10-QSB [hf]

10-Q 1 p20663form10q.htm QUARTERLY REPORT 10-QSB [hf]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

[ X ]

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

For the quarterly period ended June 30, 2009

[ ]

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

Commission file number 000-23544

HUMAN PHEROMONE SCIENCES, INC.

(Exact name of registrant as specified in its charter)

__________________California_____________________

_________94-3107202_________

(State or other jurisdiction of incorporation or organization)

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

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

___________95113____________

(Address of principal executive offices)

(Zip code)

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

Not applicable

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

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

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

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


Large accelerated filer	[ ]	Accelerated filer	[ ]	Non-accelerated filer	[ ]	Smaller reporting company	[X]

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 4,151,954 shares of Common Stock as of August 7, 2009.

HUMAN PHEROMONE SCIENCES, INC.

INDEX


			Page

PART I
FINANCIAL INFORMATION
	ITEM 1.	FINANCIAL STATEMENTS
		Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008	3

		Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2009 and 2008	4
		Statements of Cash Flows (Unaudited) for the Three and Six Months Ended June 30, 2009 and 2008	5

		Notes to Financial Statements (Unaudited)	6



	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	13

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	20
	ITEM 4T.	CONTROLS AND PROCEDURES	20


PART II
OTHER INFORMATION
	ITEM 1.	LEGAL PROCEEDINGS	21
	ITEM 1A.	RISK FACTORS	21
	ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	21
	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	21
	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	21
	ITEM 5.	OTHER INFORMATION	21
	ITEM 6.	EXHIBITS	21


SIGNATURES			22

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

Human Pheromone Sciences, Inc.

Balance Sheets


		June 30,		December 31,
(in thousands except share data)		2009		2008
		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	542	$	907
Accounts receivable		43		52
Inventories, net		50		39
Other current assets		34		58
Total current assets		669		1,056

Property and equipment, net		1		2

Total assets	$	670	$	1,058

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable	$	30	$	19
Current portion of deferred revenue		256		297
Accrued professional fees		54		79
Accrued employee benefits		44		34
Accrued income taxes		2		2
Other accrued expenses		11		16
Total current liabilities		397		447

Non-current liabilities
Deferred revenue		227		324
Total liabilities		624		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		21,067		21,043
Accumulated deficit		(21,021)		(20,756)
Total shareholders' equity		46		287
Total liabilities and shareholders’ equity	$	670	$	1,058

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)		2009		2008		2009		2008

Net revenues	$	224	$	236	$	389	$	502
Cost of goods sold		65		73		130		154

Gross profit		159		163		259		348

Operating Expenses:
Research and development		13		9		38		23
Selling, general and administrative		230		249		487		493
Total operating expenses		243		258		525		516

Loss from operations		(84)		(95)		(266)		(168)

Other income
Interest income, net		1		7		2		18
Total other income		1		7		2		18

Net loss before provision for income taxes		(83)		(88)		(264)		(150)

Provision for income taxes		1		-		1		1

Net loss	$	(84)	$	(88)	$	(265)	$	(151)


Net loss per common share
Basic	$	(0.02)	$	(0.02)	$	(0.06)	$	(0.04)
Diluted	$	(0.02)	$	(0.02)	$	(0.06)	$	(0.04)

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

See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Statements of Cash Flows

(unaudited)


		Six months ended June 30,
(in thousands)		2009		2008


Cash flows from operating activities
Net loss	$	(265)	$	(151)

Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		1		1
Stock-based compensation		24		52
Changes in operating assets and liabilities:
Accounts receivable		9		123
Inventories		(11)		(9)
Other current assets		24		5
Accounts payable and accrued liabilities		(8)		(17)
Deferred revenue		(139)		(204)

Net cash used in operating activities		(365)		(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		(365)		(200)
Cash and cash equivalents at beginning of period		907		1,437
Cash and cash equivalents at end of period	$	542	$	1,237
See accompanying notes to financial statements.

Human Pheromone Sciences, Inc.

