-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E57rgGTbuqwwGPn8tGiLnZrDU2i2u39Q6AViaTfc6bbExBE236akXXsjW6Y7/C7C HctV9+1FVCnIQcwo+DW4pA== 0000950005-02-000832.txt : 20020813 0000950005-02-000832.hdr.sgml : 20020813 20020813144906 ACCESSION NUMBER: 0000950005-02-000832 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUMAN PHEROMONE SCIENCES INC CENTRAL INDEX KEY: 0000878616 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 943107202 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23544 FILM NUMBER: 02729304 BUSINESS ADDRESS: STREET 1: 84 WEST SANTA CLARA STREET STREET 2: SUITE 720 CITY: SAN JOSE STATE: CA ZIP: 95113 BUSINESS PHONE: 4089383030 FORMER COMPANY: FORMER CONFORMED NAME: EROX CORP DATE OF NAME CHANGE: 19940307 10QSB 1 p15906_form10qsb.txt QUARTERLY REPORT U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (MARK ONE) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required) Commission file number 0-23544 HUMAN PHEROMONE SCIENCES, INC. --------------------------------------------------- (Name of small business issuer in its charter) California 94-3107202 ---------- ---------- (State or other jurisdiction (I.R.S. employee of incorporation or organization) Identification No.) 84 West Santa Clara Street, San Jose, California 95113 - -------------------------------------------------- ----------- (Address of principal executive offices) (Zip code) Issuer's telephone number: (408) 938-3030 ------------------------------------------------------------- (Former name or former address, if changed since last report) Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 3,429,839 shares of Common Stock as of July 15, 2002. 1 HUMAN PHEROMONE SCIENCES, INC. INDEX
Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and December 31, 2001.......................................................................4 Consolidated Statements of Operations and Comprehensive Income / (Loss) (Unaudited) for the Three and Six Months Ended June 30, 2002 and 2001...................................5 Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2002 and 2001................................................................6 Notes to Consolidated Financial Statements (Unaudited)......................................7 Item 2. Management's Discussion and Analysis Management's Discussion and Analysis of Financial Condition and Results of Operations......10 Item 3. Quantitative and Qualitative Disclosures about Market Risk..................................14 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ....................................................15 SIGNATURES.............................................................................................16
2 PART I FINANCIAL INFORMATION Item 1. Financial Statements 3 Human Pheromone Sciences, Inc. Consolidated Balance Sheets
June 30, December 31, (in thousands except share data) 2002 2001 - -------------------------------------------------------------- ------------ ------------ (unaudited) Assets Current assets: Cash and cash equivalents $ 1,295 $ 1,355 Accounts receivable, net of allowances of $17,000 and $6,000 in 2002 and 2001, respectively 186 803 Inventories 608 378 Other current assets 62 31 ------------ ------------ Total current assets 2,151 2,567 Property and equipment, net 4 8 Product licenses 186 50 ------------ ------------ $ 2,341 $ 2,625 Liabilities, Convertible Redeemable Preferred Stock and Shareholders' Deficiency Current liabilities: Accounts payable $ 82 $ 230 Deferred income 315 315 Accrued professional fees 33 53 Accrued vacation 38 32 Accrued sales returns -- 44 Other accrued expenses 18 14 ------------ ------------ Total current liabilities 486 688 ------------ ------------ Commitments and Contingencies Convertible redeemable preferred stock: Preferred stock, issuable in series, no par value, 10,000,000 shares authorized, Series AA 1,433,333 convertible shares issued and outstanding at each date (total liquidation value $2,150) 2,146 2,146 Series BB 17,448 convertible shares issued and outstanding at each date (total liquidation value $1,745) 1,560 1,560 ------------ ------------ Total convertible redeemable preferred stock 3,706 3,706 ------------ ------------ Shareholders' deficiency: Common stock, no par value, 13,333,333 shares authorized, 3,429,839 shares issued and outstanding at each date 17,667 17,667 Accumulated deficit (19,452) (19,368) Foreign currency translation (66) (68) ------------ ------------ Total shareholders' deficiency (1,851) (1,769) ------------ ------------ $ 2,341 $ 2,625 ============ ============
The accompanying notes are an integral part of these financial statements. 4 Human Pheromone Sciences, Inc. Consolidated Statements of Operations and Comprehensive Income (Loss) (unaudited)
Three months ended June 30, Six months ended June 30, --------------------------- ------------------------- (in thousands except per share data) 2002 2001 2002 2001 ------- ------- ------- ------- Net revenues 269 559 911 1,188 Cost of goods sold 51 198 288 424 ------- ------- ------- ------- Gross profit 218 361 623 764 Operating Expenses: Research and development 82 81 162 165 Selling, general and administrative 241 272 532 569 ------- ------- ------- ------- Total operating expenses 323 353 694 734 ------- ------- ------- ------- Income (Loss) from operations (105) 8 (71) 30 Other income and (expense) Interest income (expense) 5 8 11 16 Other income (expense) (18) (4) (24) (5) ------- ------- ------- ------- Total other income and (expense) (13) 4 (13) 11 ------- ------- ------- ------- Net income (loss) available to common shareholders (118) 12 (84) 41 Other comprehensive loss - translation adjustment 2 (4) 2 (4) ------- ------- ------- ------- Comprehensive income (loss) $ (116) $ (8) $ (82) $ 37 ======= ======= ======= ======= Net income (loss) per common share-basic and fully diluted $ (.03) $ -- $ (.02) $ .01 ======= ======= ======= ======= Weighted average common shares outstanding 3,430 3,430 3,430 3,430 ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. 