SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

6 Months Ended

Jun. 30, 2011

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 approval as pharmaceutical products. The Company believes that its related patents provide it a proprietary position in developing, licensing and marketing such products.

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2011. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

Management’s Plans

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 $26,000 in the six months ended June 30, 2011, and $97,000 and $284,000 for the years ended December 31, 2010 and 2009, respectively. In addition, the Company has used cash in operations of $86,000 in the six months ended June 30, 2011, and $258,000 and $557,000 for the years ended December 31, 2010 and 2009, respectively. As of June 30, 2011, the Company had an accumulated deficit of $21.2 million; cash and cash equivalents of $106,000 and no long-term debt.

Based on the Company’s current operating plans, management believes that the Company’s existing cash resources and cash forecasted by management to be generated by operations will not be sufficient to meet working capital and capital requirements through December 31, 2011. In this regard, the Company must be successful in its current licensing of its compounds or 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, the Company may not be successful with its plans. If events and circumstances occur such that the Company does not meet its current operating plans, the Company is unable to raise sufficient additional equity or debt financing, the Company may be required to further reduce expenses or take other steps which could have a material adverse effect on its future performance, including but not limited to, the premature sale of some or all of its assets or product lines on undesirable terms, merger with or acquisition by another company on unsatisfactory terms, or the cessation of operations.

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

Use of Estimates

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

Revenue Recognition

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

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

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

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

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

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

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

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

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

	Three months ending June 30,				Six months ending June 30,
	2011		2010		2011		2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Right of first discussion	$	-	$	-	$	-	$	-
Exclusive license		29		32		75		86
Consulting services		-		-		-		-
Total	$	29	$	32	$	75	$	86

The deferred revenue from the PPC license agreement as of June 30, 2011 was $82,000.

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

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

	Three months ending June 30,				Six months ending June 30,
	2011		2010		2011		2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Royalty revenues	$	68	$	75	$	124	$	150
License fee		8		7		14		14
Total	$	76	$	82	$	138	$	164

The deferred revenue from these licenses has been completely recognized as of June 30, 2011.

Advanced Payment

On May 16, 2011 the Company and CrowdGather, Inc. (“CrowdGather”) entered into an Asset Purchase and License Agreement (the “Agreement”). Pursuant to the Agreement, the Company sold to CrowdGather the EROX registered trademark in the United States, Hong Kong and Switzerland and the erox.com domain name.

In addition, CrowdGather obtained the exclusive license to make, use, sell, distribute, or other wise commercially exploit rights for product containing a combination of the Company compounds (the “EROX Product”) marketed to adults solely through adult sex-based Internet distribution channels worldwide, with the exception of Taiwan, for the five-year term, which may be extended for an additional five (5) year period(s) upon mutual agreement of both parties.

Pursuant to the Agreement, the Company received a $100,000 payment upon execution of the Agreement, $50,000 as compensation for the assets acquired by CrowdGather and for the assistance the Company will provide for product development, manufacturing and fulfillment facilitation for their initial product (for which the Company will sell to CrowdGather its proprietary compounds). The remaining $50,000 advance payment received will be applied, at a future date, to acquire restricted common stock of the Company. Within 30 days of receipt of the EROX Product from the Company, CrowdGather shall accept the EROX Product or request changes to the EROX Product; not later than 60 days from the end of such thirty (30) day period CrowdGather agrees to apply $50,000 of the advance payment as the payment for the purchased assets and paid up development fee and the remaining $50,000 of the advanced payment fee will be converted into restricted common stock of the Company. The number of shares of the Company’s common stock to be issued to CrowdGather shall be calculated by dividing $50,000 by the closing price of the Company’s common stock on such sixtieth (60) day. If such day is not a trading day (a day on which the New York Stock Exchange is open for business) it shall be calculated by using the closing price the next such trading day.

Inventories

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

	June 30, 2011
	(unaudited)		December 31, 2010
Components (raw materials)	$	34	$	23
Finished goods		3		3
Total	$	37	$	26

Earnings (Loss) Per Share

The Company follows the provisions of SFAS No. 128, Earnings Per Share. SFAS No. 128 provides for the calculation of “Basic” and “Diluted” earnings per share. Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is computed using the weighted-average number of common shares and dilutive common shares outstanding during the period. For the three months ended June 30, 2011 and 2010, options to purchase 837,000 and 907,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive. For the six months ended June 30, 2011 and 2010, options to purchase 838,000 and 908,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive.

