SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended Commission File Number
March 31, 1997 0-28392
- --------------------- ----------------------
HARVARD SCIENTIFIC CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 88-0226455
- ---------------------------- -------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification Number)
100 N. Arlington Ave., Suite 23P, Reno, Nevada 89501
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (702) 796 1173
--------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days. (1) Yes X
No (2) Yes X No
Indicate the number of shares outstanding of each of the Issuer's classes of
Common Equity, a of the latest practicable date.
Common Stock,
Par Value $0.001 Per Share 11,703,129
- -------------------------- -----------------
(Title of Class) (Number of Shares
Outstanding at
May 21, 1997)
<PAGE>
PART I
Item No. 1. Financial Statements
- ----------- --------------------
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited) (Audited)
----------- -----------
Current Assets:
<S> <C> <C>
Cash $3,497,023 $ --
Prepaid expenses (Note 7) 220,000 1,565
----------- -----------
Total Current Assets 3,717,023 1,565
----------- -----------
Equipment:
at cost, less accumulated depreciation of
$3,874 at March 31, 1997 and $3,491 at
December 31, 1996 (Note 3) 5,542 5,925
----------- -----------
Intangible Assets:
Intellectual Property, net of accumulated amortization
of $1,357 at March 31, 1997 and $1,048 at
December 31, 1996 (Notes 4 and 7) 7,638 7,948
Organizational cost, net of accumulated amortization
of $109,397 at March 31, 1997 and $105,760
at December 31, 1996 (Note 7) 66,153 69,789
----------- -----------
73,791 77,737
----------- -----------
Other Assets
Deposits 300 300
----------- -----------
TOTAL ASSETS $3,796,656 $ 85,527
=========== ===========
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited) (Audited)
------------ ------------
Current Liabilities:
<S> <C> <C>
Accounts payable $ 5,226 $ 36,625
Accrued Expenses (Note 5) 97,917 20,329
Bank overdraft -- 134
Due to related parties (Note 7) 183,535 190,860
Note payable to related parties (Notes 6 and 7) 37,275 37,275
Note Payable-Convertible (Note 6) 250,000 250,000
------------ ------------
Total Current Liabilities 573,953 535,223
------------ ------------
Contingencies (Note 11) -- --
Stockholders' Equity:
Common Stock, $.001 par value; 100,000,000
shares authorized; 11,403,129 and 9,883,129
shares issued and outstanding at March 31, 1997
and December 31, 1996, respectively (Note 1) 11,403 9,883
Additional paid-in capital 3,876,287 2,706,207
Debentures (net) - convertible to common stock (Note 4,375,000
9) --
Deficit accumulated during the development stage (5,039,988) (3,165,786)
------------ ------------
Total Stockholders' Equity (Deficit) 3,222,703 (449,696)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,796,656 $ 85,527
============ ============
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
--------------------------- Inception
March 31, March 31, to
1997 1996 3/31/97
(Unaudited) (Audited) (Unaudited)
----------- ----------- ------------
<S> <C> <C> <C>
Net Sales $ -- $ 26,959 $ 187,387
Cost of Sales -- 85,675 221,557
----------- ----------- ------------
Gross Profit -- (58,716) (34,170)
----------- ----------- ------------
Operating Expenses:
General and administrative expenses (Note 7) 1,856,154 287,148 3,897,024
Research and development (Note 7) 377 38,529 429,261
Depreciation and amortization (Note 7) 4,330 10,247 124,964
----------- ----------- ------------
Total Operating Expenses 1,860,861 335,924 4,451,249
----------- ----------- ------------
Loss from Operations (1,860,861) (394,640) (4,485,419)
----------- ----------- ------------
Other Income (Expense):
Settlements (Note 11) -- -- (494,813)
Interest Income -- -- 397
Interest Expense (13,341) (1,612) (35,653)
Loss on disposition of marketable securities -- -- (24,500)
