<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) of the
--------------------------------------------------
SECURITIES ACT OF 1934
For The Quarterly period ended September 30, 1998
Commission File Number 0-28392
HARVARD SCIENTIFIC CORP.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 88-0226455
- ------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
755 Rinehart Road, Suite 100, Lake Mary, FL 32746
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (407) 324-1606
--------------
Common Stock, Par Value $0.01 Per Share
---------------------------------------
(Title of Class)
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.
X Yes No
- --- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
6,207,547
---------
NUMBER OF COMMON STOCK SHARES OUTSTANDING
-----------------------------------------
on October 14, 1998
-------------------
Traditional Small Business Disclosure Format (Check One):
X Yes No
- --- ---
<PAGE> 2
HARVARD SCIENTIFIC CORP.
INDEX
PART I
FINANCIAL INFORMATION
ITEM 1:
Balance Sheet - Assets
Balance Sheet - Liabilities and Stockholders' Equity
Statement of Operations
Statement of Stockholders' Equity (4 pages)
Statement of Cash Flows
Notes to the Financial Statements (16 pages)
ITEM 2:
Management's Discussion and Analysis or Plan of Operation
PART II
OTHER INFORMATION
ITEM 1:
Legal Proceedings
ITEM 2:
Changes in Securities and Use of Proceeds
ITEM 3:
Defaults Upon Senior Securities
ITEM 4:
Submission of Matters to a Vote of Security Holders
ITEM 5:
Other Information
ITEM 6:
Exhibits and Reports on Form 8-K
Signatures
<PAGE> 3
<TABLE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
ASSETS
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
(UNAUDITED) (AUDITED)
------------- -------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 90,813 $ 873,199
Prepaid expenses 75,378 35,382
Accounts Receivable - Directors (Note 7 & 9) 4,984,197 57,711
Due From Related Parties (Note 7) 71,815 852,305
Deferred debt issue costs (Note 11) - 156,250
------------- -------------
Total Current Assets 5,222,203 1,974,847
------------- -------------
Equipment and Leasehold Improvements:
at cost, less accumulated depreciation of $15,279 and $11,930
at September 30, 1998 and December 31, 1997 (Notes 2 & 3) 34,325 50,704
------------- -------------
Intangible Assets:
Intellectual Property, net of accumulated amortization
of $35,508 and $4,147 at September 30, 1998 and
December 31, 1997, respectively (Note 4) 1,018,306 156,848
Organizational cost, net of accumulated amortization of
$166,834 and $140,686 at September 30, 1998 and
December 31, 1997, respectively 8,716 34,864
------------- -------------
1,027,022 191,712
------------- -------------
Other Assets:
Deposits 5,499 10,414
Product Inventory (Note 5) 18,000
TOTAL ASSETS $ 6,307,049 $ 2,227,677
============= =============
</TABLE>
The accompanying Notes are an integral part of these financial statements
<PAGE> 4
<TABLE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
UNAUDITED) (AUDITED)
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 134,464 $ 26,370
Accrued expenses (Note 6) 29,410 131,694
Obligation under capital lease - current (Note 3) 8,222 16,979
Debentures payable - Convertible (Note 11) - 2,800,000
------------- -------------
TOTAL CURRENT LIABILITIES 172,096 2,975,043
------------- -------------
LONG-TERM LIABILITIES:
Obligation under capital lease - non-current (Note 3) 6,317 6,317
------------- -------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; 100,000,000 shares
authorized; 6,207,547 and 3,344,137 shares issued
and outstanding at September 30, 1998 and
December 31, 1997, respectively (Note 2) 62,076 33,441
Preferred Stock, 10,000,000 shares authorized, none
issued and outstanding at September 30, 1998 (Note 2) - -
Additional paid-in capital 18,594,465 8,694,904
Deficit accumulated during the development stage (12,527,905) (9,482,028)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 6,128,636 (753,683)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,307,049 $ 2,227,677
============= =============
</TABLE>
The accompanying Notes are an integral part of these financial statements
<PAGE> 5
<TABLE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED (INCEPTION)
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, TO
1998 1997 1998 1997 9/30/98
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ - $ - $ - $ - $ 187,387
COST OF SALES - - - - 221,557
------------- ------------- ------------- -------------- ------------
GROSS PROFIT - - - - (34,170)
------------- ------------- ------------- -------------- ------------
OPERATING EXPENSES:
General and administrative expenses 718,944 (732,309) 1,770,464 1,966,508 6,106,672
Research and development 352,443 701,185 862,534 894,401 2,666,093
Depreciation and amortization 29,454 152,573 67,939 342,899 703,787
------------- ------------- ------------- -------------- ------------
TOTAL OPERATING EXPENSES 1,100,841 121,449 2,700,937 3,203,808 9,476,552
------------- ------------- ------------- -------------- ------------
LOSS FROM OPERATIONS (1,100,841) (121,449) (2,700,937) (3,203,808) (9,510,722)
------------- ------------- ------------- -------------- ------------
OTHER INCOME (EXPENSE):
Settlements (Note 9) (165,000) (10,000) (165,000) (10,000) (880,629)
Interest Income 72,528 26 77,256 217 78,821
Dividend Income 3,782 19,523 11,410 37,711 62,864
Interest Expense (22,524) (68,175) (257,026) (1,411,296) (2,242,160)
Loss on disposition of Fixed Assets - - (11,580) - (36,080)
------------- ------------- ------------- -------------- ------------
or Securities
TOTAL OTHER INCOME AND EXPENSE (111,214) (58,626) (344,940) (1,383,368) (3,017,185)
------------- ------------- ------------- -------------- ------------
NET LOSS $ (1,212,055) $ (180,075) $ (3,045,877) $ (4,587,176) $(12,527,907)
============= ============= ============= ============= =============
LOSS PER COMMON SHARE $ (0.21) $ (0.09) $ (0.59) $ (3.25)
============= ============= ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 2) 5,643,101 1,904,102 5,150,154 1,410,839
============= ============= ============= =============
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE> 6
<TABLE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 13, 1987 (DATE OF INCEPTION)
TO SEPTEMBER 30, 1998 (UNAUDITED)
<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 146,000 146 - - 146
Issuance of shares to acquire
Grant City Corporation 50,000 50 39,827 - 39,877
----------- ----------- ----------- ----------- -----------
Balance December 31, 1993 350,000 350 61,147 - 61,497
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> 7
<TABLE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 13, 1987 (DATE OF INCEPTION)
TO SEPTEMBER 30, 1998 (UNAUDITED)
<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 forward 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 255,000 255 59,828 - 60,083
Issuance of shares in conversion of debt 310,254 310 249,690 - 250,000
Issuance of shares for legal settlement 568,750 569 494,244 - 494,813
Discount on 7% Convertible Debentures - - 500,000 - 500,000
Net (loss) for the year ended
December 31, 1996 - - - (2,438,945) (2,438,945)
----------- ----------- ----------- ----------- -----------
Balance December 31, 1996 9,883,129 9,883 3,206,207 (3,665,786) (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 - - 1,270
Discount on 6% Convertible Debentures - - 1,250,000 - 1,250,000
Net (loss) for the Quarter ended
March 31,1997 - - - (3,140,868) (3,140,868)
----------- ----------- ----------- ----------- -----------
Balance March 31, 1997 11,403,129 $ 11,403 $4,580,957 $(6,806,654) $(2,214,294)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE> 8
<TABLE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 13, 1987 (DATE OF INCEPTION)
TO SEPTEMBER 30, 1998 (UNAUDITED)
<CAPTION>
Restated Deficit
Common Stock Additional From
-------------------------- Paid-in Inception
Shares Amount Capital To Date Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
March 31, 1997 balance forward 11,403,129 $ 11,403 $ 4,580,957 $(6,806,654) $(2,214,294)
Issuance of shares for fees and services 6,172,000 6,172 - - 6,172
Issuance of shares in conversion of debt 450,000 450 133,300 - 133,750
Net (loss) for the Quarter ended
June 31, 1997 - - - (1,266,233) (1,266,233)
------------ ------------ ------------ ------------ ------------
Balance June 30, 1997 18,025,129 $ 18,025 $ 4,714,257 $(8,072,887) $(3,340,605)
Issuance of shares in conversion of debt 1,446,325 1,446 1,275,133 - 1,276,579
Issuance of shares for fees and services 144,000 144 - - 144
Net (loss) for the Quarter ended
September 30, 1997 - - - (180,075) (180,075)
------------ ------------ ------------ ------------ ------------
Balance September 30, 1997 19,615,454 $ 19,615 $ 5,989,390 $(8,252,962) $(2,243,957)
Issuance of shares in conversion of debt 2,375,919 2,376 985,789 - 988,165
Issuance of shares for fees and services 8,300,000 8,300 537,100 - 545,400
Issuance of shares in legal settlement 1,150,000 1,150 439,075 - 440,225
Issuance of shares for intellectual
property 2,000,000 2,000 - - 2,000
Receivable due from related parties
reflecting the sale of stock Rule 16(b) - - 410,016 - 410,016
Receivable due from related parties - - 333,535 - 333,535
Net (loss) for the Quarter ended
December 31, 1997 - - - (1,229,065) (1,229,065)
------------ ------------ ------------ ------------ ------------
Balance at year end December 31, 1997 33,441,373 $ 33,441 $ 8,694,904 $(9,482,027) $ (753,682)
============ ============ ============ ============ ============
</TABLE>
<PAGE> 9
<TABLE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 13, 1987 (DATE OF INCEPTION)
TO SEPTEMBER 30, 1998 (UNAUDITED)
<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 in conversion of
debt 1,036,064 1,036 260,882 261,918
February 2, 1998, adjustment of shares to
effect a one-for-ten reverse split (31,029,693) - - -
Issuance of shares for a commitment
to a financing agreement 1,580,278 15,803 4,984,197 5,000,000
Issuance of shares for services 10,000 100 100
Issuance of shares for cash 200,000 2,000 598,000 600,000
Net reversal of Receivable due from related
parties reflecting the sale of stock Rule 16(b) (17,197) (17,197)
Net (loss) for the Quarter ended
March 31, 1998 (1,097,930) (1,097,930)
------------ ------------ ------------ ------------ ------------
BALANCE AT MARCH 31, 1998 5,238,022 $ 52,380 $14,520,786 $(10,579,957) $ 3,993,209
Issuance of shares for fees and services 10,500 105 124,370 124,475
Issuance of shares for cash 233,333 2,333 697,666 699,999
Net (loss) for the Quarter ended
June 30, 1998 - - - (735,894) (735,894)
------------ ------------ ------------ ------------ ------------
Balance June 30, 1998 5,481,855 $ 54,818 $15,342,822 $(11,315,851) $ 4,081,789
============ ============ ============ ============ ============
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE> 10
<TABLE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 13, 1987 (DATE OF INCEPTION)
TO SEPTEMBER 30, 1998 (UNAUDITED)
<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 in for fees
and services 101,000 1,010 396,990 398,000
Issuance of shares for cash 24,667 247 73,753 74,000
Issuance of shares for legal
settlement 600,000 6,000 2,762,900 2,768,900
Inventory 18,000 18,000
Net (loss) for the Quarter
ended September 30, 1998 - - - (1,212,055) (1,212,055)
------------ ------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 1998 6,207,522 $ 62,076 $18,594,465 $(12,527,905) $ 6,128,636
============ ============ ============ ============ ============
</TABLE>
The accompanying Notes are an integral part of these financial statements.
