QSB 1 p19474_10qsb.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 June 30, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-23544 HUMAN PHEROMONE SCIENCES, INC. ---------------------------------------------- (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 July 29, 2005. 1
HUMAN PHEROMONE SCIENCES, INC. INDEX Page PART I FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets as of June 30, 2005 (Unaudited) and December 31, 2004 ............................. 3 Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2005 and 2004 ........................................................................... 4 Statements of Cash Flows (Unaudited) for the Three and Six Months Ended June 30, 2005 and 2004 ........................................................................... 5 Notes to Financial Statements (Unaudited) ........................................................ 6 Item 2. Management's Discussion and Analysis Management's Discussion and Analysis of Financial Conditions and Results of Operations ........... 7 Item 3. Controls and Procedures ...........................................................................11 PART II OTHER INFORMATION Item 6. Exhibits ..........................................................................................12 SIGNATURES .........................................................................................................13
2 PART I FINANCIAL INFORMATION Item 1. Financial Statements Human Pheromone Sciences, Inc. Balance Sheets
June 30, December 31, (in thousands except share data) 2005 2004 --------------------------------------------------------------------------- --------- -------- (unaudited) Assets Current assets: Cash and cash equivalents $ 803 $ 1,201 Accounts receivable, net of allowances of $3,000 and $5,000, respectively 81 259 Inventories, net 57 63 Other current assets 35 8 -------- -------- Total current assets 976 1,531 Property and equipment, net 13 17 -------- -------- $ 989 $ 1,548 ======== ======== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 38 $ 41 Accrued professional fees 55 58 Accrued employee benefits 25 35 Accrued sales returns 31 40 Accrued income tax 2 3 Other accrued expenses 14 18 -------- -------- Total current liabilities 165 195 -------- -------- Total liabilities 165 195 Commitments and Contingencies Shareholders' equity: Common stock, no par value, 13,333,333 shares authorized, 4,151,954 shares issued and outstanding at each date 20,809 20,809 Accumulated deficit (19,985) (19,456) -------- -------- Total shareholders' equity 824 1,353 -------- -------- $ 989 $ 1,548 ======== ========
See accompanying notes to financial statements. 3 Human Pheromone Sciences, Inc. Statements of Operations (unaudited)
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- (in thousands except per share data) 2005 2004 2005 2004 ------- ------- ------- ------- Net revenues 131 149 257 408 Cost of goods sold 17 33 58 73 ------- ------- ------- ------- Gross profit 114 116 199 335 Operating Expenses: Research and development 48 7 94 16 Selling, general and administrative 319 388 645 689 ------- ------- ------- ------- Total operating expenses 367 395 739 705 ------- ------- ------- ------- Loss from operations (253) (279) (540) (370) Other income Interest income, net 5 4 11 7 ------- ------- ------- ------- Loss from on-going operations (248) (275) (529) (363) Net gain from sale of assets -- 1 -- 1 ------- ------- ------- ------- Net loss $ (248) $ (274) $ (529) $ (362) ======= ======= ======= ======= Net loss per common share - basic and fully diluted From on-going operations $ (0.06) $ (0.07) $ (0.13) $ (0.09) From assets sold $ (0.00) $ (0.00) $ (0.00) $ (0.00) ------- ------- ------- ------- Net loss per common share - basic and fully diluted $ (0.06) $ (0.07) $ (0.13) $ (0.09) ======= ======= ======= ======= Weighted average common shares outstanding -basic and fully diluted 4,152 4,106 4,152 4,105 ======= ======= ======= =======
See accompanying notes to financial statements. 4 Human Pheromone Sciences, Inc. Statements of Cash Flows (unaudited)
Six months ended June 30, ------------------------- (in thousands) 2005 2004 -------------------------------------------------------------------------------- -------- -------- Cash flows from operating activities Net loss from ongoing operations $ (529) $ (363) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 5 3 Changes in operating assets and liabilities: Accounts receivable 178 (41) Inventories 6 (22) Other current assets (26) (27) Accounts payable and accrued liabilities (31) (12) ------- ------- Net cash used in operating activities (397) (462) ------- ------- Cash flows provided by (used in) investing activities Acquisition of property and equipment (1) (16) Sale of Realm assets -- 1 ------- ------- Net cash used in investing activities (1) (15) Cash flows used in financing activities -- -- ------- ------- Net cash used in financing activities -- -- Net decrease in cash and cash equivalents (398) (477) Cash and cash equivalents at beginning of period 1,201 1,950 ------- ------- Cash and cash equivalents at end of period $ 803 $ 1,473 ======= =======
