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 March 31, 2011





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE 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   ̈





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   ̈  No   ̈





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
 ̈
Accelerated filer
 ̈
Non-accelerated filer
 ̈
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   ̈  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 May 6, 2011.









HUMAN PHEROMONE SCIENCES, INC.





INDEX





PagePART IFINANCIAL INFORMATIONITEM 1.
FINANCIAL STATEMENTSBalance Sheets as of March  31, 2011 (Unaudited) and December 31, 2010


3Statements of Operations (Unaudited) for the Three Months Ended March 31, 2011 and 2010


4Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2011 and 2010


5Notes to Financial Statements (Unaudited)


6ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION


11ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


16ITEM 4.
CONTROLS AND PROCEDURES


16PART IIOTHER INFORMATIONITEM 1.
LEGAL PROCEEDINGS


17ITEM 1A.
RISK FACTORS


17ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


17ITEM 3.
DEFAULTS UPON SENIOR SECURITIES


17ITEM 4.
(REMOVED AND RESERVED)


17ITEM 5.
OTHER INFORMATION


17ITEM 6.
EXHIBITS


17SIGNATURES


18




2




PART I


FINANCIAL INFORMATION





Item 1.  Financial Statements





Human Pheromone Sciences, Inc.


Balance Sheets





March 31,


December 31,(in thousands)

2011


2010(unaudited)AssetsCurrent assets:Cash and cash equivalents

$
55


$
92Accounts receivable


75



108Inventories


28



26Other current assets


40



49Total current assets


198



275Total assets

$
198


$
275Liabilities and Shareholders' Equity (Deficit)Current liabilities:Accounts payable

$
44


$
42Current portion of deferred revenue


119



146Accrued professional fees


31



52Accrued employee benefits


42



42Accrued income taxes


2



2Other accrued expenses


6



6Total current liabilities


244



290Non-current liabilitiesDeferred revenue


-



24Total liabilities


244



314Commitments and ContingenciesShareholders' equity (deficit):Common stock, no par value, 13,333,333 shares authorized, 4,151,954 shares issued and outstanding at each date


21,098



21,098Accumulated deficit


(21,144
)


(21,137
)Total shareholders' deficit


(46
)


(39
)Total liabilities and shareholders’ equity (deficit)

$
198


$
275




See accompanying notes to financial statements.




3




Human Pheromone Sciences, Inc.


Statements of Operations


(unaudited)





Three months ended March 31,(in thousands)

2011


2010Net revenue

$
186


$
185Cost of goods sold


52



34Gross profit


134



151Operating expenses:Research and development


5



17Selling, general and administrative


136



232Total operating expenses


141



249Loss from operations


(7
)


(98
)Other income:Interest income, net


-



-Total other income


-



-Net loss  before provision for income taxes


(7
)


(98
)Provision for income taxes


-



-Net loss

$
(7
)

$
(98
)Net loss per common share - basic and fully diluted

$
( 0 .00
)

$
(0 .02
)Weighted average common shares outstanding - basic and fully diluted


4,152



4,152





See accompanying notes to financial statements.




4




Human Pheromone Sciences, Inc.


Statements of Cash Flows


(unaudited)





Three months ended March 31,(in thousands)

2011


2010Cash flows from operating activitiesNet loss

$
(7
)

$
(98
)Adjustments to reconcile net loss to net cash used in operating activities:Stock-based compensation


-



8Changes in operating assets and liabilities:Accounts receivable


33



31Inventories


(2
)


16Other current assets


9



6Accounts payable and accrued liabilities


(19
)


(79
)Deferred revenue


(51
)


(62
)Net cash used in operating activities


(37
)


(178
)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


(37
)


(178
)Cash and cash equivalents at beginning of period


92



350Cash and cash equivalents at end of period

$
55


$
172





See accompanying notes to financial statements.




5




Human Pheromone Sciences, Inc.


Notes to Financial Statements


(unaudited)


March 31, 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 human pheromones and other naturally-occurring compounds tested and funded by the Company creates 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 months ended March 31, 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 for Going Concern





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 $7,000 in the three months ended March 31, 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 $37,000 in the three months ended March 31, 2011, and $258,000 and $557,000 for the years ended December 31, 2010 and 2009, respectively.  As of March 31, 2011, the Company had an accumulated deficit of $21.1 million; cash and cash equivalents of $55,000 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.