5 Human Pheromone Sciences, Inc. Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, ------------------------- (in thousands) 2002 2001 ------- ------- Cash flows from operating activities Net profit (loss) $ (84) $ 41 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 28 6 Provision for sales returns and allowances 11 40 Changes in operating assets and liabilities: Accounts receivable 606 (55) Inventories (230) (5) Other current assets (31) (67) Deferred revenue -- 85 Accounts payable and accrued liabilities (202) 5 ------- ------- Net cash provided by operating activities 98 50 Cash flows from investing activities Purchase of property and equipment -- -- Acquisition of licenses (160) (1) ------- ------- Net cash used in investing activities (160) (1) Cash flows from financing activities Proceeds from bank borrowings -- -- Repayment of bank borrowings -- -- Proceeds from issuance of convertible preferred stock -- -- ------- ------- Net cash (used in) provided by financing activities -- -- Effect of exchange rate changes on cash 2 (4) ------- ------- Net increase in cash and cash equivalents (60) 45 Cash and cash equivalents at beginning of period 1,355 982 ------- ------- Cash and cash equivalents at end of period $ 1,295 1,027 ======= ======= Interest paid $ 1 $ 1 ======= =======
The accompanying notes are an integral part of these financial statements. 6 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements (unaudited) June 30, 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Human Pheromone Sciences, Inc. (the "Company") was incorporated in the State of California in 1989 under the name of EROX Corporation. The Company changed the name to Human Pheromone Sciences, Inc. in May 1998. The Company is engaged in the research, development, manufacturing and marketing of consumer products containing synthetic human pheromones as a component. The Company initiated commercial operations in late 1994 with a line of fine fragrances and toiletries. In April 2000, the Company licensed the sale of its REALM fragrance products through department and specialty stores across the United States and selected international markets to Niche Marketing, Inc. The Company currently sells its REALM fragrance lines through distributors in selected markets in South East Asia, and licenses and sells its human pheromones for inclusion in other companies products in exchange for supply revenues and/or royalties. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles 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, 2002 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2001. Certain prior period balances have been reclassified to conform to the current period presentation. Revenue Recognition Revenue is recorded at the time of merchandise shipment, net of provisions for returns. License fees are earned over the license period according to the terms of the license agreement and interpretative guidance provided by Staff Accounting Bulletin (SAB) No. 101. The majority of the Company's sales are to distributors and licensees, and these distributors and licensees have no right to return products. Inventories Inventories are stated at the lower of cost (first in - first out method) or market. The inventory at June 30, 2002 consists of finished goods inventory valued at $121,000, work in process of $35,000, and raw materials of $452,000. At December 31, 2001, these balances were $119,000, $36,000 and $223,000, respectively. License Fees The Company capitalizes license fees it pays for the rights to use new pheromone discoveries, and rights for additional REALM and innerREALM sales territories. License agreements that have a finite useful life are amortized using the straight-line method over the life of the agreement. License agreements for pheromones and products that are not yet for available for sale are not subject to amortization in accordance with Statement of Financial Accounting Standards No. 142: Goodwill and Other Intangible Assets. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated value of the license agreements may not be recoverable. When factors indicate that the value 7 license may be impaired, the Company estimates the remaining value and reduces the license agreement to that amount. Income Taxes The Company recorded no income tax provision in 2002 or 2001, due primarily to a valuation allowance on deferred tax assets being recorded and the expected utilization of net operating losses carried forward from prior years to offset any significant tax liability. As of June 30, 2002, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,183,000. However, a full valuation allowance is provided for the gross deferred tax asset as management could not determine whether its realization is more likely than not. Earnings Per Share The Company calculates earnings (loss) per share in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaced the presentation of primary and fully diluted earnings per share with the presentation of basic and diluted earnings per share. Basic earnings per share excludes dilution and is calculated by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share includes the potential dilutive effects that could occur if securities or other contracts to issue common stock were exercised or converted into common stock ("potential common stock") that would then share in the earnings of the Company. As of June 30, 2002 and 2001(unaudited), the components of basic and diluted earnings per share are as follows (all amounts are in thousands):