See accompanying notes to financial statements. 5 Notes to Financial Statements (unaudited) June 30, 2005 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Human Pheromone Sciences, Inc. (the "Company") was incorporated in the State of California in 1989 under the name of EROX Corporation. The Company changed the name to Human Pheromone Sciences, Inc. in May 1998. The Company is engaged in the research, development, manufacturing and marketing of synthesized human pheromones and consumer products containing synthetic human pheromones as a component. The Company initiated commercial operations in late 1994 with a line of fine fragrances and toiletries. In April 2000, the Company licensed the sale of its REALM(R) fragrance products and in April 2003 the Company sold the REALM and innerREALM(R) brands and trademarks to Niche Marketing Group, Inc. The Company's strategic focus is now on expanding the market for its existing patented pheromones to other consumer product and fragrance companies and to the development of its internally developed brand of pheromone-based products under the Natural Attraction(R) brand, and mood based products under the licensed Demeter Natural Attraction label. The Company will seek to add to this group of products new, patented compounds that might be developed through the research efforts that the Company is now directly managing. Basis of Presentation The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2005. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2004. Revenue Recognition Revenue is recorded at the time of merchandise shipment, net of provisions for returns. The Company records revenues from sales, initiated by sales agents, net of the sales commissions earned following the interpretative guidance provided by FASB Emerging Issue Task Force (EITF) EITF No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. License fees are earned over the license period according to the terms of the license agreement and interpretative guidance provided by Staff Accounting Bulletin (SAB) No. 101 and No. 104. The majority of the Company's sales are to distributors and licensees, and these distributors and licensees have no right to return products. Inventories Inventories are stated at the lower of cost (first in - first out method) or market. A summary of inventories follows (in thousands): June 30, December 31, 2005 2004 ------ ------- Components (raw materials) $ 45 $ 62 Finished goods 30 18 Reserve for shrinkage and obsolescence (18) (17) ------ ------ $ 57 $ 63 ====== ====== 6 Earnings (Loss) Per Share The Company follows the provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings per share. Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted-average number of common shares and dilutive common shares outstanding during the period. For the six months ended June 30, 2005 and 2004, options to purchase 140,000 and 80,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive. As of June 30, 2005 and 2004, the unaudited components of basic and diluted earnings per share are as follows (all amounts are in thousands): 2005 2004 ------ ------ Net income (loss) available to common shareholders $ (529) $ (362) ====== ====== Weighted-average common shares outstanding during the period 4,152 4,105 ====== ====== Capital Stock and Stock Options During the three months ended June 30, 2005 no common stock or preferred stock was issued. During the quarter, no stock options under the 2003 Non-Employee Directors Stock Option Plan were granted, no issued options were exercised and 9,999 stock options expired under the initial Non-Employee Directors Stock Option Plan. 2. SEGMENT INFORMATION Revenues by geographic markets for the three and six months ended June 30, 2005 and 2004 were as follows: Three months ending Six months ending June 30, June 30, ------------------------- ------------------------- 2005 2004 2005 2004 ---------- ---------- ---------- ---------- Markets: U.S Markets $ 128 $ 132 $ 175 $ 350 International Markets 3 17 82 58 ---------- ---------- ---------- ---------- Net Sales $ 131 $ 149 $ 257 $ 408 ========== ========== ========== ========== Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations ------ ----------------------------------------------------------------------- This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Except for the historical information contained in this discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to the Company's plans for sales growth and expansion into new channels of trade, expectations of gross margin, expenses, new product introduction, and the Company's liquidity and capital needs. These matters involve risks and uncertainties that could cause actual results to differ materially from the statements made. In addition to the risks and uncertainties described in "Risk Factors", below, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. These and other factors may cause actual results to differ materially from those anticipated in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. 7 CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial conditions and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements require management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition and license fees. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our financial statements. Revenue Recognition Revenue is recorded at the time of merchandise shipment, net of provisions for returns. The Company records revenues from sales, initiated by sales agents, net of the sales commissions earned following the interpretative guidance provided by FASB Emerging Issue Task Force (EITF) EITF No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. License fees are earned over the license period according to the terms of the license agreement and interpretative guidance provided by Staff Accounting Bulletin (SAB) No. 101 and No. 104. The majority of the Company's sales are to distributors and licensees, and these distributors and licensees have no right to return products. COMPANY OVERVIEW The Company is engaged in the research, development, manufacturing and marketing of consumer products containing synthetic human pheromones and other mood enhancing compounds. The Company initiated commercial operations in late 1994 with a line of fine fragrances and toiletries. Licensing of the Company's technology is currently the core business of the Company while directly managing the on-going development of identified compounds for potential new products. The Company's patented compounds are sold to licensed customers and included as components in their fragranced consumer products. The Company also offers private label manufacturing services for third party consumer product licensees. Results of Operations Three Months ended June 30, 2005 compared to the Three Months ended June 30, 2004 Net revenues for the second quarter of 2005 were $131,000, representing a 12% decrease from the prior year's revenues of $149,000. Domestically, revenues were $4,000 less than the prior year, attributable to increased pheromone reorders for the current quarter unable to offset the decreased revenues from the Demeter Natural Attraction(R) product line. The Demeter Natural Attraction(R) product line was launched in April 2004 and generated 36% of the domestic revenues during the 2004 period which the Company did not expect to maintain in 2005. Reorders revenues from existing customers were slightly better than the previous year as the timing of the customers reorders continue to be placed in a non-cyclical manner. International revenues were $14,000 less than the prior year due to increased sales in the first three months of the year, $38,000 more than the prior year. Net revenue for the quarters ended June 30, 2004 and 2003 were as follows (in thousands): 2005 2004 ------ ------ Markets: U.S Markets $ 128 $ 132 International Markets 3 17 ------ ------ Net Sales $ 131 $ 149 ====== ====== Gross profit for the quarter ended June 30, 2005 of $114,000 is 2% less than last year's gross profit of $116,000. As a percentage of sales, gross profit of 87% was more than last year's of 78%. The increased gross margin was caused by a favorable sales mix of higher margin products for the current period compared to last year's sales mix. Research and Development expenses for the second quarters of 2005 and 2004 were $48,000 and $7,000, respectively. The increase of the research expenditures was the result of the Company inaugurating operations at the University of Utah under the Research Agreement signed July 13, 2004. The Company is now directly managing and conducting all research and development efforts from this facility. 8 Selling, general and administrative expenses of $319,000 are $69,000 less than last years $388,000. Selling, marketing and distribution expenses were $61,000 less than the prior year as the Company did not spend at the same level as in 2004 when the Company launched its Natural Attraction(R) from Demeter line of fragrances in the U.S. marketplace. General and administrative and facility costs decreased by $7,000, primarily as a result of a reduction in consulting costs associated with the Company's efforts to expand new investment potential and increase its shareholder base. The Company earned $5,000 and $4,000 in net interest income in both of the periods, respectively. The Company recorded no income tax provision in 2005 or 2004, due primarily to a valuation allowance on deferred tax assets being recorded and the expected utilization of net operating losses carried forward from prior years to offset any significant tax liability. As of June 30, 2005, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,762,000. However, a full valuation allowance is provided for the gross deferred tax asset as management could not determine whether its realization is more likely than not. Six Months ended June 30, 2005 as compared to the Six Months ended June 30, 2004 Net revenues for the six months ended June 30, 2005 were $257,000. This was a 37% decrease from net revenues of $408,000 for the first half of 2004. Domestically, revenues were $175,000 less than the prior years $350,000. The Company's domestic fourth quarter 2004 sales were $360,000, a $228,000, 173%, increase from the 2003 fourth quarter revenues. Domestic customers seem to have altered their historical purchasing patterns which resulted in increased sales in the last quarter of 2004 and decreased revenues in the current period. Since the Company is not always aware of its customer's manufacturing and marketing plans revenue fluctuations due to the customer schedules will occur periodically. International revenues were $24,000 greater than the prior year due to increased sales in the Asia and Latin America markets Net revenues for the six months ended June 30, 2005 and 2004 were as follows: ----------------------------------------- ------- -------- ------ Markets 2005 2004 ----------------------------------------- ------- -------- ------ U.S Markets $ 175 $ 350 International Markets 82 58 ------- ------ Net Revenues $ 257 $ 408 ======= ====== Gross profit for the first half of 2005 decreased 41% to $199,000 from $335,000 in 2004. The decrease is the result of the reduced sales due to the customer ordering patterns