----------- ----------- ------------
Total Other Income and Expense (13,341) (1,612) (554,569)
----------- ----------- ------------
Net Loss $ (1,874,202) $ (396,252) $ (5,039,988)
=========== =========== ============
Loss per Common Share $ (0.18) $ (0.05) $ (4.91)
=========== =========== ============
Weighted Average Shares Outstanding (Note 2) 10,308,240 8,757,903 1,025,851
=========== =========== ============
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, AND THE PERIOD
FROM INCEPTION DATE JANUARY 13, 1987 TO MARCH 31, 1997
<TABLE>
<CAPTION>
Restated Deficit
Common Stock Additional From
---------------------------- Paid-in Inception
Shares Amount Capital To Date Total
------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Issuance of shares for cash on
January 13, 1987 (inception) 103,000 $ 103 $ 2,097 $ -- $ 2,200
Issuance of shares for cash,
net of offering costs 51,000 51 19,223 19,274
Issuance of shares for services 90,000 90 -- 90
Issuance of shares for services 20,000 20 -- 20
Issuance of shares for services 36,000 36 -- 36
Issuance of shares to acquire
Grant City Corporation 50,000 50 39,827 39,877
Issuance of shares to effect a
four-for-one split 1,050,000 1,050 (1,050) --
Issuance of shares for
intellectual property rights 4,196,000 4,196 -- 4,196
Issuance of shares for
corporation property rights 394,000 394 24,231 24,625
Issuance of shares for fees
and services 1,045,000 1,045 96,893 97,938
Issuance of shares for cash,
net of offering costs 393,500 393 353,757 354,150
Adjustment of shares to effect a
four-for-one reverse split (5,571,375) (5,571) 5,571 --
Cumulative (loss) from inception
to December 31, 1994 -- -- -- (550,386) (550,386)
------------ ----------- ---------- -----------
Balance December 31, 1994 1,857,125 1,857 540,549 (550,386) (7,980)
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995, AND THE PERIOD
FROM INCEPTION DATE JANUARY 13, 1987 TO MARCH 31, 1997
<TABLE>
<CAPTION>
Restated Deficit
Common Stock Additional From
---------------------------- Paid-in Inception
Shares Amount Capital To Date Total
------------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1994 balance for 1,857,125 1,857 540,549 (550,386) (7,980)
Issuance of shares for fees
and services 553,500 553 530,796 531,349
Issuance of shares at par value for
intellectual property rights 6,138,500 6,139 -- 6,139
Issuance of shares for cash,
net of offering costs 200,000 200 831,100 831,300
Net (loss) for the year ended
December 31, 1995 -- -- -- (676,455) (676,455)
---------------- -----------------------------------------------------
Balance December 31, 1995 8,749,125 8,749 1,902,445 (1,226,841) 684,353
Issuance of shares for services
and debt reduction 565,254 565 309,518 310,083
Issuance of shares for legal
settlement 568,750 569 494,244 494,813
Net (loss) for the year ended
December 31, 1996 -- -- -- (1,938,945) (1,938,945)
---------------- -----------------------------------------------------
Balance December 31, 1996 9,883,129 9,883 2,706,207 (3,165,786) (449,696)
Issuance of shares for cash,
net of offering costs 250,000 250 124,750 125,000
Issuance of shares for fees
and services 1,270,000 1,270 1,045,330 1,046,600
Net (loss) for the Quarter ended
March 31, 1997 -- -- -- (1,874,202) (1,874,202)
---------------- -----------------------------------------------------
Balance March 31, 1997 11,403,129 $ 11,403 $ 3,876,287 $(5,039,988) $(1,152,298)
================ =====================================================
</TABLE>
The accompanying Notes are an integral part of these financial statenments.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
--------------------------- Inception
March 31, March 31, to
1997 1996 3/31/97
(Unaudited) (Audited) (Unaudited)
------------ ------------ -----------
Cash Flows form Operating Activities:
<S> <C> <C> <C>
Cash received from customers $ -- $ 26,959 $ 181,000
