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EX-32 - HUMAN PHEROMONE SCIENCES INCv216208_ex32.htm
EX-31.1 - HUMAN PHEROMONE SCIENCES INCv216208_ex31-1.htm
EX-31.2 - HUMAN PHEROMONE SCIENCES INCv216208_ex31-2.htm

United States
Securities and Exchange Commission
Washington, D.C.  20549

FORM 10-K
(MARK ONE)

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

For the fiscal year ended December 31, 2010

 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to

Commission file number 0-23544

HUMAN PHEROMONE SCIENCES, INC.

(Exact name of registrant as specified in its charter)

California
 
94-3107202
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
84 W Santa Clara St.,  Suite 720,  San Jose, California
 
95113
(Address of principal executive offices)  
(Zip code)

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

Securities registered under Section 12(b) of the Act:
None

(Title of class)

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

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act     Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o  No þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes o  No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes o  No þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check One): 
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company)      Smaller reporting company þ

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

The aggregate market value of the voting stock held by non-affiliates of the registrant was $343,000 as of June 30, 2010 based upon the closing sale price on the OTC Bulletin Board reported for such date.  Shares of common stock held by each officer and director and by each person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for other purposes.

There were 4,151,954 shares of the registrant’s common stock issued and outstanding as of March 15, 2011

DOCUMENTS INCORPORATED BY REFERENCE
None

 
 

 

TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS
 
PART I
   
 
ITEM 1.
BUSINESS
3
 
ITEM 1A.
RISK FACTORS
8
 
ITEM 2.
PROPERTIES
9
 
ITEM 3.
LEGAL PROCEEDINGS
9
 
ITEM 4.
(REMOVED AND RESERVED)
9
     
PART II
   
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
10
 
ITEM 6
SELECTED FINANCIAL DATA
10
 
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
10
 
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
16
 
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
16
 
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
16
 
ITEM 9A.
CONTROLS AND PROCEDURES
16
 
ITEM 9B.
OTHER INFORMATION
17
     
PART III
   
 
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
18
 
ITEM 11.
EXECUTIVE COMPENSATION
21
 
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT  AND RELATED STOCKHOLDER MATTERS
23
 
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
24
 
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
24
     
PART IV
   
 
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
25
SIGNATURES
27

 
2

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Except for the historical information contained in this discussion of the business and the discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements.  These forward looking statements include but are not limited to the Company’s ability to raise additional funding, enter into licensing arrangements plans for sales growth, 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.

PART I

Item 1.                  Business

Introduction

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

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

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

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

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

The HPS Technology

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

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

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

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

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

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

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

The Current HPS Products and Research

Products.  The Company began by marketing three fragrances, REALM® Women, REALM® Men and inner REALM®.  These “proof-of-concept” products included a full line of fragrance and bath and body products including eau de toilette, cologne, eau de parfume, lotion, bath and shower gel, after-shave balm, deodorant, talc, soap and body cream.  In 2003 the Company sold the assets and worldwide ownership rights to the REALM Women, REALM Men and innerREALM product lines, including the rights to all trademarks associated therewith.  The proceeds from the sale enabled the Company to focus on developing additional mood-enhancing compounds which it could license and sale to other consumer product companies.
 
Licensing the use of the Company’s Initial Compounds and related technology is currently the core business of the Company.  These compounds are sold to licensed customers and included as components in their products. The Company also offers private label manufacturing services for licensed customers if that is desired.

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

In August 2006, the Company signed an Agreement with Personal Products Company, a division of McNeil-PPC, Inc. (“PPC”) a Johnson & Johnson company. The Agreement with PPC represents a multiple-element arrangement and includes post signing consulting support to PPC as needed to assist them in claims development and manufacturing processes, an exclusive right of first discussion for new compounds that the Company develops and documents supportable claims of effectiveness, and an exclusive right to the Company’s existing patented compounds in specific consumer product fields (collectively hereinafter referred to as “PPC Rights”).  In exchange for the PPC rights HPS received an initial cash payment and will receive future royalties on sales.  The Company retains exclusive rights in several product fields and shares co-exclusive rights in other product areas, with the right to sublicense.

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

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

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

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

For the years ended December 31, 2010 and 2009, total research and development expenditures totaled $23,000 and $139,000, respectively.  Research expenditures of $54,000 that were incurred in 2009 to support the PPC license have been charged as cost of goods sold and there were no similar expenditures made in 2010.  The Company expects to continue development efforts, with or without consumer product company(s) as development partners when the financial resources become available.  Since its inception through December 31, 2010, the Company has incurred $6,300,000 in direct research and development related expenses.

Markets and Competition

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

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

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

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

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

The Company has begun selling ER 303 to existing and new licensees that are looking for to enhance their existing product lines.  The Company is manufacturing and distributing ER 303 and its initial compounds.  The Company is seeking to discuss with qualified organizations ER 99 potential development and licensing relationships.  The Company’s six other identified compounds which have completed early stages of development will not be ready for distribution until they have additional testing work performed and minimal development work performed, which is delayed until the financing for such work is available.
 
Technology Licensing and Supply Agreements

One of the strategic objectives of the Company is to expand the use of its patented human pheromone technology and other mood enhancing technologies by working closely with consumer products companies who are leaders in their particular markets.  In December 1998, HPS signed its first agreement to supply Avon Products, Inc. with its synthesized human pheromones and began shipments in 1999.  The Company continues have supply and / or licensing discussions with   companies in several consumer products fields and markets.

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

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

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

 
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Dependence on One or Few Major Customers

During 2010, three customers comprised 42%, 22% and 11% of the Company’s net revenues. Accounts receivable from these customers at December 31, 2010 account for 75%, 0% and 8%, respectively, of the net receivables.  During 2009, three customers comprised 31%, 30% and 14% of the Company’s net revenues, and accounts receivable from these customers at December 31, 2009 accounted for 0%, 61% and 21%, respectively.

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

 Patents and Other Intellectual Property

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

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

Regulation

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

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

Employees

At March 1, 2011, the Company had two full-time employees and one part-time employee.  In addition, the Company, as needed, retains consultants to provide advice in the areas of research, product safety testing, regulatory compliance, and information systems support.  None of the Company’s employees is represented by a labor union.  The Company considers its relations with its employees and consultants to be good.

 
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Manufacturing

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

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

Available Information

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

Item 1A.               Risk Factors

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

The Company requires additional funding to continue operations.    The Company’s current cash position and projected results of operations for the next twelve months requires additional outside financing.  Unless the Company raises additional funding by debt or equity issuances, asset sales or a significant increase in product and licensing revenues accompanied by reductions in corporate spending, the Company’s current cash on hand will be insufficient to cover its working capital requirements.  The Company has been actively working on securing the required funding and it is not known how successful those efforts might be.  If the Company is unable to raise sufficient additional equity or debt financing, or such financing is insufficient or not available, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on our future performance, including but not limited to, the premature sale of some or all of our assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms, or the cessation of operations.

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

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

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

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

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

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

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

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

Item 2.                  Properties

The Company presently occupies 1,443 square feet of space for its headquarter offices in San Jose, California, pursuant to a lease extension signed on March 5, 2004 that expired March 31, 2007.  The minimum annual rental is $26,840, with annual rent increases in accordance with the increase in the Consumer Price Index in the local area.  The Company has converted to a month-to-month lease for these offices. Commencing in February 2001, the Company leases storage space in the local area on a month-to-month basis for approximately $0.98 per square foot.

The Company also occupies 531 square feet of laboratory space for its research and development operations located in Salt Lake City, Utah, pursuant to a lease signed on September 1, 2008 that expired September 1, 2009.  The minimum annual rental was $14,700 with no annual rent increase and the Company is continuing the rent at this rate on a  month-to-month basis until a new lease is signed.  Our existing facilities are not yet being used at full capacity and management believes that these facilities are adequate and suitable for current and anticipated needs.