Notes to Financial Statements

(unaudited)

June 30, 2009

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

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

The Company believes that research funded by the Company into human pheromones and other naturally-occurring compounds presents an opportunity to create and market an entirely new category of fragrances, toiletry and consumer products, as well as other types of consumer products that do not require Food and Drug Administration (“FDA”) approval as pharmaceutical products. The Company believes that its related patents provide it a proprietary position in developing, licensing and marketing such products.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2009. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2008.

Revenue Recognition

Revenue is recorded at the time of merchandise shipment, net of provisions for returns. The Company records revenue from sales initiated by sales agents, net of the sales commissions earned, following the interpretative guidance provided by FASB Emerging Issue Task Force (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 and SAB No. 104 Revenue Recognition. The Company records multiple-element arrangements in accordance with EITF 00-21 Revenue Arrangements with Multiple Deliverables.

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

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

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

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

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

Our agreement with Personal Products Company (hereinafter referred to as “PPC”) represents a multiple-element arrangement and includes post signing consulting support to PPC as needed to assist them in claims development and manufacturing processes, an exclusive right of first discussion for new compounds that the Company develops and for which we document supportable claims of effectiveness, and an exclusive right to our existing patented compounds in specific consumer product fields. A portion of the initial payment received as part of the PPC agreement is being recognized as the Company incurs expenses and expends resources towards fulfilling the obligations to PPC, based on interpretative guidance provided by EITF 00-21.

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

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


	Three months ending June 30,		Six months ending June 30,
	2009	2008	2009	2008
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Right of first discussion	$ 43	$ 47	$ 75	$ 68
Exclusive license	35	36	86	90
Consulting services	1	16	2	43
Total	$ 79	$ 99	$ 163	$ 201

The deferred revenue from the PPC license agreement as of June 30, 2009 was $449,000.

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


	Three months ending June 30,		Six months ending June 30,
	2009	2008	2009	2008
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Royalty revenues	$ 29	$ 36	$ 55	$ 58
License fee	3	2	5	3
Total	$ 32	$ 38	$ 60	$ 61

The deferred revenue from theses licenses as of June 30, 2009 was $34,000.

Inventories, net

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


	June 30, 2009
	(unaudited)	December 31, 2008
Components (raw materials)	$ 58	$ 47
Finished goods	19	19
Reserve for shrinkage and obsolescence	(27)	(27)
	$ 50	$ 39

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, 2009 and 2008, options to purchase 837,000 and 723,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive. For the six months ended June 30, 2009 and 2008, options to purchase 838,000 and 712,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive.

As of June 30, 2009 and 2008, 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,
		2009		2008		2009		2008

Net income (loss) available to common shareholders (unaudited)	$	(84)	$	(88)	$	(265)	$	(151)

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

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

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

Capital Stock and Stock Options

During the six months ended June 30, 2009, no common stock or preferred stock was issued. During the six months ended June 30, 2009, no options to purchase shares of common stock were granted under the 2003 Non-Employee Directors Stock Option Plan were granted. No issued options were exercised during the six months ended June 30, 2009 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 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 June 30, 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.

Stock Option Grants

2009 Option Grants

2008 Option Grants

Weighted average interest rates

no grants to date

3.4% to 3.5 %

Dividend yield

0.0 %

Volatility factor of the Company’s common stock

no grants to date

143.0 %

Forfeiture factor – Nonstatutory Stock Option Agreements

no grants to date

3.9 %

Forfeiture factor – 2003 Non-Employee Directors Stock Option Plan

Weighted average expected life

no grants to date

7 years

The Company recorded $4,000 and $6,000 of employee and non-employee compensation expense for stock options during the three and six months ended June 30, 2009, respectively, and $9,000 and $14,000 of employee and non-employee compensation expense for stock options during the three and six months ended June 30, 2008, respectively. At June 30, 2008, there was $36,000 of unrecognized compensation costs related to non-vested share-based compensation under the 2003 Non-Employee Directors’ Stock Option Plan. This cost is expected to be recognized over the following eleven months.

The Company recorded $10,000 and $23,000 of compensation expense (both employee and non-employee) for stock options during the three months ended June 30, 2009 and 2008, respectively. The Company recorded $24,000 and $52,000 of compensation expense (both employee and non-employee) for stock options during the six months ended June 30, 2009 and 2008, respectively. At June 30, 2009, there were $16,000 of unrecognized compensation costs related to non-vested share-based compensation under the employee Nonstatutory Stock Option grants. These costs are expected to be recognized over the following twelve months.