6




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 PPC agreement, the Company received an initial payment of $1,750,000 in September 2006 and will earn royalties on 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

March 31,2011


2010(unaudited)


(unaudited)Right of first discussion

$
-


$
-Exclusive license


46



54Consulting services


-



-Total

$
46


$
54








7




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

March 31,2011


2010(unaudited)


(unaudited)Royalty revenues

$
56


$
75License fee


6



7Total

$
62


$
82




The deferred revenue from these licenses as of March 31, 2011 was $8,000.




Inventories





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





March 31, 2011(unaudited)


December 31, 2010Components (raw materials)

$
25


$
23Finished goods


3



3$
28


$
26





Earnings (Loss) Per Share





The Company follows the provisions of ASC 260, Earnings Per Share.  ASC 260 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 March 31, 2011 and 2010, options to purchase 840,000 and 910,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive.





As of March 31, 2011 and 2010, the unaudited components of basic and diluted earnings per share are as follows (in thousands):





Three months ending

March 31,2011


2010Net loss available to common shareholders (unaudited)

$
(7
)

$
(98
)Weighted-average common shares outstanding during the period


4,152



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


4,152



4,152




8




Capital Stock and Stock Options





During the three months ended March 31, 2011, no common stock or preferred stock was issued.  During the three months ended March 31, 2011 and during the year ended December 31, 2010 no options to purchase shares of common stock were granted.  No issued options were exercised during the three months ended March 31, 2011 and no stock options expired under the expired 1990 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 March 31, 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 had no employee or non-employee compensation expense for stock options during the three months ended March 31, 2011, and had $4,000 of employee and $4,000 of non-employee compensation expense for stock options during the three months ended March 31, 2010.





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

March 31, 2011Shares


Weighted

Average

Exercise

PriceOutstanding, beginning of period


400


$
0.34Options Granted


-



-Canceled or Expired


-



-Outstanding, March 31, 2011


400


$
0.34





At March 31, 2011 all of the options to purchase 400,000 shares were exercisable.




9




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 plan has expired, but stock options issued under this 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

March 31, 2011Shares


Weighted

Average

Exercise

PriceOutstanding, beginning of period


20


$
0.33Canceled or Expired


-



-Outstanding, March 31, 2011


20


$
0.33





At March 31, 2011, all of the options to purchase 20,000 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

March 31, 2011Shares


Weighted

Average

Exercise

PriceOutstanding, beginning of period


420


$
0.48Canceled or Expired


-



-Outstanding, March 31, 2011


420


$
0.48





At March 31, 2011, all of the options to purchase 420,000 shares were exercisable.





Income Taxes





A provision for income taxes for the three month period ended March 31, 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.




10




2.    SEGMENT INFORMATION





Sales by geographic markets for the three months ended March 31, 2011 and 2010 were as follows (in thousands):




Three months ending

March 31,2011


2010(unaudited)


(unaudited)Markets:U.S. markets

$
58


$
21International markets


20



28Net product revenue


78



49License revenue (worldwide)


108



136Net revenues

$
186



185





3.    RECENT ACCOUNTING PRONOUNCEMENTS





The Company has reviewed and the recently issued Accounting Standard Updates issued 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 recent 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 which could include assets sales, new license opportunities, expectations of gross margin, additional cost saving measures.  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 reporton Form 10-K for the year ended December 31, 2010,  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





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.




11




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 March 31, 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





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.





Our 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.




12




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 will earn royalties on 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

March 31,2011


2010(unaudited)


(unaudited)Right of first discussion

$
-


$
-Exclusive license


46



54Consulting services


-



-Total

$
46


$
54




The deferred revenue from the PPC license agreement as of March 31, 2011 was $111,000.




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

March 31,2011


2010(unaudited)


(unaudited)Royalty revenues

$
56


$
75License fee


6



7Total

$
62


$
82




The deferred revenue from these licenses as of March 31, 2011 was $8,000.




Inventories





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





March 31, 2011(unaudited)


December 31, 2010Components (raw materials)

$
25


$
23Finished goods


3



3$
28


$
26




13




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 operations.  The Company is looking at all sources of funding, raising equity capital, debt financing asset sales and potential merger with desirable companies.