<PAGE> 11
<TABLE>
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<CAPTION>
1/31/87
NINE MONTHS ENDED (INCEPTION)
-------------------------------------- TO
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 9/30/98
(UNAUDITED) (UNAUDITED) (UNAUDITED)
------------- ------------- -------------
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
NET LOSS $ (3,045,877) $ (4,587,176) $(12,527,907)
------------- ------------- -------------
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 securities or fixed assets 13,030 - 13,030
Depreciation and amortization 60,859 342,899 227,957
Amortization of Debt Issuance cost - - 468,750
Issuance of stock for director's fees
and services 327,575 7,586 1,577,349
Issuance of stock for Property Rights 375,000 - 377,000
Issuance of stock in legal settlement 165,000 - 960,854
Discount on Convertible Debentures - 1,250,000 1,750,000
Interest Expense converted to Stock - 35,329 86,880
(Increase) decrease in assets:
Prepaid expenses & Other Assets (14,145) 865 (14,145)
Deposits/Retainers (34,882) (5,700) (80,677)
Increase (decrease) in liabilities:
Accounts payable 129,436 (22,414) 134,463
Accrued expenses (123,625) 168,452 20,794
Due to related parties - (7,325) (203,740)
------------- ------------- -------------
TOTAL ADJUSTMENTS 898,248 1,769,692 5,324,999
------------- ------------- -------------
NET CASH USED IN OPERATING ACTIVITIES $ (2,147,629) $ (2,817,484) $ (7,202,908)
============= ============= =============
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash from sale (purchase) of equipment - (52,810) (78,114)
Cash from sale (purchase) of Intellectual Rights - - (150,000)
Capitalized organization costs - - (150,924)
------------- ------------- -------------
NET CASH USED IN INVESTING ACTIVITIES - (52,810) (379,038)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of capital stock,
net of offering costs 1,373,999 125,000 2,745,945
Proceeds from debt converted to capital stock - - 250,000
Proceeds from debt, net of costs - 27,043 438,739
Proceeds from debentures, net of costs - 4,375,000 4,375,000
Principal payments on debt (8,756) (37,275) (136,925)
------------- ------------- -------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 1,365,243 4,489,768 7,672,759
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH (782,386) 1,619,474 90,813
CASH AT BEGINNING OF PERIOD 873,199 (134) -
------------- ------------- -------------
CASH AT END OF PERIOD $ 90,813 $ 1,619,340 $ 90,813
============= ============= =============
</TABLE>
The accompanying Notes are an integral part of these financial statements
<PAGE> 12
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
NOTE 1 - NATURE OF BUSINESS AND ORGANIZATION
NATURE OF BUSINESS:
Harvard Scientific Corp. (the "Company") is a biopharmaceutical drug development
company specializing in sexual dysfunction for both male and female. The
Company's corporate objective is to utilize medically researched and developed
drug substances, determine the ability of these substances to be encapsulated in
liposomes and to determine the potential market for such products. The Company
intends to conduct and conclude all clinical testing necessary for regulatory
approval of such products from the U.S. Food and Drug Administration ("FDA") or
similar regulatory agencies in foreign countries in order to initiate marketing
and establish distribution channels for its products.
Thus far, the Company is in the process of developing five products designed to
ameliorate sexual dysfunction:
1. An Intraureathral therapeutic treatment for male erectile dysfunction
("Male Intraureathral Product")
2. A topical therapeutic treatment for male erectile dysfunction ("Male
Topical Product")
3. A topical therapeutic treatment for female sexual dysfunction ("Female
Topical Product").
4. An orally administered form of liposomal, lyophilized Apomorphine for
the treatment of male erectile dysfunction ("Male Oral Product"), and
5. An orally administered form of liposomal, lyophilized Apomorphine for
the treatment of female sexual dysfunction ("Female Oral Product").
The Company is a development stage enterprise as defined by FASB No. 7.
"Accounting and Reporting by Development Stage Enterprises".
The Company plans to focus on its LLPGE1 for the treatment of erectile
dysfunction and bring the products to the marketplace. The Company presented the
results of its Phase I clinical study on the Male Intraureathral Product to the
FDA in April 1997, as part of its pre-Phase II clinical trial meeting. On May
29, 1998, the Company received approval from the FDA of the Phase I study and
authorization of Phase II clinical trials for the Male Intraureathral Product.
Protocols and research sites for this Phase II study are complete.
On February 17, 1998, The U.S. Patent Office approved and assigned patent No.
5,718,917 to the Company for an invention "PGE1 Containing Lyophilized Liposomes
For Use In The Treatment of Erectile Dysfunction," referred to as LLPGE1. In
June 1998, the Company filed an application for a patent in numerous regions and
countries (Australia, Brazil, Canada, China, the Czech Republic, Eurasia,
Europe, Hungary, Iceland, Israel, Japan, Mexico, New Zealand, Norway, Poland,
Korea, Singapore, Slovak, Turkey and the Ukraine). In addition, in June 1998,
the Company submitted an application with the US Patent and Trademark Office,
for its development of a new method for treating male erectile dysfunction via
the Intraureathral administration of an aqueous ("liquid") solution containing
two vasodilators, PGE1 and Papaverine.
ORGANIZATION:
The Company was incorporated under the laws of the State of Nevada on January
13, 1987. Effective February 2, 1998, the Company approved a 1 for 10 reverse
stock split. Shares outstanding went from 34,477,437 on February 1, 1998 to
3,447,769 just after the split. The Company is moving forward with a strategic
plan designed to facilitate marketing of its products in a manner which is
consistent with enhancing its corporate image and further increasing shareholder
<PAGE> 13
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
value. All figures in this Report give effect to previous stock splits and the
reverse stock splits, and previously stated number of shares are appropriately
restated. The Company has 100,000,000 shares of Common Stock authorized with
6,205,547 shares issued and outstanding as of September 30, 1998 and 3,344,137
shares issued and outstanding on December 31, 1997. In addition, on July 9,
1998, the shareholders of the Company authorized 10,000,000 shares of "blank
check" Preferred Stock, none outstanding on September 30, 1998.
On February 10, 1998, three new members were elected to the Board of Directors
of the Company. Two of these members will serve as new Directors of the Company
and the third will fill an existing seat vacated by the resignation of a
previous director. The Company's Board of Directors currently consists of five
members.
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 3 & 4.
EQUIPMENT:
Equipment is stated at cost. Depreciation is incorporated on a double declining
balance basis over a period of 5 years. Expenditures for maintenance and repairs
are charged to expense 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:
In order to prepare the financial statements in conformity with generally
accepted accounting principles, 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:
The earnings per share calculations were based on the weighted average number of
shares outstanding during the period: 5,150,154 for the Period ending September
30, 1998 and 1,410,839 for the Period ending September 30, 1997.
Fully dilutive earnings per share are not reflected because they are
anti-dilutive.
INCOME TAX:
Because of losses sustained since inception, no provision has been made for
income tax.
<PAGE> 14
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
NOTE 3 - EQUIPMENT & LEASEHOLD IMPROVEMENTS
Equipment and building improvements consists of the following:
September 30, 1998 December 31, 1997
(Unaudited) (Audited)
-----------------------------------------
Equipment & Leasehold Improvements $ 49,604 $ 62,634
Less: accumulated depreciation 15,279 11,930
-----------------------------------------
Total Net Equipment & Leasehold $ 34,325 $ 50,704
Improvements
-----------------------------------------
In April 1997, the Company entered into an agreement for the lease of equipment
used in the process of sizing Liposomes which the Company uses in the delivery
of the Prostaglandin E-1. The total lease amount of $32,893 is to be paid over
24 months. The Company records the lease as a capital lease amortizing payments
over the life of the lease.
During December 1996, the Company established its administrative headquarters in
Reno, Nevada. In November 1997, the Company established the world headquarters
in Lake Mary, Florida. In May 1998, the Company moved the research and
development office from Irvine, California to Costa Mesa, California. In July
1998, the Company moved it's administrative headquarters from Reno, Nevada to
Scottsdale, Arizona. The Company has reduced its need for certain equipment and
leasehold improvements because the Company currently 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.
NOTE 4 - INTELLECTUAL PROPERTIES
On January 7, 1994, the Company exchanged 285,600 shares of Common Stock with
BTI for the intellectual rights to patent, develop, manufacture, and market the
LLPGE-1 for the treatment of male erectile dysfunction, impotency and sexual
enhancement. The Company recorded the transfer of intellectual properties at the
par value of stock transferred, which amounted to $2,856. BTI's largest
shareholder, Dr. Jackie See M.D., the inventor of the Lyophilized Liposomal
LLPGE-1, holds a 2% royalty interest on the sale of products.