During the year ended December 31, 2010, the Company incurred $50,000 in net rent expense and related charges for these facilities.

Item 3.                  Legal Proceedings

We are not currently involved in any material legal proceedings.

Item 4.                  (Removed and Reserved)

 
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PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and  Issuer Purchases of Equity Securities

The Company’s common stock is quoted on the OTC Bulletin Board under the symbol EROX.OB.  As of March 1, 2011, there were approximately 530 holders of record of the Company’s common stock.  Set forth below is the high and low bid information for the Company’s common stock on the OTC Bulletin Board as reported during each of the four calendar quarters of 2010 and 2009.
   
HIGH
   
LOW
 
2010
           
First quarter
  $ 0.17     $ 0.11  
Second quarter
  $ 0.16     $ 0.11  
Third quarter
  $ 0.12     $ 0.08  
Fourth quarter
  $ 0.10     $ 0.07  
                 
2009
               
First quarter
  $ 0.25     $ 0.12  
Second quarter
  $ 0.41     $ 0.17  
Third quarter
  $ 0.23     $ 0.15  
Fourth quarter
  $ 0.17     $ 0.13  

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

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

Issuer Purchases of Equity Securities
 
In December 2007, the Board of Directors approved a stock repurchase program for the Company to buy back up to 400,000 shares of the Company’s common stock.  No shares were repurchased in fiscal 2010.

Item 6.            Selected Financial Data

Not applicable

Item 7.            Management’s Discussion and Analysis

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

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

In 2009 the Company’s completed the majority of the services required by a licensee resulting in minimal revenue recognition in 2010.  As such, the reduction in license revenue was attributable to this one license and the Company’s other licensee revenues increased slightly from the prior year.  Product sales were down as we continue to move away from direct sales of finished goods to consumer and distributors as we concentrate on licensing the technology to established consumer product companies.  The Company expects licensing revenues to continue as the primary revenue source in future periods.

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

Year ended December 31, 2010 compared with the year ended December 31, 2009

Net revenue for the year ended December 31, 2010 and 2009 were as follows (in thousands):

   
Year ending December 31,
 
   
2010
   
2009
 
Net product revenue by markets:
           
U.S. markets
  $ 186     $ 170  
International markets
    93       119  
Net product revenues
    279       289  
                 
  License revenues (worldwide)
    527       596  
                 
  Net Revenues
  $ 806     $ 885  

Net revenues for the year ended December 31, 2010 were $806,000 compared to $885,000 for the year ending December 31, 2009, a decrease of $79,000, or 9%. The decrease in net revenues was primarily attributable to the decline of license revenue under the PPC license.   License revenues for the years ending December 31, 2010 and 2009 were $527,000 and $596,000, respectively, a 12% decrease of $69,000.  The decrease in license revenue is attributable to reduced revenue recognition from the PPC license of $102,000 which was partially offset by $32,000 from other existing licensees.  License revenues, excluding PPC revenues, were $351,000 for the year ended December 31, 2010 compared to $319,000 of license revenue, excluding PPC revenues, for year ended December 31, 2009. The increase in revenues from all other licensees was attributed to the men’s body wash product line launched in the United States in 2009 by Dial Corporation.  Revenue recognized under the PPC license totaled $177,000 in 2010, $18,000 for first discussion work, $151,000 license fee amortization and $8,000 for consulting services.  In 2009 the license revenues recognized under the PPC license were $278,000, $118,000 for first discussion work, $156,000 license fee amortization and $4,000 for consulting services.

Net product revenues of $279,000 for the year ending December 31, 2010 was $10,000, or 3%, less than the net product revenues of $289,000 for the year ending December 31, 2009.  For the year ending December 31, 2010 U.S. product sales increased by $16,000 despite no sales in 2010 to a customer releasing a pheromone based fragrance seasonally every other year historically (which was released in 2009 but not in 2010).  International sales decreased by $26,000 for the year ending December 31, 2010 as we did not have any exports to Europe in 2010 due to the high cost of shipping and our Taiwan licensee purchase less product than the prior year but sufficient to retain their exclusive rights for the Taiwan market.

Gross profit for the year ended December 31, 2010 of $678,000 is 2% less than the gross profit of $690,000 for the year ended December 31, 2009.  As a percentage of revenue, gross profit of 84% for the year ended December 31, 2010 was more than gross profit of 78% for the year ended December 31, 2009.  Gross margin on product sales decreased slightly to 61% for the year ended December 31, 2010 from 67% for the year ended December 31, 2009. The decreases in both the product total gross margin and gross profit percentage are attributed to the customer sales mix between product purchase licensees and royalty based licensees.  The increase in the higher margin license revenue is due to completion of the higher cost PPC consulting services.

   
Year December 31,
 
   
2010
   
2009
 
   
(unaudited)
   
(unaudited)
 
Gross Profit by Revenue Type:
           
Net product gross profit
  $ 170     $ 195  
License gross profit
    508       495  
Total Gross Profit
  $ 678     $ 690  

 
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Research and development expenses for the year ending December 31, 2010 and 2009 were $23,000 and $85,000, respectively.  Research expenditures of $54,000 that were incurred in 2009 to support the PPC license have been charged as cost of goods sold and there were no similar charges in 2010. The total research and development costs incurred for the year ending December 31, 2010 was $23,000 which was $116,000 less than the research and development expenses of $139,000, including the amount recorded as license costs, incurred for the year ending December 31, 2009.  The decrease of the research expenditures was the result of a rent adjustment for the Utah lab space and decreased consultant fees as we reduced research and development funding until additional financing is obtained.

Selling, general and administrative expenses decreased by $141,000, from $891,000in the year ending December 31, 2009 to $750,000 in the year ending December 31, 2010.  Sales, marketing and distribution expenses increased $3,000 from $10,000 to $13,000 for the years ending December 31, 2009 and 2010, respectively, while other administrative expenses decreased by $144,000 from $881,000 to $737,000 for the years ending December 31, 2009 and 2010, respectively.  The increase in sales, marketing and distribution expenses in 2010 was related to ER303 promotion to potential consumer product companies.  Other administrative expenses decreased in 2010 because administrative expenses of $12,000 that were incurred in 2009 to support the PPC license have been charged as cost of goods sold and there were no similar charges in 2010. The total administrative cost incurred for the year ending December 31, 2010 was $737,000 which was $156,000 less than the prior year’s administrative expenses of $893,000, including the $12,000 recorded as license costs.  The Company has made reduction in all administrative costs in the year ending December 31, 2010 except for the costs of legal expense related to the ER303 patent filing.  We continued to fund the patent approval process based on our discussions with potential investors as we attempt to raise additional capital.  General operating expense decreased in 2010 due to decrease in salaries and benefits of  $88,000 and decrease in other legal, audit fees and fees to other consultants of $75,000 in the aggregate.

There was not any interest income, or expense for the year ending December 31, 2010 as compared to $3,000 interest income earned during the year ending December 31, 2009.  The decrease in net interest income was due to decreased cash balances as the year progressed.

In 2010 we recorded a $2,000 tax provision, and in 2009 the Company recorded a $1,000 tax provision for state minimum taxes.

As of December 31, 2010 the Company’s gross deferred tax asset, which relates primarily to net operating losses carried forward, was approximately $4,602,000.  However, a full valuation allowance was provided for the gross deferred tax asset as management could not determine that it is more likely than not that the deferred tax asset will be realized.

Liquidity and Capital Resources

At December 31, 2010, the Company had cash and cash equivalents of $92,000, a negative working capital of $14,000, and no bank borrowings outstanding. At December 31, 2009 had cash and cash equivalents of $350,000 and working capital of $200,000 with no bank borrowings outstanding.  Net cash used in operating activities was $258,000 for the year ended December 31, 2010 as compared with net cash used by operating activities of $557,000 for the year ended December 31, 2009. The cash used in operations for 2010 decreased by $299,000 and is comparable to the prior year.
 