Nonstatutory Stock Option Agreements

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

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


Nonstatutory Stock Option Agreements	Three months ending June 30, 2009		Six months ending June 30, 2009
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding, beginning of period	400	$ 0.34	400	$ 0.34
Options Granted	-	-	-	-
Canceled or Expired	-	-	-	-
Outstanding, June 30, 2009	400	$ 0.34	400	$ 0.34

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, 2009		Six months ending June 30, 2009
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding, beginning of period	44	$ 0.45	53	$ 0.45
Options Granted	-	-	-	-
Vested	(9)	$ 0.45	(18)	$ 0.45

Outstanding, June 30, 2009	35	$ 0.45	35	$ 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 activity under the Directors’ Plan is as follows (in thousands except per share data):


Directors’ Plan	Three months ending June 30, 2009		Six months ending June 30, 2009
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding, beginning of period	40	$ 0.91	40	$ 0.91
Options Granted	-	-	-	-
Canceled or Expired	(10)	$ 1.80	(10)	$ 1.80
Outstanding, June 30, 2009	30	$ 0.62	30	$ 0.62

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

2003 Non-Employee Directors’ Stock Option Plan

On June 25, 2003, the Board of Directors adopted the 2003 Non-Employee Directors’ Stock Option Plan (the “2003 Plan”). On June 20, 2007 the Board increased the maximum number of authorized shares of common stock which may be issued on exercise of the options granted pursuant to the 2003 Plan from 300,000 shares to 600,000 shares. The 2003 Plan 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 activity under the 2003 Plan is as follows (in thousands except per share data):


2003 Plan	Three months ending June 30, 2009		Six months ending June 30, 2009
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding, beginning of period	400	$ 0.48	400	$ 0.48
Options Granted	-	-	-	-
Canceled or Expired	-	-	-	-
Outstanding, June 30, 2009	400	$ 0.48	400	$ 0.48

At June 30, 2009, 200,000 shares of the Company’s common stock were reserved for future grants under the 2003 Plan, and options to purchase 400,000 shares were exercisable, at a weighted average exercise price of $0.48.

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


2003 Plan Non-vested Options	Three months ending June 30, 2009		Six months ending June 30, 2009
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding, beginning of period	13	$ 0.51	33	$ 0.51
Options Granted	-	-	-	-
Vested	(13)	$ 0.51	(33)	$ 0.51

Outstanding, June 30, 2009	-	$ 0.00	-	$ 0.00

Income Taxes

A provision for income taxes for the six month period ended June 30, 2009 was recorded for minimum tax liabilities incurred.

The Company believes that all of its tax positions are sustainable and that no significant adjustment to its unrecognized tax benefits is expected. The majority of the unrecognized tax benefits 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.

2. SEGMENT INFORMATION

Sales by geographic markets for the three months ended June 30, 2009 and 2008 were as follows (in thousands):


		Three months ending June 30,				Six months ending June 30
		2009		2008		2009		2008
		(unaudited)		(unaudited)		(unaudited)		(unaudited)
Markets:
U.S markets	$	46	$	41	$	87	$	152
International markets		67		58		79		88
Net product revenue		113		99		166		240

License revenue (worldwide)		111		137		223		262

Net sales	$	224	$	236	$	389	$	502

3. NEW ACCOUNTING PRONOUNCEMENTS

The Company adopted Financial Accounting Standards Board statement No. 157, Fair Value Measurements (“SFAS 157”) 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 SFAS 157 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. SFAS 157 is effective for fiscal years beginning after November 15, 2007, with earlier application encouraged. In February 2008, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP 157-2”), which delays the effective date of SFAS 157 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 SFAS 157 and FSP 157-2 beginning January 1, 2008.

In March 2008, the FASB released FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. FAS No. 161 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 FAS No. 161 did not have any impact on the Company's financial position or results of operations.

In May 2008, the FASB released FAS No. 163, Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60. The scope of FAS No. 163 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 FAS No. 163 did not have any impact on the Company's financial position or results of operations.

