HUMAN PHEROMONE SCIENCES INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - HUMAN PHEROMONE SCIENCES INC	Financial_Report.xls
EX-32 - EXHIBIT 32 - HUMAN PHEROMONE SCIENCES INC	v239560_ex32.htm
EX-31.1 - EXHIBIT 31.1 - HUMAN PHEROMONE SCIENCES INC	v239560_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - HUMAN PHEROMONE SCIENCES INC	v239560_ex31-2.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

Commission file number 000-23544

HUMAN PHEROMONE SCIENCES, INC.

(Exact name of registrant as specified in its charter)

California		94-3107202
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

84 West Santa Clara Street, San Jose, California		95113
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number: (408) 938-3030

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

Indicate by a checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,151,954 shares of Common Stock as of November 4, 2011.

HUMAN PHEROMONE SCIENCES, INC.

INDEX

			Page
PART I
FINANCIAL INFORMATION

	ITEM 1.	FINANCIAL STATEMENTS

		Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010	3

		Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2011 and 2010	4

		Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010	5

		Notes to Financial Statements (Unaudited)	6

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	12

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	19

	ITEM 4.	CONTROLS AND PROCEDURES	19

PART II
OTHER INFORMATION

	ITEM 1.	LEGAL PROCEEDINGS	20

	ITEM 1A.	RISK FACTORS	20

	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	20

	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	20

	ITEM 4.	(REMOVED AND RESERVED)	20

	ITEM 5.	OTHER INFORMATION	20

	ITEM 6.	EXHIBITS	20

SIGNATURES			21

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

Human Pheromone Sciences, Inc.

Balance Sheets

	September 30,			December 31,
(in thousands except share data)	2011			2010 (1)
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	69		$	92
Accounts receivable		67			108
Inventories		30			26
Other current assets		29			49
Total current assets		195			275

Total assets	$	195		$	275




Liabilities and Shareholders' Deficit

Current liabilities:
Accounts payable	$	39		$	42
Current portion of deferred revenue		53			146
Advanced payment		100			-
Accrued professional fees		46			52
Accrued employee benefits		42			42
Accrued income taxes		2			2
Other accrued expenses		8			6
Total current liabilities		290			290

Non-current liabilities
Deferred revenue		-			24
Total liabilities		290			314

Commitments and Contingencies

Shareholders' (deficit):
Common stock, no par value, 13,333,333 shares authorized,
4,151,954 shares issued and outstanding at each date		21,098			21,098
Accumulated deficit		(21,193	)		(21,137	)
Total shareholders' (deficit)		(95	)		(39	)
Total liabilities and shareholders’ (deficit)	$	195		$	275

See accompanying notes to financial statements.

(1) The balance sheet as of December 31, 2010 has been derived from the audited financial statements as of that date included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Human Pheromone Sciences, Inc.

Statements of Operations

(unaudited)

	Three months ended September 30,						Nine months ended September 30,
(in thousands except per share data)	2011			2010			2011			2010

Net revenues	$	113		$	210		$	423		$	581
Cost of goods sold		15			45			78			107

Gross profit		98			165			345			474

Operating Expenses:
Research and development		4			7			14			40
Selling, general and administrative		124			213			385			647
Total operating expenses		128			220			399			687

Loss from operations		(30	)		(55	)		(54	)		(213	)

Other income
Interest expense, net		-			-			1			-
Total other expense		-			-			1			-

Net loss before provision for income taxes		(30	)		(55	)		(55	)		(213	)

Provision for income taxes		-			-			1			2

Net loss	$	(30	)	$	(55	)	$	(56	)	$	(215	)


Net loss per common share
Basic	$	(0 .01	)	$	(0 .01	)	$	(0 .01	)	$	(0 .05	)
Diluted	$	(0 .01	)	$	(0 .01	)	$	(0 .01	)	$	(0 .05	)


Weighted average common shares outstanding
Basic		4,152			4,152			4,152			4,152
Diluted		4,152			4,152			4,152			4,152

See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Statements of Cash Flows

(unaudited)

	Nine months ended September 30,
(in thousands)	2011			2010

Cash flows from operating activities
Net loss	$	(56	)	$	(215	)

Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		-			1
Stock-based compensation		-			15
Changes in operating assets and liabilities:
Accounts receivable		41			12
Inventories		(4	)		28
Other current assets		20			9
Accounts payable and accrued liabilities		(7	)		(3	)
Deferred revenue		(117	)		(162	)
Advanced payment		100			-

Net cash used in operating activities		(23	)		(315	)


Cash flows used in investing activities
		-			-
Net cash used in investing activities		-			-


Cash flows used in financing activities
		-			-
Net cash used in financing activities		-			-


Net decrease in cash and cash equivalents		(23	)		(315	)
Cash and cash equivalents at beginning of period		92			350
Cash and cash equivalents at end of period	$	69		$	35

See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Notes to Financial Statements

(unaudited)

September 30, 2011

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

The Company, a California corporation, was founded in 1989 as EROX Corporation to develop and market a broad range of consumer products containing human pheromones as a component. On May 29, 1998, the shareholders of the Company voted to change the name of the Company to Human Pheromone Sciences, Inc. Human Pheromone Sciences, Inc. is alternatively referred to in this report as “we,” “us,” “our,” or the “Company”.

The Company believes that human pheromones and other naturally-occurring compounds, identified, tested and funded by the Company, create unique product development and marketing opportunities for consumer product companies. Product categories include, but are not limited, to fragrances, toiletry and consumer products, as well as other types of consumer products that do not require Food and Drug Administration (“FDA”) approval as pharmaceutical products. The Company believes that its related patents provide it a proprietary position in developing, licensing and marketing such products.

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-Q and Article 8 of Regulation S-X. 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 nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2011. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

Management’s Plans

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred net losses of $56,000 in the nine months ended September 30, 2011, and $97,000 and $284,000 for the years ended December 31, 2010 and 2009, respectively. In addition, the Company has used cash in operations of $23,000 in the nine months ended September 30, 2011, and $258,000 and $557,000 for the years ended December 31, 2010 and 2009, respectively. As of September 30, 2011, the Company had an accumulated deficit of $21.2 million; cash and cash equivalents of $69,000 and no long-term debt.

Based on the Company’s current operating plans, management believes that the Company’s existing cash resources and cash forecasted by management to be generated by operations will not be sufficient to meet working capital and capital requirements through December 31, 2011. In this regard, the Company must be successful in its current licensing of its compounds or raising additional operating capital to fund continuing operations and support the further development of identified compounds. The Company has been working to secure the financing to continue with on-going operations, however, the Company may not be successful with its plans. If events and circumstances occur such that the Company does not meet its current operating plans, the Company is unable to raise sufficient additional equity or debt financing, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on its future performance, including but not limited to, the premature sale of some or all of its assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms, or the cessation of operations.

These factors raise a substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared on a going concern basis that contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include adjustments relating to the recoverability of recorded asset amounts or the amounts or classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Revenue is recorded at the time of merchandise shipment, net of provisions for returns. The Company records revenue from sales initiated by sales agents, net of the sales commissions earned, following the interpretative guidance provided by FASB Accounting Standards Codification (ASC) Topic 605 – Revenue Recognition. License fees are earned over the license period according to the terms of the license agreement and interpretative guidance provided by ASC 605. The Company records multiple-element arrangements in accordance with ASC 605-25 Revenue Arrangements with Multiple Deliverables.

Multiple-element arrangements are assessed to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met.

● The delivered items or service has value to the customer on a stand alone basis.

● There is objective and reliable evidence of the fair value of the undelivered items or service.

● The delivery or performance of the undelivered items or service is considered probable and substantially in our control.

If these criteria are not met, then revenues are deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the consideration is allocated to the separate units of accounting based on each unit’s relative fair value.

The Company’s agreement with Personal Products Company (hereinafter referred to as “PPC”) represents a multiple-element arrangement and includes post signing consulting support to PPC as needed to assist them in claims development and manufacturing processes, an exclusive right of first discussion for new compounds that the Company develops and for which we document supportable claims of effectiveness, and an exclusive right to our existing patented compounds in specific consumer product fields. A portion of the initial payment received as part of the PPC agreement is being recognized as the Company incurs expenses and expends resources towards fulfilling the obligations to PPC, based on guidance provided by ASC 605-25.