2002 2001 ------- ------- Net income available to common shareholders $ (84) $ 41 ======= ======= Weighted-average common shares outstanding during the period 3,430 3,430 ------- ------- Incremental shares from assumed conversions of convertible preferred stock 1,732 1,630 ------- ------- Fully diluted weighted-average common shares and potential commons stock (unaudited) 5,162 5,060 ======= =======
Capital Stock and Stock Options Outstanding options to purchase shares of common stock and potential common shares issuable upon conversion of preferred stock are excluded from the computation of diluted earnings per share since when the average stock price for the period is less than the exercise price of outstanding options or when their effect would be antidilutive. During the three months ended June 30, 2002 no common or preferred stock was issued, common stock options to purchase 13,336 shares were granted and no issued options were exercised. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, 8 construction, development, and/or the normal operation of long-lived assets, except for certain obligations of lessees. This statement is not applicable to the Company. In July 2001, the FASB issued SFAS NO. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Bulleting ("ABP") Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Pre-Acquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this statement are to be accounted for using one method, the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method for those business combinations is prohibited. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. This statement is not applicable to the Company. In July 2001, the FASB issued SFAS No, 142, Goodwill and Other Intangible Assets. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. It is effective for fiscal years beginning after December 15, 2001. The Company implemented FAS No. 142 in the second quarter of fiscal 2002, at which time the Company determined that no impairment of intangible assets have occurred. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the accounting and reporting provisions of APB No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business, and amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The adoption of SFAS No. 144 has not had a material impact, if any, on its financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 updates, clarifies, and simplifies existing accounting pronouncements. This statement rescinds SFAS No. 4, which required all gains and losses from extinguishments of debt to be aggregated and if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-lease transactions. This statement also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. This statement is not applicable to the Company. 2. RELATED PARTY TRANSACTION On March 1, 2002, the Company renewed a research and development agreement with Pherin Pharmaceuticals Corporation ("Pherin"), a company related by common shareholders, whereby Pherin supplies HPS with its required synthesized human pheromones and also provides to HPS research and development and scientific public relations services. This renewal has been extended to expire on February 28, 2003. The total expense incurred pursuant to the Company's research and development agreement with Pherin during the three months ended June 30, 2002 and 2001 was $60,000 in each year. Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Except for the historical information contained in this discussion and analysis of financial condition and results of operations, the matters 9 discussed herein are forward looking statements. These forward looking statements include but are not limited to the Company's plans for sales growth and expansion into new channels of trade, expectations of gross margin, expenses, new product introduction, and the Company's liquidity and capital needs. These matters involve risks and uncertainties that could cause actual results to differ materially from the statements made. In addition to the risks and uncertainties described in "Risk Factors", below, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. These and other factors may cause actual results to differ materially from those anticipated in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Risk Factors The Company's future results may be affected to a greater or lesser degree by the following factors among others: The Company and/or Niche may not be able to effectively compete with larger companies or with new products. The prestige fragrance market is extremely competitive. Many fragrance products are better known than the Company's products and compete for advertising and retail shelf space. Many competitors have significantly greater resources that will allow them to develop and introduce new competing products or increase the promotion of current products. The product life cycle of a fragrance can be very short. Changing fashions and fads can dramatically shift consumer preferences and demands. Traditional fragrance companies introduce a new fragrance every year or so. Changing fashions and new products may reduce the chance of creating long term brand loyalty to the REALM and innerREALM product lines. The Company's marketing strategy may not be successful. The Company or its distributors may not be able to establish and maintain the necessary sales and distribution channels. Retail outlets and catalogs may choose not to carry the Company's products. The Company or its distributors may not have sufficient funds to successfully market its products if the current marketing strategy is not successful. The current retail environment may cause pricing and promotional pressures. Five companies control the majority of the sales in the U. S. department store arena. Because of their market share, each company will have significant power to determine the price and promotional terms that the Company