10-QSB [hf]

10QSB 1 p20204form10qsb.htm QUARTERLY REPORT 10-QSB [hf]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(MARK ONE)

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-23544

HUMAN PHEROMONE SCIENCES, INC.

(Name of small business issuer in its charter)

__________________California_____________________

_________94-3107202_________

(State or other jurisdiction of incorporation or organization)

(I.R.S. employee Identification No.)

___ 84 West Santa Clara Street, San Jose, California_ ___

___________95113____________

(Address of principal executive offices)

(Zip code)

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

Not applicable

(Former name or former address, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 4,151,954 shares of Common Stock as of August 8, 2007.

HUMAN PHEROMONE SCIENCES, INC.

INDEX

Page

PART I

FINANCIAL INFORMATION


	Item 1. Financial Statements


		Balance Sheets as of June 30, 2007 (Unaudited) and December 31, 2006 . . . . . . . . . . . . . . . .	3


		Statements of Operations (Unaudited) for the Three and Six Months Ended
		June 30, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4


		Statements of Cash Flows (Unaudited) for the Six Months Ended
		June 30, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	5


		Notes to Financial Statements (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	6


	Item 2. Management’s Discussion and Analysis


		Management’s Discussion and Analysis of Financial Conditions and Results of Operations . .	12


	Item 3. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	18

PART II

OTHER INFORMATION


	Item 1. Legal Proceedings . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19


	Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19


	Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	19


SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	20

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

Human Pheromone Sciences, Inc.

Balance Sheets


		June 30,		December 31,
(in thousands except share data)		2007		2006
		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	1,677	$	1,941
Accounts receivable		171		39
Inventories, net		38		75
Other current assets		21		18
Total current assets		1,907		2,073

Property and equipment, net		-		2

Total assets	$	1,907	$	2,075


Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable	$	36	$	30
Accrued professional fees		53		69
Accrued employee benefits		30		32
Accrued income taxes		7		7
Other accrued expenses		7		6
Current portion deferred revenue		687		846
Total current liabilities		820		990

Non-current liabilities
Deferred revenue		645		721
Total liabilities		1,465		1,711

Commitments and Contingencies

Shareholders' equity:
Common stock, no par value, 13,333,333 shares authorized,
4,151,954 shares issued and outstanding at each date		20,904		20,865
Accumulated deficit		(20,462)		(20,501)
Total shareholders' equity		442		364
Total liabilities and shareholders’ equity	$	1,907	$	2,075

See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Statements of Operations

(unaudited)


		Three months ended June 30,				Six months ended June 30,
(in thousands except per share data)		2007		2006		2007		2006

Net revenues	$	329	$	184	$	663	$	450
Cost of goods sold		76		58		183		111

Gross profit		253		126		480		339

Operating Expenses:
Research and development		16		35		28		59
Selling, general and administrative		238		247		446		507
Total operating expenses		254		282		474		566

Income (loss) from operations		(1)		(156)		6		(227)

Other income
Interest income, net		16		-		34		1
Total other income		16		-		34		1

Net income (loss) before provision for income taxes		15		(156)		40		-

Provision for income taxes		-		-		1		-

Net income (loss)	$	15	$	(156)	$	39	$	(226)


Net income (loss) per common share
Basic	$	0.00	$	(0.04)	$	0.01	$	(0.05)
Diluted	$	0.00	$	(0.04)	$	0.01	$	(0.05)


Weighted average common shares outstanding
Basic		4,152		4,152		4,152		4,152
Diluted		4,805		4,152		4,794		4,152



See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Statements of Cash Flows

(unaudited)


		Six months ended June 30,
(in thousands)		2007		2006


Cash flows from operating activities
Net income (loss)	$	39	$	(226)

Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization		2		3
Stock option compensation		39		17
Changes in operating assets and liabilities:
Accounts receivable		(132)		(41)
Inventories, net		37		(4)
Other current assets		(3)		4
Accounts payable and accrued liabilities		(11)		37
Deferred revenue		(235)		10

Net cash used in operating activities		(264)		(200)


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


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


Net decrease in cash and cash equivalents		(264)		(200)
Cash and cash equivalents at beginning of period		1,941		452
Cash and cash equivalents at end of period	$	1,677	$	252

See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Notes to Financial Statements

(unaudited)

June 30, 2007

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

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

The Company believes that human pheromone research funded by the Company presents an opportunity to create and market an entirely new category of pheromone-based fragrances and toiletry products, as well as other types of consumer products that do not require FDA approval as a pharmaceutical product. The Company believes that its related patents provide it a proprietary position in developing, licensing and marketing such products.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2007 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2007. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-KSB for the year ended December 31, 2006.