The PPC agreement was entered into on August 18, 2006 and will expire when the initial patents on the licensed technology expire, in March 2012. For the services and rights granted in the agreement, the Company received an initial payment of $1,750,000 in September 2006 and would earn royalties on any products developed and sold by PPC until the patents expire. The Company records revenue for the consulting services and right of first discussions as the Company incurs expenses and expends resources towards fulfilling its obligations to PPC. License revenue is being recognized on a straight-line basis over the life of the agreement of sixty-seven months and when periodic direct costs are incurred to maintain the license. The Company began recognizing revenue from all three units during the quarter ending September 30, 2006.

A summary of the revenue recognized for these multiple units of accounting follows (in thousands):

	Three months ending September 30,				Nine months ending September 30,
	2011		2010		2011		2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Right of first discussion	$	-	$	18	$	-	$	18
Exclusive license		29		32		104		118
Consulting services		-		8		-		8
Total	$	29	$	58	$	104	$	144

The deferred revenue from the PPC license agreement as of September 30, 2011 was $53,000.

The Company has granted two additional license agreements for the development, manufacture, sale and distribution of consumer personal care products using the Company’s patented technology. License fees received and attributed to these agreements are being recognized on a straight-line basis over the initial life of the license periods ranging from fifteen to thirty-six months.

A summary of the revenue recognized from these additional licenses and royalty revenues follows (in thousands):

	Three months ending September 30,				Nine months ending September 30,
	2011		2010		2011		2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Royalty revenues	$	56	$	69	$	180	$	219
License fee		-		4		14		18
Total	$	56	$	73	$	194	$	237

The deferred revenue from these licenses has been completely recognized as of September 30, 2011.

Advanced Payment

On May 16, 2011 the Company and CrowdGather, Inc. (“CrowdGather”) entered into an Asset Purchase and License Agreement (the “Agreement”). Pursuant to the Agreement, the Company sold to CrowdGather the EROX registered trademark in the United States, Hong Kong and Switzerland and the erox.com domain name.

In addition, CrowdGather obtained the exclusive license to make, use, sell, distribute, or other wise commercially exploit rights for product containing a combination of the Company compounds (the “EROX Product”) marketed to adults solely through adult sex-based Internet distribution channels worldwide, with the exception of Taiwan, for the five-year term, which may be extended for an additional five (5) year period(s) upon mutual agreement of both parties.

Pursuant to the Agreement, the Company received a $100,000 payment upon execution of the Agreement, $50,000 as compensation for the assets acquired by CrowdGather and for the assistance the Company will provide for product development, manufacturing and fulfillment facilitation for their initial product (for which the Company will sell to CrowdGather its proprietary compounds). The remaining $50,000 advance payment received will be applied, at a future date, to acquire restricted common stock of the Company. Within 30 days of receipt of the EROX Product from the Company, CrowdGather shall accept the EROX Product or request changes to the EROX Product; not later than 60 days from the end of such thirty (30) day period CrowdGather agrees to apply $50,000 of the advance payment as the payment for the purchased assets and paid up development fee and the remaining $50,000 of the advanced payment fee will be converted into restricted common stock of the Company. The number of shares of the Company’s common stock to be issued to CrowdGather shall be calculated by dividing $50,000 by the closing price of the Company’s common stock on such sixtieth (60) day. If such day is not a trading day (a day on which the New York Stock Exchange is open for business) it shall be calculated by using the closing price the next such trading day.

The Erox product, as of September 30, 2011, had not been delivered; thus, the customer acceptance certificate has not been received and no revenue has been recognized or stock issued as of September 30, 2011. The Company will be delivering the final product for acceptance in the three month period ending December 31, 2011.