Cash paid to suppliers and employees (1,002,843) (772,300) (3,339,710)
Cash paid for interest -- (1,612) (3,167)
Cash paid for settlement -- -- (50,000)
------------ ------------ ------------
Net Cash Used in Operating Activities (1,002,843) (746,953) (3,211,877)
------------ ------------ ------------
Cash Flows from Investing Activities:
Cash from sale (purchase) of equipment -- (2,103) (24,897)
Capitalized organization costs -- -- (150,924)
Purchase of marketable securities -- -- (24,500)
------------ ------------ ------------
Net Cash Used in Investing Activities -- (2,103) (200,321)
------------ ------------ ------------
Cash Flows from Financing Activities:
Proceeds from issuance of capital stock,
net of offering costs 125,000 -- 1,621,946
Proceeds from debt, net of costs -- -- 415,444
Proceeds from debentures, net of costs 4,375,000 -- 5,000,000
Principal payments on debt -- (30,400) (128,169)
------------ ------------ ------------
Net Cash Provided by Financing
Activities 4,500,000 (30,400) 6,909,221
------------ ------------ ------------
Net Increase (Decrease) in Cash 3,497,157 (779,456) 3,497,023
Cash at beginning of period (134) 799,466 --
------------ ------------ ------------
Cash at end of period $ 3,497,023 $ 20,010 $ 3,497,023
============ ============ ============
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------- Inception
March 31, March 31, to
1997 1996 3/31/97
(Unaudited) (Audited) (Unaudited)
-------------- ------------- -------------
Reconciliation of Net Loss to Net Cash
Used in Operating Activities:
<S> <C> <C> <C>
Net Loss $(1,874,202) $ (396,252) $(5,039,988)
Adjustments to Reconcile Net Loss to
Net Cash Provided by (Used in)
Operating Activities:
Book value of assets sold -- -- 6,483
Loss on disposition of marketable securities -- -- 24,500
Depreciation and amortization 4,330 10,247 124,964
Issuance of stock for director's fees
and services 1,046,600 5,000 1,735,975
Issuance of stock in legal settlement -- -- 494,813
(Increase) decrease in assets:
Prepaid expenses (218,435) 57,105 (220,000)
Deposits -- (10,000) (300)
Increase (decrease) in liabilities:
Accounts payable (31,399) (70,780) 5,225
Accrued expenses 77,588 (84,080) 97,916
Due to related parties (7,325) (258,193) 183,535
-------------- ------------- -------------
Total Adjustments 871,359 (350,701) 2,453,111
-------------- ------------- -------------
Net Cash Used in Operating Activities $(1,002,843) $ (746,953) $(2,586,877)
============== ============= =============
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 and December 31, 1996
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION
Nature of Business:
Harvard Scientific Corp. (the "Company") is a development stage company. The
Company's primary business operations consist of development, commercialization,
marketing, and distribution of products relating to prostaglandin/microsphere
delivery and the manner in which the product is applied in treating male sexual
dysfunction. The Company has preliminary data available, indicating the possible
benefits of such a therapy.
On February 13, 1996, the Company received an assignment of an application for a
patent entitled "PGE-1 Containing Lyophilized Liposomes For Use In The Treatment
of Erectile Dysfunction" and identified as United States Application No.
08/573,408 ("PGE-1"). The assignment was made by the holder of the application,
Bio-Sphere Technology, Inc. ("BTI"), the Company's majority shareholder. The
Company plans to focus on PGE-1 to bring the product to the marketplace.
Organization:
The Company was incorporated under the laws of the State of Nevada on January
13, 1987, under the name of Witch Doctors Bones, Inc. On August 12, 1987, the
Company qualified a public offering under Rule 504 of Regulation D of the
Securities Act of 1933, as amended, with the Secretary of State of Nevada. On
June 17, 1988, the Company changed its name to Carey Ward, Inc.