In April 2009, the FASB released FAS No. 164, Not-for-Profit Entities: Mergers and Acquisitions—including an amendment of FASB Statement No. The scope of FAS No. 164 is limited to Non-for-Profit Entities and is not applicable to the Company.

In May 2009, the FASB released FAS No. 165, Subsequent Events. The scope of FAS No. 165 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 consolidated financial statements on Form 10-Q with the Securities and Exchange Commission.

In June 2009, the FASB released FAS No. 166, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140. The scope of FAS No. 166 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 FAS No. 166 is not expected to have any impact on the Company's financial position or results of operations.

In June 2009, the FASB released FAS No. 167, Amendments to FASB Interpretation No. 46(R). The scope of FAS No. 167 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 FAS No. 167 is not expected to have any impact on the Company's financial position or results of operations.

In June 2009, the FASB released FAS No. 168, The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162. The FASB Accounting Standards Codification^TM (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 Statement, 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 Statement is effective for

financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of FAS No. 168 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.

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” in our annual report on Form 10-K for the year ended December 31, 2008, 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 period ended June 30, 2009 as the Company incurred net operating losses for which no benefit was recognized, or utilized tax loss carryforwards. The tax benefit is a component of the deferred tax asset disclosed under the heading “Income Taxes” below.

Use of Estimates

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

Revenue Recognition

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

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

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

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


	Three months ending June 30,		Six months ending June 30,
	2009	2008	2009	2008
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Right of first discussion	$ 43	$ 47	$ 75	$ 68
Exclusive license	35	36	86	90
Consulting services	1	16	2	43
Total	$ 79	$ 99	$ 163	$ 201

The deferred revenue from the PPC license agreement as of June 30, 2009 was $449,000.

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


	Three months ending June 30,		Six months ending June 30,
	2009	2008	2009	2008
	(unaudited)	(unaudited)	(unaudited)	(unaudited)
Royalty revenues	$ 29	$ 36	$ 55	$ 58
License fee	3	2	5	3
Total	$ 32	$ 38	$ 60	$ 61

The deferred revenue from theses licenses as of June 30, 2009 was $34,000.

Inventories, net

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


	June 30, 2009
	(unaudited)	December 31, 2008

Components (raw materials)	$ 58	$ 47
Finished goods	19	19
Reserve for shrinkage and obsolescence	(27)	(27)
	$ 50	$ 39

Income Taxes

The Company accounts for income taxes under SFAS 109 “Accounting for Income Taxes”. Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company’s financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

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

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

COMPANY OVERVIEW

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

Results of Operations

Three Months ended June 30, 2009 compared to the Three Months ended June 30, 2008

Net revenue for the quarters ended June 30, 2009 and 2008 were as follows (in thousands):


		Three months ending June 30,
		2009		2008
		(unaudited)		(unaudited)
Net product revenue by markets:
U.S. markets	$	46	$	41
International markets		67		58
Net product revenue		113		99

License revenue (worldwide)		111		137

Net Revenues	$	224	$	236

Total revenues for the second quarter of 2009 were $224,000, a $12,000 decrease from the prior year’s revenues of $236,000. Domestic product sales for the three months ended June 30, 2009 of $46,000 were $5,000 more than the domestic product sales of $41,000 in the prior year. This increase is attributable to the orders from a new customer that were offset by the slight decline of reorders form existing customers. International sales for the three months ended June 30, 2009 of $67,000 increased by $9,000 compared to international sales of $58,000 for the three months ended June 30, 2008, as a result of sales to the Company’s new licensee. The initial sales to the new licensee were slightly offset by the decrease in sales to Latin American customers for the current three month period ending June 30, 2009. Although the current quarter’s sales have increased over the prior year we continue to believe that the general worldwide economic downturn and the significant reduction in sales of consumer products on a worldwide basis continues to negatively impact the consumer sales of our licensees.

