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Health Sciences Group Reports First Quarter Results; Forms New Division to Market Proprietary, Higher-Margin Products

LOS ANGELES, May 25, 2004 (BUSINESS WIRE) -- Health Sciences Group, Inc. (HESG) , a provider of innovative, science-based products and ingredients to customers in the nutrition, skin care, and food and beverage industries, today reported financial results for the first quarter ended March 31, 2004. The Company also announced that it had formed Nutragenica(R), a new division to market and distribute its proprietary products.

Revenues for the first quarter ended March 31, 2004 totaled $3.32 million compared to $4.78 million reported for the same period last year. The decrease in revenues resulted primarily from the Company's decision to discontinue sales of certain products which did not meet key parameters, such as minimum gross margins, established in connection with its transition to sales of higher margin products.

"We've devoted significant time and energy optimizing our product mix and eliminating products that were not profitable," said Fred E. Tannous, Co-chairman and CEO of Health Sciences Group. "We're continuing to shift our emphasis toward sales of higher-margin, differentiated products. Our customers continue to show confidence in our recently introduced proprietary products as many have placed new orders while others have expanded their purchase orders."

The net loss for the first quarter was $1.18 million, or $0.09 per share, as compared with a loss of $1.05 million, or $0.11 per share, for the same period last year. Approximately $787,000 and $785,000 of the loss was a non-cash expense attributable to the issuance of common stock, options, warrants, depreciation and amortization of discounts on convertible debentures and preferred stock during the quarters ended March 31, 2004 and 2003, respectively. Earnings before interest, taxes, depreciation and amortization (EBITDA) improved by $227,732 in the first quarter 2004, totaling an EBITDA loss of $454,187 compared to an EBITDA loss of $681,919 reported for the same period in 2003.

"The decision to discontinue sales of low-margin products is expected to accelerate our time period to profitability," said Bill Glaser, Co-chairman and President of Health Sciences Group. "We expect year-end revenues and gross margins to exceed those reported in 2003. Additionally, we expect robust sales of our new proprietary products to place us in a position to report profitability by the end of this year."

Recent Highlights

-- Booked new and repeat orders for Tri-Xanthin(TM), the
Company's proprietary, ephedra-free weight-loss product with
major retail distributors of nutritional products.

-- Expanded product offerings to include nutritional supplements
for foods and beverages; booked sales with national retailers
of snack foods and energy drinks.

-- Received approval from the U.S. Patent and Trademark Office
for a U.S. patent on its CoCare(TM) formulation covering the
composition and method for treating the effects of the cold
and flu. The Company was previously issued a patent on a
CoCare(TM) formulation for decongestion.

-- Signed an agreement to acquire exclusive rights to market and
sell a CoQ10 supplement which utilizes a patented
nanotechnology to improve delivery and absorption. The Company
expects to market its product under the name NanoFlow(TM)

New Marketing Initiatives -- Nutragenica(R)

Health Sciences Group recently formed Nutragenica(R), its new marketing division, which will focus on marketing its suite of science-backed products through direct-to-consumer channels. To broaden product exposure and diversify its sales channels, Nutragenica(R) expects to utilize direct response campaigns, consumer tradeshows, and web-based technology to market and support its product launches.

"The formation of Nutragenica(R) represents the next logical step for us as we execute on our growth strategy," commented Mr. Tannous. "With the formation of an in-house marketing platform, we expect to build an infrastructure which will support new marketing initiatives slated for the second half of the year designed to expand sales and product margins. We expect our growth to be driven by expanding our distribution channels and making inroads into direct sales channels driven by a strong demand from the retail sector for proprietary nutrition products."

Business Outlook

Health Sciences Group expects to report consolidated revenues for 2004 between $20 and $22.5 million and expects pre-tax operating income between $650,000 and $1.0 million, depending upon the level of new investment made in infrastructure. The company expects to expand its employee count by 7 to 10 people by year-end to handle sales and marketing functions of its Nutragenica(R) division. Since marketing and sales support is expected to precede the timing of new orders, it is likely that expenses will grow faster in the first half of the year than in the second half of 2004.

The company does not expect to provide quarterly guidance as revenues are still expected to be concentrated in the second half of the year and may fluctuate due to many factors, therefore making the timing and amount of revenues difficult to forecast on a quarterly basis.

About Health Sciences Group, Inc.

Health Sciences Group, Inc. is a provider of innovative, science-based products and ingredients to customers in the nutrition, skin care, and food and beverage industries. Its largest division, Quality Botanical Ingredients, Inc. (QBI), processes herbs, dried fruits and vegetables, and other nutraceuticals using cryogenic (cold) processing at its New Jersey facility. Its XCEL Healthcare division is a fully licensed, specialty compounding pharmacy delivering full service pharmacology solutions to customers with chronic ailments that require long-term therapy; and its BioSelect Innovations division develops and sells innovative, science-based products based on proprietary technologies in the areas of topical/transdermal drug delivery, cosmeceuticals, and integrative medicine to a global network of customers who manufacture and distribute compounded pharmaceuticals, functional foods and beverages, skin care products and cosmetics. For more information, visit

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934 that are based upon current expectations or beliefs, as well as a number of assumptions about future events. Although the Company believes that the expectations reflected in the forward-looking statements and the assumptions upon which they are based are reasonable, it can give no assurance that such expectations and assumptions will prove to have been correct. The reader is cautioned not to put undue reliance on these forward-looking statements, as these statements are subject to numerous factors and uncertainties, including without limitation, the independent authority of the special committee to act on the matters discussed, the successful negotiation of the potential acquisition and disposal of transactions described above, successful implementation of the company's business strategy and competition, any of which may cause actual results to differ materially from those described in the statements. In addition, other factors that could cause actual results to differ materially are discussed in the Company's most recent Form 10-QSB and Form 10-KSB filings with the Securities and Exchange Commission.

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