Inventories

Inventories are stated at the lower of cost (first in - first out method) or market. A summary of inventories follows (in thousands):

	September 30, 2011
	(unaudited)		December 31, 2010
Compounds	$	30	$	23
Finished goods		-		3
Total	$	30	$	26

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 months ended September 30, 2011 and 2010, options to purchase 810,000 and 900,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive. For the nine months ended September 30, 2011 and 2010, options to purchase 829,000 and 906,000 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, 2011 and 2010, the unaudited components of basic and diluted earnings per share are as follows (in thousands):

	Three months ending September 30,						Nine months ending September 30,
	2011			2010			2011			2010

Net income (loss) available to common shareholders (unaudited)	$	(30	)	$	(55	)	$	(56	)	$	(215	)

Weighted-average common shares outstanding during the period		4,152			4,152			4,152			4,152
Incremental shares from assumed conversions of stock options		-			-			-			-

Fully diluted weighted-average common shares and potential common stock (unaudited)		4,152			4,152			4,152			4,152

Capital Stock and Stock Options

During the nine months ended September 30, 2011, no common stock or preferred stock was issued. During the nine months ended September 30, 2010, no options to purchase shares of common stock were granted under the 2003 Non-Employee Directors Stock Option Plan. No issued options were exercised during the nine months ended September 30, 2011 and 60,000 stock options expired under the expired 2003 Stock Option Plan.

The Company adopted ASC 718 “Compensation – Stock Compensation”, for accounting for its stock options effective with the fiscal year beginning January 1, 2006. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. The Black-Scholes pricing model has assumptions for the risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the past seven years of market prices of the Company’s common stock. The expected life of an option grant is based on various factors including historical exercise and expiration experience rates in addition to the life of the option. The Company adjusts the compensation expense by a forfeiture factor based on historical experience. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.

The Company does not record the stock compensation expense net of taxes since there was no material provision for income taxes for the periods ended September 30, 2011 and 2010 as the Company incurred net operating losses for which no benefit was recognized, or utilized tax loss carryforwards. The tax benefit is a component of the deferred tax asset.

The Company did not have any employee or non-employee compensation expense for stock options to record during the three months ended September 30, 2011 and 2010.

The Company did not have any employee or non-employee compensation expense for stock options during the nine months ended September 30, 2011, but did record $8,000 of employee and $8,000 of non-employee compensation expense for stock options during the nine months ended September 30, 2010. At September 30, 2011, there was no unrecognized compensation costs related to non-vested share-based compensation under the employee Nonstatutory Stock Option grants.

Nonstatutory Stock Option Agreements

In 2006 and 2008, the Company’s Board of Directors granted nonstatutory stock options to the officers and employees of the Company covering a total of 400,000 shares of common stock pursuant to Nonstatutory Stock Option Agreements. The Board of Directors had set terms and conditions of these stock options. Options were granted at the fair value at the date of the grant as determined by the average closing price of the Company’s common stock on the day of the grant.

A summary of the activity under the Nonstatutory Stock Option Agreements is as follows (in thousands except per share data):

Nonstatutory Stock Option Agreements	Three months ending September 30, 2011				Nine months ending September 30, 2010
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of period		400	$	0.34		400	$	0.34
Options Granted		-		-		-		-
Canceled or Expired		-		-		-		-
Outstanding, September 30, 2011		400	$	0.34		400	$	0.34

At September 30, 2011 all of the options to purchase 400,000 shares were exercisable.

Non-Employee Directors’ Stock Option Plan (Directors’ Plan)

In June 1993, the Company’s Board of Directors adopted a Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”) covering a total of 158,333 shares of common stock, which provides for a one-time automatic grant of options to purchase 8,333 shares of common stock upon director’s election to the board and annual grants thereafter of options to purchase 3,333 shares of common stock to each non-employee director at an exercise price equal to the fair market value of the stock on the date of grant. This Directors’ Plan has expired, but stock options issued under this Directors’ Plan are still outstanding.

A summary of the activity under the Directors’ Plan is as follows (in thousands except per share data):

Directors’ Plan	Three months ending September 30, 2011				Nine months ending September 30, 2011
	Shares		Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, beginning of period		10	$	0.12		20		$	0.33
Options Granted		-		-		-			-
Canceled or Expired		-		-		(10	)	$	0.54
Outstanding, September 30, 2011		10	$	0.12		10		$	0.12

At September 30, 2011 all of the options to purchase 10,000 shares were exercisable.