 
The Company’s current cash position and projected results of operations for the year 2011 requires that additional sources of funding be obtained.  Unless the Company raises additional funding by debt or equity issuances, asset sales or a significant increase in product and licensing revenues accompanied by reductions in corporate spending, the Company’s current cash on hand will be insufficient to cover its working capital requirements.  The Company is actively working on securing the required funding and it is not known how successful those efforts might be.

Based on the Company’s current operating plans, management does not believe that the Company’s existing cash resources and cash forecasted by management to be generated by operations will be sufficient to meet working capital and capital requirements through the current year. In this regard, the Company must be successful in its current licensing of its compounds or raise additional operating capital to fund continuing operations and support the further development of identified compounds.  The Company has been working to secure the financing to continue with on-going operations, however, there is no assurance that the Company will be successful with its plans. If events and circumstances occur such that the Company does not meet its current operating plans, the Company is unable to raise sufficient additional equity or debt financing, or such financing is insufficient or not available, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on our future performance, including but not limited to, the premature sale of some or all of our assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms, or the cessation of operations.

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

Recent Accounting Pronouncements

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

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

In June 2009, the FASB released ASC 860-10, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.  The scope of ASC 860-10 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This statement is effective for financial statements issued for fiscal years beginning and interim periods beginning after November 15, 2009. 

In June 2009, the FASB issued ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 16.  The FASB Accounting Standards Codification (Codification) became the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this ASC, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.   This ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

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

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

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

 
13

 
 
CRITICAL ACCOUNTING POLICIES

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

Stock Option Policy

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

The Company did not record the stock compensation expense net of taxes since there was no material provision for income taxes for the periods ended December 31, 2010 and 2009 as the Company incurred net operating losses for which no benefit was recognized, nor were tax loss carryforwards utilized.  The tax benefit is a component of the deferred tax asset disclosed in the income taxes footnote.

Use of Estimates

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

Revenue Recognition

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

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

● The delivered items or service has value to the customer on a stand alone basis.
 
● There is objective and reliable evidence of the fair value of the undelivered items or service.

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

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

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

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

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

   
Year ending December 31,
 
   
2010
   
2009
 
Right of first discussion
  $ 18     $ 118  
Exclusive license
    151       156  
Consulting services
    8       4  
Total
  $ 177     $ 278  

The deferred revenue related to the PPC agreement as of December 31, 2010 and 2009 was $157,000 and $334,000, respectively.

The Company has entered into three additional license agreements for the development, manufacture, sale and distribution of consumer personal care products using the Company’s patented technology.   License fees received and attributed to these agreements are being recognized on a straight-line basis over the initial life of the license periods ranging from fifteen to thirty-six months.  There is no discernable service to be provided by the Company to warrant an alternative revenue recognition method.

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

   
Year ending December 31,
 
   
2010
   
2009
 
Royalty revenues
  $ 307     $ 297  
License fee
    43       20  
Total
  $ 350     $ 317  

The deferred revenue from these licenses as of December 31, 2010 and 2009 was $13,000 and $18,000, respectively.

Income Taxes

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

 
15

 

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.

Off-Balance-Sheet Arrangements

As of December 31, 2010, the Company did not have any off-balance-sheet arrangements as defined in Item 303(a)(4) of SEC Regulation S-K.

Item 7A.              Quantitative and Qualitative Disclosures About Market Risk

Not applicable


Item 8.                 Financial Statements

See the Company’s audited financial statements set forth on pages 28 to 44.

Item 9.                 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.              Controls and Procedures
 
a)  Evaluation of Controls and Procedures.
 
Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report on Form 10-K.
 
(b)  Management’s Report on Internal Control Over Financial Reporting.
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management concluded that our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and preparation of the financial statements for external purposes in accordance with U.S. generally accepted accounting principals as of December 31, 2010.
 
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

 
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(c)
Changes in Internal Control Over Financial Reporting.
 
There have not been any changes in the Company’s internal control over financial reporting during the most recent fiscal quarter ended December 31, 2010, that materially affected, or are reasonably likely to materially effect, the Company’s internal control over financial reporting.

Item 9B.              Other Information

None.

 
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PART III

Item 10.  Directors, Executive Officers, and Corporate Governance of the Registrant

The executive officers of the Company and their ages as of March 1, 2010 are as follows:
Name
 
Age
 
Position
         
William P. Horgan
 
63
 
Chairman of the Board of Directors, Chief Executive Officer
         
Gregory S. Fredrick
 
56
 
Chief Financial Officer

William P. Horgan biography is included under the heading “Board of Directors” below

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

Code of Ethics

The Company has adopted a Code of Ethics that applies to all of our directors, officers and employees.  The Code of Ethics is posted on our website at erox.com under the caption About the Company.  Shareholders may request a free copy of the Code of Ethics by submitting a written request to: [the company address].

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

Board of Directors

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

Name
 
Age
 
Position
William P. Horgan
 
63
 
Chairman of the Board of Directors, Chief Executive
Bernard I. Grosser, MD
 
82
 
Director
Helen C. Leong
 
83
 
Director
Carson Tang
 
51
 
Director
Robert Marx
  
80
  
Director

The following is a brief biography of each member of our board of directors, as of March 1, 2011, with each biography including information regarding the experiences, qualifications, attributes or skills that caused our board of directors to determine that each member of our board of directors should serve as a director as of the date of this Annual Report on Form 10-K

 
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William P. Horgan has served as our President and Chief Executive Officer since January 1994, when he joined the Company.  Mr. Horgan was appointed to the newly created post of Chairman of the Board in November 1996 after serving as Director since January 1994.  From May 1992 to January 1994, he served as Chief Financial and Administrative Officer of Geobiotics, Inc., a biotechnology-based development stage company, and from January 1990 to May 1992, was employed by E.S. Jacobs and Company as Senior Vice President of Worlds of Wonder, Inc.  From March 1988 to January 1990, he was Chief Financial Officer of Advanced Polymer Systems, Inc., a manufacturer and supplier of polymer based delivery systems for the ethical dermatology, OTC skin care and personal care markets.  Prior to 1988, he held various executive and management positions with CooperVision, Inc. and several affiliated companies, including President of its Revo, Inc. subsidiary.  Mr. Horgan’s industry experience, professional experiences and knowledge of the Company’s technology qualify him to serve as a director.  In addition, his experience as chief executive officer provided him with operational and industry expertise that is important to the Board, particularly, his experience guiding the Company from a consumer fragrance product company to a technology licensing company. As a result of his knowledge and experience in the biotech and consumer medical industry, Mr. Horgan has substantial knowledge of the industry and the technology, in addition to his skills in consensus building, which are especially valuable in his role as the Board Chairman.

Bernard I. Grosser, MD has served as our Director since March 1992.  Dr. Grosser has been a Professor of Psychiatry at the University of Utah and served as Chairman of the Department of Psychiatry at the University of Utah from 1975 to 2007.  Dr. Grosser has conducted extensive research related to hormonal target areas of the brain. Dr. Grosser served on the Board of Directors for Large Scale Biology Corporation, a biotechnology company, from 1995 to 2007.  Dr. Grosser has participated as a member of the Speaker’s Bureau  for AstraZeneca, Schering Plough and Eli Lilly, and sat on the Pharmacy and Therapeutics Committee for Regence Blue Cross.  Dr. Grosser’s medical background, professional experience and research expertise are attributes that qualify him as a director.