Revenue Recognition

Revenue is recorded at the time of merchandise shipment, net of provisions for returns. The Company records revenues from sales initiated by sales agents, net of the sales commissions earned following the interpretative guidance provided by FASB Emerging Issue Task Force (EITF) EITF No. 99-19 Reporting Revenue Gross as a Principal versus Net as an Agent. License fees are earned over the license period according to the terms of the license agreement and interpretative guidance provided by Staff Accounting Bulletin (SAB) No. 101 Revenue Recognition in Financial Statements, No. 104 Revenue Recognition and EITF No. 00-21 Revenue Arrangements with Multiple Deliverables. The majority of the Company’s sales are to distributors and licensees, and these distributors and licensees have no right to return products.

In addition to the aforementioned general policy, we enter into transactions that represent multiple-element arrangements, which may include post signing training and technical support to our licensee’s as needed to assist them in the use of our products and integration into their product development. 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 probably and substantially in our control.

If these criteria are not met, then license revenues are deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. If there is an 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. A portion of the initial payment received as part of a license agreement is being recognized as milestones are achieved towards fulfillment of the license agreement terms, based on interpretative guidance provided by EITF No. 00-21.

Inventories

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


	June 30, 2007
	(unaudited)		December 31, 2006

Components (raw materials)	$	47	$	83
Finished goods		29		30
Reserve for shrinkage and obsolescence		(38)		(38)
	$	38	$	75

Earnings (Loss) Per Share

The Company follows the provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted-average number of common shares and dilutive common shares outstanding during the period. For the three months ended June 30, 2006, options to purchase 808,000 shares of common stock were excluded from the computation of diluted earnings per share since their effect would be antidilutive.

As of June 30, 2007 and 2006, the unaudited components of basic and diluted earnings per share are as follows (in thousands):


		Three months ending June 30,				Six months ending June 30,
		2007		2006		2007		2006

Net income (loss) available to common shareholders (unaudited)	$	15	$	(156)	$	39	$	(226)

Weighted-average common shares outstanding during the period		4,152		4,152		4,152		4,152

Incremental shares from assumed conversions of stock options		653		-		642		-

Fully diluted weighted-average common shares and potential common stock (unaudited)		4,805		4,152		4,794		4,152

Capital Stock and Stock Options

During the six months ended June 30, 2007 no common stock or preferred stock was issued. During the quarter ended June 30, 2007, options to purchase 80,000 share of common stock were granted under the 2003 Non-Employee Directors Stock Option Plan. No issued options were exercised during the six months ended June 30, 2007; and 9,999 stock options expired under the expired 1990 Stock Option Plan.

The Company adopted SFAS 123 (R) “Share-Based Payment”, 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 adjusted 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 June 30, 2007 and 2006 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	2007 Option Grants	2006 Option Grants

Weighted average interest rates	4.7%	5.1%
Dividend yield	0.0%	0.0%
Volatility factor of the Company’s common stock	246.0%	180.0%
Forfeiture factor – Nonstatutory Stock Option Agreements	-	5.0%
Forfeiture factor – 2003 Non-Employee Directors Stock Option Plan	-	-
Weighted average expected life	7 years	7 years

The Company recorded $13,000 and $9,000 of employee and non-employee compensation expense for stock options during the three months ended June 30, 2007, respectively, and $4,000 and $7,000 of employee and non-employee compensation expense for stock options during the three months ended June 30, 2006, respectively. The Company recorded $26,000 and $13,000 of employee and non-employee compensation expense for stock options during the six months ended June 30, 2007, respectively, and $4,000 and $13,000 of employee and non-employee compensation expense for stock options during the six months ended June 30, 2006, respectively. At June 30, 2007, there was $107,000 of unrecognized compensation costs related to non-vested share-based compensation under the 2003 Non-Employee Directors’ Stock Option Plan and the Nonstatutory Stock Option grants. This cost is expected to be recognized over the following eleven months.