Results of Operations





Net revenue for the three months ended March 31, 2011 and 2010 were as follows (in thousands):





Three months ending March 31,2011


2010(unaudited)


(unaudited)Net product revenue by markets:U.S. markets

$
58


$
21International markets


20



28Net product revenue


78



49License revenue (worldwide)


108



136Net Revenues

$
186


$
185




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Net revenues for the three months ending March 31, 2011 were $186,000, a $1,000 increase from the three months ending March 31, 2010 revenues of $185,000.  Domestic revenues for the three months ended March 31, 2011 were $58,000, a $37,000 increase from the domestic sales of $21,000 for the three months ended March 31, 2010. The increase is due to a purchase by a licensee in 2011 that did not make a similar purchase of our compounds in 2010.  International revenues for the three months ended March 31, 2011 of $20,000 were decreased by $8,000 as compared to the sales of $28,000 for the three months ended March 31, 2010 due to decreased purchases in the Latin American market.  Neither the domestic or international customers’ purchasing patterns are on a seasonal or cyclical pattern which results in inconsistent revenue.





License revenues for the three months ending March 31, 2011 and 2010 were $108,000 and $136,000, respectively, a decrease of $28,000 or 21%.  The decrease is primarily attributable to reduced royalties generated from sales of a body wash product and hair treatment products.  The PPC license revenues totaled $46,000 in the three months ending March 31, 2011, compared to $54,000 in the three months ending March 31, 2010.  PPC license revenues in the three months ending March 31, 2011 and 2010 were derived from license fee amortization and required patent renewal costs, with both items having less revenue recognized in 2011 than in 2010. The additional licenses (non-PPC revenue) produced $62,000 of license revenue for the three months ending March 31, 2011, as compared to $82,000 of license revenue for the three months ended March 31, 2010.





Gross profit for the three months ended March 31, 2011 of $134,000 is 11% less than the gross profit of $151,000 for the three months ended March 31, 2010.  As a percentage of revenue, gross profit of 72% for the three months ended March 31, 2011 was less than gross profit of 82% for the three months ended March 31, 2010.  Gross margin on product sales decreased to 50% for the three months ended March 31, 2011 from 69% for the three months ended March 31, 2010. The decrease in both the total gross margin and gross profit percentage are attributed to the lower income from high margin royalty revenues with increased product sales on lower margin products.





Three months ending March 31,2010


2009(unaudited)


(unaudited)Gross Profit by Revenue Type:Net product gross profit

$
39


$
34License gross profit


95



117Total Gross Profit

$
134


$
151





Research and development expenses for the three months ended March 31, 2011 and 2010 were $5,000 and $17,000, 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.





Selling, general and administrative expenses for the three months ended March 31, 2011 of $136,000 are $96,000 less than the selling general and administrative expenses of $232,000 incurred for the three months ended March 31, 2010.  Selling, marketing and distribution expenses of $2,000 were incurred in both of the three month periods ending March 31, 2011 and 2010.  General and administrative and facility costs decreased by $96,000.  The decrease in costs is the result of a $64,000 reduction in wages and employee benefits, reduced legal, professional and consulting fees of $20,000 and reductions in many other expense categories.





The Company did not record any net interest income or expense for the three months ended March 31, 2011 or 2010.  The Company’s cash position limited any interest income and interest expense has also been limited as of March 31, 2011 and 2010.





The Company did not record a minimum tax provision for the quarters ended March 31, 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.





Off-Balance Sheet Arrangements.





None.




15




LIQUIDITY AND CAPITAL RESOURCES





At March 31, 2011, the Company had cash of $55,000 with no outstanding bank borrowings and a negative working capital of $46,000.  At December 31, 2010, it had cash of $92,000 with no outstanding bank borrowings and a negative working capital of $15,000.  Net cash used in operating activities was 37,000 for the three months ended March 31, 2011 as compared to net cash used in operating activities of $178,000 for the three months ended March 31, 2010.  The net cash used in operations for the first three months of 2011 was $141,000 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.





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.




Item 3. Quantitative and Qualitative Disclosures about Market Risk.




Not required for smaller reporting companies.





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 at the reasonable assurance level.





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 March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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PART II


OTHER INFORMATION





Item 1.  Legal Proceedings




The Company is not party to any pending legal proceedings.





Item 1A.  Risk Factors




Not required for smaller reporting companies.





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 March 31, 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 ActExhibit 31.2

Certification Pursuant to Section 302 of the Sarbanes-Oxley ActExhibit 32

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350




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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:  May 16, 2011
/s/ William P. HorganWilliam P. HorganChairman and Chief Executive Officer(Principal Executive Officer)Date:  May 16, 2011
/s/ Gregory S. FredrickGregory S. FredrickChief Financial Officer(Principal Financial Officer and Principal AccountingOfficer)




18