and its distributor/licensee, Niche, must meet in order to sell its products in the department stores. Upper end department stores face increasing competition by discount perfumeries, drug chains and lower priced department stores for sales of fragrances and cosmetics. To compete, upper end department stores have cut inventories, reduced co-op advertising, and increased promotions. These tactics may force the Company or its distributors to reduce its prices or increase the cost of its promotions. The Company is subject to economic downturns, specifically in the Asian markets. Economic downturns can lead to a reduction in consumer spending which could lead to reduced demand for products and could require additional promotional expenditures. Seasonality in sales may cause significant variation in quarterly results. Sales in the fragrance industry are generally seasonal with sales higher in the second half of the year because of Christmas. This seasonality could cause a significant variation in the Company's quarterly operating results. The Company not be able to protect its technology or trade secrets. The Company's patents and patent applications may not protect the Company's technology or ensure that the Company's technology does not infringe another's valid patent. Others may independently develop substantially equivalent proprietary information. The Company may not be able to protect its technology, proprietary information or trade secrets. 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. 10 The Company relies upon other companies to manufacture its products. The Company relies upon Pherin and other companies to manufacture its pheromones, supply components, and to blend, fill and package its fragrance products. The Company may not be able to obtain or retain pheromone manufacturers, fragrance suppliers, or component manufacturers on acceptable terms. If not, the Company may not be able to obtain commercial quantities of its products. This would adversely affect operating results. Results of Operations Three Months ended June 30, 2002 compared to the Three Months ended June 30, 2001 Net sales and revenues for the second quarter of 2002 were $269,000, representing a decrease of 52% from sales of $559,000 for the prior year's quarter. The $170,000, or 90%, decline in sales to International markets in the current period is a result of a weakened Southeast Asia market in the current period, and the higher sales volume in 2001 was due to the initial launch into those markets last year. The Company remains focused on building its REALM business in Southeast Asia. License and pheromone revenues decreased by 33% to $228,000 for the quarter. This decrease was expected as none of the current licensees have introduced new products containing the patented pheromones, and some shipments to a new licensee was delayed. Discussions are being pursued with several companies at the present time with respect to new licensing opportunities. Net sales for the quarters ended June 30, 2002 and 2001 were as follows (in thousands). 2002 2001 ------------------------------------------------------------------------ Markets: International Markets $ 18 $ 188 License and Supply Revenues 228 343 U.S. Retail & Distributor Markets 23 28 ------- ------- Net Sales $ 269 $ 559 ======= ======= Gross profit for the quarter ended June 30, 2002 of $218,000 is $143,000 less than last years $361,000. As a percentage of sales, gross profit of 81% is greater than last years 64% due to the greater percentage of license and pheromone revenues versus product sales made this year compared to 2001. Research and Development expenses for the first quarters of 2002 and 2001 were $82,000 and $81,000, respectively. These costs principally reflect payments and costs under the Company's consulting agreements in this area. Selling, general and administrative expenses of $241,000 were $31,000 less than with last years second quarter expenses of $272,000. The Company settled an outstanding department store return issue and recorded $32,000 as a bad debt recovery. Selling, and marketing and distribution expenses were $15,000 less than the prior year as a result of decreased sales activities in the Southeast Asia markets. General and administrative and facility costs were $16,000 more in the current year's quarter a result of costs associated to closing the French branch and general increases in costs since last year. The Company earned $5,000 in net interest income in the current year quarter and earned $8,000 in net interest income during the first quarter of 2001. The decrease is due to reduced interest rates. The fee paid to reacquire the Realm and innerRealm rights for international territories from Niche Marketing, Inc. is being conservatively amortized over the remaining initial term of the license agreement. The Company recorded no income tax provision in 2002 or 2001, due primarily to a valuation allowance on deferred tax assets being recorded and the expected utilization of net operating losses carried forward from prior years to offset any significant tax liability. As of June 30, 2002, the Company's gross deferred tax asset, which relates primarily to net operating losses carried forward was $6,183,000. However, a full valuation allowance is provided for the gross deferred tax asset as management could not determine whether its realization is more likely than not. 11 Six Months ended June 30, 2002 as compared to the Six Months ended June 30, 2001 Net revenues for the six months ended June 30, 2002 were $911,000. This was a 23% decrease from net revenues of $1,188,000 for the first half of 2001. License and supply revenues decreased by $228,000 for the first six months of 2001 to $432,000 as a result of decreased licensing and supply activities to Avon Products in 2002. Sales in International