On October 18, 1993, the Company acquired Grant City Corporation by merger,
changed its name to Grant City Corporation, and issued 50,000 shares of stock
carrying two classes of warrants. Class A warrants entitled the holder to
purchase stock at $8.00 per share and the Class B warrants entitled the holder
to purchase stock for $10.00 per share. The warrants could only be exercised if
a registration statement was filed with the United States Securities and
Exchange Commission ("SEC") pursuant to the Securities Act of 1933 as amended.
The warrants were redeemable by written notice of twenty (20) days at a
redemption price of $.001 per warrant. During 1996, before the warrants could be
exercised, the Company gave the required notice and redeemed both classes of
warrants.
On January 18, 1994, the Company changed its name to The Male Edge, Inc. On May
10, 1994, the Company changed its name to Harvard Scientific Corp.
The Company has 100,000,000 shares of common stock authorized with 11,403,129
shares issued and outstanding as of March 31, 1997, and 9,883,129 issued and
outstanding on December 31, 1996. BTI owned approximately 56% of the Company's
shares at March 31, 1997.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organizational Costs:
Organization costs are being amortized over a five-year period using the
straight-line method. Also see the discussion contained in Note 7.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 and December 31, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Equipment:
Equipment is stated at cost. Depreciation is incorporated on a double declining
balance basis over periods of 5 to 7 years. Expenditures for maintenance and
repairs are charged to expenses as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation are eliminated from the accounts
and any resulting gain or loss is included in expense. See Note 3.
Use of Estimates:
To prepare financial statements in conformity with generally accepted accounting
principals, management must make estimates and assumptions that affect certain
reported accounts and disclosures. Actual results could differ from these
estimates.
Intellectual Properties:
The costs of intellectual properties are amortized using the straight-line
method over a period of fifteen years. See Note 4.
Earnings per share:
Primary loss per share amounts are computed based upon the weighted average
number of shares actually outstanding plus the additional estimated number of
shares that would be outstanding, assuming conversion of the 6% convertible
debenture. See Note 9.
Income Tax:
Because of losses sustained since inception, no provision has been made for
income tax.
NOTE 3 - EQUIPMENT
Equipment at March 31, 1997 and December 31, 1996, consists of the following:
March 31, 1997 December 31, 1996
--------------------- ----------------------
Equipment $ 9,416 $ 9,416
Less: accumulated depreciation 3,874 3,491
--------------------- ----------------------
$ 5,542 $ 5,925
--------------------- ----------------------
The Company relocated to Reno, Nevada, during December 1996. By relocating, the
Company reduced its need for certain equipment and leasehold improvements. The
Company does not own manufacturing equipment for its product. The product has
been and will continue to be manufactured by third-party manufacturers according
to the Company's specifications.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 and December 31, 1996
NOTE 4 - INTELLECTUAL PROPERTIES
On January 7, 1994, the Company exchanged 2,856,000 shares of common stock with
BTI for the intellectual rights to patent, develop, manufacture, and market
PGE-1. The Company recorded the transfer of intellectual properties at the par
value of stock transferred, which amounted to $2,856. BTI's largest shareholder,
the originator of PGE-1, holds a 2% royalty interest in the Company's gross
proceeds.
On November 16, 1995, the Company exchanged 6,138,500 shares of common stock
with BTI for assistance in raising working capital and patent application and
for management assistance and distribution agreements associated with the PGE-1
product. The Company recorded the transfer at the par value of stock
transferred, which amounted to $6,139.
During 1996, the Company expensed the unamortized cost of acquiring technology
relating to the development of an HIV home test kit. The Company, which
originally acquired the rights in exchange for 335,000 shares of common stock,
ceased product development in connection with a settlement accrued in 1995.
NOTE 5 - ACCRUED EXPENSES
Accrued expenses at March 31, 1997 and December 31, 1996 consist of the
following:
March 31, 1997 December 31, 1996
------------------ ---------------------
Payroll $ 63,640 $ 9,680
Payroll taxes 4,869 1,000
Interest on notes and debentures 29,408 9,649
------------------ ---------------------
$ 97,917 $ 20,329
------------------ ---------------------
Also see Notes 9 and 10.