2003 Non-Employee Directors’ Stock Option Plan

On June 25, 2003, the Board of Directors adopted the 2003 Non-Employee Directors’ Stock Option Plan (the “2003 Plan”). On June 20, 2007 the Board increased the maximum number of authorized shares of common stock which may be issued on exercise of the options granted pursuant to the 2003 Plan from 300,000 shares to 600,000 shares. The 2003 Plan expired on June 24, 2010. This plan replaced the Directors’ Plan which expired on June 13, 2003. The 2003 Plan provided for annual grants of options to purchase 20,000 shares of common stock to each non-employee director at an exercise price equal to the fair market value of the stock on the date of the grant.

A summary of the activity under the 2003 Plan is as follows (in thousands except per share data):

2003 Plan	Three months ending September 30, 2011					Nine months ending September 30, 2011
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, beginning of period		420		$	0.48		420		$	0.48
Options Granted		-			-		-			-
Canceled or Expired		(60	)	$	0.60		(60	)	$	0.60
Outstanding, September 30, 2011		360		$	0.46		360		$	0.46

At September 30, 2011 all of the options to purchase 360,000 shares were exercisable.

Income Taxes

A provision for income taxes for the three month period ended September 30, 2011 was recorded for minimum tax liabilities incurred.

The Company believes that all of its tax positions are sustainable and that no significant adjustment to its unrecognized tax benefits is expected. The majority of the unrecognized tax benefits relate to positions where only the timing of a deduction item is in question. Such liabilities are offset by deferred tax assets and the only effect on the Company's statements of operations relates to the interest accrued on such liabilities.

2. SEGMENT INFORMATION

Sales by geographic markets for the three and nine months ended September 30, 2011 and 2010 were as follows (in thousands):

	Three months ending September 30,				Nine months ending September 30,
	2011		2010		2011		2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Markets:
U.S. markets	$	28	$	63	$	105	$	143
International markets		-		16		20		57
Net product revenue		28		79		125		200

License revenue (worldwide)		85		131		298		381

Net sales	$	113	$	210	$	423	$	581

3. NEW ACCOUNTING PRONOUNCEMENTS

The Company has reviewed the recently issued Accounting Standard Updates and have determined that none of the recent pronouncements are currently applicable to the Company and therefore they are not anticipated to have a material effect on the financial position or results of operations of the Company. For a listing of new accounting pronouncements previously disclosed, see Form 10-K for the year ended December 31, 2010.

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 requirement this year for additional working capital to fund continuing operations. 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” in our annual report on Form 10-K for the year ended December 31, 2010, these risks and uncertainties may include consumer trends, business cycles, scientific developments and the ability to obtain additional working capital or successfully complete financing to support continuing operations. 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

The Company’s discussion and analysis of its financial conditions and results of operations are based upon financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires 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.

Stock Option Policy

The Company adopted ASC 718 “Compensation – Stock Compensation”, for accounting for its stock options effective with the fiscal year beginning January 1, 2006. The fair value of each option granted is estimated on the date of the grant using the Black-Scholes option-pricing model. The Black-Scholes pricing model has assumptions for the risk free interest rates, dividends, stock volatility and expected life of an option grant. The risk free interest rate is based on the U.S. Treasury Bill rate with a maturity based on the expected life of the options and on the closest day to an individual stock option grant. Dividend rates are based on the Company’s dividend history. The stock volatility factor is based on the past seven years of market prices of the Company’s common stock. The expected life of an option grant is based on various factors including historical exercise rates in addition to the life of the stock option. The Company adjusts compensation expense by a forfeiture factor based on historical experience. The fair value of each option grant is recognized as compensation expense over the vesting period of the option on a straight line basis.

The Company did not record the stock compensation expense net of taxes since there was no material provision for income taxes for the period ended September 30, 2011 as the Company incurred net operating losses for which no benefit was recognized, or utilized tax loss carryforwards. The tax benefit is a component of the deferred tax asset disclosed under the heading “Income Taxes” below.

Use of Estimates

Revenue Recognition

● The delivered items or service has value to the customer on a stand alone basis.