On November 16, 1995, the Company exchanged 613,850 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 LLPGE-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 33,500 shares of Common Stock,
ceased product development in connection with a settlement accrued in 1995.
During 1997, the Company entered into three additional significant transactions
with BTI for the acquisition of intellectual rights, and for the provision of
technological, management, fundraising and marketing assistance. In addition, in
1996, the Company incurred costs payable to BTI for consultation and rent of
$133,157 and for research and development $50,378 of the LLPGE1 product. During
the first quarter 1998, BTI chose to convert the accounts payable balance of
$333,535 as a contribution to additional-paid-in-capital.
<PAGE> 15
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
On November 20, 1997, the Company agreed to exchange 200,000 shares of Common
Stock, which has been issued, to BTI for the Intellectual Property Rights to
Prostaglandin E1 Lyophilized Liposomes for the use of treatment of Psoriasis. In
addition, the Company is to pay BTI $150,000. BTI was to receive a 3% override
on royalties of the Psoriasis product. On June 11, 1998, BTI and the Company
agreed that BTI would transfer an irrevocable royalty-free license to all
intellectual property, intangibles, patents, trade secrets, trademarks, trade
names and goodwill relating to BTI that exists or is in development, relating to
male and/or female sexual dysfunction, for the return of the intellectual
property related to the Psoriasis product that BTI previously had transferred to
the Company and the granting to BTI registration rights (effective July 28,
1998) as to all shares of the Company's Common Stock held by BTI on July 20th,
1998. In addition, all royalty agreements with respect to products other than
sexual dysfunction have been terminated. In addition, the Company forgave the
indebtedness of $892,819 of BTI. The debt forgiveness is treated as part of the
cost of the intellectual properties received from BTI. See Note 7.
NOTE 5 - INVENTORY
In September 1998, the Company received 30 grams of Prostaglandin PGE-1 with a
value of $600 a gram or $18,000, from Pharmacia-Upjohn for future use in
manufacturing clinical lots. The Company received this product, free of charge,
in good faith with the possibility of future business cooperation.
NOTE 6 - ACCRUED EXPENSES
Accrued expenses consist of the following:
September 30, 1998 December 31, 1997
(Unaudited) (Audited)
-----------------------------------------
Interest on notes and debentures $ - $ 131,694
Accrued payroll & payroll taxes 29,410 -
-----------------------------------------
Total $ 29,410 $ 131,694
-----------------------------------------
Also see Notes 11 for interest on debentures.
NOTE 7 - RELATED PARTY TRANSACTIONS
1. During 1994, 1995 and 1997, 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.
2. During 1997, the Company incurred a payable of $150,000 to BTI for the
Intellectual Property Rights to Prostaglandin E-1 Lyophilized Liposomes for
the use of treatment of Psoriasis. On June 11, 1998, BTI and the Company
agreed that BTI would transfer an irrevocable royalty-free license to all
its intellectual property relating to sexual dysfunction, for the return of
the intellectual property related to the Psoriasis and other non-sexual
dysfunction products that BTI previously had transferred. In addition, the
Company forgave BTI's indebtedness of $895,819, which was treated as part
of the basis of the intellectual properties. See Note 4.
<PAGE> 16
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
3. During 1996, BTI advanced 20,000 of its shares on behalf of the Company as
a subordinated loan agreement. The shares were loaned and are expected to
be returned to BTI in 1998. At the time of the advance, the fair market
value of the shares transferred was $500,000. During 1997, the Company
advanced to BTI $500,000 in connection with this settlement. The $500,000
was part of the forgiven debt of $895,819 described above.
4. In 1997, BTI, a major stockholder of the Company, received $352,305 from
the sale of the Company's Common Stock that was subject to recapture by the
Company pursuant to Section 16(b) of the Securities Exchange Act of 1934.
In January 1998, BTI received $40,514 from the sale of the Company's Common
Stock that was subject recapture by the Company pursuant to Section 16(b)
of the Securities Exchange Act of 1934. In January 1998, $40,514 was booked
as a receivable from related parties to reflect the recapture. This amount
was also part of the forgiven debt of $895,819 described above.
5. During the year, BTI chose to convert the accounts payable balance of
$333,535 as a contribution to additional-paid-in-capital.
6. BTI owned approximately 10.5% and 22% of the Company's shares on September
30, 1998 and December 31, 1997, respectively. Dr. Jackie See a Director of
the Company and a controlling person of BTI. Dr. Jackie See owned
approximately 35% of the Common Stock of the Company on September 30, 1998,
including the shares owned by BTI and shares that Dr. See has the right to
purchase (296,302 shares)(see Note 9).
7. In November 1997, the Company issued 400,000 shares of Common Stock to
Thomas E. Waite, the President and Chairman of the Board, as a signing
bonus. The transaction was recorded at par value.
8. The Company has entered into a financing agreement dated January 13, 1998,
as amended on February 3, 1998, between Dr. Jackie R. See, Thomas E. Waite
and the Company for the funding of the Company up to $10,000,000. Dr.
Jackie R. See and Mr. Thomas E. Waite are Directors of the Company. Thomas
E. Waite is also President and Chief Executive Officer of the Company. On
February 3, 1998, the Company issued 790,139 shares to each Dr. Jackie See,
M.D. and Thomas E. Waite in connection with this private placement. All
shares owned by Dr. Jackie See and Thomas E. Waite, have registration
rights. These registration rights have been exercised and upon the
registration statement becoming effective (July 28, 1998), the shares can
be sold in accordance with the Securities Act of 1933, subject to state
securities laws. See Note 9.
9. The Company often pays for services, fees, and salaries by issuing shares
of Common Stock. Most of this stock issued for services must be held for
investment to satisfy the exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended. Rule 144 under the statute requires
that such stock be held for a year, before it can be sold in accordance
with rule 144.
During 1998, the Company issued a total of 1,590,278 shares of Common Stock
to directors of the Company. 10,000 of these shares were booked at the
closing stock price of the Company's Common Stock on the day the stock was
issued and the balance of 1,580,278 was issued in conjunction with the
Waite and See Agreement, see Note 9.
<PAGE> 17
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
During 1997, the Company approved the issuance of 1,190,200 shares of
Common Stock (restricted) to officers and directors of the Company for
prior and current services rendered or signing bonuses. In addition, during
1997 the Company issued 428,400 shares of Common Stock (restricted) for
services performed by outside consultants or scientists, and 50,000 shares
of Common Stock (restricted) to an employee of the Company as a signing
bonus. These shares were recorded at par value.
During 1998, the Company has issued 111,525 shares of Common Stock for
services performed by outside consultants.
Also see discussions regarding intellectual properties, agreements, and
subsequent events in Notes 4 and 9.
NOTE 8 - INCOME TAXES
The Company has federal net operating loss carryforwards for financial
statement purposes of approximately $12,500,000 at September 30, 1998,
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.
NOTE 9 - CONTRACTS & AGREEMENTS
1. A financing agreement dated January 13, 1998, as amended on February 3,
1998 was entered into between Dr. Jackie R. See, Thomas E. Waite and the
Company for the funding of the Company up to $10,000,000. The agreement as
so amended, calls for initial funding of $5,000,000 in exchange for
1,580,278 shares of Common Stock, with registration rights, calculated at
$3.164 per share (the average closing bid price per share of the Common
Stock for the 10 days ending January 12, 1998, and adjusted for the 1 for
10 reverse split effective February 2, 1998). This initial funding was
effected on February 3, 1998 by the delivery of a check for $7,901.39 and
Promissory Notes to March 31, 1999 in the principal amount of
$2,492,098.61, bearing interest at the rate of 1% above prime and secured
by the shares purchased from each of Dr. See and Mr. Waite. Subsequent
funding is at the discretion of the investors and can be purchased in
tranches of $500,000 to $2,000,000 up to an aggregate of $10,000,000,
including the initial funding, prior to April 1, 1999. The future funding
price is $6.328 per share for the next $2,500,000 and $12.626 per share for
the last $2,500,000 (as adjusted to reflect the 1 for 10 reverse stock
split effective February 2, 1998). Dr. Jackie R. See and Mr. Thomas E.
Waite are Directors of the Company. Thomas E. Waite is also President and
Chief Executive Officer of the Company. On February 3, 1998, the Company
issued 790,139 shares to each Dr. Jackie See, M.D. and Thomas E. Waite in
connection with this private placement with registration rights effective
July 28, 1998. A fairness opinion has been obtained in connection with this
Financing Agreement from HD Brous & Co., Inc., a New York Stock Exchange
member firm located in Phoenix, Arizona.
The promissory began to accrue interest at 8% on the date the registration
statement for these shares became effective (July 28, 1998). At September
30, 1998, the Company has accrued interest income of $71,815 on these
notes.
<PAGE> 18
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
2. On November 3, 1995, BTI entered into an agreement with a European
marketer, Pharma Maehle ("Pharma"), whereby Pharma was to establish the
European market for the Company's erectile dysfunction product (only the
Intraureathral Product) to develop, manufacture, sell, practice and exploit
the use of the Company's proprietary license technology. In February 1996,
an amendment to the agreement was signed to reflect the transfer of said
agreement from BTI to the Company. On March 20, 1996, Section 19.0 (Entire
Agreement) was amended to better express the intent of the parties. On
December 20, 1996, the Company notified Pharma in writing that it was
terminating the agreement for breach of contract and the implied covenant
of good faith and fair dealing inherent in all contracts by failing to
exercise reasonable diligence to exploit the technology and patent rights.
On January 13, 1997, the Company signed a Letter of Understanding with
Pharma, whereby the parties would consider working out a formal agreement
settling their disputes after seeking advice from legal council. The
agreement was to be accomplished within 10 working days from January 13,
1997, and when that did not occur, the Company again notified Pharma of
it's intent to terminate any and all agreements with Pharma referencing
previous termination notices. Pharma contends the various notices of
termination were withdrawn or ineffective and the agreement is enforceable.
However, the Company believes it has rightfully terminated the agreement
with Pharma, which has been and continues to be in breach of the agreement
in any event. The validity of the agreement is currently in dispute.