NOTE 6 - NOTES PAYABLE
The Company had the following notes payable at March 31, 1997 and December 31,
1996:
March 31, 1997 December 31, 1996
------------------ ---------------------
8% note, payable to former director
on demand, unsecured (Note 7) $ 37,275 $ 37,275
7% convertible debentures 250,000 250,000
------------------- ---------------------
$ 287,275 $ 287,275
------------------- ---------------------
Also see Notes 9 and 10.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 and December 31, 1996
NOTE 7 - RELATED PARTY TRANSACTIONS
During 1994, the Company paid $150,000 to related parties for work performed in
completing a merger (described in Note 1). Of this amount, $100,000 was paid to
BTI. The remaining $50,000 was paid to individuals affiliated with BTI. These
amounts have been capitalized, and are included in organizational costs.
Additional organizational costs of $24,625 were capitalized in 1994. The Company
transferred 246,000 shares of common stock to former owners and directors in
return for corporation property rights and 148,000 shares to individuals for
assistance in acquiring the rights. These shares were valued at $.0625 per
share, as determined by a 1994 appraisal.
During 1994 and 1995, the Company entered into three significant transactions
with related parties for the acquisition of intellectual rights, and for the
provision of technological, management, fundraising and marketing assistance.
Note 4 describes the valuation of these transactions.
The Company has a payable to BTI of $183,535 as of March 31, 1997 and December
31, 1996. The payable is related to costs incurred by BTI, on the Company's
behalf, for consultation and rent, and for research and development of the PGE-1
product.
The Company has a note payable to a former director as of March 31, 1997 and
December 31, 1996 (Note 6). The amount of accrued interest associated with the
note at March 31, 1997 and December 31, 1996 was $7,164 and $6,419,
respectively.
The Company often pays for services, fees, and salaries by issuing shares of
common stock. The shares are valued at a discount of free-trading stock, if
market valuation is available. Several material transactions of this type
occurred during 1995 and 1996, during which time the Company issued 1,188,754
shares, recorded at $841,432.
On March 18, 1997, the Company issued 420,000 shares of its common stock to four
individuals for prepaid legal fees through March of 1998 and for past consulting
services, and 850,000 shares to officers and directors of the Company for prior
services rendered.
Also see discussions regarding agreements, intellectual properties, and
subsequent events in Notes 4, 10, and 13.
NOTE 8 - INCOME TAXES
The Company has federal net operating loss carryforwards for financial statement
purposes of approximately $5,600,000 at March 31, 1997, which will be used to
offset future earnings of the Company. The loss carryforwards will expire during
the years ending 2002 through 2012 if not used.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 and December 31, 1996
NOTE 9 - CONVERTIBLE DEBENTURES
In March 1997, pursuant to a private placement, the Company (a) sold to one
investor $5,000,000 principal amount of 6% Convertible Debentures (the
"Debentures") due March 30, 1998 and (b) received a commitment from that
investor, subject to various conditions, to purchase additional Debentures in
the aggregate principal amount of up to $10,000,000 in two tranches of
$5,000,000 each, also to be due March 30, 1998. The Debentures will be
convertible into shares of common stock at the lesser of the market price on
March 21, 1997, or 80% of the market price on the conversion date. The Company
has the right to require, by written notice to the holder of this debenture at
any time on or before ten days prior to the maturity date, that the holder of
this debenture exercise its right of conversion with respect to all or that
portion of the principal amount and interest outstanding on the maturity date.
The Company's intention is to require conversion. See Note 13.
NOTE 10 - AGREEMENTS
In conjunction with the agreement of November 16, 1995, between BTI and the
Company (Note 4), BTI transferred four agreements to the Company related to the
manufacture, marketing, and distribution of the PGE-1 product overseas. The
Company terminated two of these agreements during 1996 for nonperformance. A
third agreement for distribution in Korea was terminated in 1996 by mutual
agreement. The Company is prepared to terminate a fourth agreement with its
European licensor, Pharma Maehle unless Pharma Maehle can resolve the Company's
concerns (Note 11).