● There is objective and reliable evidence of the fair value of the undelivered items or service.

● The delivery or performance of the undelivered items or service is considered probable and substantially in our control.

A summary of the revenue recognized for these multiple units of accounting follows (in thousands):

	Three months ending September 30,				Nine months ending September 30,
	2011		2010		2011		2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Right of first discussion	$	-	$	18	$	-	$	18
Exclusive license		29		32		104		118
Consulting services		-		8		-		8
Total	$	29	$	58	$	104	$	144

The deferred revenue from the PPC license agreement as of September 30, 2011 was $53,000.

A summary of the revenue recognized from these additional licenses and royalty revenues follows (in thousands):

	Three months ending September 30,				Nine months ending September 30,
	2011		2010		2011		2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Royalty revenues	$	56	$	69	$	180	$	219
License fee		-		4		14		18
Total	$	56	$	73	$	194	$	237

The deferred revenue from these licenses has been completely recognized as of September 30, 2011.

Inventories

Inventories are stated at the lower of cost (first in - first out method) or market. A summary of inventories follows (in thousands):

	September 30, 2011
	(unaudited)		December 31, 2010
Compounds	$	30	$	23
Finished goods		-		3
Total	$	30	$	26

Income Taxes

The Company accounts for income taxes under ASC 740 “Accounting for Income Taxes”. Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company’s financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would ultimately be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more-likely-than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. The evaluation of a tax position taken is considered by itself and not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as interest expense and additional income taxes in the statements of operations.

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 the Company directly manages 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. The Company has been unable to sustain profitability and will need additional financing to support its operations. The Company is looking at all sources of funding, raising capital, financing, asset sales and potential merger with desirable companies.

Results of Operations

Net revenue for the three months ended September 30, 2011 and 2010 were as follows (in thousands):

	Three months ending September 30,
	2011		2010
	(unaudited)		(unaudited)
Net product revenue by markets:
U.S. markets	$	28	$	63
International markets		-		16
Net product revenue		28		79

License revenue (worldwide)		85		131

Net Revenues	$	113	$	210

Net revenues for the three months ended September 30, 2011 were $113,000, a $97,000 decrease from the net revenues of $210,000 for the three months ending September 30, 2010. Domestic net revenues for the three months ended September 30, 2011 were $28,000, a $35,000 decrease from the domestic net revenues of $63,000 for the three months ended September 30, 2010. The decrease in domestic revenues is primarily attributable to one customer that placed a reorder in the first quarter of 2011 compared to the third quarter of 2010. The timing of international reorders resulted with the Company not having any international net revenues for the three months ended September 30, 2011 compared to $16,000 for the three months ended September 30, 2010. Orders from Latin American were deferred to the last quarter of this year in contrast to ordering patterns in the prior year. Neither of the domestic nor international customers’ purchasing patterns are on a seasonal or cyclical pattern which results in inconsistent revenue.

License revenues for the three months ended September 30, 2011 and 2010 were $85,000 and $131,000, respectively, a decrease of $46,000 or 35%. The decreased license revenue is due to a combination of the $26,000 final PPC license revenue recognized during the three months ended September 30, 2010 for the first discussion and consulting portion of the license, and reduced royalties earned on product sales for the three months ended September 30, 2011 versus the comparable period last year. The PPC license revenues totaled $29,000 in the three months ending September 30, 2011, compared to $58,000 in the three months ending September 30, 2010. PPC license revenues in the three months ending September 30, 2011 consisted of $29,000 for first discussion work. In the three months ending September 30, 2010 the PPC license revenues consisted of $18,000 for first discussion work, $32,000 from license fee amortization and $8,000 for consulting services. The additional licenses produced $56,000 of license revenue for the three months ending September 30, 2011 compared to $73,000 of license revenue for the three months ended September 30, 2010.

oss profit for the three months ended September 30, 2011 of $98,000 is 41% less than the gross profit of $165,000 for the three months ended September 30, 2010. As a percentage of revenue, gross margin of 87% for the three months ended September 30, 2011 was more than gross margin of 79% for the three months ended September 30, 2010. Gross margin on product sales increased to 46% for the three months ended September 30, 2010 from 41% for the three months ended September 30, 2010. The improved gross margin is based on the increased percentage of license revenue, which has no costs component. The decrease in the total gross profit was due to the lower revenues recognized due to the final PPC license and reduced royalties earned.