markets decreased by 11% to $440,000 as a result of the sluggish economy in the South East Asia region, and the fact that Realm was still being launched into the Japanese market in the second quarter of 2001. Net sales for the six months ended June 30, 2002 and 2001 were as follows: ================================================================================ Markets 2002 2001 - -------------------------------------------------------------------------------- International Markets $ 440 $ 492 License and Supply Revenues 432 660 U.S. Retail & Distributor Markets 39 36 --------- --------- Net Sales $ 911 $ 1,188 Gross profit for the first half of 2002 declined 18% to $623,000 from $764,000 in 2001. The decrease is the result of reduced sales volume. Gross profit as a percentage of revenues increased to 68% compared to 64% in 2002 as a result of the highly profitable licensing business representing a larger percentage of sales. Research and Development expenses for the first half of 2002 and 2001 were $162,000 and $165,000, respectively, and are principally comprised of payments under the Company's contract with Pherin Corporation. Selling, general and administrative expenses for the first half of 2002 were $532,000 and $569,000 for the comparable period of 2001. Overall spending is consistent with the prior year once the $32,000 department store recovery recorded in 2002 is considered. The Company's cash balances generated $11,000 in net interest income during the first half of 2002, as compared to $16,000 in 2001. The decrease is due to reduced interest rates. Miscellaneous expense of $24,000 was incurred in 2002 as compared with $5,000 of in the same period of 2001. The amortization of licenses accounts for the majority of the expense in 2002. LIQUIDITY At June 30, 2002, the Company had cash of $1,295,000 with no outstanding bank borrowings; at June 30 , 2001, it had cash of $1,027,000 with no outstanding bank borrowings, this represents an increase of 26%. For the six months of 2002, net cash generated from operating activities was $98,000. For the fist six months of 2001, net cash generated from operating activities was $50,000. Assuming the Company's activities proceed substantially as planned, the Company's current cash position and projected results of operations for the next twelve months are not expected to require additional outside financing. On May 20, 2002, the Company signed a new Business Loan Agreement with Mid-Peninsula Bank of Palo Alto, California (the "Bank") providing for a revolving line of credit. The Company may borrow up to $500,000 at an interest rate equal to the Bank's prime rate plus 0.75% with borrowings secured primarily by the Company's trade receivables and inventory. The agreement, which expires on May 3, 2003, contains certain debt-to-equity and working capital covenants. At June 30, 2002 the Company was in compliance with such covenants. 12 RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development, and/or the normal operation of long-lived assets, except for certain obligations of lessees. This statement is not applicable to the Company. In July 2001, the FASB issued SFAS NO. 141, Business Combinations. This statement addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Bulleting ("ABP") Opinion No. 16, Business Combinations, and SFAS No. 38, Accounting for Pre-Acquisition Contingencies of Purchased Enterprises. All business combinations in the scope of this statement are to be accounted for using one method, the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method for those business combinations is prohibited. This statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. This statement is not applicable to the Company. In July 2001, the FASB issued SFAS No, 142, Goodwill and Other Intangible Assets. This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. It is effective for fiscal years beginning after December 15, 2001. The Company implemented FAS No. 142 in the second quarter of fiscal 2002, at which time the Company determined that no impairment of intangible assets have occurred. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the accounting and reporting provisions of APB No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business, and amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The adoption of SFAS No. 144 has not had a material impact, if any, on its financial position or results of operations. In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 updates, clarifies, and simplifies existing accounting pronouncements. This statement rescinds SFAS No. 4, which required all gains and losses from extinguishments of debt to be aggregated and if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-lease transactions. This statement also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. This statement is not applicable to the Company. CRITICAL ACCOUNTING POLICIES Our discussion and analysis of our financial conditions and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements require managers 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 judgements. 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 consolidated financial statements. 