In December 1996, the Company entered into an agreement with Martin E. Janis &
Company, Inc., a public relations agency. The agency was to carry out a
financial public relations program for the Company through June of 1997 in
exchange for out-of-pocket costs and an option on 50,000 shares of free-trading
common stock, exercisable at $1.25 per share.
NOTE 11 - CONTINGENCIES
The Company has been named as a party in certain pending or threatened legal,
governmental, administrative, or judicial proceedings that arose in the ordinary
course of business. These pending or threatened proceedings may affect the
Company in a material way.
The December 31, 1996 financial statements reflect the manner in which the
Company has resolved two litigations:
a. The Company reached a mutual release regarding a Distribution
Agreement, which provided for the manufacturing, marketing, and
distribution of HIV test kits. The mutual release called for a
$50,000 payment, which accrued during 1995 and was paid in full
during the first quarter of 1996.
b. The Company amicably settled an action with Thomas E. Waite &
Associates regarding a contract under which Waite was to provide
an array of business services. The Company issued 568,750 shares
of common stock in settlement, which accrued in the December 31,
1996 financial statements at $494,813.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 and December 31, 1996
NOTE 11 - CONTINGENCIES (CONTINUED)
In February 1997, two noteworthy legal actions transpired:
a. The Company became a defendant in a U.S. District Court action
initiated by Ailouros Ltd. Ailouros claims that it is entitled to
263,225 shares of common stock and/or damages in the amount of
$2,000,000. The Company had previously initiated a lawsuit in the
Nevada courts respecting the same claim, and both matters were
removed to Federal court. The Company is asking that any shares
issued to Ailouros be issued pursuant to the requirements of the
SEC's Regulation S. It is too early to estimate the monetary
outcome of this litigation.
b. The Company filed an action for damages due to negligence and
breach of contract by D. Weckstein and Co., Inc. and Donald
Weckstein. The contract at issue was an agreement to obtain
financing in exchange for Company stock. The Weckstein defendants
subsequently filed a lawsuit in New York against the Company
respecting the same contract, and asked for damages against a
third party for tortious interference with the contract. The
Weckstein plaintiffs seek damages on their contract claim in the
amount of $250,000 and $400,000, and damages in excess of $10,000
on an abuse of process claim. However, this litigation was settled
in April 1997 (See Note 13 - Subsequent Events).
One additional act may impact the Company in the future. The Company is prepared
to terminate its licensing agreement with Pharma Maehle, the holder of the
Company's distribution rights in a portion of its overseas market. The Company
is negotiating to resolve the contract issues to benefit business operations,
but the ultimate resolution and its impact upon the Company cannot be estimated.
The Company experienced a management change in December 1996 as it moved its
headquarters to Reno, Nevada, but expects no negative impact from that change.
The ultimate effect of other proceedings cannot be estimated
NOTE 12 - UNCERTAINTY - GOING CONCERN
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. The Company's future success is
dependent upon its ability to raise additional funds to complete the
commercialization process for its erectile dysfunction treatment product. The
Company intends to obtain these funds through public and private financing or
from other sources, such as collaboration agreements. Although the Company has
sold $5,000,000 principal amount of Debentures (Note 9), and has an undertaking,
subject to various conditions, to raise an additional $10,000,000 principal
amount of Debentures, there can be no assurance that this additional funding
will occur or be sufficient and that, if this additional funding does not occur
or is sufficient, other required funds will be available or will be available on
terms satisfactory to the Company. Failure to obtain adequate financing could
cause a delay or termination of the Company's product development and marketing
efforts.