Helen C. Leong has served as our Director since April 1993.  Since  1974,Mrs. Leong is and has been for more than fifteen years the managing partner of Leong Ventures, which makes investments in the areas of biogenetics and health-oriented technologies.  She is a general partner, and lead investment analyst, with CLW Associates since 1976, which specializes in real estate, biotech and consumer product fields.  Mrs. Leong was also a founder of Mid-Peninsula Bank of Palo Alto where she served as a director from 1988 until October 2007 when the bank was acquired by Wells Fargo Bank and was a member of the Investment Committee for Mid-Peninsula Bank from 1988 to 1990.  Mrs. Leong accounting and financial education and experiences with biogenetics and health-oriented companies, banking and venture capital companies qualify her to as both a director and as chairperson of the audit committee.

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

Carson Tang has served as our Director since June 2007.  Mr. Tang serves as the Managing Partner of the Renovatio Global Fund, a technology-based fund based in San Jose, California since 2004.  Mr. Tang is also advisor and a General Partner for the Atlanta based Seraph Fund, the founder and director of American Prolmage, Inc. in Los Angeles, California and a Managing Director of DISC Beteiligungs-und Management GmbH in Bingen, Germany. Before founding American Prolmage, Inc. in 1990, Mr. Tang was the Vice President and co-founder of ViewSonic Corporation from 1987 to 1990.  Mr. Tang’s experience with high tech industry with ties to Asia, venture capital management and capital funding experience qualify him as a director.

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

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

 
19

 

Criteria for Board Membership.  In selecting candidates for appointment or re-election to the Board, the current Board of Directors considers the appropriate balance of experience, skills and characteristics required of the Board of Directors, and seeks to insure that at least a majority of the directors are independent under the rules of the Nasdaq Stock Market, that members of the Company’s audit committee meet the financial literacy and sophistication requirements under the rules of the Nasdaq Stock Market and at least one of them qualifies as an “audit committee financial expert” under the rules of the Securities and Exchange Commission. Nominees for director are selected on the basis of their depth and breadth of experience, industry knowledge, integrity, ability to make independent analytical inquiries, understanding of the Company’s business environment, and willingness to devote adequate time to Board duties.
 
Shareholder Nominees. The Board of Directors will consider written proposals from stockholders for nominees for director. Any such nominations should be submitted to the Board of Directors c/o the Secretary of the Company and should include the following information: (a) all information relating to such nominee that is required to be disclosed pursuant to Regulation 14A under the Securities Exchange Act of 1934 (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) the names and addresses of the shareholders making the nomination and the number of shares of the Company’s common stock which are owned beneficially and of record by such shareholders; and (c) appropriate biographical information and a statement as to the qualification of the nominee, and should be submitted in the time frame described in our Bylaws of the Company.
 
            Process for Identifying and Evaluating Nominees.   The Board of Directors believes the Company is well-served by its current directors.   In the ordinary course, absent special circumstances or a material change in the criteria for Board membership, the nominating committee will renominate incumbent directors who continue to be qualified for Board service and are willing to continue as directors.    If an incumbent director is not standing for re-election, or if a vacancy on the Board occurs between annual shareholder meetings, and the Board determines the seat should be filled, the Board of Directors will seek out potential candidates for Board appointment who meet the criteria for selection as a nominee and have the specific qualities or skills being sought.  Director candidates will be selected based on input from members of the Board, senior management of the company and, if the Board of Directors deems appropriate, a third-party search firm. The Board of Directors will evaluate each candidate's qualifications and check relevant references; in addition, such candidates will be interviewed by at least one member of the Board of Directors. Candidates meriting serious consideration will meet with all members of the Board.  Based on this input, the Board of Directors will evaluate which of the prospective candidates is qualified to serve as a director and whether the Board of Directors should recommend that this candidate be appointed to fill a current vacancy on the Board, or presented for the approval of the shareholders, as appropriate.      The Company has never received a formal proposal from a shareholder to nominate a director.  Although the Board of Directors has not adopted a formal policy with respect to shareholder nominees, the Board of Directors expects that the evaluation process for a shareholder nominee would be similar to the process outlined above.
 
Audit Committee
 
The current members of the Audit Committee of the Board of Directors are Mrs. Leong, Dr. Grosser and Mr. Marx.  The Board has determined that all members of the audit committee are independent directors under the rules of the Nasdaq Stock Market and each of them is able to read and understand fundamental financial statements.  The Board has determined that Mrs. Leong qualifies as an “audit committee financial expert” as defined by the rules of the Securities and Exchange Commission.  The Audit Committee’s purpose is to consult with the Company’s independent auditors concerning their audit plans, the results of the audit, the Company’s accounting principles and the adequacy of the Company’s general accounting controls.  The Audit Committee operates under a written charter, a copy of which is posted on our website at www.erox.com.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than 10% of the outstanding shares of the Company’s Common Stock, to file with the Securities and Exchange Commission initial reports of ownership (Form 3) and changes in ownership of such stock (Forms 4 and 5).

To the Company’s knowledge, based solely upon review of the copies of such reports and certain representations furnished to it, all Section 16(a) filing requirements applicable to its executive officers and four of the directors were complied with during the year ended December 31, 2010.  Mr. Tang has not yet filed with the SEC the Form 4 to report his July 29, 2009 stock option grant.

 
20

 

Item 11.               Executive Compensation

The following tables and descriptive materials set forth information concerning compensation earned for services rendered to the Company by the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”) who are the only executive officers for fiscal year 2010 whose salary and bonus for the fiscal year 2010 exceeded $100,000 (the “Named Executive Officers”).
 
Summary Compensation Table – Named Executive officers
 
Name and Principal Position
 
Year
 
Salary
   
Bonus
   
Option
Awards(1)
   
Other 
Compensation(1)
   
Total
 
William P. Horgan
 
2010
  $ 178,900                 $ 5,200     $ 184,100  
Chairman of the Board and
 
2009
  $ 221,500                 $ 18,000     $ 239,500  
Chief Executive Officer
                                           
                                             
Gregory S. Fredrick
 
2010
  $ 106,300                       $ 106,300  
Chief Financial Officer
 
2009
  $ 120,000                       $ 120,000  


1         Mr. Horgan received an automobile allowance of $18,000 per year until April 15, 2010.

Outstanding Equity Awards at Fiscal Year End

The following table sets forth information on outstanding option and stock awards held by the Named Executive Officers at December 31, 2010, including the number of shares underlying both exercisable and unexercisable portions of each stock option as well as the exercise price and the expiration date of each outstanding option.   All options granted at fair market value based on the closing price of our stock on the day of the grant.

  
 
Option awards
Name 
 
Number of
securities
underlying
unexercised
options (#)
exercisable
   
Number of securities
underlying
unexercised options
(#) unexercisable 
   
Option
exercise price
($)
 
Option expiration
date 
William P. Horgan
    300,000       -     $ 0.315  
6/21/2013
                           
Gregory S. Fredrick
    20,000       -     $ 0.315  
6/21/2013
      70,000       -     $ 0.450  
7/17/2015
 
1 All options for the Named Executive Officers vest monthly over a period of two (2) years. The options are exercisable for seven  years, and expire on the date seven years from the date of grant.

Employment Agreements and Arrangements

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

 
21

 

Change in Control Agreements

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

Since the closing market price of our common stock on December 31, 2010 of $0.07 was lower than the exercise price of these options, our Named Executive Officers would not have realized any value from the acceleration had the change of control occurred on December 31, 2010.  

Indemnification Agreement

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

DIRECTOR COMPENSATION

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

Cash Compensation Paid to Board Members

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

The Company’s 2003 Non-Employee Directors’ Stock Option Plan (the “2003 Plan”) provides for the automatic grant of 20,000 shares of Common Stock if a person who is neither an officer nor an employee of the Company and who has not previously been a member of the Board is elected or appointed director.  Each such option will become exercisable at the rate of one-twelfth of the number of shares covered by the option each month following the grant date, so long as the individual is serving as a director, with full vesting over one year.  In addition, on the date of the first meeting of the Board immediately following each annual meeting of shareholders of the Company, the Company is required to grant to each non-employee director a seven year Non-Qualified Option to purchase 20,000 shares of the Company’s Common Stock at an exercise price equal to the fair market value of Common Stock on the date of the grant.  These options will vest one-twelfth per month after the date of grant, as long as the individual is serving as a director, with full vesting over one year.   The exercise price of all options granted pursuant to the 2003 Plan is the fair market value of the Company’s Common Stock at the closing price on the day of the grant.  The 2003 Plan expired on June 24, 2010 and a total of 440,000 shares are reserved for issuance under the 2003 Plan.  We did not grant any stock options to our directors in 2010.
 