On February 19, 1998, the Company renewed it's previous notices of
termination and renoticed the termination of the licensing agreement with
Pharma, and demanded binding arbitration under Nevada law of the existing
disputes between the parties pursuant to the terms of the licensing
agreement. Pharma has retained Nevada counsel and arbitration is being
pursued. Discovery is presently scheduled to be completed by November 20,
1998 and arbitration is scheduled for the week of November 30, 1998 in
Reno, Nevada.
3. On December 1, 1997, the Company renegotiated the consulting agreement with
Martin E. Janis & Company, Inc. ("Janis"), dated December 13, 1996, whereby
Janis, a public relations agency, is to carry out an extensive financial
promotional program including public relations for the Company, in exchange
for 50,000 shares of the Company's (restricted) Common Stock plus a fee of
$5,000 a month for a period of one year beginning December 1, 1997. The
Company recorded the shares at par value.
4. On August 4, 1997, the Company entered into a consulting agreement with Dr.
Lorenz M. Hofmann, Ph.D. ("Hofmann"), whereby Hofmann is to lead the
clinical development program for liposomal Prostaglandin E-1 for the
treatment of male erectile dysfunction. The Company agreed to pay Hofmann
$15,000 per month plus 10,000 shares of (restricted) Common Stock. The
stock was recorded at par value. On May 29, 1998, the Company terminated
his agreement.
5. On August 1, 1997, the Company entered into a consulting agreement with Dr.
Irwin Goldstein, M.D. ("Goldstein"), whereas the Company has agreed to pay
Goldstein $10,000 upon signing the agreement and $4,000 per month until
March 1, 1999. Effective July 1, 1998, the Company agreed to pay Goldstein
$7,500 per month until March 1, 1999. Goldstein is a Professor of Urology
and is assisting the Company through the required FDA stages in bringing
the LLPGE-1 product to the marketplace. At September 30, 1998, the Company
had paid Goldstein $93,500.
6. On July 15, 1997, the Company entered into a consulting agreement with
Scopes-Garcia-Carlisle Advertising, Inc. ("Scopes"), whereby Scopes will
provide professional advertising and marketing, and a public relations
promotion plan to help promote the Company's sale of it's product(s) and
stock, in exchange for a fee of $3,000 per month beginning August 15, 1997.
The agreement expired January 15, 1998 and was not renewed. The Company
disputed a balance of $5,900.64 and in conjunction with the recent legal
settlement with Alexander Walker, Jr., it was agreed the Company would pay
Scopes this remaining balance. This amount of $5,900.64 was accrued at
September 30, 1998. See Note 10.
<PAGE> 19
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
7. On March 19, 1997, and again on May 15, 1997, the Company entered into an
agreement with Alexander H. Walker, Jr. ("Walker"), former General Counsel,
Director and Officer of the Company. Walker was retained as General Counsel
as to all legal matters for the Company. In addition, he was to prepare or
supervise the preparation of Securities and Exchange Commission filings,
contracts and agreements. Walker was to receive $15,000 per month plus the
issuance of Common Stock shares of the Company of up to 100,000 shares
prorated over a three-year period. In 1997, Walker received $231,678 and
issued to himself 105,200 shares of Common Stock. The shares transferred
were recorded at par value. In December 1997, the Company terminated all
agreements with Walker requesting all records, documents, agreements, the
corporate minute book, etc. be turned over to the Company immediately. See
Note 10 (d) through (h).
8. On November 6, 1997, the Company renegotiated the consulting agreement with
I.W. Miller & Co. ("Miller") dated September 18, 1997, whereby Miller will
provide investor relation consulting services for the Company for a one
year term beginning September 18, 1997 expiring September 17, 1998, in
exchange for 40,000 shares of the Company's Common Stock (with registration
rights). All prior agreements with Miller have been terminated. In November
1997, the shares transferred were recorded at $537,500, the fair market
value of the shares on the date the shares were transferred.
The Company did not renew this agreement with Miller.
9. On November 17, 1997, the Company amended the consulting agreement with
Kostech Data Corporation ("Kostech") dated December 31, 1996, whereby
Kostech will establish and maintain an ongoing Internet based investor
relations program including the reprint and republish of research material
on wire service and media, in exchange for 10,000 shares of (restricted)
Common Stock of the Company. The agreement expires December 9, 1998. The
Company recorded the shares at par value.
10. On February 23, 1998, the Company entered into a financing agreement with
an independent investor ("Investor"), under which the Investor provided
financing of $600,000 to the Company in exchange for 200,000 shares of
Common Stock of the Company. The agreement states that if on the effective
date of the Registration Statement, the closing bid price of the Company's
stock is less than $6.00 per share, the Investor is to receive additional
shares calculated by taking the difference between (a) 600,000 divided by
one-half the closing bid price of the company's Common Stock on the
effective date and (b) 200,000. In February 1998, the Company received
$600,000 and issued 200,000 shares to the Investor. The Registration
Statement was effective July 28, 1998 and the closing bid price on that day
was $6.62.
11. On June 11, 1998, the Company authorized the issuance of 30,000 shares of
Common Stock to a consultant of the Company, Medhat Gorgy, as a part of his
consultant agreement dated June 10, 1998. Of such shares, 25,000 shares of
Common Stock are entitled to registration rights under the Securities Act
of 1933. The 5,000 shares without registration rights plus 3,000 shares
with registration rights were issued on June 11, 1998. The balance of
22,000 shares is issuable monthly in lots of 2,000 shares each. The shares
issued and issuable to Mr. Gorgy are effected pursuant to the exemption
from registration under Section 4(2) of the Securities Act of 1933. The
8,000 shares issued through June 30, 1998 were valued at the closing bid
price on the day the shares were issued. The Registration Statement was
effective July 28, 1998 and the closing bid price on that day was $6.62.
<PAGE> 20
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
12. On June 19, 1998, the Company entered into a financing agreement with
Ronald E. Patterson, under which Mr. Patterson provided financing of
$249,999 to the Company in exchange for 83,333 shares of Common Stock of
the Company. If, on the effective date of the Registration Statement, the
closing bid price of the Company's stock is less than $6.00 per share, Mr.
Patterson is to receive additional shares calculated by taking the
difference between (a) 249,999 divided by one-half the closing bid price of
the company's Common Stock on the effective date and (b) 83,333. The
Registration Statement was effective July 28, 1998 and the closing bid
price on that day was $6.62.
13. On June 29, 1998 the Company entered into financing agreements with the RK
Company, under which The RK Company provided a total financing of $450,000
to the Company in exchange for 150,000 shares of Common Stock of the
Company. If, on the effective date of the Registration Statement, the
closing bid price of the Company's stock is less than $6.00 per share, the
RK Company is to receive additional shares calculated by taking the
difference between (a) 50,000 divided by one-half the closing bid price of
the company's Common Stock on the effective date and (b) 16,667. The
Registration Statement was effective July 28, 1998 and the closing bid
price on that day was $6.62.
14. On July 1, 1998, the Company entered into a settlement agreement between
GensiaSicor Pharmaceuticals, Inc. and agreed to transfer 20,000 shares of
Common Stock of the Company in exchange for the release of all claims,
demands, etc. arising from a manufacturing agreement with the Company. The
shares were transferred on July 8, 1998 and valued at $7.75 each, the
closing stock price on the date transferred.
15. On July 1, 1998, the Company entered into financing agreements with the RK
Company, under which the RK Company provided financing of $50,000 to the
Company in exchange for 16,667 shares of Common Stock of the Company. If,
on the effective date of this Registration Statement, the closing bid price
of the Company's stock was less than $6.00 per share, the RK Company was to
receive additional shares calculated by taking the difference between (a)
50,000 divided by one-half the closing bid price of the company's Common
Stock on the effective date and (b) 16,667. The Registration Statement was
effective July 28, 1998 and the closing bid price on that day was $6.62.
16. On July 7, 1998, the Company entered into a financing agreement with
Elisabeth & Samuel Valenzisi, under which Mr. and Mrs. Valenzisi provided a
total financing of $24,000 to the Company in exchange for 8,000 shares of
Common Stock of the Company. If, on the effective date of this Registration
Statement, the closing bid price of the Company's stock was less than $6.00
per share, Mr. & Mrs. Valenzisi were to receive additional shares
calculated by taking the difference between (a) 24,000 divided by one-half
the closing bid price of the company's Common Stock on the effective date
and (b) 8,000. The Registration Statement was effective July 28, 1998 and
the closing bid price on that day was $6.62.
17. The Company entered into a consulting agreement with Francis C. Pizzulli
effective June 1, 1998, whereby Mr. Pizzulli is to perform legal advice,
service and legal consulting and to retain legal counsel to serve as
counsel of record in litigation and arbitration matters to the Company, in
exchange for a fee of $10,000 per month plus 45,000 shares of the Company's
Common Stock as a signing bonus. The shares issued have registration rights
and have been included in the Registration Statement filed with the U.S.
Securities and Exchange Commission on July 20, 1998, which became effective
on July 28, 1998.
18. On July 9, 1998, the Company changed transfer agents from Atlas Stock
Transfer Co. in Salt Lake City, Utah to Olde Monmouth Stock Transfer Co.,
Inc. in Atlantic Highlands, New Jersey.
<PAGE> 21
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
19. On July 20, 1998, the Company's filed a registration statement under the
Securities Act of 1933, registering 4,166,133 shares of its Common Stock,
and was declared effective on July 28th, 1998. The closing bid price of the
stock on that day was $6.62.
20. The Company has the following office lease commitments at September 30,
1998:
a The Company occupies 2992 square feet in Lake Mary, Florida where the
corporate headquarters and general operations of the Company are
maintained. Rent of $4,268.58 is paid monthly beginning December 15,
1997 through December 31, 2000.
b The Company moved it's research & development offices from Irvine,
California to Costa Mesa, California where they currently occupy 930
square feet and pay rent of $900 monthly beginning June 15, 1998
expiring June 14, 1999.
c On July 20, 1998 the Company moved the administrative headquarters
from Reno, Nevada to Scottsdale, Arizona where all accounting
operations are maintained. They occupy 144 square feet and pay rent of
$610 monthly expiring August 31, 1999.