noted above. Gross margin increased to 82% compared to 77% in 2004 due to a favorable sales mix of higher margin products. Research and Development expenses for the first half of 2005 and 2004 were $94,000 and $16,000, respectively. The increase of the research expenditures was the result of the Company inaugurating operations at the University of Utah under the Research Agreement signed July 13, 2004. The Company is now directly managing and conducting all research and development efforts from this facility. Selling, general and administrative expenses for the first half of 2005 were $645,000 and $689,000 for the comparable period of 2004, a $44,000 reduction. Selling, marketing and distribution expenses are $68,000 less than the prior year as the Company did not launch any new products lines in 2005 as it did in 2004. General, administrative and facility expenses were $ 26,000 more than last year primarily due to increased fees related to patent, audit and consulting services. The Company's cash balances generated $11,000 in net interest income during the first half of 2005, as compared to $7,000 in 2004. The increase is due to increased interest rates. 9 LIQUIDITY AND CAPITAL RESOURCES At June 30, 2005, the Company had cash of $803,000 with no outstanding bank borrowings and working capital of $811,000. At December 31, 2004, it had cash of $1,201,000 with no outstanding bank borrowings and working capital of $1,336,000. For the first six months of 2005, net cash used in on-going activities was $397,000 compared to the prior years $461,000 and is the result of collections from the higher than usual accounts receivable balance at December 31, 2004. The Company did not renew its Business Loan Agreement with Mid-Peninsula Bank of Palo Alto, California (the "Bank") which had been providing for a revolving line of credit, secured primarily by the Company's trade receivables and inventory. The agreement which expired on May 3, 2005 was never drawn upon by the Company. Assuming the Company's activities proceed substantially as planned, the Company's current cash position and projected results of operations for the next twelve months are not expected to require additional outside financing. However, management is reviewing additional sources of cash should the operational requirements warrant additional funding and has hired an investment banking firm to assist in this area. Risk Factors The Company's future results may be affected to a greater or lesser degree by the following factors, among others: The Company has not had sustained profitable operations since 1997. Since 1997, the Company has incurred losses from operations. In May 2000 the Company refocused its business model based on product licensing agreements. While the Company anticipates that this change in its business will result in profitable operations, it has not to date, and the Company's license based business model may not be successful in the future. The Company's marketing strategy may not be successful. The Company may not be able to establish and maintain the necessary sales and distribution channels. Consumer product and traditional fragrance companies may choose not to license or private label the Company's products. The Company may not be able to protect its technology or trade secrets. The Company's patents and patent applications may not protect the Company's technology or ensure that the Company's technology does not infringe another's valid patent. Others may independently develop substantially equivalent proprietary information. The Company may not be able to protect its technology, proprietary information or trade secrets. The Company may not be able to develop new patentable compounds. The Company's success substantially depends upon developing and obtaining patents for new mood and sensory enhancing compounds. The Company requires that its products be scientifically tested validating the human responses to the compounds. The Company may not be successful in validating that the desired human responses are obtained. The Company may not be able to recruit and retain key personnel. The Company's success substantially depends upon recruiting and retaining key employees and consultants with research, product development and marketing experience. The Company may not be successful in recruiting and retaining these key people. The Company relies upon other companies to manufacture its products. The Company and its distributors/licensees rely upon other companies to manufacture its pheromones, supply components, and to blend, fill and package its fragrance products. The Company and its distributors/licensees may not be able to obtain or retain pheromone manufacturers, fragrance suppliers, or component manufacturers on acceptable terms. This would adversely affect operating results. 10 Item 3. Controls and Procedures Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with our evaluation that occurred during our second fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 11 PART II OTHER INFORMATION Item 6. Exhibits ------- -------- a. Exhibits Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this Report to be signed on behalf by the undersigned thereunto duly authorized. HUMAN PHEROMONE SCIENCES, INC. Date: August 8, 2005 /s/ William P. Horgan --------------------- William P. Horgan Chairman and Chief Executive Officer Date: August 8, 2005 /s/ Gregory S. Fredrick ----------------------- Gregory S. Fredrick Chief Financial Officer 13