10-K 1 e10074_form10k.htm ANNUAL REPORT - FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION

United States

Securities and Exchange Commission

Washington, D.C.  20549


FORM 10-K

(MARK ONE)


[X]

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


For the fiscal year ended December 31, 2009


[   ]

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


For the transition period from                    to


Commission file number 0-23544


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 W Santa Clara St.,  Suite 720,  San Jose, California_   ____________95113____________

(Address of principal executive offices)          (Zip code)


Registrant’s telephone number, including area code:  (408) 938-3030


Securities registered under Section 12(b) of the Act:

______None_______

(Title of class)


Securities registered under Section 12(g) of the Act:

_Common_Stock_

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o  No þ


Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities and 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 þ  No o    


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   

Yes o  No o


Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Yes o  No þ    

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.  (Check One):    


Large accelerated filer o

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company þ 


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  

Yes o  No þ    


The aggregate market value of the voting stock held by non-affiliates of the registrant was $578,000 as of June 30, 2009 based upon the closing sale price on the OTC Bulletin Board reported for such date.  Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.


There were 4,151,954 shares of the registrant’s common stock issued and outstanding as of March 15, 2010


DOCUMENTS INCORPORATED BY REFERENCE


None




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TABLE OF CONTENTS



FORWARD LOOKING STATEMENTS

 

PART I

 

 

 

    ITEM 1.

BUSINESS

  3

 

    ITEM 1A.

RISK FACTORS

  8

 

    ITEM 2.

PROPERTIES

  9

 

    ITEM 3.

LEGAL PROCEEDINGS

  9

 

    ITEM 4.

(REMOVED AND RESERVED)

  9

 

 

 

PART II

 

 

 

    ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

10

 

    ITEM 6

SELECTED FINANCIAL DATA

10

 

    ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

10

 

    ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

17

 

    ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

17

 

    ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

17

 

    ITEM 9A(T).

CONTROLS AND PROCEDURES

17

 

    ITEM 9B.

OTHER INFORMATION

17

 

 

 

PART III

 

 

 

    ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

18

 

    ITEM 11.

EXECUTIVE COMPENSATION

20

 

    ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  AND RELATED STOCKHOLDER MATTERS

24

 

    ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

25

 

    ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

25

 

 

 

PART IV

 

 

 

    ITEM 15.

EXHIBITS

26

SIGNATURES

28





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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 of the business and the discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements.  These forward looking statements include but are not limited to the Company’s plans for sales growth and expansion into new channels of trade, expectations of gross margin, expenses, new product introduction, and the Company’s liquidity and capital needs.  These matters involve risks and uncertainties that could cause actual results to differ materially from the statements made.  In addition to the risks and uncertainties described in “Risk Factors”, below, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation.  These and other factors may cause actual results to differ materially from those anticipated in forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.


Item 1.

Business


Introduction


The Company, a California corporation, was founded in 1989 as EROX Corporation to develop and market a broad range of consumer products containing mood-enhancing compounds containing pheromones or eliciting pheromone like responses.  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,” “HPS” or the “Company”.


The Company believes that research funded by the Company presents an opportunity to create and market new categories of mood-enhancing based consumer products that do not require FDA approval.  The Company believes that its related patents provide it a proprietary position in developing, licensing and marketing this category of consumer products.


Replications of naturally occurring compounds, such as pheromones that underlie the Company’s current patents, are chemical substances known to stimulate species-specific biological responses in animals.  For nineteen years, scientists and advisors engaged by the Company have studied the functions and characteristics of human pheromones and other mood-enhancing compounds.


The compounds are included as a component of the Company’s current products and are manufactured for the Company by contract vendors.  The manufacturing process for these compounds begins with hydrocarbon compounds commonly available from chemical supply houses, and involves the use of a synthetic chemistry process.  Since 2001 an independent laboratory has manufactured these compounds, androstadienone and estratetraenol (the “Initial Compounds”), under the direction of HPS’ consulting scientists.  All the steps in the manufacturing process are standard chemical laboratory procedures.  The manufacturing process for compounds are similar to methods by which other naturally occurring substances (such as amino acids) are synthetically produced.


The Company is also involved in the identification and development of additional compounds that, in initial human studies, have shown a wide spectrum of mood-enhancing activities.  In September 2008, the Company filed with the U.S. Patent Office a Comprehensive Patent Application for ER 303 one of the new compounds that it has been testing.  The application continues to be under review by the Patent Office.



The HPS Technology


The Initial Compounds.  People have long known that insects and animals communicate with one another through subtle, biochemical cues recognized and understood by other members of the same species.  These biochemical signals warn of danger, indicate the presence of food, mark territorial boundaries and display sexual maturation or readiness.  The biochemical messengers that deliver these communications are pheromones.  Pheromones trigger (pheromonal response) a nerve impulse to the hypothalamus and other emotion-related centers of the brain when applied within or adjacent to the nasal passages.





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Scientists have observed that in higher species the influence of pheromones grows increasingly more subtle and complex.  Not surprisingly, reactions to these mood-enhancing compounds are very subtle in human beings.  While humans have definite responses to pheromones, the research sponsored by HPS and other scientists suggests that the highly developed human brain filters and masks those reactions.  Rather than producing an isolated effect, as in lower level species, these mood-enhancing human pheromones act in concert with other sensory cues provided by odor, sight, taste, sound and touch to provide a cumulative influence.  


As a result of its research and the research of other scientists, the Company believes evidence has been developed that indicates that humans respond to these Initial Compounds.  HPS has also found that they are sexually dimorphic; that is, some show more activity in females while others show a higher level of activity in males.  During the studies of human pheromones conducted by the Company, certain human subjects volunteered descriptions of their feelings.  Women frequently described feeling comfortable or at ease or more positive, while a number of male subjects described a feeling of confidence and self-assurance.  These results have been independently validated at leading universities around the world.


Consumer Products and the Initial Compounds. Animal pheromones are well known in the consumer products industry.  Natural and synthetic equivalents of mammalian pheromones such as musk, civet and castoreum are found in many fragrances today.  However, since pheromonal cues can trigger a response only by members of the same species, these animal pheromones have no specific effect on humans; instead, they act only as fixatives or carriers for the fragrance or as a component of the consumer product.


A scent binds to smell receptors in the nose and stimulates a specific region of the brain resulting in the sensation of smell.  These Initial Compounds bind to separate receptors that are physically and functionally distinct from smell receptors.  These pheromone receptors stimulate a region of the brain different from that stimulated by smell receptors.  Since it is widely believed that traditional perfumes and toiletry products allure and intrigue the senses, an alliance between these products and the Company’s compounds seems quite natural.  For these products to create a true effect in humans, however, it must contain compounds that will trigger the pheromonal response in humans. Thus, consumer products containing these mood enhancing components may provide more allure than any others currently available.


Additional Compounds.  The Company continues to explore naturally occurring substances in a variety of tests to increase its knowledge and understanding of their range of influence on human emotions and their application as components of consumer products.  In 2005, the Company began conducting studies on human volunteers with two additional naturally-occurring compounds, ER 303 and ER 99, with positive results.  The Company continued to invest in further development of these two additional compounds.  In September 2008, the Company filed with the U.S. Patent Office a Comprehensive Patent Application for ER 303 and has begun presenting the benefits of the compound to interested consumer product companies.  ER 303 is a previously undeveloped compound with its origin in sea coral, which has positive emotional impacts on both men and women, enhancing feelings of positive social relationships, excitement and social attraction.  


With respect to ER 99, which preliminary results have not been made public, the Company is seeking funding for expanded human testing to validate the initial findings.  The Company’s six other identified compounds which have completed early stages of development will not have additional testing work performed and minimal development work performed until the financing for such work is available.



The Current HPS Products and Research


Products.  The Company began by marketing three fragrances, REALM® Women, REALM® Men and inner REALM®.  These “proof-of-concept” products included a full line of fragrance and bath and body products including eau de toilette, cologne, eau de parfume, lotion, bath and shower gel, after-shave balm, deodorant, talc, soap and body cream.  In 2003 the Company sold the assets and worldwide ownership rights to the REALM Women, REALM Men and innerREALM product lines, including the rights to all trademarks associated therewith.  The proceeds from the sale enabled the Company to focus on developing additional mood-enhancing compounds which it could license and sale to other consumer product companies.

 

Licensing the use of the Company’s Initial Compounds and related technology is currently the core business of the Company.  These compounds are sold to licensed customers and included as components in their products. The Company also offers private label manufacturing services for licensed customers if that is desired.




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The Company developed a new line of fragrance and toiletry products containing these Initial Compounds for men and women under the trademark Natural Attraction®. The Company distributes these products via www.naturalattraction.com and through distributors both inside and outside the United States. The reference to this Internet website does not constitute incorporation by reference of the information contained on or hyperlinked from this Internet website.


In August 2006, the Company signed an Agreement with Personal Products Company, a division of McNeil-PPC, Inc. (“PPC”) a Johnson & Johnson company. The Agreement with 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 documents supportable claims of effectiveness, and an exclusive right to our existing patented compounds in specific consumer product fields (collectively hereinafter referred to as “PPC Rights”).  In exchange for the PPC rights HPS received an initial cash payment and will receive future royalties on sales.  The Company retains exclusive rights in several product fields and shares co-exclusive rights in other product areas, with the right to sublicense.


In May 2007, the Company signed an Agreement with Schwarzkopf & Henkel, a division of Henkel Consumer Goods, Inc. and they introduced hair styling products containing our patented compounds.  


In June 2009 a second division of Henkel Consumer Goods, Inc., Dial Corporation released a new body wash product line into its retail distribution channel.  Also during the year a license agreement was signed for distribution of products containing the Company’s patented compounds in Taiwan and a licensee launched a new product on the Home Shopping Network.


Research.  Mood-enhancing compounds, in general, are chemical substances known to stimulate species-specific biological responses in animals.  The study of the uses, effects and advantages of human specific compounds is in its infancy, but studies conducted under the Company’s sponsorship as well as several studies conducted by scientists at leading research universities around the world have revealed new information regarding the beneficial effects of the Company’s compounds and the biological pathways these compounds traverse in the human body.


The Research Agreement with the University of Utah, singed on July 13, 2004, to conduct research and provide services expired July 14, 2009.  The five year agreement provided that the University will provide professional research and services for specific research programs mutually initiated by the Company and accepted by the University.  While the University shall own any inventions and improvements conceived or reduced to practice from the work performed, the Company retains the exclusive option to license any inventions or improvements conceived or reduced to practice and market the products developed from the research results.  The Company has the right to develop new compounds outside of this Research Agreement.  During the five year period there was no activity undertaken under this agreement.


For the years ended December 31, 2009 and 2008, total research and development expenditures totaled $139,000 and $184,000, respectively.  Research expenditures of $54,000 that were incurred in 2009, and $137,000 incurred in 2008, to support the PPC license have been charged as cost of goods sold.  The Company expects to continue development efforts, with or without consumer product company(s) as development partners.  Since its inception through December 31, 2009, the Company has incurred $6,277,000 in direct research and development related expenses.


Markets and Competition


The Competitive Environment.  The Company’s current products contain what the Company believes are unique components: androstadienone and estratetraenol, and a mood-enhancing compound derived from sea coral, ER 303.  With these components HPS is able to differentiate its products, and its licensees products, from traditional consumer products.  Other than its customers and licensees, the Company believes that no other companies in or outside the United States have the right to produce or distribute products that contain these compounds.  However, even with this proprietary technology, the Company and its current customers and licensees are competing against numerous companies including Estee Lauder, Chanel, Proctor and Gamble, Unilever, L’Oreal, and offerings from retailers such as Victoria’s Secret Beauty and Bath and Body Works.