NOTE 10 - CONTINGENCIES
The Company is a party in certain pending or threatened legal, governmental,
administrative, or judicial proceedings that arose in the ordinary course of
business. The following includes a list of current pending or threatened
proceedings, which are believed not to affect the financial position of the
Company in a material way at this time:
(a) ERIC N. SAVAGE V. HARVARD SCIENTIFIC CORP., DR. JACKIE SEE, DOES I
THROUGH X, Case No. A381022 filed on November 10, 1997 in the District
Court, Clark County, Nevada. Eric N. Savage ("Savage"), a former
employee and officer of Harvard, alleges that pursuant to an oral
representation made in March 1994, that he was entitled to receive
150,000 shares (restated to reflect the current stock splits and
reverse stock splits), which were not authorized for issuance to him
until July 1994. Savage also alleges that the Company agreed to
backdate the issuance of the 150,000 shares to Savage to the date March
17, 1994 employment contract, which contract made no mention of any
share compensation. Savage further alleges that the defendants
restricted and delayed him from selling shares causing him financial
losses in excess of $1,250,000.
On April 2, 1998, the Company filed an answer to Savage's complaint
denying all liability. The Company denies any mention of the issuance
of shares to Savage in his employment contract. In addition, the
Company agrees there was a severance agreement entered into on December
11, 1995 and the Company agrees that there is mention of issuing
150,000 shares to Savage, however the Company denies any mention of
backdating such shares to the date of the employment contract.
Savage filed a motion for partial summary judgment on August 11, 1998
stating that there are no material facts at issue. On September 21,
1998, the motion was denied. The matter has been scheduled for trial on
the May 9, 2000 trial calendar.
<PAGE> 22
The financial statements reflect the manner in which the Company has resolved
certain litigations:
(a) On October 27,1997, the Company became a defendant in a U.S. District
Court action initiated by Wood Gundy ("Gundy"), a 7% debenture holder.
On December 26, 1997, the Company reached an agreement with Gundy
electing to convert the balance of $125,000 in 7% convertible debenture
plus accrued interest of $14,384 into 1,000,000 shares of Common Stock
of the Company. The Company recorded the shares at the fair market
value of the Common Stock on the date of the agreement, amounting to
$350,000. Approximately $210,600 was expensed to legal settlements in
1997.
(b) On December 3, 1997, the Company agreed to transfer 15,000 shares as
payment in full of an outstanding debt of $90,225 owed to Pyramid
Laboratories, Inc. ("Pyramid") by the Company for work performed on the
PaGE1 project. The Company maintains a good relationship with Pyramid
whereby Pyramid has agreed to perform a six-month stability study for
the LLPGE1 product.
(c) HARVARD SCIENTIFIC CORP. V. VIVUS, INC., Case No. CV-N-97-00562-HDM
(RAM) United States District Court, District of Nevada, filed October
1, 1997. In a letter dated August 29, 1997 Vivus, Inc. alleges that the
product and method used by Harvard Scientific for the treatment of male
erectile dysfunction infringed on a patent held by Vivus. On September
16, 1997, the Company responded advising Vivus that they did not
infringe on such patent, identifying those claim limitations not
present in the defendant's product and methods. On September 19, 1997,
Vivus again reiterated its claim of infringement against the Company.
The Company then filed this complaint for declaratory judgment of
non-infringement of the patent. Defendant filed a motion asking for
dismissal of the plaintiff's declaratory judgment action on the basis
that there is no infringement and, therefore, no actual controversy.
Vivus then asserted that its allegation of infringement was premature
because the plaintiff's use of its product and method for treating
erectile dysfunction is limited to FDA clinical trials which is a
non-infringing use under the patent laws. The Company opposed Vivus
motion to dismiss on the basis that it has taken concrete steps toward
the commercialization of its product and method. On March 16, 1998, the
court granted defendant's motion for dismissal, without prejudice,
allowing the Company to renew the action at an appropriate time.
(d) HARVARD SCIENTIFIC CORPORATION V. NEVADA AGENCY & TRUST COMPANY, a
Nevada corporation, and Does I - V, inclusive and ABC Corporations I-V,
inclusive, Case No. CV98-00017 filed in the District Court of the State
of Nevada, Washoe County, Nevada, filed on January 2, 1998. In this
action, Harvard filed a request for an injunction against Nevada Agency
& Trust Company, Harvard's former transfer agent, to relinquish all
records of the Company to a newly appointed transfer agent located in
Salt Lake City, Utah. The Company was granted the injunction, and the
records were transferred to the new transfer agent on January 6, 1998.
On September 18, 1998 settlement discussions were concluded and all
parties entered into a mutual settlement agreement whereby both parties
were to pay their own costs and attorney fees and take nothing further.
<PAGE> 23
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
(e) COGDILL VS. HARVARD SCIENTIFIC CORP., DR. JACKIE R. SEE INDIVIDUALLY
AND ON BEHALF OF HARVARD SCIENTIFIC CORP., AND NEVADA AGENCY & TRUST
COMPANY, Case No. KC-025611, filed in the Superior Court for the State
of California, in the County of Los Angeles on June 2, 1997. Cletus
Cogdill, ("Cogdill") a shareholder of the Company alleges that he
purchased the Company's Common Stock on March 17, 1994. The certificate
was issued on June 17, 1994 after the closing of a subscription
agreement, pursuant to Rule 144 under the Securities Act of 1933
whereby such stock was to be held for two years before it could be
sold. On March 18, 1996, Cogdill completed form 144 listing his
acquisition date as June 17, 1994 in an attempt to sell his stock. On
April 12, 1996, Cogdill completed a revised form 144 indicating the
shares had been acquired on March 17, 1994, meeting the two year
holding period as required by Rule 144. New certificates were approved
and issued to Cogdill but were apparently lost in the mail or lost by
Cogdill's broker. Two months later (June 10, 1996) Cogdill sold his
stock and due to the reduction in market share price during that two
month period, he claims he lost value of approximately $57,000. Cogdill
alleged that the Company committed acts of fraud, intentional
misrepresentation and negligent misrepresentation causing him financial
losses.
The Company filed their answer to his complaint on August 4, 1997,
denying both generally and specifically, each and every allegation in
the complaint. On December 29, 1997 the Company filed a cross-complaint
against Cogdill's brokerage firm, Olde discount, for indemnity. On
September 24, 1998 the parties entered into a mutual settlement
agreement whereby the Company paid to Cogdill $5,000 and the action was
dismissed with prejudice.
(f) ALEXANDER H. WALKER JR. V. HARVARD SCIENTIFIC CORP. AND JACKIE R. SEE,
M.D., Case No. 980901221 in the Third Judicial District Court in Salt
Lake City, Utah, filed on February 6, 1998. Alexander H. Walker, Jr.
("Walker"), a former officer, director and General Counsel to the
Company, alleges two causes of action: 1) breach of contract by the
Company with respect to his employment agreement, and 2) false
representations allegedly made to Walker by the Company causing him
damages in excess of $1,420,000. The Company denies liability to
Walker and initiated an action against Walker and Nevada Agency &
Trust, Co., in the District Court for the State of Nevada. (See (g)
and (h) below).
On September 18, 1998 the parties concluded settlement discussions and
entered into a mutual settlement agreement wherein Walker was to return
all outstanding share certificates to the Company (approximately
120,200 shares) from which 16,000 shares would be re-issued to Walker
with the remaining shares being returned to the Company's Treasury. A
dismissal with prejudice will be filed once all actions required by the
Settlement Agreement have been completed. See Note 13 "Subsequent
Events".
(g) HARVARD SCIENTIFIC CORP. VS. ALEXANDER H. WALKER JR. AND NEVADA AGENCY
& TRUST, CO., Case No. CV98-01959 filed on March 23, 1998 in the Second
Judicial District Court of the State of Nevada in the County of Washoe.
The Company sought to recover damages sustained by the Company as a
result of Walker's failure to perform his responsibilities as General
Counsel for the Company, and breaches of fiduciary duties owed to the
Company by both Walker and Nevada Agency & Trust, Co. In addition, the
Company sought indemnity from Walker for damages sustained as a result
of having been forced to negotiate settlements in other litigation's as
a result of Walkers actions. The Nevada Court stayed this action
pending the outcome of the jurisdictional issues raised in the Utah
litigation between the parties.
On September 18, 1998 the parties concluded settlement discussions and
entered into a mutual settlement agreement. See settlement discussions
at (f) and (h)). A dismissal with prejudice will be filed once all
actions required by the Settlement Agreement have been completed. See
Note 13 "Subsequent Events".
<PAGE> 24
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
(h) ALEXANDER H. WALKER, JR., DON STEFFENS INDIVIDUALLY AND AS TRUSTEE FOR
THE STEFFENS FAMILY TRUST, AND IAN HICKS, VS. ATLAS STOCK TRANSFER
COMPANY, HARVARD SCIENTIFIC CORP., AND JACKIE R. SEE, M.D., Case No.
98-0905858 filed on June 12, 1998 in the Third Judicial District Court
in the State of Utah in the County of Salt Lake. The action alleges
that the Plaintiffs, collectively, own approximately 270,200 shares
(adjusted for the 1 for 10 reverse stock split on February 2, 1998).
The Plaintiffs alleged that the Company fraudulently issued stop
transfer orders or placed other prohibitions to keep the Plaintiffs
from trading said shares. Plaintiffs have requested damages of
unspecified amounts for the defendant's wrongful refusal to transfer
the shares. On August 3, 1998 the Company filed a response denying each
and every material allegation in the complaint. The shares in dispute
include 1) 120,200 shares issued to Alexander H. Walker, Jr., 2)
125,000 shares issued to Don Steffens and/or the Steffens Family Trust,
and 3) 25,000 shares issued to Ian Hicks.