As of June 30, 2011 and 2010, the unaudited components of basic and diluted earnings per share are as follows (in thousands):

	Three months ending June 30,						Six months ending June 30,
	2011			2010			2011			2010

Net income (loss) available to common shareholders (unaudited)	$	(19	)	$	(62	)	$	(26	)	$	(160	)

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

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

Capital Stock and Stock Options

During the six months ended June 30, 2011, no common stock or preferred stock was issued. During the six months ended June 30, 2010, no options to purchase shares of common stock were granted under the 2003 Non-Employee Directors Stock Option Plan. No issued options were exercised during the six months ended June 30, 2011 and 9,999 stock options expired under the expired 1990 Stock Option Plan.

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

The Company does not record the stock compensation expense net of taxes since there was no material provision for income taxes for the periods ended June 30, 2011 and 2010 as the Company incurred net operating losses for which no benefit was recognized, or utilized tax loss carryforwards. The tax benefit is a component of the deferred tax asset.

The Company did not have any employee or of non-employee compensation expense for stock options to record during the three months ended June 30, 2011, but did record $4,000 of employee and $4,000 of non-employee compensation expense for stock options during the three months ended June 30, 2010.

The Company did not have any employee or non-employee compensation expense for stock options during the six months ended June 30, 2011, but did record $8,000 of employee and $8,000 of non-employee compensation expense for stock options during the six months ended June 30, 2010. At June 30, 2011, there was no unrecognized compensation costs related to non-vested share-based compensation under the employee Nonstatutory Stock Option grants.

Nonstatutory Stock Option Agreements

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

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

Nonstatutory Stock Option Agreements	Three months ending June 30, 2011				Six months ending June 30, 2011
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of period		400	$	0.34		400	$	0.34
Options Granted		-		-		-		-
Canceled or Expired		-		-		-		-
Outstanding, June 30, 2011		400	$	0.34		400	$	0.34

At June 30, 2011 all of the options to purchase 400,000 shares were exercisable.

Non-Employee Directors’ Stock Option Plan (Directors’ Plan)

In June 1993, the Company’s Board of Directors adopted a Non-Employee Directors’ Stock Option Plan (“Directors’ Plan”) covering a total of 158,333 shares of common stock, which provides for a one-time automatic grant of options to purchase 8,333 shares of common stock upon director’s election to the board and annual grants thereafter of options to purchase 3,333 shares of common stock to each non-employee director at an exercise price equal to the fair market value of the stock on the date of grant. This Directors’ Plan has expired, but stock options issued under this Directors’ Plan are still outstanding.

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

Directors’ Plan	Three months ending June 30, 2011					Six months ending June 30, 2011
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, beginning of period		20		$	0.33		20		$	0.33
Options Granted		-			-		-			-
Canceled or Expired		(10	)	$	0.54		(10	)	$	0.54
Outstanding, June 30, 2011		10		$	0.12		10		$	0.12

At June 30, 2011 all of the options to purchase 10,000 shares were exercisable.

2003 Non-Employee Directors’ Stock Option Plan

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

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

2003 Plan	Three months ending June 30, 2011				Six months ending June 30, 2011
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding, beginning of period		420	$	0.48		420	$	0.48
Options Granted		-		-		-		-
Canceled or Expired		-		-		-		-
Outstanding, June 30, 2011		420	$	0.48		420	$	0.48

At June 30, 2011 all of the options to purchase 420,000 shares were exercisable.

Income Taxes

A provision for income taxes for the three month period ended June 30, 2011 was recorded for minimum tax liabilities incurred.

The Company believes that all of its tax positions are sustainable and that no significant adjustment to its unrecognized tax benefits is expected. The majority of the unrecognized tax benefits relate to positions where only the timing of a deduction item is in question. Such liabilities are offset by deferred tax assets and the only effect on the Company's statements of operations relates to the interest accrued on such liabilities.

- Definition

The entire disclosure for all significant accounting policies of the reporting entity.

+ References+ Details

HUMAN PHEROMONE SCIENCES INC 10-Q