Compensation Committee Interlocks and Insider Participation
 
The Compensation Committee consists of Dr. Grosser (Chairman), Mr. Marx and Mr. Carson Tang all of whom are independent non-management directors. None of the Compensation Committee members has served as an officer or employee of the Company, and none of the Company’s executive officers has served as a member of a Compensation Committee.

 
22

 

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of December 31, 2010 with respect to the shares of the Company’s Common Stock that may be issued under all of the Company’s existing equity compensation plans (including individual compensation arrangements) consisting of the  2003 Non-Employee Directors’ Stock Option Plan and restricted-stock option grants made to employees outside the plan.

Equity Compensation Plans
 
Number of 
securities to be
issued upon
exercise of
outstanding
options, warrants 
and rights
   
Weighted-average
exercise price of
outstanding options,
warrants and rights
   
Number of remaining
available for future
issuance under equity
compensation
plans(excluding securities
reflected in column(a))
 
Equity compensation plans approved by  security holders
    -       -       -  
Equity compensation plans not approved by security holders
    840,000     $ 0.41       -  

DESCRIPTION OF PLANS NOT APPROVED BY SHAREHOLDERS

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

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

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

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
 
The following table sets forth certain information regarding the beneficial ownership of the Company’s Common Stock as of March 16, 2011 by:  (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each of the Company’s executive officers named in the Summary Compensation Table; (iii) each of the Company’s directors; and (iv) by all directors and executive officers as a group.  In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of March 16, 2011 are deemed outstanding.  Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of each other person.  The percentage of beneficial ownership is based on 4,151,954 shares of Common Stock outstanding as of March 16, 2011.  Except as otherwise indicated, the Company believes that the beneficial owners of the securities listed below, based on information furnished by such owners, have sole investment and voting power with respect to the Common Stock shown as being beneficially owned by them:

 
23

 

Directors, Nominees, Officers And 5% Stockholders
 
Shares Beneficially Owned
   
Percent Of Class
 
5% Stockholders
           
Renovatio Global Funds, L.P. (1)
    654,720       15.8 %
Larry H. Schatz (2)
    300,000       7.2  
Directors, Nominees and Officers
               
William P. Horgan (3)  (4)
    357,733       8.0  
Bernard I. Grosser, M.D.(4) (5)
    247,184       5.8  
Helen C. Leong(4) (5)
    190,020       4.4  
Robert Marx(4) (5)
    221,018       5.1  
Carson Tang(4) (6)
    714,720       17.0  
Greg Fredrick (4) (7)
    90,000       2.1  
All executive officers and directors as a group(3)  (5) (6)  (7)
    1,820,675       36.2  

 
(1)
Fund may be contacted at 1737 N. First St., Suite 350, San Jose, CA 95116.  Carson Tang, a director of the Company, is the Managing Partner of Renovatio Global Funds, L.P. (“Renovatio”) and, as such, may be deemed to share voting and investment power over all of such shares and therefore may be deemed a beneficial owner of such shares.  Mr. Tang disclaims beneficial ownership of shares held by Renovatio except to the extent of his direct pecuniary interest therein.
 
(2)
Individual may be contacted at 152 W. 57th Street, 31st Floor, New York, NY 10019.   Based upon information supplied by Mr. Schatz. on the Schedule 13D filed with the SEC on April 10, 2006
 
(3)
Includes 300,000 shares issuable on exercise of outstanding options.
 
(4)
Individuals may be contacted at the corporate offices at 84 W. Santa Clara St., Suite 720, San Jose, CA 95113.
 
(5)
Includes 126,667 shares issuable on exercise of outstanding options.
 
(6)
Mr. Tang is a managing partner of Renovation Global Funds, L.P., and in such capacity he may be deemed to beneficially own the shares owned by Renovation Global Funds, L.P. Mr. Tang disclaims beneficial ownership of these shares.] Includes 60,000 shares issuable on exercise of outstanding options.
 
(7)
Includes 90,000 shares issuable on exercise of outstanding options.

Item 13.               Certain Relationships and Related Transactions, and Director Independence

The Board has determined that Dr. Grosser, Mrs. Leong, Mr. Marx and Mr. Tang are independent under the rules of the Nasdaq Stock Market.  In making this determination, our Board considered Mr. Tang’s affiliation with Renovation Global Funds, L.P., one of our shareholders.  The Board did not believe that this affiliation would interfere with Mr. Tang's exercise of independent judgment in carrying out his responsibilities as a director.

There were no related party transactions between the Company and any related person in the two last fiscal years.

Item 14.               Principal Accountant Fees and Services

SingerLewak LLP was retained as the Company’s independent registered public accounting firm for the years ended December 31, 2010 and 2009.  The following table shows the fees paid or accrued by the Company for the audit and other services provided by SingerLewak LLP for fiscal 2010 and 2009.

   
2010
   
2009
 
Audit Fees(1)
  $ 49,535     $ 50,963  
Audit-Related Fees(1)
  $ 24,100     $ 29,711  
Tax Fees(2)
  $ 8,346     $ 9,266  
All Other Fees
    0       0  
(1)
Audit fees represent fees for professional services provided in connection with the audit of the Company’s financial statements and review of the statutory and regulatory filings.  Audit related fees are for the review of the Company’s quarterly financial statement and audit services provided in connection with other statutory or regulatory filings.
 
 (2)
Tax fees principally represent tax compliance services.

 
24

 
 
The Audit Committee reviews and pre-approves the audit and tax fees proposed by SingerLewak LLP in their annual engagement letter.  All fees described above were approved by the Audit Committee.  SingerLewak LLP did not provide any other services during 2010.

PART IV

Item 15.
Exhibits

Financial Statements.  The following are filed as a part of this report:
   
   
Page
Report of SingerLewak LLP, Independent Registered Public Accounting Firm
 
28
Balance Sheets – December 31, 2010 and 2009
 
29
Statements of Operations – Years ended December 31, 2010 and 2009
 
30
Statements of Shareholders’ Equity (Deficit) –Years ended December 31, 2010 and 2009
 
31
Statements of Cash Flows – Years ended December 31, 2010 and 2009
 
32
Notes to Financial Statements
 
33
     
Exhibits.  The following exhibits are filed as part of this report.
  
 

EXHIBIT
   
NUMBER
 
EXHIBIT TITLE
       
3.1
   
Copy of the Registrant’s Articles of Incorporation (1)
3.2
   
Copy of Registrant’s By-laws (1)
10.1
   
Technology Transfer Agreement between Registrant and Pherin dated August 23, 1991 (1)
10.2
   
Lease Agreement between Registrant and Ernest E. Pestana and Irene Pestana, dated March 5, 2001 for the Registrant’s California offices (2).
       
10.3
   
2003 Nonemployee Directors Stock Option Plan of Human Pheromone Sciences, Inc*(3)
10.4
   
Lease Agreement between Registrant and Ernest E. Pestana and Irene Pestana, dated March 5, 2004 for the Registrant’s California offices (4).
10.5
   
Research Agreement with University of Utah effective July 15, 2004 (5).
10.6
   
Form of Nonstatutory Stock Option Agreement *(6).
10.7
   
License Agreement with Personal Products Company (PPC), a division of McNeil-PPC, Inc.(7)
       
31.1
   
Certification of Chief Executive Officer pursuant to Rules 13a – 15(e)
31.2
   
Certification of Chief Financial Officer pursuant to Rules 13a – 15(e)
32   
 
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to U.S.C. 1350

(1)
Filed as an exhibit with corresponding exhibit no. to Registrant’s Registration Statement on Form SB-2 (Registration No. 33-52340) and incorporated herein by reference.