On September 18, 1998 the parties concluded settlement discussions and
entered into a mutual settlement agreement whereby all the Plaintiffs
are to return outstanding share certificates to the Company, at which
time 16,000 shares will be re-issued to Walker; 15,890 shares will be
re-issued to Steffens and; 3,500 shares will be re-issued to Hicks. The
remaining shares are being returned to the Company's Treasury. A
dismissal with prejudice will be filed once all actions required by the
Settlement Agreement have been completed. See (f) and (g) above and see
Note 13 "Subsequent Events".
(i) BIOSPHERE TECHNOLOGY INC. AND HARVARD SCIENTIFIC CORP. VS. DON
STEFFENS, INDIVIDUALLY AND AS TRUSTEE FOR THE STEFFENS FAMILY TRUST AND
IAN HICKS, Filed in the Superior Court for the County of Los Angeles,
State of California, Case No.BC194236, filed on July 14, 1998. On April
21, 1998, the Company issued a Demand Letter to Don Steffens
("Steffens"), a former officer and director of the Company, for the
return of 125,000 shares of its Common Stock issued to him in 1997 plus
the return of $100,000 cash paid to him on April 18, 1997. The shares
were issued to Steffens in consideration of his performance as an
officer and director of the Company, and were advanced in accordance
with his employment contract, for the period beginning May 1997 through
May 2000. Steffens resigned his positions as officer and director of
the Company on November 14, 1997. Ian Hicks ("Hicks") was issued 25,000
shares of Common Stock in consideration of promised faithful discharge
of officer and director duties. Hicks resigned in May 1997. During such
times as they held their positions, both Steffens and Hicks undertook
various actions, which the Company believes, were in breach of their
fiduciary duty.
On September 18, 1998 the parties concluded settlement discussions and
entered into a mutual settlement agreement wherein Steffens and Hicks
are to return outstanding share certificates to the Company from which
15,890 shares of Common Stock would be re-issued to Steffens and 3,500
shares of Common Stock would be re-issued to Hicks. The remaining
shares returned to the Company's Treasury. A dismissal with prejudice
will be filed once all actions required by the Settlement Agreement
have been completed. See (f), (g) and (h) above and Note 13 "Subsequent
Events".
(j) HARVARD SCIENTIFIC CORP. V. SPRINGRANGE INVESTMENT GROUP, Case No. 98
civ. 0735 (DC), filed in the United States District court, Southern
District of New York, filed on February 3, 1998. Springrange Investment
Group ("Springrange") was the holder of 6% Convertible Debentures
issued pursuant to the Securities Purchase Agreement dated March 21,
1997. The Company alleges that Springrange had breached its
representations under the agreement by taking a short position and
otherwise manipulating the price of the Company's Common Stock. The
Company is seeking to recover damages arising from Springrange's breach
of contract and misrepresentations. On January 28, 1998, the investor
of the 6% Convertible Debenture gave notice to the Company to convert
into Common Stock $250,000 of principal plus interest calculated at
$12,863. The conversion calculated at 80% of the market price, called
for the transfer of 525,726 shares of Common Stock to the investor. On
January 29, 1998, the investor again gave notice to the Company to
convert into Common Stock $250,000 of principal plus interest
calculated at $12,904. The conversion called for the transfer of
486,859 shares of Common Stock to the investor. The Company has not
honored the above requests.
<PAGE> 25
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
On February 18, 1998, Springrange filed a motion to dismiss the
Complaint and to enjoin the Company's Financing Agreement with Thomas
E. Waite and Dr. Jackie R. See (see Note 6 and 8). Springrange also
sought injunctive relief requiring the Company to deliver shares of
Common Stock pursuant to notices of conversion filed in January 1998.
The Company opposed the motion and requested injunctive relief. In
early March 1998, a hearing on the motion was held and the judge
granted Springrange's motion to dismiss the Complaint, with leave to
amend in 30 days, and in view of the dismissal, denied Springrange's
motion for injunctive relief. On April 3, 1998, the Company filed a
first amended Complaint against Springrange to recover its damages
arising from Springrange's breach of contract, misrepresentations and
stock manipulation. Springrange is free to pursue its claims
independently or in this action.
On August 17, 1998 the parties entered into a mutual Settlement
Agreement and Release whereby the Company agreed to transfer $1,800,000
to Springrange in exchange for full and final settlement of all claims
asserted in all the legal actions against the Company, its Board of
Directors and management by Springrange. The Company agreed to issue
600,000 shares to a third party purchaser in exchange for $1,800,000.
The Terms of the agreement were subject to a ruling by the presiding
judicial authority as to their fairness. On September 23, 1998 a
fairness hearing was held in the New York action approving the terms of
the settlement agreement and the exemption of the 600,000 shares from
registration. The Company issued 600,000 shares of its Common Stock to
a third party who purchased them for $1,800,000, which, in turn, was
paid to Springrange for full and final settlement of all claims.
The shares were issued pursuant to the court order in this action and
the exchange of stipulations dismissing with prejudice the Nevada
action (see (k) below) and the New York action. Also see Note 9.
(k) SPRINGRANGE INVESTMENT GROUP LTD. VS. HARVARD SCIENTIFIC CORP., THOMAS
E. WAITE, DR. JACKIE R. SEE, MARTIN J. HOLLORAN, ROBERT T. HAYDEN,
CURTIS A. ORGILL, Case No. A385912 filed on March 17, 1998 in the
Eighth Judicial Court for the State of Nevada and the County of Clark.
Springrange is seeking to enjoin and nullify the Financing Agreement
between the Company and Mr. Waite and Dr. See. On March 18, 1998,
Springrange filed an ex-parte Application for Temporary Restraining
Order and a Motion for Preliminary Injunction. On March 23, 1998, the
Court issued a Temporary Restraining Order against the Company, Mr.
Waite and Dr. See. On March 31, 1998, the Company filed a motion to
Vacate the Temporary Restraining Order requesting the imposition of
sanctions against Springrange and its counsel for untruthful
representations made in Springrange's application for a Temporary
Restraining Order. The Company also moved to have the action
transferred from Las Vegas, Nevada to Reno, Nevada. On April 6, 1998,
the Nevada District Court dissolved the Temporary Restraining Order,
transferred the litigation to Washoe County, imposed a sanction award
against Springrange in the amount of $11,095.76; and continued any
determination with regard to Springrange's motion for preliminary
injunction.
On August 17, 1998 the parties entered into a mutual Settlement
Agreement and Release whereby the Company agreed to transfer $1,800,000
to Springrange in exchange for full and final settlement of all claims
asserted in all the legal actions against the Company, its Board of
Directors and management by Springrange. The Company agreed to issue
600,000 shares to a third party purchaser in exchange for $1,800,000.
The Terms of the agreement were subject to a ruling by the presiding
judicial authority as to their fairness. On September 23, 1998 a
fairness hearing was held in the New York action approving the terms of
the settlement agreement and the exemption of the 600,000 shares from
registration. The Company issued 600,000 shares of its Common Stock to
a third party who purchased them for $1,800,000, which, in turn, was
paid to Springrange for full and final settlement of all claims.
<PAGE> 26
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
The shares were issued pursuant to the court order in this action and
the exchange of stipulations dismissing with prejudice the Nevada
action and the New York action (see (j) above). Also see Note 11.
NOTE 11 - 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 are 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. Market price is defined as
the average closing bid of the Common Stock on the five (5) days immediately
preceding March 21, 1997 or the actual 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. In
addition, at the time of issuance, the Company accounted for the 20% discount to
market of $1,000,000 as additional interest expense and paid-in-capital.
Issuance costs of $625,000 related to the first $5,000,000 principal amount of
6% Convertible Debentures sold in March 1997 were deferred and are being
amortized on a straight-line basis through March 31, 1998. On January 6, 1998,
the investor served a conversion notice for the sum of $250,000 of the principal
amount plus $11,917 of interest expense, for the issuance of 1,036,064 shares of
Common Stock on January 15, 1998. Springrange has submitted two additional
conversion notices: 1) January 28, 1998 for the conversion of $250,000 principle
plus interest, and 2) on January 29, 1998 for the conversion of $250,000
principle plus interest. The Company has not honored these requests.
On September 23, 1998, the Company came to an agreement with Springrange and the
courts approved the terms of the settlement agreement. The Company issued
600,000 shares of its Common Stock to a third party who purchased them for
$1,800,000, and, in turn, paid $1,800,000 to Springrange for full and final
settlement of all claims (see Note 10, (j) and (k)).
On September 23, 1998, $2,450,000 of the Debenture plus $75,661 interest on the
Debenture had been converted into 385,831 shares of the Company's Common Stock.
The Company recorded the transfer of 600,000 shares of Common Stock valued at
$1,800,000, eliminating the debt balance of $2,550,000 plus accrued interest of
$218,901, with the net of $968,901 booked to additional paid in capital.
<PAGE> 27
HARVARD SCIENTIFIC CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
Based on Unaudited Financial Statements at September 30, 1998 and
Audited Financial Statements at December 31, 1997
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 continued existence is
dependent upon its ability to resolve its liquidity problems, principally by
obtaining additional equity capital and through the sale of its products or the
licensing of its products. If additional capital is not secured, then there is
substantial doubt about the Company's ability to continue as a going concern.
See Note 9 regarding agreements arranged by the Company and the sale of stock by
the Company.
NOTE 13 - SUBSEQUENT EVENTS
1. HARVARD SCIENTIFIC CORPORATION VS. DAVID E JORDAN, Case No. 98-2031-CA-16-P
filed in the circuit court of the 18th Judicial Circuit, in Seminole
County, Florida, filed on October 1, 1998. David E. Jordan ("Jordan") was a
consultant to the Company. On May 15, 1997, the Board of Directors
considered a resolution engaging Jordan for his services. At that time the
Company discussed a compensation of $15,000 per month plus 1,000,000 shares
of the Company's Common Stock. A Consulting Agreement was never
consummated. Despite the fact that no agreement was consummated, stock
certificates evidencing 1,000,000 shares of the Company's Common Stock were
issued and delivered to Jordan on June 6, 1997. On or about June 17, 1997,
the Company cancelled the 1,000,000 shares issued and delivered to Jordan.