License revenues for the three months ending June 30, 2009 and 2008 were $111,000 and $137,000, respectively, a decrease of $26,000 or 19%. The decrease attributable to the PPC license, from which revenues totaled $79,000 in the three months ending June 30, 2009, compared to $99,000 in the three months ending June 30, 2008. PPC license revenues in the three months ending June 30, 2009 consisted of $43,000 for first discussion work, $35,000 from license fee amortization and $1,000 for consulting services. In the three months ending June 30, 2008 the PPC license revenues consisted of $47,000 for first discussion work, $36,000 from license fee amortization and $16,000 for consulting services. The decrease in consulting services is consistent with the Company expectations since much of the technical information required by PPC has been provided. The additional licenses produced $32,000 of license revenue for the three months ending June 30, 2009 compared to $38,000 of license revenue for the three months ended June 30, 2008.

Gross profit for the quarter ended June 30, 2009 of $159,000 is 3% less than the gross profit of $163,000 for the quarter ended June 30, 2008. The decrease in gross profit is attributable a reduction of the license revenues and a more favorable sales mix of higher margin product sales in the current quarter. As a percentage of revenues, gross margin of 71% for the three months ending June 30, 2009 was a 2% improvement over the gross margin of 69% for the three month ending June 30, 2008. Gross margin on product sales decreased slightly to 70% in the three months ending June 30, 2009 from 71% in the three months ending June 30, 2008. The increased license revenue gross margin, 72%and 68% for the three months ending June 30, 2009 and 2008, respectively, is due to decreased PPC license revenue which incurs service related costs while the additional license revenue does not incur any additional costs.


		Three months ending June 30,
		2009		2008
		(unaudited)		(unaudited)
Gross Profit by Revenue Type
Net product revenue	$	79	$	70
License revenue		80		93
Total Gross Profit	$	159	$	163

Research and development expenses for the three months ending June 30, 2009 and 2008 were $13,000 and $9,000, respectively. Research expenditures of $21,000 and $30,000 that were incurred for the three months ended June 30, 2009 and 2008, respectively, to support the PPC license, have been charged as license cost in cost of goods sold. The total research and development costs incurred, including the amounts recorded as license costs, were $34,000 for the three months ended June 30, 2009, which was $5,000 less than the $39,000 incurred for the three months ended June 30, 2008. Decreased facility rental costs and travel expenses, offset by slight increase in consultant costs accounted for the reduced total research and development spending. A fifty percent rent reduction for the Utah lab facility began as of September 1, 2008. Research and development on several new compounds, in addition to the two compounds noted in the PPC license, is continuing at reduced funding levels.

Selling, general and administrative expenses for the three months ended June 30, 2009 of $230,000 are $19,000 less than the selling, general and administrative expenses of $249,000 incurred for the three months ended June 30, 2008. General and administrative and facility cost reductions were made in audit and tax fees, stock option compensation and travel costs.

The Company earned $1,000 and $7,000 in net interest income during the three months ending June 30, 2009 and 2008, respectively. The decreased earnings resulted from a reduction in the Company’s cash balances.

The Company has recorded a $1,000 minimum tax provision for the quarter ended June 30, 2009, 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.

Six Months ended June 30, 2009 as compared to the Six Months ended June 30, 2008

Net revenue for the six months ended June 30, 2009 and 2008 were as follows:


		Six months ending June 30,
		2009		2008
		(unaudited)		(unaudited)
Net product revenue by markets:
U.S. markets	$	87	$	152
International markets		79		88
Net product revenue		166		240

License revenue (worldwide)		223		262

Net Revenues	$	389	$	502

Net revenue for the six months ended June 30, 2009 was $389,000. This was a 23% decrease from net revenue of $502,000 for the first six months of 2008. Domestic product sales for the six months ended June 30, 2009 of $87,000 were $65,000 less than the $152,000 for the six months ended June 30, 2008. The decrease is attributable to a licensee who has discontinued the product line after ten years of purchases, partially offset by existing and new customer sales during the first six months of 2009. International revenues of $79,000 for the six months ended June 30, 2009 decreased by $9,000 than the international revenue for the six months ended June 30, 2008 of $88,000 due to a new licensee partially offset decreased sales into the Latin American markets.