(2)
Filed as an exhibit with corresponding exhibit no. To Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 2001  (Registration No. 000-23544) and incorporated herein by reference.

(3)
Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the three month ended June 30, 2003  (Registration No. 000-23544) and incorporated herein by reference.

(4)
Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the three month ended March 31, 2004 (Registration No. 000-23544) and incorporated herein by reference.

(5)
Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the six months ended June 30, 2004 (Registration No. 000-23544) and incorporated herein by reference.
 
 
25

 

(6)
Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the six months ended June 30, 2006 (Registration No. 000-23544) and incorporated herein by reference.

(7)
Filed as an exhibit with corresponding exhibit no. to Registrant’s Quarterly Report on Form 10-QSB for the nine months ended September 30, 2006. Certain portions of this exhibit have been omitted and filed separately with the Commission.  Confidential treatment has been requested with respect to the omitted portions (Registration No. 000-23544) and incorporated herein by reference.

*
Management contract or compensatory plan
 
 
26

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Human Pheromone Sciences, Inc. Corporation has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in San Jose, California, on March 30, 2011.

 
HUMAN PHEROMONE SCIENCES, INC.
   
 
By:
/s/ William P. Horgan
     
 
Name:
William P. Horgan
     
 
Title:
Chief Executive Officer and Chairman of the Board

POWER OF ATTORNEY

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

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

SIGNATURE
 
CAPACITY
 
DATE
         
/s/ William P. Horgan
 
Chief Executive Officer
 
March 30, 2011
William P. Horgan
 
and Chairman
   
   
(Principal Executive Officer)
   
         
/s/ Gregory S. Fredrick
 
Chief Financial Officer
 
March 30, 2011
Gregory S. Fredrick
 
(Principal Financial and
   
   
Accounting Officer)
   
         
/s/ Bernard I. Grosser
 
Director
 
March 30, 2011
Bernard I. Grosser, MD
       
         
         
/s/ Helen C. Leong
 
Director
 
March 30, 2011
Helen C. Leong
       
         
         
/s/ Robert Marx
 
Director
 
March 30, 2011
Robert Marx
       
         
/s/ Carson Tang
  
Director
  
March 30, 2011
Carson Tang
       
 
 
27

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
Human Pheromone Sciences, Inc.
San Jose, California

We have audited the accompanying balance sheets of Human Pheromone Sciences, Inc. (the “Company”) as of December 31, 2010 and 2009, and the related statement of operations, stockholders' equity (deficit), and cash flows for the years then ended.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Human Pheromone Sciences, Inc. as of December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

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

/s/ SingerLewak LLP
 
San Jose, California
March 30, 2011
 
 
28

 

Human Pheromone Sciences, Inc.

Balance Sheets

   
December 31,
   
December 31,
 
(in thousands)
 
2010
   
2009
 
Assets
           
             
Current assets:
           
Cash and cash equivalents
  $ 92     $ 350  
Accounts receivable
    108       141  
Inventories
    26       58  
Other current assets
    49       40  
Total current assets
    275       589  
                 
Property and equipment, net
    -       1  
                 
Total assets
  $ 275     $ 590  
                 
Liabilities and Shareholders' Equity (Deficit)
               
                 
Current liabilities:
               
Accounts payable
  $ 42     $ 60  
Current portion of deferred revenue
    146       194  
Accrued professional fees
    52       71  
Accrued employee benefits
    42       40  
Accrued income taxes
    2       2  
Other accrued expenses
    5       22  
Total current liabilities
    289       389  
                 
Non-current liabilities
               
Deferred revenue
    24       158  
Total liabilities
    314       547  
                 
Commitments and contingencies
               
                 
Shareholders' equity (deficit):
               
Common stock, no par value, 13,333,333 shares authorized,
               
4,151,954 shares issued and outstanding at each date
    21,098       21,083  
Accumulated deficit
    (21,137 )     (21,040 )
Total shareholders' equity (deficit)
    (39 )     43  
Total liabilities and shareholders’ equity (deficit)
  $ 275     $ 590  

See accompanying notes to financial statements.
 
 
29

 

Human Pheromone Sciences, Inc.

Statements of Operations

   
Years ended December 31,
 
(in thousands)
 
2010
   
2009
 
             
Net revenues
  $ 806     $ 885  
Cost of goods sold
    128       195  
                 
Gross profit
    678       690  
                 
Operating expenses:
               
Research and development
    23       85  
Selling, general and administrative
    750       891  
                 
Total operating expenses
    773       976  
                 
Loss from operations
    (95 )     (286 )
                 
Other income
               
Interest, net
    -       3  
Total other income
    -       3  
                 
Net loss before provision for income taxes
    (95 )     (283 )
                 
Provision for income taxes
    2       1  
                 
Net loss
  $ (97 )   $ (284 )
                 
Net loss per common share - basic and fully diluted
  $ (0.02 )   $ (0.07 )
                 
Weighted average common shares outstanding – basic and fully diluted
    4,152       4,152  

See accompanying notes to financial statements.
 
 
30

 

Human Pheromone Sciences, Inc.

Statements of Shareholders’ Equity (Deficit)

(in thousands)
                   
   
Common Stock
         
Total Shareholders’
 
   
Shares
   
Amount
   
Accumulated Deficit
   
Equity Deficit)
 
Balances, at December 31, 2008
    4,152     $ 21,043     $ (20,756 )   $ 287  
Net loss
                (284 )     (284 )
Stock option compensation
          40             40  
                                 
Balances, at December 31, 2009
    4,152       21,083       (21,040 )     43  
Net loss
                (97 )     (97 )
Stock option compensation
          15             15  
Balances, at December 31, 2010
    4,152     $ 21,098     $ (21,137 )   $ (39 )

See accompanying notes to financial statements.
 
 
31

 

Human Pheromone Sciences, Inc.

Statements of Cash Flows

   
Years ended December 31,
 
(in thousands)
 
2010
   
2009
 
             
Cash flows from operating activities:
           
Net loss
  $ (97 )   $ (284 )
Adjustments to reconcile net loss to net cash used in
               
operating activities:
               
Depreciation
    1       1  
Stock option compensation
    15       40  
Changes in operating assets and liabilities:
               
Accounts receivable
    33       (90 )
Inventories
    32       (18 )
Other current assets
    (8 )     18  
Accounts payable and accruals
    (52 )     45  
Deferred revenue
    (182 )     (269 )
                 
Net cash used in operating activities
    (258 )     (557 )
                 
Cash flows used  in investing activities:
               
Purchases of property and equipment
    -       -  
Net cash used in investing activities
    -       -  
                 
Cash flows used in financing activities
               
Net cash used in financing activities
    -       -  
                 
Net decrease in cash and cash equivalents
    (258 )     (557 )
Cash and cash equivalents at beginning of the year
    350       907  
Cash and cash equivalents at end of the year
  $ 92     $ 350  

(in dollars)
           
Cash disbursements for income taxes
  $ 1,000     $ 1,000  
                 
Cash disbursements for interest
  $ 2,000     $ 2,000  

See accompanying notes to financial statements.
 
 
32

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

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

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

Management’s Plans for Going Concern

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred net losses of $97,000 for the year ending December 31, 2010, and $284,000 and $239,000 for the years ended December 31, 2009 and 2008, respectively. In addition, the Company has used cash in operations of $258,000 in the year ending December 31, 2010, and $557,000 and $530,000 for the years ended December 31, 2009 and 2008, respectively.  As of December 31, 2010, we had an accumulated deficit of $21.1 million; cash and cash equivalents of $92,000 and no long-term debt.