In April 1997, prior to the issuance date of the 1,000,000 shares, Jordan
marketed and sold portions of these shares. Jordan also presented himself
as an agent of the Company in the sale of these shares when, indeed, he had
never received the authority to do so. The Company claims an action for
damages, injunctive relief and declaratory judgement in excess of $15,000.
2. As part of a mutual settlement agreement between Alexander Walker Jr.
("Walker"), Don Steffens ("Steffens") and Ian Hicks ("Hicks") on October
14, 1998, collectively returned 270,200 shares of Common Stock to treasury,
including 120,200 shares from Alexander Walker, 125,000 shares from Don
Steffens and 25,000 shares from Ian Hicks (see Note 10 "Contingencies" (g)
through (i)). In addition, upon the return of those shares the Company
agreed to re-issue 16,000 shares to Walker, 15,890 shares to Steffens and
3,500 shares to Hicks. These shares were re-issued on October 14, 1998.
A dismissal with prejudice is in the process of being filed, as required
by the Settlement Agreement.
<PAGE> 28
ITEM 2. MANAGEMENT'S DISCUSSION ANALYSIS AND PLAN OF OPERATION
The discussion contained in this Item 2 is "forward looking", as that term is
identified in, or contemplated by, Section 27A of the Securities Act and Section
21E of the Exchange Act. Accordingly, actual results may materially differ from
projections. Additional information concerning factors that could cause actual
results to differ materially is readily available in this section.
OVERVIEW:
Harvard Scientific Corp. is a biopharmaceutical drug development company.
The Company's corporate objective is to utilize medically researched and
developed drug substances, determine the ability of these substances to be
encapsulated in liposomes and to determine the potential market for such
products. The Company intends to conduct and conclude, either on its own or with
the assistance of an industry partner, all clinical testing necessary for
regulatory approval of such products from the U.S. Food and Drug Administration
("FDA") and/or similar regulatory agencies in foreign countries in order to
initiate marketing and establish distribution channels for its products. The
Company is currently focused on three of its five products, each of which uses
the Company's patented formula of lyophilized liposomal Prostaglandin E1
("LLPGE1"): (i) an intraurethrally administered treatment for male erectile
dysfunction ("Male Intraurethral Product"), and (ii) a topically applied cream
treatment for male sexual disorder ("Male Topical Product"), and (iii) a
topically applied treatment for female sexual arousal disorder ("FSAD") in both
a gel-base and an aqueous solution spray ("Female Topical Product").
The Company also has acquired the rights for an oral delivery treatment
whereby lyophilized liposomal delivery of Apomorphine will be developed to treat
male and female sexual disorder. A capsule which contains lyophilized liposomal
Apomorphine is taken orally by the patient. The capsule is designed to pass
through the stomach (acidic pH) without degradation or uptake of the drug and
into the small intestine (basic pH) whereby the capsule is dissolved and
Apomorphine is then gradually released from the liposome. The Company believes
this will alleviate the undesired side-effects of nausea and vomiting normally
associated with Apomorphine.
The Company plans to license each of these products to pharmaceutical
companies for marketing and worldwide distribution upon approval by the U.S.
Food and Drug Administration and/or other foreign regulatory agencies. The
Company is currently in discussions with several globally recognized
pharmaceutical companies regarding licensing of its LLPGE1 products for male and
female sexual disorder treatment. During the last ninety days, the Company has
entered into Letter(s) of Intent with two such companies and is optimistic that
a licensing agreement(s) will result from these efforts in the fourth quarter of
this year.
The Company believes that a sizable market already exits for both male and
female sexual disorder and that this market will continue to expand as effective
products are approved for treatment. The market for treating female sexual
arousal disorder ("FSAD") is relatively new when compared to the male sexual
disorder treatment market. In fact, certain world renowned authorities and some
market analysts are suggesting that the market for FSAD will surely equal, if
not surpass, the market for male sexual disorder. Independent studies by Dr.
Irwin Goldstein, a Professor and Urologist at Boston University School of
Medicine and a Consultant to the Company, found that approximately 10-million
women in the United States, between the ages of 50 and 74, reported a lack of
lubrication on 229-million sexual intercourse occasions and 58.5 percent of the
260 female partners of impotent men he surveyed were affected with some form of
sexual disorder. The Company believes that its Female Topical Product (in which
LLPGE1 is reconstituted into either a gel formulation or an aqueous solution
(liquid) spray and then applied topically to the female's vaginal area) will
provide a solution to this problem by enhancing blood flow within the clitoral
and vaginal tissue to stimulate nerve endings for increased sensitivity in the
female sex organs. The Company believes this should facilitate lubrication, thus
enabling greater satisfaction and possibly sexual orgasm for the female.
The Company is moving forward as rapidly as possible with implementation of
its protocols for gaining U.S. regulatory approval. During September, toxicity
studies were completed on female rabbits and the results showed no toxicity and
no redness or irritation at any dose or with the gel itself when observed
visually each day. Therefore, there was no gross (clinical) toxicity in the
LLPGE1 gel base used. The results also showed the virtual microscopic absence of
inflammation at the highest dose administered. In fact, microscopic inflammation
<PAGE> 29
was significantly less at each escalating dose, including 1.5 mg, than when the
rabbits were only given placebo gel, suggesting that the application process
itself for 14 consecutive days caused very minor microscopic but not clinically
apparent inflammation which was reduced by the increased blood flow into the
area induced by the LLPGE1. Additionally, very minor microscopic inflammation at
the highest dose administered was reduced by the increased blood flow into the
area induced by the LLPGE1. The Company is preparing to submit its application
for an IND in connection with the Female Topical Product to the U.S. Food and
Drug Administration in October 1998.
The Company's Male Topical Product is a local treatment and will be
administered directly to the end of the penis (glans) as a lotion or as a liquid
spray. It is very similar in composition to the Company's new treatment product
for FSAD and compliments the aqueous solution Male Intraurethral Product.
The Company has named Dr. Goldstein as its Principal Investigator in trials
involving the use of the Company's patented LLPGE1 for the treatment of both
male and female sexual disorder products. On August 27, 1998, the Company
submitted an Investigational New Drug Application ("IND") to the U.S. Food and
Drug Administration for Lyophilized Liposomal Prostaglandin E1, as an
intraurethrally delivered treatment for male sexual disorder. On August 28,
1998, the FDA assigned IND Number 56,840 to the Company. Simultaneous to
receiving the new IND, the Company withdrew IND Number 50,502. Dr. Goldstein
will conduct a Phase I pilot study for publication in parallel with the Phase II
clinical trials for treating male sexual disorder under an Investigational
Review Board ("IRB") at Boston University.
The Company's core technology is covered by a U.S. patent. On August 18,
1997, the Company received a Notification of Allowance for Patent from the U.S.
Patent and Trademark Office for "PGE1 CONTAINING LYOPHILIZED LIPOSOMES FOR USE
IN THE TREATMENT OF ERECTILE DYSFUNCTION". This is the active drug agent used in
the Company's Male Intraurethral, Male Topical and Female Topical Products. The
U.S. Patent and Trademark Office issued Patent Number 5,718,917 to the Company
on February 17, 1998.
There can be no assurance that any of the Company's products will be
commercially successful even if they are scientifically successful and gain FDA
and other regulatory approval, none of which is assured.
During fiscal years 1994 through 1997 and through the 3rd quarter of 1998,
the Company's activities consisted primarily of raising capital, identifying a
core management team, developing a patent application for LLPGE1 and the
submission of this application to the U.S. Patent and Trademark Office, which
resulted in the issuance of Patent No. 5,718,917, concluding manufacturing scale
up and initial clinical trials and formulating both a commercialization and
clinical development strategy. The Company has considered and evaluated
additional products and market potential for those products in order to enhance
its own current product portfolio and intends to continue this strategy for
future corporate development.
The Company believes that its strategic plan, which was launched by a new
management team in November 1997, will be successful, although there is no
assurance that it will be. The Company's management team is currently
established, and it is not expected that the Company will need to hire any
additional employees during the next six months. Since the middle of November
1997: (i) the Company's International Patent Application, No. PCT/US96/18820
(International Publication No. W097/2234) for LLPGE1 received a favorable
Preliminary Examination Report, from the U.S. Patent and Trademark Office
Examiner acting as the International Preliminary Examining Authority, (ii) a
study utilizing gamma radiation instead of standard 0.2 micron filters to
sterilize the chemical components used in the Company's products proved
successful in the production of "GMP" (Good Manufacturing Practice) product,
which should lead to substantial cost savings, (iii) a financing agreement to
provide funds of up to $10,000,000 was signed between the Company and its two
largest stockholders, Thomas E. Waite, President and Chief Executive Officer of
the Company, and Jackie R. See, M.D., F.A.C.C., Director of Research and
Development, (iv) financing agreements of independent investors brought in a
total of $1,373,999 to the Company to be used toward working capital, (v)
stability studies on LLPGE1 conducted with the collaborative efforts of Pyramid
Labs, Inc. in Costa Mesa, California have proven that LLPGE1 remains stable
without any degradation and chemical breakdown at room temperature for at least
12-months. These stability studies are ongoing in order to determine the exact
shelf life for the Company's products at room temperature, (vi) a topically
applied treatment product (gel-base and liquid spray) is being developed for
female sexual arousal disorder, (vii) a topically applied treatment product is
being developed for male sexual disorder, (viii) the rights were acquired for an
oral delivery treatment method for both male and female sexual disorder whereby
<PAGE> 30
a capsule of Apomorphine in lyophilized liposomal form will be taken orally by
the patient, (ix) toxicity studies and dynamic magnetic resonance imaging
("MRI") studies have been completed by the Company for its female sexual arousal
disorder treatment product, (x) through a settlement agreement, the company will
recapture a net of 234,810 shares of its common stock (for return to treasury),
which were previously issued to past officers and directors Walker, Steffens and
Hicks, and (xi) a settlement agreement was reached with Springrange Investment
Group, Ltd. whereby the Company believes that its shareholders saved
approximately $1-million.