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While HPS’s current products are fragrances and toiletries, the Company believes its patented technology has applications beyond traditional fragrances and bath and body products.  HPS hopes to position its technology as a desired “value added” ingredient for any consumer product.  Mood-enhancing pheromonal response compounds provide the first patented technology of a component that has broad application and usage in cosmetic, hair treatment, cleansing, over-the-counter health supplements and home and vehicle environmental products.  The Company does not feel that it has the resources to successfully exploit the potential markets for such applications and continues to actively seek licensing and supply relationships with consumer product manufacturers.


Marketing Strategy.    The Company’s strategy has shifted from the initial need to educate the consumers and the trade about the Company’s compounds to its current focus on educating consumer product and fragrance companies. There are many consumer product and fragrance companies that could use these inexpensive and scientifically validated compounds in their various products to add product differentiation and mood enhancing benefits to their consumer.  These consumer product and fragrance companies are in the business of developing new product and product lines and marketing those products to the consumer.    The Company’s marketing strategy and focus is to provide the compounds and technical expertise so that new products are successfully brought to market.


 In addition the Company continues to market its internally developed brand of mood enhancing based products under the Natural Attraction brand.    The Company will seek to license this brand to a consumer product and fragrance companies and exit the direct manufacture, distribution and sales of consumer products


Distribution and Promotional Activities.    The Company’s strategic focus is now on expanding the market for its existing patented mood-enhancing compounds to other consumer product companies and to the expansion of its internally developed brand of products under the Natural Attraction label.  The Company manufactures and supplies its compounds using contract manufacturing; the compounds are distributed from Company facilities.  The Company continues to manufacture and sell its Natural Attraction Brand products to distributors and individuals from its own facilities. The Company will seek to license this brand to a consumer product and fragrance companies and exit the direct manufacture, distribution and sales of consumer products.  


The Company has presented ER 303 to a few qualified companies that are looking for a new compound to enhance their existing product lines.  The Company will manufacture and distribute ER 303 as it does with its initial compounds.  The Company is seeking to discuss with qualified organizations ER 99 potential development and licensing relationships.  The Company’s six other identified compounds which have completed early stages of development will not be ready for distribution until they have additional testing work performed and minimal development work performed, which is delayed until the financing for such work is available.



Technology Licensing and Supply Agreements


One of the strategic objectives of the Company is to expand the use of its patented human pheromone technology and other mood enhancing technologies by working closely with consumer products companies who are leaders in their particular markets.  In December 1998, HPS signed its first agreement to supply Avon Products, Inc. with its synthesized human pheromones and began shipments in 1999. Life-to-date revenues from licensing and supply agreements, which began in 1999 with Avon and continuing through 2009 with subsequent licensees aggregated $3,068,000 in 2009 and $2,804,000, in 2008, respectively.  HPS is also in supply and / or licensing discussions with other companies in several consumer products fields and markets.


In August 2006, the Company signed an agreement with Personal Products Company, a division of McNeil-PPC., Inc. (“PPC”) a Johnson & Johnson company.  As consideration for the rights of first discussion, technology consulting services and licensing rights granted the Company received an initial cash payment of $1,750,000 and future royalties on sales.  The PPC agreement will expire when the initial patents on the licensed technology expire in March 2012.  The Company records revenue for the consulting services and rights of first discussions as the Company incurs expenses and resources towards fulfilling the obligations to PPC.  License revenue is being recognized over the life of the agreement, sixty-seven months, on a straight line basis.  


In May 2007, the Company signed an Agreement with Schwarzkopf & Henkel, a division of Henkel Consumer Goods, Inc. and later that year a new hair styling product line containing our patented compounds was launched.  





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In June 2009 a second division of Henkel Consumer Goods, Inc., Dial Corporation released a new body wash product line into its retail distribution channel.  Also during the fiscal year 2009 a license agreement was signed for distribution of products containing the Company’s patented compounds in Taiwan and a licensee launched a new product on the Home Shopping Network.


Dependence on One or Few Major Customers


During 2009, three customers comprised 31%, 23% and 10% of the Company’s net revenues. Accounts receivable from these customers at December 31, 2009 account for 0%, 21% and 61%, respectively, of the net receivables.  During 2008, three customers comprised 46%, 17% and 15% of the Company’s net revenues, and accounts receivable from these customers at December 31, 2008 accounted for 0%, 0% and 73%, respectively.  


The Company’s customer base has shifted to a few mid to large size consumer product and fragrance companies.  These types of companies provide the promotion, advertising and distribution necessary to launch new products in a mass market.  The specialty and smaller sized companies continue to be an important part of our business.


 Patents and Other Intellectual Property


In December 1993 and January 1994, the Company received two United States patents for non-therapeutic compositions of fragrances and human pheromones for use as components in perfumes and personal care products and consumer and industrial products such as clothing, air fresheners and paper products. The initial patents on the licensed technology will expire in March 2012.  In 1995, patents, for the compounds, were granted in Taiwan, and in 1997, patents were granted in Mexico.  In June 1998, the Company was granted a Notice of Allowance of its patents for the inclusion of synthesized human pheromones by the European Patent Office.  Individual country patents were also granted.  HPS is also the exclusive licensee for non-therapeutic uses of pheromones in consumer products under a royalty-free worldwide perpetual license to United States patents and patent applications covering pheromone technology owned by Pherin Pharmaceuticals, Inc.  This technology is also the subject of other foreign patents and applications.  The Company also relies on trade secrets protection for confidential and proprietary information.  Other patent applications are currently anticipated as new compounds are developed.


In September 2008, the Company filed with the U.S. Patent Office a Comprehensive Patent Application for a new compound, referred to by the Company as ER 303, which is derived from sea coral.   In testing with human volunteers, ER 303 showed significant improvement in many types of feelings in both men and women as compared with a placebo.


Regulation


Unless the FDA extends its regulatory authority, regulation by governmental authorities in the United States and other countries is not expected to be a significant consideration in the sale of the Company’s products and in its ongoing research and development activities.  Under current regulations, the market introduction of the majority of non-medicated cosmetics products does not require prior formal registration or approval by the FDA, although this could change in the future.  The cosmetic industry has established self-regulating procedures and most companies perform their own toxicity and consumer tests.  Voluntary filings related to manufacturing facilities are made with the FDA. The Cosmetics Division of the FDA, however, does monitor closely problems of safety, adulteration and labeling.  In addition, if the FDA should determine that claims made by the Company for its fragrances involve the cure, mitigation or treatment of disease, the FDA could take regulatory action against the Company and its products.


In addition, the United States Federal Trade Commission (“FTC”) monitors product claims made in television and radio commercials and print advertising to ensure that any claim can be substantiated.  If the FTC believes that any advertising claim made by the Company with regard to the effect or benefit of its products is not substantiated by adequate data or research and the Company cannot support such claim, the FTC could also take regulatory action against the Company and its products.


Employees


At March 1, 2010, the Company had two full-time employees and one part-time employee.  In addition, the Company, as needed, retains consultants to provide advice in the areas of research, sales and marketing, advertising, product safety testing, regulatory compliance, MIS and product development.  None of the Company’s employees is represented by a labor union.  The Company considers its relations with its employees and consultants to be good.




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Manufacturing


The Company and its licensees are dependent on third parties to manufacture its products.  The Company has qualified two manufacturers for the production of the synthesized compounds.    Since 2002, the Company has utilized only one of these manufacturers, with multiple plants worldwide, to furnish all of the Company’s compound requirements.  The Company does not believe that it would be economically feasible to establish its own manufacturing facilities since synthesized compounds are available from multiple facilities with the experience in the preparation of these compounds on a large scale.


The Company has selected several essential oil companies that provide fragrance products to the industry to supply such compounds to HPS and its licensees in accordance with proprietary formulas developed for the Company and generic formulas developed by the essential oil companies.  The Company has agreements in place with the supplier for its products and has been furnished with commercial quantities of the Company’s and its licensees’ products for sale to consumers.  While the Company is responsible for providing the patented compounds, final bottling and packaging of the products and ancillary product lines are performed by independent manufacturers.  These manufacturers selected by HPS and its licensees have extensive experience in blending, filling and packaging consumer products, and have the capacity to satisfy the Company’s and its licensees’ manufacturing needs, at least for the foreseeable future.  The Company believes that such manufacturing services are widely available to the consumer products industry at competitive prices and has identified additional contract manufacturing companies.


Available Information


We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.  Our Internet website address is "www.erox.com".  The reference to our Internet website does not constitute incorporation by reference of the information contained on or hyperlinked from our Internet website. Our filings are also available online at the Securities and Exchange Commission (SEC) website on the Internet. The address of that site is www.sec.gov.  The materials are also available at the SEC’s Public Reference Room, located at 100 F Street, Washington, D.C. 20549. The public may obtain information through the public reference room by calling the SEC at 1-800-SEC-0330.


Item 1A.  

Risk Factors


Our business is subject to various risks, including those described below.  You should carefully consider the following risk factors and all other information contained in this Form 10-K.    If any of the following events or outcomes actually occurs, our business, operating results and financial condition would likely suffer.


The Company requires additional funding to continue operations.    The Company’s current cash position and projected results of operations for the next twelve months requires additional outside financing.  Unless the Company raises additional funding by debt or equity issuances, asset sales or a significant increase in product and licensing revenues accompanied by reductions in corporate spending, the Company’s current cash on hand will be insufficient to cover its working capital requirements.  The Company is actively working on securing the required funding and it is not known how successful those efforts might be.


The Company may be unable to raise sufficient additional capital when we need it or to raise capital on favorable terms.  The sale of equity or convertible debt securities in the future may be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur future indebtedness and may contain other terms that are not favorable to us or our stockholders.  If we are unable to obtain adequate funds on reasonable terms, we may be required to curtail operations, obtain funds by entering into financing agreements on unattractive terms, or enter a merger or acquisition agreement with another entity.


The Company has not had sustained profitable operations.  Since 1997, the Company has incurred losses from operations.  In 2000 the Company refocused its business model based on product licensing agreements.  Although the change to a licensing based business model has resulted in reduced operating losses, profitable operations have not been achieved.    The Company has added additional licensees in recent years but has not achieved profitability.





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The Company’s marketing strategy to solicit existing consumer product companies to license the compounds may not be successful. The Company may not be attract and retain an adequate license and royalty revenue base to achieve profitable operations.  Consumer product companies may choose not to license or private label the Company’s compounds which could assist in differentiating their products and product lines from competitors.  The success of the new compounds will require the licensees to invest in marketing the benefits of their products containing the Company compounds, and the Company can not control the licensees marketing efforts.  


The Company is dependent on a few major customers.  The Company is reliant on a small number of consumer product companies who have embraced the Company’s compounds which provides a way to differentiate their products and product lines from competitors.  If one or more of these licenses discontinues its products containing the Company’s compounds the resulting lack of revenues could have an adverse financial impact to the Company.  The Company continues to market its compounds to Consumer product companies that may choose not to license or private label the Company’s products.  


The Company may not be able to develop new patentable compounds.  The Company’s success substantially depends upon developing and obtaining patents for new mood and sensory enhancing compounds.   The Company requires that its products be scientifically tested validating the human responses to the compounds.  The Company may not be successful in validating that the desired human responses or have the required funding to develop the compounds which have been identified.


The Company may not be able to protect its technology or trade secrets from others who choose to violate the Company’s patents.  The Company intends to protect and defend its patent rights from those who might violate them. However, the costs to defend and litigate may exceed the Company’s financial resources.