Nonstatutory Stock Option Agreements

In June 2006, the Company’s Board of Directors granted Nonstatutory Stock Option Agreements to the Company’s employees covering a total of 330,000 shares of common stock. 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 day prior to the grant date and the day of the grant.

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


Nonstatutory Stock Option Agreements	Three months ending June 30, 2007			Six months ending June 30, 2007
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Outstanding, beginning of period	330	$	0.32	330	$	0.32
Options Granted	-		-	-		-
Canceled or Expired	-		-	-		-
Outstanding, June 30, 2007	330	$	0.32	330	$	0.32

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


Nonstatutory Stock Options Non-vested Options	Three months ending June 30, 2007			Six months ending June 30, 2007
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Outstanding, beginning of period	193	$	0.32	234	$	0.32
Options Granted	-		-	-		-
Vested	(42)	$	0.32	(83)	$	0.32

Outstanding, June 30, 2007	151	$	0.32	151	$	0.32

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


Non-Employee Directors’ Plan	Three months ending June 30, 2007			Six months ending June 30, 2007
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Outstanding, beginning of period	60	$	1.83	60	$	1.83
Options Granted	-		-	-		-
Canceled or Expired	(10)	$	5.34	(10)	$	5.34
Outstanding, June 30, 2007	50	$	1.13	50	$	1.13

At June 30, 2007, no shares of the Company’s common stock were reserved for future grants under the Directors’ Plan, and all options to purchase 50,000 shares were exercisable, at a weighted average exercise price of $1.13.

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 to 600,000, from 300,000 previously authorized, shares of common stock the maximum of 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 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. The 2003 Plan also grants to new directors options to purchase 20,000 shares of common stock upon election to the Board. Mr. Carson Tang was elected to the Board on June 20, 2007 and stock options were issued to Mr. Tang as specified by the 2003 Plan.

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


2003 Non-Employee Directors’ Plan	Three months ending June 30, 2007			Six months ending June 30, 2007
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Outstanding, beginning of period	240	$	0.36	240	$	0.36
Options Granted	80	$	0.82	80	$	0.82
Canceled or Expired	-		-	-		-
Outstanding, June 30, 2007	320	$	0.48	320	$	0.48

At June 30, 2007, 280,000 shares of the Company’s common stock were reserved for future grants under the 2003 Non-Employees Directors’ Plan, and options to purchase 297,000 shares were exercisable, at a weighted average exercise price of $0.37.

A summary of the non-vested options activity under the 2003 Non-Employee Directors Stock Option Plan is as follows (in thousands except per share data):


2003 Non-Employee Director’s Plan Non-vested Options	Three months ending June 30, 2007			Six months ending June 30, 2007
	Shares		Weighted Average Exercise Price	Shares		Weighted Average Exercise Price
Outstanding, beginning of period	10	$	0.32	25	$	0.32
Options Granted	80	$	0.82	80	$	0.82
Vested	(17)	$	0.52	(32)	$	0.41

Outstanding, June 30, 2007	73	$	0.82	73	$	0.82

INCOME TAXES

A provision for income taxes for the six month period ended June 30, 2007 was recorded for minimum tax liabilities incurred. For the period ending 2006, the minimum tax liabilities were recorded as administrative expenses as the Company incurred net operating losses for which no benefit was recognized, or utilized tax loss carryforwards.

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


		Six months ending June 30,
		2007		2006
		(unaudited)		(unaudited)

Federal tax (benefit) at the federal statutory rate	$	13	$	(77)
Other differences		(146)		-
Permanent differences		-		-
Increase in valuation allowance		133		77
Income tax benefits	$	-	$	-

At June 30, 2007, the Company had federal net operating loss carryforwards of approximately $16,633,000. The Company also had federal and state research and development tax carryforwards of approximately $176,000. The net operating loss and credit carryforwards will expire between 2007 and 2021. The utilization of certain of the loss carryforwards is limited under Section 382 of the Internal Revenue Code.