License revenues for the six months ending June 30, 2009 and 2008 were $223,000 and $262,000, respectively, a decrease of $41,000 or 15%. The decrease primarily attributable to the PPC license, from which revenues totaled $163,000 in the six months ending June 30, 2009, compared to $221,000 in the six months ending June 30, 2008. PPC license revenues in the six months ending June 30, 2009 consisted of $75,000 for first discussion work, $86,000 from license fee amortization and $2,000 for consulting services. In the six months ending June 30, 2008 the PPC license revenues consisted of $68,000 for first discussion work, $90,000 from license fee amortization and $43,000 for consulting services. The decrease in consulting services is consistent with the Company expectations since much of the technical information required by PPC has been provided. The additional licenses produced $60,000 for the six months ending June 30, 2009 compared to $61,000 of license revenue for the six months ended June 30, 2008.

Gross profit for the six months ending June 30, 2009 decreased 26% to $259,000 from $348,000 for the six months ending June 30, 2008. The decreased gross profit is attributable to the decreased product sales and reduced PPC license revenues. Gross margins for the six months ended Jun 30, 2009 and 2008 was 67% and 69%, respectivily. The gross margin has decreased slightly due to a fluctuating product sales mix, offset by improved license revenue margins.


		Six months ending June 30,
		2009		2008
		(unaudited)		(unaudited)
Gross Profit by Revenue Type:
Net product gross profit	$	105	$	180
License gross profit		154		168
Total Gross Profit	$	259	$	348

Research and development expenses for the first half of 2009 and 2008 were $38,000 and $23,000, respectively. Research expenditures of $27,000 and $53,000 that were incurred in 2009 and 2008, respectively, to support the PPC license have been charged as cost of goods sold. The total research and development cost incurred for the first six months of 2009 was $66,000 and $76,000 for the six months in 2008. Decreased facility rental costs accounted for $13,000 of the decreased spending while consultant costs increased by $3,000.

Selling, general and administrative expenses for the six months ending June 30, 2009 were $487,000 and $493,000 for the six months ending June 30, 2008, a $6,000 decrease. Selling, marketing and distribution expenses are $1,000 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 $5,000 primarily due to reduced audit and tax services, reduced stock compensation recognition.

The Company earned $2,000 and $18,000 in net interest income during the six months ending June 30, 2009 and 2008, respectively. The decreased earnings were due to reduced interest rates and lower cash balances.

The Company recorded a $1,000 minimum tax provisions in 2009 and 2008, due primarily to a valuation allowance on deferred tax assets being recorded and the expected utilization of net operating losses carried forward from prior years to offset any significant tax liability.

Off-Balance Sheet Arrangements.

None.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2009, the Company had cash of $542,000 with no outstanding bank borrowings and working capital of $296,000. At December 31, 2008, it had cash of $907,000 with no outstanding bank borrowings and working capital of $609,000. For the first six months of 2009, net cash used in on-going activities was $365,000 as compared to the prior year’s $200,000, an increase of $165,000.

The current cash position at June 30, 2009 was $56 more than the Company’s annual budget had projected. The Company is aware of its liquidity position and the inconsistent revenue streams, the lead times involved in product development, the time involved in executing new license agreements and the current difficult economic environment. The Company continues to limit spending to necessary operating expenses. Although the Company’s current cash position and projected results of operations for the next six months are not expected to require additional outside financing, the Company must be successful within the current year with its licensing of its current technology and its new compounds, ER 303 and ER 99. If these efforts are not successful the Company will need to secure additional financing opportunities. The Company may not be able to obtain such additional funding on commercially reasonable terms, if at all, should such funding be required.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not required for smaller reporting companies.

Item 4T. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Based on our evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting identified in connection with our evaluation that occurred during the fiscal quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not party to any pending legal proceedings.

Item 1A. Risk Factors

Not required for smaller reporting companies.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

Item 5. Other Information

Not applicable.

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 has duly caused this Report to be signed on behalf by the undersigned thereunto duly authorized.

HUMAN PHEROMONE SCIENCES, INC.

Date: August 13, 2009

/s/ William P. Horgan

William P. Horgan

Chairman and Chief Executive Officer

(Principal Executive Officer)

Date: August 13, 2009

/s/ Gregory S. Fredrick

Gregory S. Fredrick

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)