Based on the Company’s current operating plans, management believes that the Company’s existing cash resources and cash forecasted by management to be generated by operations will not be sufficient to meet working capital and capital requirements through the current year. In this regard, the Company must be successful in its current licensing of its compounds or raise additional operating capital to fund continuing operations and support the further development of identified compounds.  The Company has been working to secure the financing to continue with on-going operations, however, there is no assurance that the Company will be successful with its plans. If events and circumstances occur such that the Company does not meet its current operating plans, the Company is unable to raise sufficient additional equity or debt financing, or such financing is insufficient or not available, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on our future performance, including but not limited to, the premature sale of some or all of our assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms, or the cessation of operations.

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

Use of Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.
 
 
33

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Concentration of Credit Risk

Since the Company has refocused its business based on a licensing model, its concentration of credit risk consists principally of cash, cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high quality institutions.  As of December 31, 2010 the Company had deposits in two financial institutions which aggregated $92,000 and as of December 31, 2009, the Company had deposits in two financial institutions which aggregated $350,000.  Such funds are insured by the Federal Deposit Insurance Corporation up to $250,000 and non-interest bearing accounts are 100% insured.  Concentration of credit risk with respect to accounts receivable has been consistent since the Company’s customer base consisting of several large customers in the United States and distributors in several international markets has remained relatively unchanged.  On-going credit evaluations of customers’ financial condition are performed and, generally, no collateral is required.  However, until the credit worthiness of these international customers is acceptable to the Company, the customer generally pays in advance of shipment.  The Company maintains an allowance, when appropriate, for potential losses based upon management’s analysis of possible uncollectible accounts.

Customer Concentration

During 2010, three customers comprised 42%, 22% and 11% of the Company’s net revenues. Accounts receivable from these customers at December 31, 2010 account for 75%, 0% and 8%, respectively, of the net receivables.  During 2009, three customers comprised 31%, 30% and 14% of the Company’s net revenues, and accounts receivable from these customers at December 31, 2009 accounted for 0%, 61% and 21%, respectively.

Supplier Concentration

The Company is dependent on third parties to manufacture its fragrance products, as well as the synthesized human pheromones used in these products.  Capacity limitations at these essential suppliers, or any other occurrences leading to an interruption of supply, could have a material adverse effect on the Company.  During 2010 two suppliers provided 100% of the cost of goods sold and for  2009, three suppliers provided over 98% of the cost of goods sold.

Revenue Recognition

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

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

· The delivered items or service has value to the customer on a stand alone basis.
 
· There is objective and reliable evidence of the fair value of the undelivered items or service.

· If the delivery or performance of the undelivered items or service is considered probable and substantially in our control.
 
 
34

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue Recognition (continued)

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

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

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

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

   
Year ending December 31,
 
   
2010
   
2009
 
Right of first discussion
  $ 18     $ 118  
Exclusive license
    151       156  
Consulting services
    8       4  
Total
  $ 177     $ 278  

The deferred revenue related to the PPC agreement as of December 31, 2010 and 2009 was $157,000 and $334,000, respectively.

The Company has entered into three additional license agreements for the development, manufacture, sale and distribution of consumer personal care products using the Company’s patented technology.   License fees received and attributed to these agreements are being recognized on a straight-line basis over the initial life of the license periods ranging from fifteen to thirty-six months.  There is no discernable service to be provided by the Company to warrant an alternative revenue recognition method.

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

   
Year ending December 31,
 
   
2010
   
2009
 
Royalty revenues
  $ 307     $ 297  
License fee
    43       20  
Total
  $ 350     $ 317  

The deferred revenue from these licenses as of December 31, 2010 and 2009 was $13,000 and $18,000, respectively.
 
 
35

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Research and Development

Research and development costs are charged to expense when incurred.  Research and development costs were $23,000 and $85,000 in 2010 and 2009, respectively.


Fair Value of Financial Instruments

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

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

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

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

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

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

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

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

Income Taxes

The Company accounts for income taxes following the interpretative guidance provided by FASB Accounting Standards Codification (ASC) Topic 740 – Income Taxes.  Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company’s financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
 
 
36

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2009

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income Taxes (continued)

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

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

Stock Option Policy

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

The Company did not record the stock compensation expense net of taxes since there was no material provision for income taxes for the periods ended December 31, 2010 or December 31, 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 Taxesabove.

Recent Accounting Pronouncements

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

In May 2009, the FASB released ASC 855-10, Subsequent Events.  The scope of ASC 855-10 is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This statement is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009.  The Company has evaluated subsequent events for recognition or disclosure through the time of filing these financial statements on Form 10-K with the Securities and Exchange Commission.
 
 
37

 
 
Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

New Accounting Pronouncements (continued)

 
In June 2009, the FASB released ASC 860-10, Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.  The scope of ASC 860-10 is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This statement is effective for financial statements issued for fiscal years beginning and interim periods beginning after November 15, 2009. 

In June 2009, the FASB issued ASC 105-10, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 16.  The FASB Accounting Standards Codification (Codification) became the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this ASC, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.   This ASC is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

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

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

In October 2009, the FASB concurrently issued the following Accounting Standards Updates:  ASU No. 2009-13 - Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (formerly EITF Issue No. 08-1).  This standard modifies the revenue recognition guidance for arrangements that involve the delivery of multiple elements, such as product, software, services or support, to a customer at different times as part of a single revenue generating transaction.  This standard provides principles and application guidance to determine whether multiple deliverables exist, how the individual deliverables should be separated and how to allocate the revenue in the arrangement among those separate deliverables. The standard also expands the disclosure requirements for multiple deliverable revenue arrangements.
 
 
38

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Net Income (Loss) Per Common Share

The Company follows the provisions of ASC 260, Earnings Per Share.  ASC 260 provides for the calculation of “basic” and “diluted” earnings per share.  Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted-average number of common shares and dilutive common shares outstanding during the period.  For the years ended December 31, 2010 and 2009, options to purchase 904,000 and 874,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be anti-dilutive.

Cash and Cash Equivalents

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

Accounts Receivable and Sales Returns Allowances

The Company records accounts receivable upon the shipment of goods and records an offsetting estimate for future sales returns or other allowances that the Company anticipates.  The Company estimates the required reserves based on historical sales activity, contractual obligations with customers, current sell-through of inventory at the customer locations, customer credit worthiness and general economic and consumer trends.  Significant judgment is required to estimate our allowance for doubtful accounts in any accounting period. Therefore, our estimates could differ materially from actual results.  At December 31, 2010 and 2009 the Company has an allowance for uncollectible accounts of $0 as it believes that the accounts receivable balances are fully collectible.

Inventories

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

Property and Equipment

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

2.
INVENTORIES

A summary of inventories follows (in thousands):

   
December 31,
 
   
2010
   
2009
 
Components (raw materials)
  $ 23     $ 50  
Finished goods
    3       8  
Total
  $ 26     $ 58  
 
 
39

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

3.
PROPERTY AND EQUIPMENT

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

   
December 31,
 
   
2010
   
2009
 
Computer hardware
  $ 42     $ 42  
Computer software
    52       52  
Furniture and other office equipment
    21       21  
      115       115  
Accumulated depreciation
    (115 )     (114 )
    $ -     $ 1  

Depreciation expense for the years ended December 31, 2010 and 2009 were $1,000 and $1,000, respectively.

4.
BANK BORROWING

The Company did not have any credit facility opened during and as of the year ended December 31, 2010.

5.
COMMITMENTS AND CONTINGENCIES
 
The Company presently occupies 1,443 square feet of space for its headquarters offices in San Jose, California and 520 square feet of laboratory space for its research and development operations located in Salt Lake City, Utah. Both of these leases are on a month-to-month basis and as such there are not any future minimum lease payments.