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


		June 30,		December 31,
		2007		2006
		(unaudited)
Deferred tax asset:
Net operating loss carryforward	$	6,040	$	5,667
Research credit carryforward		176		227
Reserves and accruals		662		751
Other, net		(203)		(103)
Valuation allowance for deferred tax assets		(6,675)		(6,542)
Net deferred tax assets	$	-	$	-

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, and FASB Interpretation No. 48-1 “Definition of Settlement in FASB Interpretation No. 48”, on January 1, 2007. 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 increased by $133,000 in first six months of 2007. 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 believes that all of its tax positions are sustainable and that no significant adjustment to its unrecognized tax benefits is expected. The majority of the unrecognized tax benefits relates to positions where only the timing of a deduction item is in question. Such liabilities are offset by deferred tax assets and the only effect on the Company's statements of operations relates to the interest accrued on such liabilities.

The Company files U.S. federal income tax returns and state income tax returns in California, New Jersey, New York, Pennsylvania and Utah. Because of the net operating loss carryforwards available to the Company, Federal tax returns filed for tax years 1991 to 1995, 1997 to 2000, 2002 to 2006 are subject to examination. Tax returns for California, New Jersey, New York, Pennsylvania for these jurisdictions remain subject to examination by the relevant taxing authorities for tax years ended on or after December 31, 2001. The initial tax return for Utah will be filed for the year ending December 31, 2006 and will be subject examination by the relevant taxing authorities.

The Company did not recognize any change to retained earnings upon adoption of FIN No. 48 and FIN No. 48-1.

2. SEGMENT INFORMATION

Sales by geographic markets for the three and six months ended June 30, 2007 and 2006 were as follows:


		Three months ending June 30,				Six months ending June 30,
		2007		2006		2007		2006
		(unaudited)		(unaudited)		(unaudited)		(unaudited)
Markets:
U.S Markets	$	196	$	103	$	350	$	248
International Markets		13		81		58		202
Net product revenue		209		184		408		450

License revenue (worldwide)		120		-		255		-

Net Sales	$	329	$	184	$	663	$	450

3. NEW ACCOUNTING PRONOUNCEMENTS

In February 2007, the FASB released SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities – Including and amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective for fiscal years beginning after November 15, 2007. Management does not believe the adoption of SFAS No. 159 will have a material impact on the Company's financial position or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Except for the historical information contained in this discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to the Company’s plans for sales growth and expansion into new channels of trade, expectations of gross margin, expenses, new product introduction, and the Company’s liquidity and capital needs. These matters involve risks and uncertainties that could cause actual results to differ materially from the statements made. In addition to the risks and uncertainties described in “Risk Factors”, below, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. These and other factors may cause actual results to differ materially from those anticipated in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

CRITICAL ACCOUNTING POLICIES

The Company’s discussion and analysis of its financial conditions and results of operations are based upon financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to revenue recognition and license fees. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our financial statements.

Stock Option Policy

The Company adopted SFAS 123 (R) “Share-Based Payment”, 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 June 30, 2007 and 2006 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.

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

● 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 probably and substantially in our control.

Income Taxes

Deferred income taxes are provided using the liability method whereby 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 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 some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

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

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

COMPANY OVERVIEW

The Company is engaged in the research, development, manufacturing and marketing of consumer products containing synthetic human pheromones and other mood enhancing compounds. The Company initiated commercial operations in late 1994 with a line of fine fragrances and toiletries. Licensing of the Company’s technology is currently the core business of the Company while directly managing the on-going development of identified compounds for potential new products. The Company’s patented compounds are sold to licensed customers and included as components in their fragranced consumer products. The Company also offers private label manufacturing services for third party consumer product licensees.