The Company may not be able to recruit and retain key personnel.  The Company’s success substantially depends upon recruiting and retaining key employees and consultants with research, product development and marketing experience.  The Company may not be successful in recruiting and retaining these key people.


The Company relies upon other companies to manufacture its products. The Company and its distributors/licensees rely upon other companies to manufacture its compounds, supply components, and to blend, fill and package its fragrance products.  The Company and its distributors/licensees may not be able to obtain or retain compound manufacturers, fragrance suppliers, or component manufacturers on acceptable terms.   This would adversely affect operating results.


Item 2.

Properties


The Company presently occupies 2,609 square feet of space for its headquarter offices in San Jose, California, pursuant to a lease extension signed on March 5, 2004 that expired March 31, 2007.  The minimum annual rental is $50,734, with annual rent increases in accordance with the increase in the Consumer Price Index in the local area.  The Company has converted to a month-to-month lease for these offices. Commencing in February 2001, the Company leases storage space in the local area on a month-to-month basis for approximately $0.98 per square foot.


The Company also occupies 1,700 square feet of laboratory space for its research and development operations located in Salt Lake City, Utah, pursuant to a lease signed on September 1, 2008 that expired September 1, 2009.  The minimum annual rental was $25,000 with no annual rent increase and the Company is continuing the rent at this rate on a  month-to-month basis until a new lease is signed.  Our existing facilities are not yet being used at full capacity and management believes that these facilities are adequate and suitable for current and anticipated needs.


During the year ended December 31, 2008, the Company incurred $82,000 in net rent expense and related charges for these facilities.


Item 3.

Legal Proceedings


We are not currently involved in any material legal proceedings.


Item 4.

(Removed and Reserved)





9





Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and  Issuer Purchases of Equity Securities


The Company’s common stock is quoted on the OTC Bulletin Board under the symbol EROX.OB.  As of March 1, 2010, there were approximately 580 holders of record of the Company’s common stock.  Set forth below is the high and low bid information for the Company’s common stock on the OTC Bulletin Board as reported during each of the four calendar quarters of 2009 and 2008.


 

 

 

 

 

 

 

 

 

 

HIGH

 

 

LOW

2009

 

 

 

 

 

 

First quarter

 

$

0.25

 

$

0.12

Second quarter

 

$

0.41

 

$

0.17

Third quarter

 

$

0.23

 

$

0.15

Fourth quarter

 

$

0.17

 

$

0.13

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

First quarter

 

$

0.69

 

$

0.55

Second quarter

 

$

0.63

 

$

0.57

Third quarter

 

$

0.50

 

$

0.29

Fourth quarter

 

$

0.35

 

$

0.11

 

 

 

 

 

 

 


These quotations reflect interdealer prices, without retail mark-up, markdown or commissions and may not represent actual sales.


The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business and does not plan to pay any cash dividends in the foreseeable future.


Issuer Purchases of Equity Securities

 

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 fiscal 2009.


Item 6.

Selected Financial Data


None


Item 7.

Management’s Discussion and Analysis


The Company’s strategic focus is now on expanding the use of its existing patented compounds to other consumer product companies on a worldwide basis and the development of its internally developed Natural Attraction and other proprietary lines of mood enhancing based products.  In addition, the Company has added ER 303 to this group of products for which a use patent has been filed.


The Company’s business model results in the generation of two types of revenue, licensing income and product sales income.  Under some agreements, the licensee will opt to pay a higher price for the compounds it purchases and a lower royalty rate; other companies will select the alternate – lower compounds costs with a higher royalty rate.  


In 2008 the Company’s first multinational licensee discontinued production, after eleven years of manufacturing, of the fragrance products containing our patented compounds.  This licensee had been purchasing the pheromones at a relatively high price per gram, but did not pay a royalty on sales.  As such, product revenue was significantly reduced as compared with the prior year. However, the Company is party to other agreements which provide for lower sales prices per gram, but include a royalty payment on the licensee’s sales.  The Company would expect increases in licensing revenue as a percentage of total revenue in future periods.





10




New product development expenses and the launch timetable are determined by the licensee.  The licensee also works closely with its ultimate consumer and better understands the thought process and mood of the end user than the Company does.  As such, it is difficult for the Company to definitively assess how national and world economic weakness may effect the licensee’s sales of products containing our compounds/technology, and the resulting impact on the Company.



Year ended December 31, 2009 compared with the year ended December 31, 2008


Net revenue for the year ended December 31, 2009 and 2008 were as follows (in thousands):



 

 

Year ending  December 31,

 

 

2009

 

2008

 Net product revenue by markets:

 

 

 

 

  U.S. markets

$

170

$

277

  International markets

 

119

 

111

      Net product revenues

 

289

 

388

 

 

 

 

 

  License revenues (worldwide)

 

596

 

604

 

 

 

 

 

  Net Revenues

$

885

$

992


Net revenues for the year ended December 31, 2009 were $885,000 compared to $992,000 for the year ending December 31, 2008, a decrease of $107,000, or 11%. The decrease is a result of a large customer discontinuing a product line containing our patented compounds after 11 years of selling their fragrance.  License revenues for the years ending December 31, 2009 and 2008 were $596,000 and $604,000, respectively, a 1% decrease of $8,000.  The decrease is attributable to reduced revenue recognition from the PPC license of $179,000 which was almost offset by $171,000 of revenue from both new and existing licensees.  License revenues, excluding PPC revenues, were $319,000 for the year ended December 31, 2009 compared to $148,000 of license revenue, excluding PPC revenues, for year ended December 31, 2008. The increase in revenues was attributed to a new men’s body wash product line launched in the United States in 2009 by Dial Corporation.  Revenue recognized under the PPC license totaled $278,000 in 2009, $118,000 for first discussion work, $156,000 license fee amortization and $4,000 for consulting services.  In 2008 the license revenues recognized under the PPC license were $457,000, $248,000 for first discussion work, $163,000 license fee amortization and $46,000 for consulting services.  


 Net product revenues of $289,000 for the year ending December 31, 2009 was $99,000 less than last year’s $388,000 for the year ending December 31, 2008.  Product sales were down due to our multinational licensee which discontinued our product line in 2008.  For the year ending December 31, 2009 product sales to active customers increased by $73,000.  International sales increased $8,000 for the year ending December 31, 2009 due to a new Taiwan licensee.  The Company is continuing to seek new licensees and to expand discussions with potential licensees in consumer product markets.


 

 

Year ending December 31,

 

 

2009

 

2008

 

 

(in thousands)

 

(in thousands)

  Net revenue by type:

 

 

 

 

  License revenue

$

      596

$

     604

  Product revenue

 

      289

 

     388

  Total

$

      885

$

    992


Gross profit for the year ended December 31, 2009 of $690,000 is 3% more than the gross profit of $670,000 for the year ended December 31, 2008.  As a percentage of revenue, gross profit of 78% for the year ended December 31, 2009 was more than gross profit of 68% for the year ended December 31, 2008.  Gross margin on product sales decreased slightly to 67% for the year ended December 31, 2009 from 74% for the year ended December 31, 2008. The increases in both the total gross margin and gross profit percentage are attributed to the increased license revenues from the launch of a new product line by an affiliate of an existing licensee.  The increases in the higher margin license revenue is consistent with the Company’s goal of licensing the technology being at the core of the Company’s business.    




11




 

 

Year  December 31,

 

 

2009

 

2008

 

 

(unaudited)

 

(unaudited)

 Gross Profit by Revenue Type:

 

 

 

 

  Net product gross profit

$

      195

$

      288

  License gross profit

 

      495

 

      382

 Total Gross Profit

$

      690

$

      670


Research and development expenses for the year ending December 31, 2009 and 2008 were $85,000 and $47,000, respectively.  Research expenditures of $54,000 that were incurred in 2009, and $137,000 incurred in 2008, to support the PPC license have been charged as cost of goods sold. The total research and development costs incurred for the current year, including the amount recorded as license costs, was $139,000 which was $45,000 less than the prior year’s $184,000.  The decrease of the research expenditures was the result of a decreased consultant fees as the Company reduced research and development funding until additional financing is obtained.


Selling, general and administrative expenses increased $2,000 to $891,000 for the year ending December 31, 2009 from $889,000 for year ending December 31, 2008.  Sales, marketing and distribution expenses increased $3,000, while other administrative expenses decreased by $1,000.  The increase in sales and marketing expenses was due to the Company introducing ER303 to potential consumer product companies.  Administrative expense of $12,000 that were incurred in 2009, and $38,000 incurred in 2008, to support the PPC license have been charged as cost of goods sold. The total administrative cost incurred for the current year, including the amount recorded as license costs, was $828,000 which was $26,000 less than the prior year’s administrative expenses of $854,000.  Decreased audit and tax fees of $25,000, and stock option grant compensation decrease of $40,000 were the primary cause of the decrease. General operating expense  decreases were offset by increased business development and funding costs of $30,000 and legal fee increases of $17,000.


Total other income decreased by $27,000 to $3,000 for the year ending December 31, 2009 from $30,000 for the year ending December 31, 2008.  Net interest income for 2009 was $3,000 and in 2008 the net interest income was $30,000. The decrease in net interest income was due to decreased cash balances as the year progressed.


In 2009 the Company recorded a $1,000 tax provision, and in 2008 the Company recorded a $3,000 tax provision for state minimum taxes.


As of December 31, 2009 the Company’s gross deferred tax asset, which relates primarily to net operating losses carried forward, was approximately $4,769,000.  However, a full valuation allowance was provided for the gross deferred tax asset as management could not determine that it is more likely than not that the deferred tax asset will be realized.  


Liquidity and Capital Resources


At December 31, 2009, the Company had cash and cash equivalents of $350,000, working capital of $200,000, and no bank borrowings outstanding. These balances at December 31, 2008 were $907,000 and $609,000, respectively with no bank borrowings outstanding.  Net cash used in operating activities was $557,000 for the year ended December 31, 2009 as compared with net cash used by operating activities of $530,000 for the year ended December 31, 2008. The cash used in operations for 2009 increased by $27,000 and is comparable to the prior year.

 

The Company’s current cash position and projected results of operations for the year 2010 requires that additional sources of funding be obtained.  Unless the Company raises additional funding by debt or equity issuances, asset sales or a significant increase in product and licensing revenues accompanied by reductions in corporate spending, the Company’s current cash on hand will be insufficient to cover its working capital requirements.  The Company is actively working on securing the required funding and it is not known how successful those efforts might be.


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 be sufficient to meet working capital and capital requirements through the current year. In this regard, the Company must be successful in its current licensing of its compounds or raise 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, there is no assurance that the Company will 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, or such financing is insufficient or not available, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on our future performance, including but not limited to, the premature sale of some or all of our assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms, or the cessation of operations.




12




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.


  New Accounting Pronouncements


Effective July 2009, the Financial Accounting Standards Board (FASB) codified accounting literature into a single source of authoritative accounting principles, except for certain authoritative rules and interpretive releases issued by the Securities and Exchange Commission. Since the codification did not alter existing U.S. GAAP, it did not have an impact on our Condensed Consolidated Financial Statements. All references to pre-codified U.S. GAAP have been removed from this Form 10-K.


The Company adopted FASB ASC 820-10, Fair Value Measurements on January 1, 2008, which did not have a material impact on its financial condition and results of operations. In September 2006, the Financial Accounting Standards Board issued ASC 820-10 which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. ASC 820-10 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. In February 2008, the Financial Accounting Standards Board delayed the effective date of ASC 820-10 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually to fiscal years beginning after November 15, 2008. The Company adopted ASC 820-10 beginning January 1, 2008.