6.
SHAREHOLDERS’ EQUITY

Stock Option Plan

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

The Company does not record the stock compensation expense net of taxes since there was no material provision for income taxes for the periods ended December 31, 2010 and 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 in the income taxes footnote.

Stock Option Grants
 
2010 Option Grants
   
2009 Option Grants
 
             
Weighted average interest rates
 
no grants made
   
1.5% to 3.1
%
Dividend yield
    0.0 %     0.0 %
Volatility factor of the Company’s common stock
 
no grants made
      144.0 %
Forfeiture factor – Nonstatutory Stock Option Agreements
 
no grants made
      - %
Forfeiture factor – 2003 Non-Employee Directors Stock Option Plan
    -       -  
Weighted average expected life
 
no grants made
   
7 years
 
 
 
40

 
 
Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

6.
SHAREHOLDERS’ EQUITY (continued)

There was no aggregate intrinsic value of the stock options issued as of December 31, 2010.  Aggregate intrinsic value is the market price at December 31, 2010, $0.07, less the exercise price of the outstanding options.   Since the exercise price of the options was more than the market price there was no intrinsic vale at year end.

There were not stock option grants made in 2010.  The weighted-average fair value of options granted during the year ended December 31, 2009  for which the exercise price was equal to the market price on the grant date was $0.20 and the weighted-average exercise price was $0.21.    No stock options were granted during the year ended December 31, 2009  for which the exercise price was greater than or less than the market price on the grant date.

The Company recorded $15,000 and $40,000 of employee and non-employee compensation expense for stock options during the periods ending December 31, 2010 and 2009, respectively.  At December 31, 2010, no unrecognized compensation costs related to non-vested share-based compensation under the 2003 Non-Employee Directors’ Stock Option Plan and employee Nonstatutory Stock Option grants remained.

Nonstatutory Stock Option Agreements

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

         
Weighted Average
 
   
Shares
   
Exercise Price
 
Outstanding, January 1, 2009
    400     $ 0.34  
Granted
    -     $ -  
Outstanding, December 31, 2009
    400     $ 0.34  
Granted
    -     $ -  
Outstanding, December 31, 2010
    400     $ 0.34  

At December 31, 2010 options to purchase 400,000 shares of common stock were exercisable.  A summary of the non-vested options activity under the Nonstatutory Stock Option Agreements is as follows (in thousands except per share data):

         
Weighted Average
 
   
Shares
   
Exercise Price
 
Outstanding, January 1, 2009
    53     $ 0.45  
Granted
    -     $ -  
Vested
    (35 )   $ 0.45  
Outstanding, December 31, 2009
    18     $ 0.45  
Granted
    -     $ -  
Vested
    ( 18 )   $ 0.45  
Outstanding, December 31, 2010
    -     $ -  

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.
 
 
41

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

6.
SHAREHOLDERS’ EQUITY (continued)

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

         
Weighted Average
 
   
Shares
   
Exercise Price
 
             
Outstanding, January 1, 2009
    40     $ 0.91  
Forfeited or Expired
    (10 )   $ 1.80  
Outstanding, December 31, 2009
    30     $ 0.62  
Forfeited or Expired
    (10 )   $ 1.19  
Outstanding, December 31, 2010
    20     $ 0.33  
 
At December 31, 2010, no shares of the Company’s common stock were reserved for future grants under the Directors’ Plan, and all options to purchase 20,000 shares were exercisable, at a weighted average exercise price of $0.33.

2003 Non-Employee Directors’ Stock Option Plan

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

A summary of the stock option activity under the Director’s Plans is as follows (in thousands except per share data):

         
Weighted Average
 
   
Shares
   
Exercise Price
 
Outstanding, January 1, 2009
    400     $ 0.48  
Granted
    80     $ 0.21  
Canceled or Expired
    -     $ -  
Outstanding, December 31, 2009
    480     $ 0.44  
Granted
    -     $ -  
Canceled or Expired
    (60 )   $ 0.13  
Outstanding, December 31, 2010
    420     $ 0.48  

At December 31, 2010, no shares of the Company’s common stock were reserved for future grants under the expired 2003 Plan.  At December 31, 2010 options to purchase 420,000 shares of common stock were exercisable.  A summary of the non-vested options activity under the Nonstatutory Stock Option Agreements is as follows (in thousands except per share data):
 
         
Weighted Average
 
   
Shares
   
Exercise Price
 
             
Outstanding, December 31, 2009
    40     $ 0.21  
Granted
    -     $ -  
Vested
    (40 )   $ 0.21  
Outstanding, December 31, 2010
    -     $ -  
 
 
42

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

6.
SHAREHOLDERS’ EQUITY (continued)

The following table summarizes information about all stock options of the Company that are outstanding at December 31, 2010 (in thousands except per share data).

   
Options Outstanding
   
Options Exercisable
 
         
Weighted
               
At a
 
   
Number of
   
Average
   
Weighted
         
Weighted
 
Range
 
Shares
   
Remaining
   
Average
   
Number
   
Average
 
of Exercise
 
Outstanding
   
Contractual
   
Exercise
   
Exercisable
   
Exercise
 
Prices
 
at 12/31/10
   
Life (years)
   
Price
   
At 12/31/10
   
Price
 
                               
$ 0.12 to $ 0.30
    90       3.8     $ 0.20       90     $ 0206  
$ 0.31 to $ 0.50
    520       2.5     $ 0.34       520     $ 0.34  
$ 0.51 to $ 0.80
    150       2.1     $ 0.55       150     $ 0.55  
$ 0.81 to $ 1.19
    80       3.4     $ 0.82       80     $ 0.82  
$ 0.12 to $ 1.19
    840       2.8     $ 0.41       840     $ 0.41  

7.
INCOME TAXES

In 2010, the Company has recorded a $2,000 tax provision for state minimum taxes and for states where the utilization of net losses carried forward are not available.

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

   
Years ended December 31,
 
   
2010
   
2009
 
             
Federal tax benefit at the federal statutory rate
  $ (33 )   $ (96 )
Expiring net operating losses and tax credits
    206       768  
Other differences
    (4 )     (80 )
Permanent differences
    -       -  
Decrease in valuation allowance
    (169 )     (592 )
Income tax benefits
  $ -     $ -  

At December 31, 2010, the Company had federal and state net operating loss carryforwards of approximately $17,655,000.  The Company also had federal and state research and development tax credit carryforwards of approximately $125,000.  The net operating loss and credit carryforwards will expire between 2013 and 2030.

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

   
December 31,
 
   
2010
   
2009
 
Deferred tax asset (liabilities):
           
Net operating loss carryforward
  $ 4,442     $ 4,548  
Research credit carryforward
    125       135  
Reserves and accruals
    262       308  
Other, net
    (229 )     (222 )
Valuation allowance for deferred tax assets
    (4,600 )     (4,769 )
Net deferred tax assets
  $ -     $ -  
 
 
43

 

Human Pheromone Sciences, Inc.
Notes to Financial Statements
December 31, 2010

7.
INCOME TAXES (continued)

Because of the Company’s lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance. The net valuation allowance has decreased by $169,000 in 2010, mainly due to expiring net operating losss carryforwards and tax credits, and decreased by $593,000 in 2009.  The valuation allowance was established because the Company was not able to determine that it is more likely than not that the deferred tax asset will be realized.

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

Generally taxing authorities have a three to four year period to conduct an examination of tax filing made by the Company.  As of December 31, 2010 the filing made in the years of 2006 to 2010 remain open for review by the various governmental agencies.

8.
SEGMENT INFORMATION

Sales by geographic markets for the year ended December 31, 2010 and 2009 were as follows:

   
Year ending December 31,
 
   
2010
   
2009
 
Net Sales by Markets:
           
U.S Markets
  $ 186     $ 171  
International Markets
    93       119  
Net Sales
    279       290  
License revenues (worldwide)
    527       595  
                 
Total Revenues
  $ 806     $ 885  
 
 
44