Results of Operations

Three Months ended June 30, 2007 compared to the Three Months ended June 30, 2006

Net revenue for the quarters ended June 30, 2007 and 2006 were as follows (in thousands):


		Three months ending June 30,
		2007		2006
		(unaudited)		(unaudited)
Net product revenue by markets:
U.S. markets	$	196	$	103
International markets		13		81
Net product revenue		209		184

License revenue (worldwide)		120		-

Net Revenues	$	329	$	184

Total revenues for the second quarter of 2007 were $329,000, representing a 79% increase from the prior year’s revenues of $184,000. The increase in total revenues was due to $120,000 in licensing revenues attributed to the Personal Products Company (“PPC”), a division of McNeil-PPC, Inc. (a Johnson & Johnson company) license agreement signed in August 2006. Net product revenues of $209,000 for the three months ending June 30, 2007 were $25,000 more than last year’s $184,000 for the comparable period. Domestically, sales were $93,000 greater than the prior year, attributable to initial shipments for a new retail specialty store licensee that is preparing for a fall launch a new product incorporating the Company’s technology. International sales of $13,000 were $68,000 less than 2006 sales of $81,000 due to reduced reorders from a private label manufacturer.

Gross profit for the quarter ended June 30, 2007 of $253,000 is 100% more than last year’s gross profit of $126,000. As a percentage of revenues, gross margin of 77% was more than last year’s gross margin of 68%. Gross margin on product revenues increased in 2007 due to a favorable sales mix of higher margin products. To fulfill a portion of the license agreement terms, expenses associated with the PPC work have been included as cost of goods sold to offset the revenue recorded which results in a reduced overall gross margin.


		Three months ending June 30,
		2007		2006
		(unaudited)		(unaudited)
Gross Profit by Revenue Type:
Net product revenue	$	190	$	126
License revenue		63		-
Gross Profit	$	253	$	126

Research and development expenses for the second quarters of 2007 and 2006 were $16,000 and $35,000, respectively. Research expenditures of $32,000 that were incurred in 2007 to support the PPC license have been charged as cost of goods sold. The total research and development cost incurred for the current quarter, including the amount recorded as license costs, was $48,000 which was $15,000 more than the prior year’s $35,000. Research and development on several new compounds, other than the two compounds noted in the PPC license, is on-going at a reduced funding level.

Selling, general and administrative expenses of $238,000 are $9,000 less than last year’s $247,000. Selling, marketing and distribution expenses were $13,000 less than the prior year as the Company continues to focus on product licensing which is less capital intensive. General and administrative and facility costs increased by $4,000, with increases in audit and tax service fees being somewhat offset by expenditures to support the PPC license being charged as cost of goods sold rather than to general and administrative expenses.

The Company earned $16,000 in net interest income during the three months ending June 30, 2007 with no similar income for the three months ending June 30, 2006. The increased earnings was due to the Company’s cash increases resulting from the $1,750,000 payment upon signing the PPC license agreement in August 2006.

Six Months ended June 30, 2007 as compared to the Six Months ended June 30, 2006

Net revenues for the six months ended June 30, 2007 and 2006 were as follows:


		Six months ending June 30,
		2007		2006
		(unaudited)		(unaudited)
Net product revenue by markets:
U.S. markets	$	350	$	248
International markets		58		202
Net product revenue		408		450

License revenue (worldwide)		255		-

Net Revenues	$	663	$	450

Net revenues for the six months ended June 30, 2007 were $663,000. This was a 47% increase from net revenues of $450,000 for the first half of 2006. The increase in total revenues was due to the $255,000 license revenues attributed to the Personal Products Company (PPC), a division of McNeil-PPC, Inc. (a Johnson & Johnson company) license agreement signed in August 2006. Net product revenues of $408,000 for the six months ending June 30, 2007 was $42,000 less than last year’s $450,000 for the comparable period. Domestically, revenues were $102,000 more than the prior year’s $248,000. A new specialty retailer’s initial order more than exceeded reduced reorders from existing accounts resulting in increased sales in the current year. Since the Company is not always aware of its customer’s manufacturing and marketing plans, revenue fluctuations will occur. International revenues were $144,000 less than the prior year due to decreased sales in the Asian private label markets.

Gross profit for the first half of 2007 increased 42% to $480,000 from $339,000 in 2006. The increased gross profit is the result of the increased license revenue and a more favorable sales mix of products. Gross margin decreased slightly to 72% compared to 75% in 2006 due to the decreased margin incurred under the PPC license.