In March 2008, the FASB released ASC 815-10, Disclosures about Derivative Instruments and Hedging Activities.  ASC 815-10 requires enhanced disclosures about an entity’s derivative instruments and hedging activities and thereby improves the transparency of financial reporting.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The adoption of ASC 815-10 did not have any impact on the Company's financial position or results of operations.


In May 2008, the FASB released ASC 460-10, Accounting for Financial Guarantee Insurance Contracts.  The scope of FAS ASC 460-10 is limited to financial guarantee insurance contracts focusing on the recognition and measurement of claim liabilities.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  The adoption of ASC 460-10 did not have any impact on the Company's financial position or results of operations.


In April 2009, the FASB released ASC 958-10, Not-for-Profit Entities: Mergers and Acquisitions—including an amendment of FASB Statement No.  The scope of ASC 958-10 is limited to Non-for-Profit Entities  and is not applicable to the Company.


In May 2009, the FASB released ASC 855-10, Subsequent Events.  The scope of ASC 855-10 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009.  The Company has evaluated subsequent events for recognition or disclosure through the time of filing these financial statements on Form 10-K with the Securities and Exchange Commission.


In June 2009, the FASB released ASC 860-10, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.  The scope of ASC 860-10 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This statement is effective for financial statements issued for fiscal years beginning and interim periods beginning after November 15, 2009.  The adoption of ASC 860-10 is not expected to have any impact on the Company's financial position or results of operations.





13




In June 2009, the FASB released ASC 810-10, Amendments to FASB Interpretation No. 46(R).  The scope of ASC 810-10 is to improve financial reporting by enterprises involved with variable interest entities.  This statement is effective for financial statements issued for fiscal years beginning and interim periods beginning after November 15, 2009.  The adoption of ASC 810-10 is not expected to have any impact on the Company's financial position or results of operations.


In June 2009, the FASB issued ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 16.  The FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this ASC, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.   This ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of ASC 105-10 is not expected to have any impact on the Company's financial position or results of operations, but nominal costs will be incurred for resource materials, staff education and initiating reporting requirement compliance.


In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. The adoption of ASU 2009-05 is not expected to have any impact on the Company's financial position or results of operations.


In October 2009, the FASB concurrently issued the following Accounting Standards Updates:  ASU No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1).  This standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction.  This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements.


ASU No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (formerly EITF Issue No. 09-3).  This standard removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance.


ASUs No. 2009-13 and 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted.  Alternatively, an entity can elect to adopt these standards on a retrospective basis, but both these standards must be adopted in the same period using the same transition method.  The Company expects to apply this standard on a prospective basis for revenue arrangements entered into or materially modified beginning January  1, 2011 and these are not expected to have a material impact on the Company’s financial position or results of operations.  



CRITICAL ACCOUNTING POLICIES


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




14




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 option 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 periods ended December 31, 2009 and 2008 as the Company incurred net operating losses for which no benefit was recognized, nor were tax loss carryforwards utilized.  The tax benefit is a component of the deferred tax asset disclosed in the income taxes footnote.



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 revenues 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.


● If 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 documents 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 resources towards fulfilling the obligations to PPC, based on based on guidance provided by ASC 605-25.





15




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 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. 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):


 

 

Year ending December 31,

 

 

2009

 

2008

Right of first discussion

 

$

118

 

$

248

Exclusive license

 

156

 

163

Consulting services

 

4

 

46

  Total

 

$

278

 

$

457


The deferred revenue related to the PPC agreement as of December 31, 2009 and 2008 was $334,000 and $612,000, respectively.   


The Company has granted three 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.  There is no discernable service to be provided by the Company to warrant an alternative revenue recognition method.


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


 

 

Year ending December 31,

 

 

2009

 

2008

Royalty revenues

 

$

297

 

$

141

License fee

 

20

 

7

  Total

 

$

317

 

$

148


The deferred revenue from these licenses as of December 31, 2009 and 2008 was $18,000 and $9,000, respectively.   


Income Taxes


The Company accounts for income taxes following the interpretative guidance provided by FASB Accounting Standards Codification (ASC) Topic 740 – 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.




16




Off-Balance-Sheet Arrangements


As of December 31, 2009, the Company did not have any off-balance-sheet arrangements as defined in Item 303(a)(4) of SEC Regulation S-K.



Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


None



Item 8.

Financial Statements


See the Company’s audited financial statements set forth on pages 29 to 46.



Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure


None.



Item 9A(T).

Controls and Procedures


a)  Evaluation of Controls and Procedures.


Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report on Form 10-K.


(b)  Management’s Report on Internal Control Over Financial Reporting.


Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and preparation of the financial statements for external purposes in accordance with U.S. generally accepted accounting principals as of December 31, 2009.


This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.


(c)  Changes in Internal Control Over Financial Reporting.  

There have not been any changes in the Company’s internal control over financial reporting during the most recent fiscal quarter ended December 31, 2009, that materially affected, or are reasonably likely to materially effect, the Company’s internal control over financial reporting.


Item 9B.

Other Information


None.




17




PART III


Item 10.

Directors, Executive Officers, and Corporate Governance of the Registrant


The executive officers of the Company and their ages as of March 1, 2010 are as follows:


Name

 

Age

 

Position

 

 

 

 

 

William P. Horgan

 

62

 

Chairman, Chief Executive Officer and Director

 

 

 

 

 

Gregory S. Fredrick

 

55

 

Chief Financial Officer


William P. Horgan has served as the President and Chief Executive Officer since January 1994, when he joined the Company.  Mr. Horgan was appointed to the newly created post of Chairman of the Board in November 1996 after serving as Director since January 1994.  From May 1992 to January 1994, he served as Chief Financial and Administrative Officer of Geobiotics, Inc., a biotechnology-based development stage company, and from January 1990 to May 1992, was employed by E.S. Jacobs and Company as Senior Vice President of Worlds of Wonder, Inc.  From March 1988 to January 1990, he was Chief Financial Officer of Advanced Polymer Systems, Inc., a manufacturer and supplier of polymer based delivery systems for the ethical dermatology, OTC skin care and personal care markets.  Prior to 1988, he held various executive and management positions with CooperVision, Inc. and several affiliated companies, including President of its Revo, Inc. subsidiary.


Gregory S. Fredrick joined the Company in October 1998 as Vice President and Controller. Prior to joining the Company. Mr. Fredrick spent nearly eight years in the entertainment industry.  From February 1997 to June 1998, he was the Vice President and Controller for the start-up record label / internet company 911 Entertainment.  Mr. Fredrick served in various finance and operations capacities while with Windham Hill Records / BMG Entertainment from April 1990, leaving as Director of Operations in December 1996.


Code of Ethics


The Company has adopted a Code of Ethics that applies to all of our directors, officers and employees.  The Code of Ethics is posted on our website at erox.com under the caption About the Company.


The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics by posting such information on our website, at the address and location specified above.


Board of Directors



Name

Age

Position

William P. Horgan

62

Chairman of the Board of Directors, Chief Executive Officer and Director

Bernard I. Grosser, MD

81

Director

Helen C. Leong

82

Director

Carson Tang

50

Director

Robert Marx

79

Director





18




William P. Horgan was appointed Chairman of the Board in November 1996 after serving as President, Chief Executive Officer and Director since January 1994, when he joined the Company. Prior to joining the Company 1994 Mr. Horgan spent almost 17 years in executive positions in several public and privately-held OTC Pharmaceutical, Consumer Products and Technology Companies.   .Mr. Horgan’s industry experience, professional experiences and knowledge of the Company’s technology qualify him to serve as a director.  In addition, his experience as chief executive officer provided him with operational and industry expertise that is important to the Board, particularly, his experience guiding the Company from a consumer fragrance product company to a technology licensing company. As a result of his knowledge and experience in the biotech and consumer medical industry, Mr. Horgan has substantial knowledge of the industry and the technology, in addition to his skills in consensus building, which are especially valuable in his role as board chair.


Bernard I. Grosser, MD has served as a Director since March 1992.  Dr. Grosser is a Professor of Psychiatry at the University of Utah and served as Chairman of the Department of Psychiatry at the University of Utah from 1982 to 2007.  Dr. Grosser has conducted extensive research related to hormonal target areas of the brain. Dr. Grosser served on the Board of Directors for Large Scale Biology Corporation from 1995 to 2007.  Dr. Grosser has participated as a member of the Speaker’s Bureau  for AstraZeneca, Schering Plough and Eli Lilly, and sits on the Pharmacy and Therapeutics Committee for Regence Blue Cross.  Dr. Grosser’s medical background, professional experience and research expertise are attributes that qualify him as a director.  


Helen C. Leong has served as a Director since April 1993.  Mrs. Leong is and has been for more than fifteen years the managing partner of Leong Ventures, which makes investments in the areas of biogenetics and health-oriented technologies.  She is a general partner, and lead investment analyst, with CLW Associates, which specializes in real estate, biotech and consumer product fields.  Mrs. Leong was also a founder of Mid-Peninsula Bank of Palo Alto where she served as a director from 1988 until October 2007 when the bank was acquired by Wells Fargo Bank and was a member of the Investment Committee for Mid-Peninsula Bank.  Mrs. Leong accounting and financial education and experiences with biogenetics and health-oriented companies, banking and venture capital companies qualify her to as both a director and as chairperson of the audit committee.


Robert Marx has served as a Director since October 1994.  Mr. Marx was the founder and Co-Chief Executive Officer of Gilda Marx Incorporated, a firm specializing in designing and manufacturing exercise apparel and products for active lifestyles from 1979 until the sale of the company in 1996.  He is a former member of the Executive Committee of the Sports Apparel Products Council and the Board of Directors of the California Manufacturers Association (from 1982 to1988), and has been active with the City of Hope joining the Board of Governors in 1999 and has been the Chairman of the Board of Governors for the City of Hope since 2007.  Mr. Marx’s consumer product sales and marketing and leadership experiences qualify him as a director.


Carson Tang has served as a Director since June 2007.  Mr. Tang serves as the Managing Partner of the Renovatio Global Fund, a technology-based fund based in San Jose, California.  Renovatio Global Fund currently holds 654,720 shares (approximately 16%) of the Company’s Common Stock.  Mr. Tang is also advisor and a General Partner for the Atlanta based Seraph Fund, the founder and director of American Prolmage, Inc. in Los Angeles, California and a Managing Director of DISC Beteiligungs-und Management GmbH in Bingen, Germany. Before founding American Prolmage, Inc., Mr. Tang was the Vice President and co-founder of ViewSonic Corporation.  Mr. Tang’s experience with high tech industry with ties to Asia, venture capital management and capital funding experience qualify him as a director.


There are no family relationships among directors or executive officers of the Company.


Director Nomination   

The Company does not have a standing nominating committee due to the small size of the Board.  Each of the current Board members participates in the consideration of director nominees.





19




Criteria for Board Membership.  In selecting candidates for appointment or re-election to the Board, the current Board of Directors considers the appropriate balance of experience, skills and characteristics required of the Board of Directors, and seeks to insure that at least a majority of the directors are independent under the rules of the Nasdaq Stock Market, that members of the Company’s audit committee meet the financial literacy and sophistication requirements under the rules of the Nasdaq Stock Market and at least one of them qualifies as an “audit committee financial expert” under the rules of the Securities and Exchange Commission. Nominees for director are selected on the basis of their depth and breadth of experience, industry knowledge, integrity, ability to make independent analytical inquiries, understanding of the Company’s business environment, and willingness to devote adequate time to Board duties.