<PAGE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
March 31, 1997 and December 31, 1996
NOTE 13 - SUBSEQUENT EVENTS
Relative to the Company's undertaking to issue $15,000,000 in 6% Convertible
Debentures, on April 14, 1997, the Company filed with the Securities and
Exchange Commission a registration statement on Form SB-2 (together with all
amendments thereto), under the Securities Act with respect to the securities
offered thereby. The registration relates to an aggregate of 12,064,344 shares
of Common Stock, $.001 par value per share, which is approximately 300% of the
4,021,448 shares issuable if the proposed $15,000,000 principal amount of
Debentures had been outstanding on April 14, 1997, and all the Debentures had
been converted on that date. See Note 9.
The lawsuits involving D. Weckstein and Co., Inc. and Donald Weckstein, and the
Company and a third party, were settled on April 23, 1997, with the issuance of
35,000 shares of the Company's common stock to D. Weckstein & Co., Inc.
<PAGE>
Item No. 2. Management's Discussion and Analysis or Plan of Operation.
- ----------- ----------------------------------------------------------
The Registrant incorporates herein by this reference Management's
Discussion and Analysis contained in the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on or about April 21, 1997.
PART II - OTHER INFORMATION
Item No. 1. Legal Proceedings.
- ----------- ------------------
The Registrant incorporates herein by this reference the description of
legal proceedings contained in the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on or about April 21, 1997 with the following
modifications:
A. Harvard Scientific Corp. v. D. Wechstein & Co., Inc. and
D. Wechstein & Co., Inc. v. Harvard Scientific Corp. and
Thomas E. Waite & Associates Inc.
The Registrant's Form SB-2 refers to two cases involving the
Registrant and D. Wechstein & Co., Inc. One action was filed
in the Second Judicial District Court of Nevada, County of
Washoe, on or about February 10, 1997 and the second case was
filed in the Supreme Court of New York, County of New York,
filed on or about February 18, 1997. The actions are more
fully described in the Registrant's Form SB-2 filed with the
Securities and Exchange Commission on or about April 21, 1997,
and such description is incorporated herein by this reference.
Both actions were settled amicably between the parties and the
litigation is no longer pending.
B. Rex Morden v. Harvard Scientific Corp.
The Registrant's Form SB-2 describes an action involving the
Registrant and an individual known as Rex Morden. The action
was filed on or about March 17, 1997 in the District Court of
Nevada, County of Clark. The action is more fully described in
the Registrant's Form SB-2 filed with the Securities and
Exchange Commission on or about April 21, 1997, and such
description is incorporated herein by this reference. The
action was settled amicably between the parties and is no
longer pending.
<PAGE>
C. Neal Armstrong v. Harvard Scientific Corp.
On or about April 4, 1997, Neal Armstrong, a former officer
and director of the Registrant, filed a complaint in a
District Court of Clark County, State of Nevada, which listed
the Registrant as a defendant. Also listed as defendants are
Don Steffens, the Chief Financial Officer, Secretary,
Treasurer and a Director of the Registrant; Dr. Jackie See, a
Director of the Registrant; and Ian Hicks, Chairman of the
Board, President, Chief Executive Officer and a Director of
the Registrant. In his complaint, Armstrong alleges that the
Registrant breached the terms of an employment agreement which
Armstrong alleges he had with the Registrant. Armstrong
alleges that the Registrant wrongfully terminated his
employment with the Registrant pursuant to the terms of his
employment agreement and that the other defendants conspired
with one another to terminate his employment with the
Registrant. The complaint seeks compensatory damages, punitive
damages and reasonable attorneys' fees and costs in a total
amount in excess of $10,000.00. The Registrant is defending
the action.
Item No. 2. Changes in Securities.
- ----------- ----------------------
Any changes regarding the securities of the corporation are described
in the Registrant's Form SB-2 filed with the Securities and Exchange Commission
on or about April 21, 1997. Such information is contained in the section
captioned "Description of Securities" in that Form SB-2 and such description is
incorporated herein by this reference.
Item No. 3. Defaults Upon Senior Securities.
- ----------- --------------------------------
None
Item No. 4. Submission of Matters to a Vote of the Security Holders.