	Three months ending September 30,
	2011		2010
	(unaudited)		(unaudited)
Gross Profit by Revenue Type:
Net product gross profit	$	13	$	33
License gross profit		85		132
Total Gross Profit	$	98	$	165

Research and development expenses for the three months ended September 30, 2011 and 2010 were $4,000 and $7,000, respectively. Research expenditures have been curtailed, to the extent possible, until the Company’s liquidity issues have been resolved. Reductions in rent and consultant fees account accounted for the reduced research and development spending. However, patent costs associated with securing U.S. and international registrations for ER 303, our mood-enhancement compound, continues to be funded, as needed, on an on-going basis.

Selling, general and administrative expenses for the three months ended September 30, 2011 of $124,000 are $89,000 less than the selling general and administrative expenses of $213,000 incurred for the three months ended September 30, 2010. Selling, marketing and distribution expenses were $3,000 less than the prior year and general and administrative and facility costs decreased by $86,000. The decreases in costs are the result of decreased compensation and benefits, insurance and legal expenses.

The Company did not record a minimum tax provision for the quarters ended September 30, 2011 and 2010, 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.

Nine Months ended September 30, 2011 as compared to the Nine Months ended September 30, 2010

Net revenue for the nine months ended September 30, 2011 and 2010 were as follows:

	Nine months ending September 30,
	2011		2010
	(unaudited)		(unaudited)
Net product revenue by markets:
U.S. markets	$	105	$	143
International markets		20		57
Net product revenue		125		200

License revenue (worldwide)		298		381
Net Revenues	$	423	$	581

Net revenue for the nine months ended September 30, 2011 was $423,000. This was a 27% decrease from net revenue of $581,000 for the nine months ended September 30, 2010. Domestic product sales for the nine months ended September 30, 2011 of $105,000 were $38,000 less than the $143,000 for the nine months ended September 30, 2010. The decrease is attributable to both inconsistent ordering patterns and slightly reduced reorder quantities. International revenues of $20,000 for the nine months ended September 30, 2011 decreased by $37,000 as compared to the international revenue of $57,000 for the nine months ended September 30, 2010. The decrease in international sales is due to our Latin America customer that deferred reorders until after September 30, 2011.

License revenues for the nine months ending September 30, 2011 and 2010 were $298,000 and $381,000, respectively, a decrease of $83,000 or 22%. Revenues attributable to the PPC license totaled $104,000 in the nine months ending September 30, 2011, compared to $144,000 in the nine months ending September 30, 2010, a $40,000 decrease. PPC license revenues in the nine months ending September 30, 2011 consisted $104,000 from license fee amortization. In the nine months ending September 30, 2010 the PPC license revenues consisted of $18,000 for first discussion work, $118,000 from license fee amortization and $8,000 for consulting services. The Company completed all of the first discussion and consulting work and recognized the remaining deferred revenue for these services during the three months ended September 30, 2010. The additional licenses produced $194,000 for the nine months ending September 30, 2011 compared to $237,000 of license revenue for the nine months ended September 30, 2010, a decrease of $43,000, or 18%.

Gross profit for the nine months ending September 30, 2011 decreased, 129,000, or 27%, to $345,000 from $474,000 for the first nine months ended September 30, 2010. Gross margin of 82% was consistent for both if the nine months ended September 30, 2011 and 2010. Both net revenues and gross profit decreased 27% for the first nine months of 2011 and 2010 and gross margin was also unchanged due to revenue mix and price variances offsetting the reduced revenues in the current period.

Gross margin on product sales increased slightly to 57% for the nine months ended September 30, 2011 from 56% for the nine months ended September 30, 2010. The decreased product gross profit and increasing gross margin on product sales is attributable to the revenue mix of products among transactions are, or are not, subject to royalty payments. Gross margin on license revenue increased to 96% for the nine months ended September 30, 2011 from 95% for the nine months ended September 30, 2010.