Shareholder Nominees. The Board of Directors will consider written proposals from stockholders for nominees for director. Any such nominations should be submitted to the Board of Directors c/o the Secretary of the Company and should include the following information: (a) all information relating to such nominee that is required to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) the names and addresses of the shareholders making the nomination and the number of shares of the Company’s common stock which are owned beneficially and of record by such shareholders; and (c) appropriate biographical information and a statement as to the qualification of the nominee, and should be submitted in the time frame described in the Bylaws of the Company and under the caption, “Shareholder Proposals” below.

Process for Identifying and Evaluating Nominees.   The Board of Directors believes the Company is well-served by its current directors.   In the ordinary course, absent special circumstances or a material change in the criteria for Board membership, the nominating committee will renominate incumbent directors who continue to be qualified for Board service and are willing to continue as directors.    If an incumbent director is not standing for re-election, or if a vacancy on the Board occurs between annual shareholder meetings, and the Board determines the seat should be filled, the Board of Directors will seek out potential candidates for Board appointment who meet the criteria for selection as a nominee and have the specific qualities or skills being sought.  Director candidates will be selected based on input from members of the Board, senior management of the company and, if the Board of Directors deems appropriate, a third-party search firm. The Board of Directors will evaluate each candidate's qualifications and check relevant references; in addition, such candidates will be interviewed by at least one member of the Board of Directors. Candidates meriting serious consideration will meet with all members of the Board.  Based on this input, the Board of Directors will evaluate which of the prospective candidates is qualified to serve as a director and whether the Board of Directors should recommend that this candidate be appointed to fill a current vacancy on the Board, or presented for the approval of the shareholders, as appropriate.      The Company has never received a proposal from a shareholder to nominate a director.  Although the Board of Directors has not adopted a formal policy with respect to shareholder nominees, the Board of Directors expects that the evaluation process for a shareholder nominee would be similar to the process outlined above.


Audit Committee

The current members of the Audit Committee of the Board of Directors are Mrs. Leong, Dr. Grosser and Mr. Marx.  The Board has determined that all members of the audit committee are independent directors under the rules of the Nasdaq Stock Market and each of them is able to read and understand fundamental financial statements.  The Board has determined that Mrs. Leong qualifies as an “audit committee financial expert” as defined by the rules of the Securities and Exchange Commission.  The Audit Committee’s purpose is to consult with the Company’s independent auditors concerning their audit plans, the results of the audit, the Company’s accounting principles and the adequacy of the Company’s general accounting controls.  The Audit Committee operates under a written charter, a copy of which is posted on our website at www.erox.com.


Item 11.

Executive Compensation


The following tables and descriptive materials set forth information concerning compensation earned for services rendered to the Company by the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”) who are the only executive officers for fiscal year 2009 whose salary and bonus for the fiscal year 2009 exceeded $100,000 (the “Named Executive Officers”).




20




The following table sets forth for each of the Named Executive Officers: (i) the dollar value of base salary and bonus earned during the year ended December 31, 2009; (ii) the aggregate grant date fair value of stock and option awards granted during the year, computed in accordance with FASB ASC Topic 718; (iii) all other compensation for the year; and, finally, (iv) the dollar value of total compensation for the year.  



Summary Compensation Table – Named Executive officers

  



Name and Principal Position

Year



Salary

Bonus

Option Awards(1)


Other
Compensation(2)

Total

William P. Horgan

Chairman of the Board and

Chief Executive Officer

2009

2008

$221,500

$221,500

$ 18,000

 $ 18,000

$239,500 $239,500

 

 

 

 

 

 

 

Gregory S. Fredrick

Chief  Financial Officer

2009

2008

$120,000

$120,000


$31,500

$120,000 $151,500


1

 For each of the stock option grants, the value shown is the total valuation as of the grant date as calculated per FASB ASC Topic 718.

2

Mr. Horgan receives an automobile allowance of $18,000 per year.




Outstanding Equity Awards at Fiscal Year End


The following table sets forth information on outstanding option and stock awards held by the Named Executive Officers at December 31, 2009, including the number of shares underlying both exercisable and unexercisable portions of each stock option as well as the exercise price and the expiration date of each outstanding option.   All options granted at fair market value based on the closing price of our stock on the day of the grant.



  

 

Option awards

Name

  

Number of securities underlying unexercised options (#) exercisable

  

Number of securities underlying unexercised options (#) unexercisable 1

  

  

Option exercise price ($)

  

Option expiration date

William P. Horgan

 

 

300,000

  

  

-

  

  

$

0.315

  

  

6/21/2013

  

 

 

  

 

  

 

 

 

  

  

 

  

  

Gregory S. Fredrick

 

 

20,000

 

  

-

 

 

$

0.315

 

  

6/21/2013

 

 

 

52,500

 

  

17,500

 

 

$

0.450

 

  

7/17/2015

  

1 All options for the Named Executive Officers vest monthly over a period of two (2) years. The options are exercisable for seven  years, and expire on the date seven years from the date of grant.



Employment Agreements and Arrangements


We have no employment agreements or arrangements with any of the Named Executive Officers of the Company or with any other employee of the Company.  




21




Change in Control Agreements


All of the stock option agreements issued to the Named Executive Officers contain a change in control provision.  In the event of a change of control the stock options accelerate, so that the options become fully exercisable and vested as immediately prior to consummation of the Change of Control.   


Since the closing market price of our common stock on December 31, 2009 of $0.15 was lower than the exercise price of these options, our Named Executive Officers would not have realized any value from the acceleration had the change of control occurred on December 31, 2009.   



Indemnification Agreement


We have no indemnification agreements with any of the Named Executive Officers of the Company or with any other employee of the Company.


DIRECTOR COMPENSATION


The Company uses a stock-based incentive compensation to attract and retain qualified candidates to serve on the Board. In setting director compensation, the Company considers the significant amount of time that Directors expend in fulfilling their duties to the Company as well as the skill-level required by the Company of members of the Board.


Cash Compensation Paid to Board Members


Members of the Board who are not employees of the Company do not receive any cash compensation for their services.  The members are reimbursed for their out-of-pocket travel expenses incurred to attend the meetings.

  

Stock Option Program   


The Company’s 2003 Non-Employee Directors’ Stock Option Plan (the “2003 Plan”) provides for the automatic grant of 20,000 shares of Common Stock if a person who is neither an officer nor an employee of the Company and who has not previously been a member of the Board is elected or appointed director.  Each such option will become exercisable at the rate of one-twelfth of the number of shares covered by the option each month following the grant date, so long as the individual is serving as a director, with full vesting over one year.  In addition, on the date of the first meeting of the Board immediately following each annual meeting of shareholders of the Company, the Company is required to grant to each non-employee director a seven year Non-Qualified Option to purchase 20,000 shares of the Company’s Common Stock at an exercise price equal to the fair market value of Common Stock on the date of the grant.  These options will vest one-twelfth per month after the date of grant, as long as the individual is serving as a director, with full vesting over one year.   The exercise price of all options granted pursuant to the 2003 Plan is the fair market value of the Company’s Common Stock at the closing price on the day of the grant.  A total of 600,000 shares are reserved for issuance under the 2003 Plan.

  




22




The following table discloses the cash, equity awards and other compensation earned, paid or awarded, as the case may be, to each of the Company’s directors during the fiscal year ended December 31, 2009.


Summary Compensation Table – Directors

  

Name

  

Year

  

Fees Earned or Paid in Cash ($)

  

Stock Awards ($)

  

Option Awards ($) 1

  

Nonequity Incentive Plan Compensation ($)

  

Change in Pension Value and Nonquali-fied Deferred Compen-sation Earnings ($)

  

All Other Compensation

  

Total ($)

  

Bernard I. Grosser, MD

  

  

2009

  

  

0

  

  

0

  

  

4,200

  

  

N/A

 

 

N/A

  

  

0

  

  

4,200

  

  

  

  

 

  

  

  

  

  

  

  

  

  

  

  

 

 

 

 

  

  

  

  

  

  

  

Helen Leong

  

  

2009

  

  

0

  

  

0

  

  

 4,200

  

  

N/A

 

 

N/A

  

  

0

  

  

4,200

  

  

  

  

 

  

  

  

  

  

  

  

  

  

  

  

 

 

 

 

  

  

  

  

  

  

  

Robert Marx

  

  

2009

  

  

0  

  

  

0

  

  

4,200

  

  

N/A

 

 

N/A

  

  

0

  

  

4,200

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carson Tang

  

  

2009

  

  

0  

  

  

0

  

  

4,200

  

  

N/A

 

 

N/A

  

  

0

  

  

4,200

  

  


1

Stock option grants issued to outside Directors vest monthly over a one (1) year period immediately from the date of grant. The options are exercisable for seven years, and expire on the date seven years from the date of grant. For each of the stock option grants, the value shown is the total valuation as of the grant date as calculated per FASB ASC Topic 718.  All grants made at the fair market value based on the closing price of our stock on the day of the grant.




Compensation Committee Interlocks and Insider Participation

  

The Compensation Committee consists of Dr. Grosser (Chairman), Mr. Marx and Mr. Carson Tang all of whom are independent non-management directors. None of the Compensation Committee members has served as an officer or employee of the Company, and none of the Company’s executive officers has served as a member of a Compensation Committee.

  

EQUITY COMPENSATION PLAN INFORMATION


The following table provides information as of December 31, 2009 with respect to the shares of the Company’s Common Stock that may be issued under all of the Company’s existing equity compensation plans (including individual compensation arrangements) consisting of the  2003 Non-Employee Directors’ Stock Option Plan and restricted-stock option grants made to employees outside the plan.


Equity Compensation Plans

Number of  securities to be issued upon exercise of outstanding options, warrants and rights

  Weighted-average exercise price of outstanding options, warrants and rights

Number of remaining available for future issuance under equity compensation plans(excluding securities reflected in column(a))

Equity compensation plans approved by security holders

-

 -

-    

Equity compensation plans not approved by security holders

910,000

 $ 0.40

120,000





23




DESCRIPTION OF PLANS NOT APPROVED BY SHAREHOLDERS


On June 25, 2003 the Board of Directors adopted the 2003 Non-employee Directors Stock Option Plan  (the “2003  Plan”) of Human Pheromone Sciences, Inc.  A maximum of 600,000 shares of common stock which may be issued on exercise of the Options granted pursuant to the 2003 Plan.  The 2003 Plan will expire on June 24, 2010.  This plan replaces the Directors’ Plan which expired June 13, 2003.  The 2003 Plan provides 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.


 

In June 2006, the Company’s Board of Directors Compensation Committee granted Nonstatutory Stock Options to the Company’s employees, including the Named Executive Officers, covering a total of 330,000 shares of common stock. These stock options were granted outside of any stock option plan and are subject to two year vesting.  Options were granted at the fair value at the date of the grant as determined by the closing price on the day of the grant.


In July 2008, the Company’s Board of Directors Compensation Committee granted Nonstatutory Stock Options to a Named Executive Officer, covering a total of 70,000 shares of common stock. These stock options were granted outside of any stock option plan and are subject to two year vesting.  Options were granted at the fair value at the date of the grant as determined by the closing price on the day of the grant.


COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT


Section 16(a) Beneficial Ownership Reporting Compliance


Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than 10% of the outstanding shares of the Company’s Common Stock, to file with the Securities and Exchange Commission initial reports of ownership (Form 3) and changes in ownership of such stock (Forms 4 and 5).

To the Company’s knowledge, based solely upon review of the copies of such reports and certain representations furnished to it, all Section 16(a) filing requirements applicable to its executive officers and four of the directors were complied with during the year ended December 31, 2009.  Mr. Tang has not yet filed with the SEC the July 29, 2009 stock option grant.



Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

 

The following table sets forth certain information regarding the beneficial ownership of the Company’s Common Stock as of March 16, 2010 by:  (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each of the Company’s executive officers named in the Summary Compensation Table; (iii) each of the Company’s directors; and (iv) by all directors and executive officers as a group.  In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of March 16, 2010 are deemed outstanding.  Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of each other person.  The percentage of beneficial ownership is based on 4,151,954 shares of Common Stock outstanding as of March 16, 2010.  Except as otherwise indicated, the Company believes that the beneficial owners of the securities listed below, based on information furnished by such owners, have sole investment and voting power with respect to the Common Stock shown as being beneficially owned by them:





24




Directors, Nominees, Officers And 5% Stockholders

Shares Beneficially Owned

Percent Of Class

 

5% Stockholders

 

 

 

    Renovatio Global Funds, L.P. (1)

654,720

15.8%

 

    Larry H. Schatz (2)

300,000

7.2  

 

Directors, Nominees and Officers

 

 

 

    William P. Horgan (3)  (4)

357,733

8.0  

 

    Bernard I. Grosser, M.D.(4) (5)

268,851

6.3  

 

    Helen C. Leong(4) (5)

211,687

4.9  

 

    Robert Marx(4) (5)

242,685

5.6  

 

    Carson Tang(4) (6)

713,053

17.0  

 

    Greg Fredrick (4) (7)

87,083

2.1  

 

All executive officers and directors as a group (6 shareholders)

1,881,092

37.4  

 

 

 

 

(1)

Fund may be contacted at 1737 N. First St., Suite 350, San Jose, CA 95116.  Carson Tang, a director of the Company, is the Managing Partner of Renovatio Global Funds, L.P. (“Renovatio”) and, as such, may be deemed to share voting and investment power over all of such shares and therefore may be deemed a beneficial owner of such shares.  Mr. Tang disclaims beneficial ownership of shares held by Renovatio except to the extent of his direct pecuniary interest therein.

(2)

Individual may be contacted at 152 W. 57th Street, 31st Floor, New York, NY 10019.   Based upon information supplied by Mr. Schatz. on the Schedule 13D filed with the SEC on April 10, 2006  

(3)

Includes 300,000 shares issuable on exercise of outstanding options.

(4)

Individuals may be contacted at the corporate offices at 84 W. Santa Clara St., Suite 720, San Jose, CA 95113.

(5)

Includes 145,001 shares issuable on exercise of outstanding options.

(6)

Includes 55,000 shares issuable on exercise of outstanding options.

(7)

Includes 87,083 shares issuable on exercise of outstanding options.




Item 13.

Certain Relationships and Related Transactions, and Director Independence


The Board has determined that Dr. Grosser, Mrs. Leong, Mr. Marx and Mr. Tang are independent under the rules of the Nasdaq Stock Market.  There were no related party transactions to be considered in the last fiscal year in the determination of the independence of the directors.



Item 14.

Principal Accountant Fees and Services


SingerLewak LLP was retained as the Company’s independent registered public accounting firm for the years ended December 31, 2009 and 2008.  The following table shows the fees paid or accrued by the Company for the audit and other services provided by SingerLewak LLP for fiscal 2009 and 2008.  


 

 

 

2009

 

 

2008

Audit Fees(1)

 

$

 50,963

 

$

 53,746

Audit Related Fees(1)

 

$

 29,711

 

$

 58,888

Tax Fees(2)

 

$

 9,266

 

$

 10,359

All Other Fees

 

 

-

 

 

 -




25




(1)

Audit fees represent fees for professional services provided in connection with the audit of the Company’s financial statements and review of the statutory and regulatory filings.  Audit related fees are for the review of the Company’s quarterly financial statement and audit services provided in connection with other statutory or regulatory filings.

 (2)

Tax fees principally represent tax compliance services.

The Audit Committee reviews and pre-approves the audit and tax fees proposed by SingerLewak LLP in their annual engagement letter.  All fees described above were approved by the Audit Committee.  SingerLewak LLP did not provide any other services during 2009.

The Company does not anticipate that representatives from SingerLewak LLP will be present at the Annual Meeting.



PART IV


Item 15.

Exhibits


Financial Statements.  The following are filed as a part of this report:

Page

Report of SingerLewak LLP, Independent Registered

    Public Accounting Firm

 

   29

Balance Sheets – December 31, 2009 and 2008

 

   

   30

Statements of Operations – Years ended December 31, 2009 and 2008

   31

Statements of Shareholders’ Equity –Years ended December 31, 2009 and 2008

   32

Statements of Cash Flows – Years ended December 31, 2009 and 2008

   33

Notes to Financial Statements

   34


Exhibits.  The following exhibits are filed as part of this report.



EXHIBIT

NUMBER

EXHIBIT TITLE


      3.1

Copy of the Registrant’s Articles of Incorporation (1)

      3.2

Copy of Registrant’s By-laws (1)

 

    10.1

Technology Transfer Agreement between Registrant and Pherin dated

     August 23, 1991 (1)

  10.2  

Supply Agreement with Avon Products, Inc.(2)

  10.3   

Lease Agreement between Registrant and Ernest E. Pestana and Irene Pestana, dated

                                  March 5, 2001 for the Registrant’s California offices (3).

 10.4

Amendment to License and Purchase Agreement with Niche Marketing, Inc. dated

     March 8, 2002. (4)

   

   10.5

2003 Nonemployee Directors Stock Option Plan of Human Pheromone Sciences, Inc*(5)


Item 15.

Exhibits (continued)


        EXHIBIT

       NUMBER

EXHIBIT TITLE


 10.6

Lease Agreement between Registrant and Ernest E. Pestana and Irene Pestana, dated

                                  March 5, 2004 for the Registrant’s California offices (6).

 10.7

Research Agreement with University of Utah effective July 15, 2004 (7).

 10.8  

Form of Nonstatutory Stock Option Agreement *(8).

 10.9  

License Agreement with Personal Products Company (PPC), a division of McNeil-PPC, Inc.(9)


 31.1

Certification of Chief Executive Officer pursuant to Rules 13a – 15(e)

               31.2

Certification of Chief Financial Officer pursuant to Rules 13a – 15(e)

               32

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




26




(1)

Filed as an exhibit with corresponding exhibit no. to Registrant’s Registration Statement on Form SB-2 (Registration No. 33-52340) and incorporated herein by reference.


(2)

Filed as an exhibit with corresponding exhibit no. to Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 1998  (Registration No. 000-23544) and incorporated herein by reference.


(3)

Filed as an exhibit with corresponding exhibit no. To Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2001  (Registration No. 000-23544) and incorporated herein by reference.


(4)

Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the three month ended March 31, 2002   (Registration No. 000-23544) and incorporated herein by reference.   


(5)

Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the three month ended June 30, 2003  (Registration No. 000-23544) and incorporated herein by reference.


(6)

Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the three month ended March 31, 2004 (Registration No. 000-23544) and incorporated herein by reference.


(7)

Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the six months ended June 30, 2004 (Registration No. 000-23544) and incorporated herein by reference.


(8)

Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the six months ended June 30, 2006 (Registration No. 000-23544) and incorporated herein by reference.


(9)

Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the nine months ended September 30, 2006. Certain portions of this exhibit have been omitted and filed separately with the Commission.  Confidential treatment has been requested with respect to the omitted portions (Registration No. 000-23544) and incorporated herein by reference.



  *     Management contract or compensatory plan







27




SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, Human Pheromone Sciences, Inc. Corporation has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in San Jose, California, on March 29, 2010.



HUMAN PHEROMONE SCIENCES, INC.



By: /s/ William P. Horgan   


Name: William P. Horgan    


Title: Chief Executive Officer and Chairman of the Board



POWER OF ATTORNEY


KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints William P. Horgan and Gregory S. Fredrick, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed on behalf of Human Pheromone Sciences, Inc. by the following persons in the capacities and on the dates indicated.



SIGNATURE

CAPACITY

DATE


/s/ William P. Horgan                                      

Chief Executive Officer

March 29, 2010

William P. Horgan

and Chairman

(Principal Executive Officer)


/s/ Gregory S. Fredrick                                        

Chief Financial Officer

March 29, 2010

Gregory S. Fredrick

(Principal Financial and

Accounting Officer)


/s/ Bernard I. Grosser                                      

Director

March 29, 2010

Bernard I. Grosser, MD



/s/ Helen C. Leong                                          

Director

March 29, 2010

Helen C. Leong



/s/ Robert Marx                                               

Director

March 29, 2010

Robert Marx


/s/ Carson Tang                                               

Director

March 29, 2010

Carson Tang




28




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors  

Human Pheromone Sciences, Inc.

San Jose, California




We have audited the balance sheets of Human Pheromone Sciences, Inc. (the “Company”) as of December 31, 2009 and 2008, and the related statements of operations, shareholders’ equity and cash flows for each of the years then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.


In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Human Pheromone Sciences, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.


The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and negative operating cash flows. This raises substantial doubt about the Company's ability to continue as a going concern.  Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.


We were not engaged to examine management's assessment of the effectiveness of Human Pheromone Sciences, Inc.’s  internal control over financial reporting as of December 31, 2009 included in the accompanying Item 9A(T) Controls and Procedures and, accordingly, we do not express an opinion thereon.

 




/s/ SingerLewak LLP


San Jose, California

March 29, 2010








29




Human Pheromone Sciences, Inc.


Balance Sheets


 

 

December 31,

 

 

December 31,

 

(in thousands except share data)

 

2009

 

 

2008

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

  Cash and cash equivalents

 

$

350 

 

 

$

907 

 

  Accounts receivable

 

141 

 

 

52 

 

  Inventories, net

 

58 

 

 

39 

 

  Other current assets

 

40 

 

 

58 

 

      Total current assets

 

589 

 

 

1,056 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

 

 

 

 

 

 

 

 

 

        Total assets

 

$

590 

 

 

$

1,058 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

  Accounts payable

 

$

60 

 

 

$

19 

 

  Current portion of deferred revenue

 

194 

 

 

297 

 

  Accrued professional fees

 

71 

 

 

79 

 

  Accrued employee benefits

 

40 

 

 

34 

 

  Accrued income taxes

 

 

 

 

  Other accrued expenses

 

22 

 

 

16 

 

      Total current liabilities

 

389 

 

 

447 

               

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

    Deferred revenue

 

158 

 

 

324 

 

      Total liabilities

 

547 

 

 

771 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

  Common stock, no par value, 13,333,333 shares authorized,

 

 

 

 

 

 

  4,151,954 shares issued and outstanding at each date

 

21,083 

 

 

21,043 

 

 Accumulated deficit

 

(21,040)

 

 

(20,756)

 

Total shareholders' equity

 

43 

 

 

287 

 

        Total liabilities and shareholders’ equity

 

$

590 

 

 

$

1,058 

 







See accompanying notes to financial statements.




30





Human Pheromone Sciences, Inc.


Statements of Operations



 

 

 

Years ended December 31,

 

(in thousands except per share data)

 

 

2009

 

 

2008

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

885 

 

 

$

992 

 

Cost of goods sold

 

195 

 

 

322 

 

 

 

 

 

 

 

 

 

Gross profit

 

690 

 

 

670 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

    Research and development

 

85 

 

 

47 

 

    Selling, general and administrative

 

891 

 

 

889 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

976 

 

 

936 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(286)

 

 

(266)

 

 

 

 

 

 

 

 

 

Other income

 

 

 

 

 

 

 

    Interest income, net

 

 

 

30 

 

Total other income

 

 

 

30 

 

 

 

 

 

 

 

 

 

Net loss before provision for income taxes

 

(283)

 

 

(236)

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(284)

 

 

$

(239)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Net loss per common share - basic and fully diluted

 

$

(0.07)

 

 

$

(0.06)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding – basic and fully diluted

 

4,152 

 

 

4,152 

 










See accompanying notes to financial statements.