- ----------- --------------------------------------------------------
No matters have been submitted to a vote of the security holders during
the period covered by this report through the solicitation of proxies or
otherwise.
Item No. 5. Other Information.
- ----------- ------------------
In March 1997, pursuant to a private placement, the Registrant (a) sold
to one investor $5,000,000 principal amount of 6% Convertible Debentures (the
"Debentures') and (b) received a commitment from that investor, subject to
various conditions, to purchase additional Debentures in the aggregate principal
amount of up to $10,000,000 in two tranches of $5,000,000 each. The investor may
convert the Debentures into Common Stock.
<PAGE>
The Registrant's 6% Convertible Debentures ("Debentures") bear an
interest rate of six percent (6%) per annum and mature on March 30, 1998 as to
the $5,000,000 principal amount of Debentures currently outstanding and as of
the end of the first anniversary month of the issuance of the two additional
$5,000,000 tranches of Debentures that the Selling Shareholder has agreed to
purchase. The Debentures are issuable in denominations of $100,000 and integral
multiples thereof and, at the holder's request, are exchangeable for an equal
aggregate principal amount of debentures of different authorized denominations.
Upon maturity of the Debentures, payment for principal and accrued interest will
be made either in currency or in shares of the Registrant's Common Stock, at the
option of the holder.
The holder may convert the Debentures into Common Stock commencing on
the effective date of the Registration Statement. The conversion price per share
will be either (a) $6.525, the Market Price as defined in the Debentures as of
March 21, 1997, or (b) 80% of the Market Price on the date of conversion,
whichever is lower. "Market Price," as used herein, means the average closing
bid price of the Common Stock on the five (5) trading days immediately preceding
Mar h 21, 1997 or Conversion Date as may be applicable, as reported by the
National Association of Securities Dealers, or the closing bid price on the
over-the-counter market on such date or, in the event the Common Stock is listed
on a stock exchange or traded on NASDAQ, the Market Price means the closing
price on the exchange on such date, as reported in the Wall Street Journal. The
Registrant has the option to pay the interest accrued from the date of issuance
to the date of conversion either in cash or in shares of Common Stock.
The Registrant may redeem any Debentures for which a Notice of
Conversion has not been submitted if the conversion price equals or is less than
$1.60 per share by delivering a Notice of Redemption to the holder. However, the
holder may still opt to convert any such Debentures into shares of Common Stock
by submitting a Notice of Conversion to the Registrant within three business
days of the holder's receipt of the Registrant's Notice of Redemption.
The redemption price will be 125% of the principal amount of the
Debentures, plus accrued unpaid interest. The Registrant must pay the redemption
price to the holder within ten days from the date of the Notice of Redemption.
If the Company fails to make the redemption payment within these ten days, the
Registrant forfeits its right to redeem those Debentures.
A holder may also require the Registrant to declare whether it intends
to effect a redemption within the following ten days by faxing a notice to the
Registrant. The Registrant must respond to this notice within 24 hours. If it
fails to do so, the Registrant may not redeem that holder's Debentures during
the ten day period commencing 24 hours after the date of the notice from the
holder.
<PAGE>
Item No. 6. Exhibits and Reports on Form 8-K.
- ----------- ---------------------------------
A. Exhibits
(2) Plan of acquisition, reorganization, liquidation or
succession: None
(3) (i) Articles of Incorporation*
(ii) By-laws*
(4) Instruments defining the rights of holders, including
indentures: Form of 6% Debenture**
(10) Material contracts: Securities Purchase Agreement
dated March 21, 1997 between the Registrant and
Springrange Investment Group, Ltd.**
(27) Financial Data Schedule
*Incorporated by reference from the Registrant's Form 10-SB.
**Incorporated by reference from the Registrant's Form SB-2 filed on or about
April 21, 1997.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
<PAGE>
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: May 31, 1997.
HARVARD SCIENTIFIC CORP.
By /s/ Don Steffens
---------------------
Don Steffens
Secretary
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