13 Revenue Recognition Revenue is recorded at the time of merchandise shipment, net of provisions for returns. License fees are earned over the license period according to the terms of the license agreement and interpretative guidance provided by Staff Accounting Bulletin (SAB) No. 101. The majority of the Company's sales are to distributors and licensees, and these distributors and licensees have no right to return products. License Fees The Company capitalizes license fees paid for the rights to use new pheromone discoveries, and rights for additional REALM and innerREALM sales territories. License agreements that have a finite useful life are amortized using the straight-line method over the life of the agreement. License agreements for pheromones and products that are not yet for available for sale are not subject to amortization in accordance with Statement of Financial Accounting Standards No. 142: Goodwill and Other Intangible Assets. The Company continually evaluates whether events or circumstances have occurred that indicate the remaining estimated value of the license agreements may not be recoverable. When factors indicate that the value license may be impaired, the Company estimates the remaining value and reduces the license agreement to that amount. Item 3A. Quantitative and Qualitative Disclosures about Market Risk Foreign Currency Exchange Risk. All of the Company's sales are denominated in U.S. dollars, and as a result the Company has little exposure to foreign currency exchange risk. The effect of an immediate 10% change in exchange rates would not have a material impact on the Company's future operating results or cash flows. 14 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - None Exhibit 10.26 Business Loan Agreement dated April 19, 2002. Exhibit 10.27 Certification of William P. Horgan Pursuant to 18 U.S.C. Section 1350 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant had duly caused this Report to be signed on behalf by the undersigned thereunto duly authorized. HUMAN PHEROMONE SCIENCES, INC. Registrant Date: August 12, 2002 /s/ William P. Horgan --------------------------- William P. Horgan Chairman and Chief Executive Officer Date: August 12, 2002 /s/ Gregory S. Fredrick --------------------------- Gregory S. Fredrick Vice President Finance 16 EX-10.26 3 p15906_ex10-26.txt BUSINESS LOAN AGREEMENT BUSINESS LOAN AGREEMENT
======================================================================================================== Principal Loan Date Maturity Loan No Call / Coll Account Officer Initials $500,000.00 04-19-2002 05-03-2003 108143856 2000 016 ========================================================================================================
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. ================================================================================ Borrower: Human Pheromone Sciences, Inc. Lender: Mid-Peninsula Bank 84 West Santa Clara Street, Suite 720 Palo Alto Office San Jose, CA 95113 420 Cowper Street Palo Alto, CA 94301 ================================================================================ THIS BUSINESS LOAN AGREEMENT dated April 19, 2002, is made and executed between Human Pheromone Sciences, Inc. ("Borrower") and Mid-Peninsula Bank ("Lender') on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement ("Loan"). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement. TERM. This Agreement shall be effective as of April 19, 2002, and shall continue in full force and effect until such time as all of Borrower's Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys' fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement. CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender's satisfaction of all of the conditions set forth in this Agreement and in the Related Documents. Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender's Security Interests; (4) evidence of insurance as required below; (5) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender's counsel. Borrower's Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require. Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document. Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct. No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of California. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 84 West Santa Clara Street, Suite 720, San Jose, CA 95113. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrowers state of organization or any change in Borrowers name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower's business activities. Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None. Authorization. Borrower's execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of Borrower's articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower's properties. Financial Information. Each of Borrower's financial statements supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower's financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years. Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower's ownership of Borrower's Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, BUSINESS LOAN AGREEMENT Loan No: 108143856 (Continued) Page 2 ================================================================================ treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all of Borrower's tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will: Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower's financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with the following: Interim Statements. As soon as available, but in no event later than 45 days after the end of each fiscal quarter, Borrower's balance sheet and profit and loss statement for the period ended, compiled by a certified public accountant satisfactory to Lender. Additional Requirements. To provide Lender with 10-K report annually within ninety (90) days of year end. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios: Working Capital Requirements. Borrower shall comply with the following working capital ratio requirements: Quick Ratio. Maintain a Quick Ratio in excess of 1.750 to 1.000. The term "Quick Ratio" means Borrower's Cash & Equivalent plus Borrower's net Trade Receivables divided by Borrower's total Current Liabilities. This liquidity ratio should be maintained at all times and may be evaluated at any time. Tangible Net Worth Requirements. Maintain a minimum Tangible Net Worth of not less than: $1,500,000.00. In addition, Borrower shall comply with the following net worth ratio requirements: Debt / Worth Ratio. Maintain a ratio of Debt / Worth not in excess of 0.500 to 1.000. The ratio "Debt / Worth" means Borrower's Total Liabilities divided by Borrower's Tangible Net Worth. This leverage ratio should be maintained at all times and may be evaluated at any time. Other Requirements. As stated above under Debt / Worth Ratio. Tangible Net Worth (excluding deferred revenue from debt). Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender's loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. BUSINESS LOAN AGREEMENT Loan No: 108143856 (Continued) Page 3 ================================================================================ Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner. Environmental Studies. Promptly conduct and complete, at Borrower's expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by--product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, eased or used by Borrower. Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower's properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender's sole opinion, Lender's interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender's interest. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificates. Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower's part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. LENDER'S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender's interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower's failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower's behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the Indebtedness and, at Lender's option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note's maturity. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect. Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower's stock. Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets, (2) purchase, create or acquire any interest in any other or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business. BUSINESS LOAN AGREEMENT Loan No: 108143856 (Continued) Page 4 ================================================================================ CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt: (C) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Payment Default. Borrower fails to make any payment when due under the Loan. Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's or any Grantor's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. Change in Ownership. Any change in ownership pursuant to which any person or controlled group acquires twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired. Right to Cure. If any default, other than a default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender's Option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. ACCOUNTS RECEIVABLE AGINGS. Borrower agrees to furnish Lender with, as soon as available, but in no event later than forty five (45) days after the end of each fiscal quarter, Borrower's detailed accounts receivable aging for the period ended. EXHIBIT A. Exhibit A is attached to this Agreement, and by this reference is made a part of this Agreement just as if all the provisions, terms and conditions of the Exhibit had been fully set forth in this Agreement. OUT OF DEBT PROVISION. Borrower agrees to maintain the principal balance on the Note at a zero balance for a period of at least thirty consecutive days commencing with the date of this Promissory Note and continuing through the maturity date of this Promissory Note. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Attorneys' Fees; Expenses. Borrower agrees to pay upon demand all of Lender's costs and expenses, including Lender's attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court. BUSINESS LOAN AGREEMENT Loan No: 108143856 (Continued) Page 5 ================================================================================ Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Governing Law. This Agreement will be governed by, construed and enforced in accordance with federal law and the laws of the State of California. This Agreement has been accepted by Lender in the State of California. Choice of Venue. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Santa Clara County, State of California. No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any of Borrower's or any Grantor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower's current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers. Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used in this Agreement shall include all of Borrower's subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower's subsidiaries or affiliates. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind Borrower's successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower's rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival of Representations and Warranties. Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. Time is of the Essence. Time is of the essence in the performance of this Agreement. DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement: Advance. The word "Advance" means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower's behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement. Agreement. The word "Agreement" means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time. Borrower. The word "Borrower" means Human Pheromone Sciences, Inc., and all other persons and entities signing the Note in whatever capacity. Collateral. The word "Collateral" means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. Environmental Laws. The words "Environmental Laws" mean any and all state, federal and local statutes, regulations and ordinances relating to BUSINESS LOAN AGREEMENT Loan No: 108143856 (Continued) Page 6 ================================================================================ the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto. Event of Default. The words "Event of Default" mean any of the events of default set forth in this Agreement in the default section of this Agreement. GAAP. The word "GAAP" means generally accepted accounting principles. Grantor. The word "Grantor" means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means any guarantor, surety, or accommodation party of any or all of the Loan. Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note. Hazardous Substances. The words "Hazardous Substances" mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words "Hazardous Substances" are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term "Hazardous Substances" also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. Lender. The word "Lender" means Mid-Peninsula Bank, its successors and assigns. Loan. The word "Loan" means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means the Note executed by Human Pheromone Sciences, Inc. in the principal amount of $500,000.00 dated April 19, 2002, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement. Permitted Liens. The words "Permitted Liens" mean (1) liens and security interests securing Indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled "Indebtedness and Liens"; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower's assets. Related Documents. The words "Related Documents" mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total debt. Trade Receivables. The words "Trade Receivables" mean all of Borrower's accounts from trade, net of allowance for doubtful accounts. BORROWER ACKNOWLEDGES HAVING READ ALL ThE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED APRIL 19,2002. BORROWER: HUMAN PHEROMONE SCIENCES, INC. By: /s/ William Horgan --------------------------------------- William Horgan, Chairman & CEO of Human Pheromone Sciences, Inc. BUSINESS LOAN AGREEMENT Loan No: 108143856 (Continued) Page 7 ================================================================================ LENDER: MID-PENINSULA BANK By: /s/ J. H. STAFFORD -------------------------------------- Authorized Signer ================================================================================ LASER PRO Lending, Ver.5.19.20.02 Copr. Harland Financial Solutions, Inc. 1997, 2002. All Rights Reserved. - CA C:\CFI\LpL\C40.FC TR-4022 EXHIBIT "A" TO BUSINESS LOAN AGREEMENT
======================================================================================================== Principal Loan Date Maturity Loan No Call / Coll Account Officer Initials $500,000.00 04-19-2002 05-03-2003 108143856 2000 016 ========================================================================================================
References in the shaded area are for Lenders use only and do not limit the applicability of this document to any particular loan or item. Any item above containing "***" has been omitted due to text length limitations. ================================================================================ Borrower: Human Pheromone Sciences, Inc. Lender: Mid-Peninsula Bank 84 West Santa Clara Street, Suite 720 Palo Alto Office San Jose, CA 95113 420 Cowper Street Palo Alto, CA 94301 ================================================================================ This EXHIBIT "A" TO BUSINESS LOAN AGREEMENT is attached to and by this reference is made a part of the Business Loan Agreement, dated April 19, 2002, and executed in connection with a loan or other financial accommodations between MID-PENINSULA BANK and Human Pheromone Sciences, Inc. ADDITIONAL PROVISION As applicable, the definition(s) of the following financial covenants and/or defined terms contained in this Business Loan Agreement are amended to read as follows: Working Capital. The words "Working Capital" mean Borrower's current assets less current liabilities. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, franchises, capitalized software, covenants not to compete, organizational costs, investments, employee/owner and intercompany accounts receivable and similar intangible items) less total debt, excluding subordinated debt. Cash Flow. The words "Cash Flow" mean Borrower's net income after taxes, exclusive of extraordinary gains and income, plus depreciation and amortization less cash dividends, distributions and withdrawals, and repurchase of treasury stock. Debt / Worth Ratio.* The ratio "Debt / Worth" means Borrower's Total Liabilities, excluding subordinated debt, divided by Borrower's Tangible Net Worth. *excludes deferred revenue from debt THIS EXHIBIT "A" TO BUSINESS LOAN AGREEMENT IS EXECUTED ON APRIL 19, 2002. BORROWER: HUMAN PHEROMONE SCIENCES, INC. By: /s/ William Horgan --------------------------------------- William Horgan, Chairman & CEO of Human Pheromone Sciences, Inc. LENDER: MID-PENINSULA BANK By: /s/ J. H. STAFFORD --------------------------------------- Authorized Signer ================================================================================ LASER PRO Lending, Ver.5.19.20.02 Copr. Harland Financial Solutions, Inc. 1997, 2002. All Rights Reserved. - CA C:\CFI\LpL\C40.FC TR-4022 EX-10.27 4 p15906_ex10-27.txt CERTIFICATION Exhibit 10.27 CERTIFICATION OF WILLIAM P. HORGAN PURSUANT TO 18 U.S.C. SECTION 1350 --------------------------------------------------------------------- In connection with the Quarterly Report of Human Pheromone Sciences, Inc. (the "Company") on Form 10-QSB for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William P. Horgan. Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1394; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ William P. Horgan August 12, 2002 -----END PRIVACY-ENHANCED MESSAGE-----