31




Human Pheromone Sciences, Inc.


Statements of Shareholders’ Equity





(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

Total Shareholders’

 

 

Shares

 

Amount

 

Accumulated Deficit

 

Equity

Balances, at December 31, 2007

 

4,152

 

$

20,963

 

$

(20,517)

 

$

446 

Net loss

 

 

 

(239)

 

(239)

Stock option compensation

 

 

80

 

       –

 

80 

 

 

 

 

 

 

 

 

 

Balances, at December 31, 2008

 

4,152

 

21,043

 

(20,756)

 

287 

Net loss

 

 

 

(284)

 

(284)

Stock option compensation

 

 

40

 

       –

 

40 

Balances, at December 31, 2009

 

4,152

 

$

21,083

 

$

(21,040)

 

$

43 















See accompanying notes to financial statements.





32




Human Pheromone Sciences, Inc.


Statements of Cash Flows





 

 

 

 

 

      

 

 

 

 

 

 

 

Years ended December 31,

(in thousands)

 

 

 

 

2009

 

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

    Net loss

 

 

 

 

$

(284)

 

 

$

(239)

    Adjustments to reconcile net loss to net cash provided by                       

 

 

 

 

 

 

 

 

     (used in) operating activities:

 

 

 

 

 

 

 

 

        Depreciation

 

 

 

 

 

 

        Stock option compensation

 

 

 

 

40 

 

 

80 

    Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

        Accounts receivable

 

 

 

 

(90)

 

 

142 

        Inventories, net

 

 

 

 

(18)

 

 

(14)

        Other current assets

 

 

 

 

18 

 

 

(18)

        Accounts payable and accruals

 

 

 

 

45 

 

 

(19)

        Deferred revenue

 

 

 

 

(269)

 

 

(463)

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

 

 

(557)

 

 

(530)

 

 

 

 

 

 

 

 

 

Cash flows used  in investing activities:

 

 

 

 

 

 

 

 

    Purchases of property and equipment

 

 

 

 

 

 

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

 

 

 

 

(557)

 

 

(530)

Cash and cash equivalents at beginning of the year

 

 

 

 

907 

 

 

1,437 

Cash and cash equivalents at end of the year

 

 

 

 

$

350 

 

 

$

907 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in dollars)

 

 

 

 

 

 

 

 

Cash disbursements for income taxes

 

 

 

 

$

1,000

 

 

$

3,000

 

 

 

 

 

 

 

 

 

Cash disbursements for interest

 

 

 

 

$

2,000

 

 

$

2,000









See accompanying notes to financial statements.




33




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization and Nature of Operations


Human Pheromone Sciences, Inc. (the “Company”) was incorporated in the state of California in 1989 under the name of EROX Corporation.  The Company changed its name to Human Pheromone Sciences, Inc. in May 1998.  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.  In April 2000, the Company licensed the sale of its REALM fragrance products through department and specialty stores across the United States and select international markets to Niche Marketing, Inc.  On April 14, 2003 the Company sold to Niche Marking Group, Inc. the assets and worldwide ownership rights to the REALM Women, REALM Men and innerREALM product lines.  Assets consisting of the REALM and innerREALM trademarks, inventory and product licenses were sold.   Licensing of the Company’s technology is currently the core business of the Company.  The Company’s patented compounds are sold to licensed customers and included as components in their products.  The Company also offers private label manufacturing services for third party consumer product licensees.


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 $284,000 for the year ending December 31, 2009, and $239,000 and $16,000 for the years ended December 31, 2008 and 2007, respectively. In addition, the Company has used cash in operations of $557,000 in the year ending December 31, 2009, and $530,000 and $501,000 for the years ended December 31, 2008 and 2007, respectively.  As of December 31, 2009, we had an accumulated deficit of $21.0 million; cash and cash equivalents of $350,000 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 be sufficient to meet working capital and capital requirements through the current year. In this regard, the Company must be successful in its current licensing of its compounds or raise 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, there is no assurance that the Company will 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, or such financing is insufficient or not available, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on our future performance, including but not limited to, the premature sale of some or all of our 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.




34




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Concentration of Credit Risk


Since the Company has refocused its business based on a licensing model, its concentration of credit risk consists principally of cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high quality institutions.  As of December 31, 2009 the Company had deposits in two financial institutions which aggregated $350,000 and as of December 31, 2008, the Company had deposits in two financial institutions which aggregated $907,000.  Such funds are insured by the Federal Deposit Insurance Corporation up to $250,000.  Concentration of credit risk with respect to accounts receivable has been consistent since the Company’s customer base consisting of several large customers in the United States and distributors in several international markets has remained relatively unchanged.  On-going credit evaluations of customers’ financial condition are performed and, generally, no collateral is required.  However, until the credit worthiness of these international customers is acceptable to the Company, the customer generally pays in advance of shipment.  The Company maintains an allowance, when appropriate, for potential losses based upon management’s analysis of possible uncollectible accounts.



Customer Concentration


During 2009, three customers comprised 31%, 23% and 10% of the Company’s net revenues. Accounts receivable from these customers at December 31, 2009 account for 0%, 21% and 61%, respectively, of the net receivables.  During 2008, three customers comprised 46%, 17% and 15% of the Company’s net revenues, and accounts receivable from these customers at December 31, 2008 accounted for 0%, 0% and 73%, respectively.



Supplier Concentration


The Company is dependent on third parties to manufacture its fragrance products, as well as the synthesized human pheromones used in these products.  Capacity limitations at these essential suppliers, or any other occurrences leading to an interruption of supply, could have a material adverse effect on the Company.  During 2009 and 2008, three suppliers provided over 98% of the cost of goods sold.  



Revenue Recognition


Revenue is recorded at the time of merchandise shipment, net of provisions for returns.  The Company records revenues from sales initiated by sales agents net of the sales commissions earned following the interpretative guidance provided by FASB 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.


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




35





Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Revenue Recognition (continued)


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 documents 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 resources towards fulfilling the obligations to PPC, based on 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 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 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. 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):


 

 

Year ending December 31,

 

 

2009

 

2008

Right of first discussion

 

$

118

 

$

248

Exclusive license

 

156

 

163

Consulting services

 

4

 

46

  Total

 

$

278

 

$

457


The deferred revenue related to the PPC agreement as of December 31, 2009 and 2008 was $334,000 and $612,000, respectively.   


The Company has entered into three 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.  There is no discernable service to be provided by the Company to warrant an alternative revenue recognition method.


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


 

 

Year ending December 31,

 

 

2009

 

2008

Royalty revenues

 

$

297

 

$

141

License fee

 

20

 

7

  Total

 

$

317

 

$

148


The deferred revenue from these licenses as of December 31, 2009 and 2008 was $18,000 and $9,000, respectively.   




36





Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Research and Development


Research and development costs are charged to expense when incurred.  Research and development costs were $85,000 and $47,000 in 2009 and 2008, respectively.



Fair Value of Financial Instruments


The Company measures and discloses fair value measurements as required by the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification.


     The carrying value of accounts receivable, inventories, other current assets, accounts payable, and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of those instruments.


     Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, the FASB establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:


 

 

Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

 

 

 

 

 

Level 2 — Include other inputs that are directly or indirectly observable in the marketplace.

 

 

 

 

 

 

Level 3 — Unobservable inputs which are supported by little or no market activity.

    

 The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.


     As required by the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification, we measure our cash and cash equivalents  at fair value. Our cash and cash equivalents are classified within Level 1 by using quoted market prices utilizing market observable inputs.



Income Taxes


The Company accounts for income taxes following the interpretative guidance provided by FASB Accounting Standards Codification (ASC) Topic 740 – 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.





37




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Income Taxes (continued)


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.


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 periods ended December 31, 2009 or December 31, 2008 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.


New Accounting Pronouncements


Effective July 2009, the Financial Accounting Standards Board (FASB) codified accounting literature into a single source of authoritative accounting principles, except for certain authoritative rules and interpretive releases issued by the Securities and Exchange Commission. Since the codification did not alter existing U.S. GAAP, it did not have an impact on our Condensed Consolidated Financial Statements. All references to pre-codified U.S. GAAP have been removed from this Form 10-K.


The Company adopted FASB ASC 820-10, Fair Value Measurements on January 1, 2008, which did not have a material impact on its financial condition and results of operations. In September 2006, the Financial Accounting Standards Board issued ASC 820-10 which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. ASC 820-10 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. In February 2008, the Financial Accounting Standards Board delayed the effective date of ASC 820-10 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually to fiscal years beginning after November 15, 2008. The Company adopted ASC 820-10 beginning January 1, 2008.




38




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


New Accounting Pronouncements (continued)



In March 2008, the FASB released ASC 815-10, Disclosures about Derivative Instruments and Hedging Activities.  ASC 815-10 requires enhanced disclosures about an entity’s derivative instruments and hedging activities and thereby improves the transparency of financial reporting.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.  The adoption of ASC 815-10 did not have any impact on the Company's financial position or results of operations.


In May 2008, the FASB released ASC 460-10, Accounting for Financial Guarantee Insurance Contracts.  The scope of FAS ASC 460-10 is limited to financial guarantee insurance contracts focusing on the recognition and measurement of claim liabilities.  This statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  The adoption of ASC 460-10 did not have any impact on the Company's financial position or results of operations.


In April 2009, the FASB released ASC 958-10, Not-for-Profit Entities: Mergers and Acquisitions—including an amendment of FASB Statement No.  The scope of ASC 958-10 is limited to Non-for-Profit Entities  and is not applicable to the Company.


In May 2009, the FASB released ASC 855-10, Subsequent Events.  The scope of ASC 855-10 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009.  The Company has evaluated subsequent events for recognition or disclosure through the time of filing these financial statements on Form 10-K with the Securities and Exchange Commission.


In June 2009, the FASB released ASC 860-10, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.  The scope of ASC 860-10 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This statement is effective for financial statements issued for fiscal years beginning and interim periods beginning after November 15, 2009.  The adoption of ASC 860-10 is not expected to have any impact on the Company's financial position or results of operations.


In June 2009, the FASB released ASC 810-10, Amendments to FASB Interpretation No. 46(R).  The scope of ASC 810-10 is to improve financial reporting by enterprises involved with variable interest entities.  This statement is effective for financial statements issued for fiscal years beginning and interim periods beginning after November 15, 2009.  The adoption of ASC 810-10 is not expected to have any impact on the Company's financial position or results of operations.


In June 2009, the FASB issued ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 16.  The FASB Accounting Standards Codification (Codification) will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this ASC, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.   This ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of ASC 105-10 is not expected to have any impact on the Company's financial position or results of operations, but nominal costs will be incurred for resource materials, staff education and initiating reporting requirement compliance.




39




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


New Accounting Pronouncements (continued)


In August 2009, the FASB issued ASU No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. The adoption of ASU 2009-05 is not expected to have any impact on the Company's financial position or results of operations.


In October 2009, the FASB concurrently issued the following Accounting Standards Updates:  ASU No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1).  This standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction.  This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements.


ASU No. 2009-14 - Software (Topic 985): Certain Revenue Arrangements That Include Software Elements (formerly EITF Issue No. 09-3).  This standard removes tangible products from the scope of software revenue recognition guidance and also provides guidance on determining whether software deliverables in an arrangement that includes a tangible product, such as embedded software, are within the scope of the software revenue guidance.