	Nine months ending September 30,
	2011		2010
	(unaudited)		(unaudited)
Gross Profit by Revenue Type:
Net product gross profit	$	60	$	112
License gross profit		285		362
Total Gross Profit	$	345	$	474

Research and development expenses for the nine months ended September 30, 2011 and 2010 were $14,000 and $40,000, respectively. Research expenditures have been curtailed, to the extent possible, until the Company’s liquidity issues have been resolved. Reductions in rent and consultant fees account accounted for the reduced research and development spending. However, patent costs associated with securing U.S. and international registrations for ER 303, our mood-enhancement compound, continues to be funded on an on-going basis.

Selling, general and administrative expenses for the nine months ending September 30, 2011 were 385,000 and $647,000 for the nine months ending September 30, 2010, a $262,000 decrease. Selling, marketing and distribution expenses were reduced by $3,000 as the Company continues to focus on product licensing which is less capital intensive and places the Company technology into consumer products which are marketed by consumer product companies. General and administrative and facility costs decreased by $259,000 primarily due to reduced employee compensation and benefits, insurance, legal and accounting fees and rent.

The Company incurred $1,000 of net interest expense for the nine months ended September 30, 2011 compared to no net interest income or expense during the nine months ending September 30, 2010. The increase in net interest expense was due to the Company’s interest paid for financing insurance premiums.

The Company recorded a $1,000 and $2,000 minimum tax provision for the nine months ended September 30, 2011 and 2010, respectively, 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.

Off-Balance Sheet Arrangements.

We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4), investments in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.

Contractual Obligations and Commercial Commitments

In comparison with our Annual Report on Form 10-K for the year ended December 31, 2010, we believe that there have been no significant changes in contractual obligations or commercial commitments outside the ordinary course of business, during the nine months ended September 30, 2011.]

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2011, the Company had cash of $69,000, accounts receivable of $67,000 with no outstanding bank borrowings. At December 31, 2010, it had cash of $92,000 and accounts receivables of $108,000 with no outstanding bank borrowings. For the first nine months of 2011, net cash used in on-going activities was $23,000 as compared to the prior year’s $315,000. The net cash used in operations for the first nine months of 2011 was $292,000 less than the prior year.

Based on the Company’s current operating plans, management believes that the Company’s existing cash resources and cash forecasted by management to be generated by operations will not be sufficient to meet working capital and capital requirements through December 31, 2011. In this regard, the Company must be successful in its current licensing strategy of its compounds or raising additional operating capital to fund continuing operations and support the further development of identified compounds. The Company has been working to secure the financing to continue with on-going operations, however, the Company may not be successful with its plans. If events and circumstances occur such that the Company does not meet its current operating plans, the Company is unable to raise sufficient additional equity or debt financing, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on its future performance, including but not limited to, the premature sale of some or all of its assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms, or the cessation of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Pursuant to Section 229.305(e) of Regulation S-K, we are not required to provide information regardingquantitative and qualitative disclosures about market risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on our evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, 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) were effective.

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 the fiscal quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not party to any pending legal proceedings.

Item 1A. Risk Factors

Pursuant to Item 1A of Form 10-Q we are not required to provide information regarding material changes from he risk factors previously disclosed in our Form 10-K for the year ended December 31, 2010.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In December 2007, the Board of Directors approved a stock repurchase program for the Company to buy back up to 400,000 shares of the Company’s common stock. No shares were repurchased in the quarter ended September 30, 2011.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits

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

101.INS**

XBRL Instance Document

101.SCH**

XBRL Taxonomy Extension Schema

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase

101.LAB**

XBRL Taxonomy Extension Label Linkbase

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase

(**)

Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. In accordance with Rule 406T of Regulation S-T, the information in these exhibits is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on behalf by the undersigned thereunto duly authorized.

		HUMAN PHEROMONE SCIENCES, INC.


Date: November 14, 2011		/s/ William P. Horgan
		William P. Horgan
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

Date: November 14, 2011		/s/ Gregory S. Fredrick
		Gregory S. Fredrick
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

Attached files

HUMAN PHEROMONE SCIENCES INC Reports

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