		Six months ending June 30,
		2007		2006
		(unaudited)		(unaudited)
Gross Profit by Revenue Type:
Net product revenue	$	350	$	339
License revenue		130		-
Gross Profit	$	480	$	339

Research and development expenses for the first half of 2007 and 2006 were $28,000 and $59,000, respectively. Research expenditures of $67,000 that were incurred in 2007 to support the PPC license have been charged as cost of goods sold. The total research and development cost incurred for the current quarter, including the amount recorded as license costs, was $95,000 which was $36,000 more than the prior year’s $59,000. The increase of the research expenditures was the result of the Company continuing to invest in the two compounds that have yielded encouraging results.

Selling, general and administrative expenses for the first half of 2007 were $446,000 and $507,000 for the comparable period of 2006, a $61,000 reduction. Selling, marketing and distribution expenses are $29,000 less than the prior year as the Company continues to focus on product licensing which is less capital intensive. General and administrative and facility costs decreased by $32,000 primarily due to expenditures to support the PPC license being charged as cost of goods sold rather than to general and administrative expenses.

The Company earned $34,000 and $1,000 in net interest income during the six months ending June 30, 2007 and 2006, respectively. The increased earnings were due to the Company’s increased cash resulting from the $1,750,000 payment upon signing the PPC license agreement in August 2006.

The Company recorded $1,000 minimum tax provisions in 2007 and 2006, due primarily to a valuation allowance on deferred tax assets being recorded and the expected utilization of net operating losses carried forward from prior years to offset any significant tax liability. As of June 30, 2007, the Company’s gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,675,000. However, a full valuation allowance is provided for the gross deferred tax asset as management could not determine whether its realization is more likely than not.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2007, the Company had cash and accounts receivables of $1,848,000 and current liabilities, net of the current portion of deferred revenue, of $133,000 with no outstanding bank borrowings. At December 31, 2006, it had cash and accounts receivables of $1,980,000 and current liabilities, net of the current portion of deferred revenue, of $144,000 with no outstanding bank borrowings. For the second quarter ending June 30, 2007, net cash used in on-going activities was $264,000 as compared with the prior year’s $200,000. Increased audit, corporate compliance requirements and legal fees for patent application work have resulted in increased cash use in 2007.

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-QSB. If any of the following events or outcomes actually occurs, our business, operating results, and financial condition would likely suffer.

The Company has not had sustained profitable operations since 1997. Since 1997, the Company has incurred annual losses from operations. In May 2000, the Company refocused its business model based on product licensing agreements. While the Company anticipated that this change in its business will result in profitable operations, it has not to date, and the Company’s license based business model may not be successful in the future. Although the Company’s current cash position and projected results of operations for the next twelve months are not expected to require additional outside financing, the Company is continuing to seek additional financing opportunities . The Company may not be able to obtain such additional funding on commercially reasonable terms if such funding is required.

The Company’s marketing strategy may not be successful. The Company may not be able to establish and maintain the necessary sales and distribution channels, even if funding is obtained. Consumer product companies may choose not to license or private label the Company’s products.

The Company may not be able to protect its technology or trade secrets 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 develop new patentable compounds. The Company’s success substantially depends upon developing and obtaining patents for new mood and sensory enhancing compounds. The Company requires that its products be scientifically tested validating the human responses to the compounds. The Company may not be successful in validating that the desired human responses are obtained.

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

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

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on our evaluation as of the end of the period covered by this Quarterly Report on Form 10-QSB, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with our evaluation that occurred during the fiscal quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not party to any pending legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

The Company’s annual shareholder meeting was held on June 20, 2007, at which the following proposal was approved:

Proposal 1: Election of the following Directors:


Name	Votes For	Votes Withheld

William P. Horgan	3,756,031	42,001
Bernard I. Grosser, M.D.	3,757,895	40,134
Helen C. Leong	3,757,895	40,134
Robert Marx	3,757,895	40,134

Item 6. Exhibits

Exhibits

Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act

Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act

Exhibit 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350

SIGNATURES

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

HUMAN PHEROMONE SCIENCES, INC.

Date: August 13, 2007

/s/ William P. Horgan

William P. Horgan

Chairman and Chief Executive Officer

(Principal Executive Officer)

Date: August 13, 2007

/s/ Gregory S. Fredrick

Gregory S. Fredrick

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)