These ASUs should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted.  Alternatively, an entity can elect to adopt these standards on a retrospective basis, but both these standards must be adopted in the same period using the same transition method.  The Company expects to apply this standard on a prospective basis for revenue arrangements entered into or materially modified beginning January 1, 2011 and it is not expected to have a material impact on the Company’s financial position or results of operations.


Net Income (Loss) Per Common 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 years ended December 31, 2009 and 2008, options to purchase 874,000 and 776,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be anti-dilutive.


Cash and Cash Equivalents


The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.


Accounts Receivable and Sales Returns Allowances


The Company records accounts receivable upon the shipment of goods and records an offsetting estimate for future sales returns or other allowances that the Company anticipates.  The Company estimates the required reserves based on historical sales activity, contractual obligations with customers, current sell-through of inventory at the customer locations, customer credit worthiness and general economic and consumer trends.  Significant judgment is required to estimate our allowance for doubtful accounts in any accounting period. Therefore, our estimates could differ materially from actual results.  At December 31, 2009 and 2008 the Company has an allowance for uncollectible accounts of $0 as it believes that the accounts receivable balances are fully collectible.




40




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


Inventories, net


Inventories are stated at the lower of cost (first-in, first-out method) or market.   The Company records an inventory reserve for inventory shrinkage and obsolescence.   The Company estimates the required reserves based on historical sales and projected sales, historical inventory shrinkage, marketing plans, packaging modifications required, minimum production runs, economic viability and general economic environment.


Property and Equipment


The Company’s property and equipment are stated at cost, net of accumulated depreciation.  Depreciation is provided on a straight-line basis over three years for all categories.



2.

INVENTORIES, net


A summary of inventories follows (in thousands):



 

 

December 31,

 

 

2009

 

2008

Components (raw materials)

 

$

68 

 

$

47 

Finished goods

 

17 

 

19 

Reserve for shrinkage and obsolescence

 

(27)

 

(27)

  Total

 

$

58 

 

$

39 



3.

 PROPERTY AND EQUIPMENT


Property and equipment consist of the following (in thousands):


 

 

December 31,

 

 

2009

 

2008

Computer hardware

 

$

42 

 

$

42 

Computer software

 

 

52 

 

 

52 

Furniture and other office equipment

 

 

21 

 

 

21 

 

 

 

115 

 

 

115 

Accumulated depreciation

 

 

(114)

 

 

(113)

 

 

$

 

$

 

 

 

 

 

 

 


Depreciation expense for the years ended December 31, 2009 and 2008 were $1,000 and $1,000, respectively.


4.

BANK BORROWING


The Company did not have any credit facility opened during and as of the year ended December 31, 2009.



5.

COMMITMENTS AND CONTINGENCIES

  

The Company presently occupies 2,609 square feet of space for its headquarters offices in San Jose, California and 1,700 square feet of laboratory space for its research and development operations located in Salt Lake City, Utah. Both of these leases are on a month-to-month basis and as such there are not any future minimum lease payments.




41





Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


6.

SHAREHOLDERS’ EQUITY


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 December 31, 2009 and 2008 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 in the income taxes footnote.


Stock Option Grants

 

2009 Option Grants

 

2008 Option Grants

 

 

 

 

 

Weighted average interest rates

 

      1.5% to 3.1 %

 

         3.4% to 3.5 %

Dividend yield

 

     0.0 %

 

         0.0 %

Volatility factor of the Company’s common stock

 

                144.0 %

 

    143.0 %

Forfeiture factor – Nonstatutory Stock Option Agreements

 

                      -

 

        3.9 %

Forfeiture factor – 2003 Non-Employee Directors Stock Option Plan

 

        -

 

          -

Weighted average expected life

 

7 years

 

7 years


The aggregate intrinsic value of the stock options issued as of December 31, 2009 was $2,000.  Aggregate intrinsic value is the market price at December 31, 2009, $0.15, less the exercise price of the outstanding options.


The weighted-average fair value of options granted during the years ended December 31, 2009 and 2008 for which the exercise price was equal to the market price on the grant date was $0.20 and $0.47, respectively, and the weighted-average exercise price was $0.21 and $0.48, respectively.    No stock options were granted during the years ended December 31, 2009 and 2008 for which the exercise price was greater than or less than the market price on the grant date.


The Company recorded $40,000 and $80,000 of employee and non-employee compensation expense for stock options during the periods ending December 31, 2009 and 2008, respectively.  At December 31, 2009, there was $16,000 of unrecognized compensation costs related to non-vested share-based compensation under the 2003 Non-Employee Directors’ Stock Option Plan and employee Nonstatutory Stock Option grants.  This cost is expected to be recognized over the following six months.


In July 2008, the Company’s Board of Directors granted nonstatutory stock options to a Company’s officer covering a total of 70,000 shares of common stock pursuant to the 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.




42




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


6.

SHAREHOLDERS’ EQUITY (continued)


Nonstatutory Stock Option Agreements


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

 

 

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

 

 

 

 

 

Outstanding, January 1, 2008

 

330 

 

0.32 

Granted

 

70 

 

0.45 

Outstanding, December 31, 2008

 

400 

 

0.34 

Granted

 

 

Outstanding, December 31, 2009

 

400 

 

0.34 


At December 31, 2009 options to purchase 382,000 shares of common stock were exercisable.  A summary of the non-vested options activity under the Nonstatutory Stock Option Agreements is as follows (in thousands except per share data):

 

 

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

 

 

 

 

 

Outstanding, January 1, 2008

 

69 

 

0.32 

Granted

 

70 

 

0.45 

Vested

 

(86)

 

0.34 

Outstanding, December 31, 2008

 

53 

 

0.45 

Granted

 

 

0.45 

Vested

 

(35)

 

0.45 

Outstanding, December 31, 2009

 

18 

 

0.45 


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 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 options activity under the 1993 Non-Employee Directors Stock Option Plan is as follows (in thousands except per share data):

 

 

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

 

 

 

 

 

Outstanding, January 1, 2008

 

50 

 

1.13 

Forfeited or Expired

 

(10)

 

2.02 

Outstanding, December 31, 2008

 

40 

 

0.91 

Forfeited or Expired

 

(10)

 

1.80 

Outstanding, December 31, 2009

 

30 

 

0.62 


At December 31, 2009, no shares of the Company’s common stock were reserved for future grants under the Directors’ Plan, and all options to purchase 30,000 shares were exercisable, at a weighted average exercise price of $0.62.




43




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009


6.

SHAREHOLDERS’ EQUITY (continued)


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”) of Human Pheromone Sciences, Inc.  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 will expire on June 24, 2010.  This plan replaces the Directors’ Plan which expired on June 13, 2003.  The 2003 Plan provides 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 stock option activity under the Director’s Plans is as follows (in thousands except per share data):


 

 

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

 

 

 

 

 

Outstanding, January 1, 2008

 

320 

 

0.48 

Granted

 

80 

 

0.51 

Canceled or Expired

 

 

Outstanding, December 31, 2008

 

400 

 

0.48 

Granted

 

80 

 

0.21 

Canceled or Expired

 

 

Outstanding, December 31, 2009

 

480 

 

0.44 


At December 31, 2009, a total of 120,000 shares of the Company’s common stock were reserved for future grants under the 2003 Plan.  At December 31, 2009 options to purchase 440,000 shares of common stock were exercisable.  A summary of the non-vested options activity under the Nonstatutory Stock Option Agreements is as follows (in thousands except per share data):


 

 

 

 

Weighted

Average

Exercise Price

 

 

Shares

 

 

 

 

 

 

 

Outstanding, December 31, 2008

 

33 

 

0.45 

Granted

 

80 

 

0.21 

Vested

 

(73)

 

0.35 

Outstanding, December 31, 2009

 

40 

 

0.21 


The following table summarizes information about all stock options of the Company that are outstanding at December 31, 2009 (in thousands except per share data).


 

 

Options Outstanding

 

Options Exercisable

 

 

 

 

Weighted

Average

Remaining

Contractual

Life (years

 

 

 

 

 

 

 

At a

Weighted

Average

Exercise

Price

 

 

Number of

Shares

Outstanding

at 12/31/09

 

 

 

Weighted

Average

Exercise

Price

 

 

 

 

Range

of Exercise

Prices

 

 

 

 

 

Number

Exercisable

At 12/31/09

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$  0.12 to $  0.30

 

150 

 

4.5

 

0.17 

 

110 

 

0.16 

$  0.31 to $  0.50

 

524 

 

4.5

 

0.34 

 

503 

 

0.34 

$  0.51 to $  0.80

 

153 

 

4.1

 

0.54 

 

150 

 

0.55 

$  0.81 to $  1.19

 

100 

 

2.7

 

0.95 

 

90 

 

0.86 

$  0.12 to $  1.19

 

927 

 

4.0

 

0.41 

 

853 

 

0.41 




44




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009



7.

INCOME TAXES


In 2009, the Company has recorded a $1,000 tax provision for state minimum taxes and for states where the utilization of net losses carried forward are not available.


A reconciliation of the effective tax and the statutory U.S. federal income tax is as follows (in thousands):


 

 

 

 

Years ended December 31,   

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

Federal tax benefit at the federal statutory rate

 

 

(96)

 

(80)

 

Expiring net operating losses and tax credits

 

 

 

768 

 

 

1,441 

 

Other differences

 

 

 

(80)

 

 

(58)

 

Permanent differences

 

 

 

 

 

 

Decrease in valuation allowance

 

 

 

(592)

 

 

(1,303)

 

Income tax benefits

 

 

 



At December 31, 2009, the Company had federal and state net operating loss carryforwards of approximately $17,857,000.  The Company also had federal and state research and development tax credit carryforwards of approximately $135,000.  The net operating loss and credit carryforwards will expire between 2010 and 2027.  


Temporary differences that give rise to a significant portion of the deferred tax asset (liabilities) are as follows (in thousands):


 

 

 

 

December 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

2008

 

Deferred tax asset (liabilities):

 

 

 

 

 

 

 

 

Net operating loss carryforward

 

 

4,548 

 

5,014 

 

Research credit carryforward

 

 

 

135 

 

 

132 

 

Reserves and accruals

 

 

 

308 

 

 

427 

 

Other, net

 

 

 

(222)

 

 

(212)

 

Valuation allowance for deferred tax assets

 

 

 

(4,769)

 

 

(5,361)

 

Net deferred tax assets

 

 

 


Because of the Company’s lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance. The net valuation allowance has decreased by $592,000 in 2009, mainly due to expiring NOL carryforwards and tax credits, and decreased by $1,303,000 in 2008.  The valuation allowance was established because the Company was not able to determine that it is more likely than not that the deferred tax asset will be realized.  


 The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN No. 48) and FASB Interpretation No. 48-1 “Definition of Settlement in FASB Interpretation No. 48” (FIN No. 48-1), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not to be sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on the Company’s consolidated financial position or results of operations.





45




Human Pheromone Sciences, Inc.

Notes to Financial Statements

December 31, 2009




8.    SEGMENT INFORMATION


Sales by geographic markets for the year ended December 31, 2009 and 2008 were as follows:



 

 

Year ending December 31,

 

 

2009

 

2008

 Net Sales by Markets:

 

 

 

 

  U.S Markets

$

171

$

277

  International Markets

 

119

 

111

      Net Sales

 

290

 

388

License revenues (worldwide)

 

595

 

604

 

 

 

 

 

  Total Revenues

$

885

$

992






46