Over the next 12 months, the Company's primary focus will be to
strategically implement its business plan as it pertains to furthering the
development of both male and female treatment products for sexual disorders and
to secure a globally recognized pharmaceutical company as a licensing partner
for its products. The Company anticipates it will: 1) submit its IND for its
FSAD product to the FDA in October and commence clinical trials under this IND
as allowed by the FDA, 2) proceed with phase II/III clinical trials and product
validation of its Male Intraurethral Product to conform to the regulatory
process of the FDA, 3) petition the FDA for an IND for its Male Topical Product
as soon as possible and initiate clinical trials when the FDA approves the right
to do so, 4) continue development with the Male and Female Oral Products, 5)
continue monitoring patent applications, and 6) seek to identify other companies
with similar technologies or companies seeking new proprietary products in order
to strengthen their own existing market position and formulating strategic
alliances for joint venture arrangements, licensing and distribution agreements,
research and development agreements and other collaborative arrangements to
assist in the development, marketing and distribution of the Company's products.
It is the belief of the Company that if an agreement with a major industry
partner can be secured, the possibility exists that the regulatory process for
its products could be expedited. This should enhance the Company's ability to
bring its products to market more quickly, thus enabling the Company to make
fuller use of the remaining life of its patent for LLPGE1 which was issued
February 17, 1998. Without the benefit of an industry partner, the Company
believes an 18 to 24 month time-line to obtain regulatory approval of the Male
Intraurethral Product is probable, but there can be no assurance that the
product will receive FDA approval in that time span, if ever.
The Company's future success is dependent upon its ability to raise
additional funds to complete the commercialization process for its Female and
Male Topical Products, Male Intraurethral Product and its other products either
through strategic agreements (i.e. licensing, distribution or joint venture) or
through private placements or public issuance of the Company's common stock. In
the past, the Company has relied upon the private purchase of its securities by
accredited investors to raise such funds and may have to rely upon this practice
in the future. There can be no guarantee that the investors who have been
interested in purchasing the Company's securities in the past will be interested
in doing so in the future, or that alternative investors will be found, or that
public financing or collaborative arrangements will be available on terms
satisfactory to the Company.
The Company does not expect to purchase or sell any significant equipment over
the next ninety days.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDING SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
During the first and second quarters of 1997, the Company began spending
for research & development ("R&D") which was initially booked to General &
Administrative ("G&A") expense. During the third quarter 1997, these costs were
reclassified to accurately reflect expenditures in R&D. Furthermore, a funding
fee of approximately $625,000 previously recorded was re-classed and amortized
over 12 months beginning in September 1997. Consequently, by comparison, for the
three months ending September 30, 1997, the records show a distorted amount in
G&A due to these reclassifications incurred during that period. As a result, the
costs for the three months ending September 30th should be reviewed by comparing
the overall Total Operating Expense for the three months of $1,100,841 in 1998
less the reclassification of $625,000 for a total of $475,841 vs. $121,449 in
1997, for an increase of approximately $354,000 in 1998 over 1997. This increase
is primarily a result of increased salaries and consulting fees of approximately
$157,000 and an increase in legal fees of approximately $197,000.
<PAGE> 31
With exception to the reclassifications discussed above, management
anticipates that such general and administrative expenses will continue to be
incurred in similar amounts for the balance of 1998 as the Company obtains
additional investment capital and expand its operations. The Company expects
legal expenses to increase for during the balance of 1998 as the legal bills
begin to finalize, as a result of recently resolving several pending litigation
matters which the Company was recently involved.
For the three months ending September 30, dividend income decreased from
1997 to 1998 by approximately $15,700 and interest income increased by
approximately $72,500 as a result of accrued interest income on the Promissory
Note from Dr. Jackie R. See and Thomas E. Waite. In addition, interest expense
decreased in the third quarter 1998 by approximately $46,000 as a result of the
reduction of the 6% convertible Debenture. Overall, the Company has continued to
make efforts to reduce costs and increase operation efficiency. These savings
are expected to be reflective throughout the balance of the year.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDING SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
During the period ending September 30, 1998 and September 30, 1997, the
Company had no net sales, and, accordingly, had no cost of sales. During that
time, the Company has remained focused on completing the required regulatory
review process for its male intraurethral product and introducing the new male
and the new female sexual dysfunction products. The Company intends to focus on
promotions of their products only after completing the regulatory review
process.
For the nine months ending September 30, 1998, General and Administrative
Expenses decreased by approximately $196,000 over 1997, a direct result of
identifying a core management team in November 1997 and strategically
eliminating unnecessary costs. Research and Development remained materially
consistent, however Depreciation and Amortization decreased by approximately
$275,000 in 1998 over 1997 as a result of the debenture issuance cost which
became fully depreciated in March 1998. Overall, the Total Operating Expenses
resulted in a decrease of $502,871 in 1998 over 1997, a positive affect of the
cost-saving measures implemented beginning November 1997.
As discussed above, dividend income and interest expense were greater in
1997 by $26,301 and $1,154,270, respectively, a direct result of the 6%
Convertible Debenture. The Debentures are 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. At the time of issuance (March 1997), the Company
accounted for the 20% discount to market of $1,250,000 as additional interest
expense and paid-in-capital. The balance of the deferred issuance cost on the 6%
Debenture of $156,250 was amortized within the first quarter of 1998.
At the end of the third quarter of 1998, the Company reported total assets
of $6,307,049. This compares with total assets at December 31, 1997 of
$2,227,677. The primary reason for this increase in assets is a result of the
two promissory notes, totaling $4,984,000 (described above).
The Company's total current liabilities for the third quarter of 1998
decreased by $2,802,947 over the total current liabilities at December 31, 1997.
The difference is primarily due to a settlement agreement resolved in September
1998, eliminating the $2,800,000 principal balance of the 6% Convertible
Debentures (see Part I, Notes to the Financial Statements, Note #10 (j) and (k),
and Note #11).
The Company issued a total of 2,863,409 shares of common stock during the
first nine months of the year ending September 30, 1998, mostly attributed to
the Debentures converted during January 1998 (103,606), securing four additional
financing arrangements (2,638,278), shares issued to new directors (10,000) and
shares issued for services and fees (111,525). The Company anticipates that it
will continue the practice of issuing shares of its common stock as compensation
for services rendered to the Company.
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
The Company's major financial transaction for 1997 incurred during the
first quarter was the issuance of $5,000,000 aggregate principal amount of 6%
Convertible Debentures on March 21, 1997, resulting in a net receipt of
$4,375,000 by the Company for its general operating account. During 1997, the
majority of the cash used in the Company's operations came from the issuance of
the 6% Convertible Debentures. During the first quarter of 1998, the Company
managed to secure two additional financing arrangements: (1) the Company's two
principal stockholders, Thomas E. Waite, President and Chief Executive Officer,
and Jackie R. See, M.D., F.A.C.C., Director of Research and Development, entered
into the Financing Agreement pursuant to which on February 3, 1998 they each
made payments of $7,901.39 and gave a promissory note of $2,492,098.61 due March
31, 1999, with a right to purchase an additional $5,000,000 of the Company's
Common Stock together, and (2) O. Lee Tawes III, a person otherwise not
affiliated with the Company, purchased 200,000 shares of the Company's Common
Stock for $600,000, with the right to receive additional shares of Common Stock
of the Company if the price per share is below $6.00 when the shares are
registered with the U.S. Securities and Exchange Commission. (The Company's
Registration Statement filed on July 20, 1998 became effective on July 28, 1998,
and the closing bid price on that day was $6.62 per share). During the second
quarter of 1998, two additional investors, under the same terms as Mr. Tawes,
purchased shares of Common Stock of the Company: 1) Ronald E. Patterson
purchased 83,333 shares for $249,999, also with the right to receive additional
shares of Common Stock of the Company if the price per share is below $6.00, and
2) RK Company purchased 150,000 shares for $450,000, with the right to receive
additional shares of Common Stock of the Company if the price per share is below
$6.00. Total monies raised in the second quarter of 1998 were $699,999. During
the third quarter of 1998, three additional investments were made, under the
same terms as described above, whereby they purchased shares of Common Stock of
the Company for cash: 1) RK Company purchased 16,667 shares for $50,000, 2)
Elisabeth and Samuel Valenzisi purchased 8,000 shares for $24,000, and 3) O. Lee
Tawes purchased 600,000 shares for $1,800,000, in lieu of a litigation
settlement (see Part I, Notes to the Financial Statements, Note #10 (j) and (k),
and Note 11. Total monies raised in the Third quarter of 1998 were $1,874,000.
To complete the regulatory process for its products, the Company estimates
it will need as much as $12-million for the Female Topical Product, potentially
$10-million for the Male Topical Product and as much as $12-million for the Male
Intraurethral Product. For the next six months, expected costs to be incurred
for research & development is $1,983,000, which includes clinical trials on the
Male Intraurethral Product as well as the Male and Female Topical products. Up
to an additional $20-million may be required to complete testing and bring to
market the Company's additional products. However, regulatory and testing costs
per product for these additional products are projected to be lower due to data
generated by the CMC, animal and clinical data related to the Male Intraurethral
Product.
The Company expects to obtain capital funds either from the issuance of
common stock or debt. It is expected that external sources will be available to
provide these funds, but there can be no guarantees of such funding.
<PAGE> 33
PART II - OTHER INFORMATION
ITEM NO. 1. LEGAL PROCEEDINGS.
Registrant hereby references the description of legal proceedings previously
reported in the Registrant's (1) Form 10-QSB for the first quarter 1998 filed
with the U.S. Securities and Exchange Commission on May 15, 1998, (2)
Registration Statement, form SB-2, filed with the U.S. Securities and Exchange
Commission on July 20, 1998, effective July 28, 1998, and 3) Form 10-QSB for the
second quarter 1998 filed with the U.S. Securities and Exchange Commission on
August 14, 1998.
The Registrant hereby makes reference to Part I of this Form 10-QSB Item 1
Financial Statement Footnote No. 9 "Contingencies" under the caption Resolved
Litigation Proceedings (a) - (k), and Part I Item 1 Footnote No. 10 "Convertible
Debentures" and Footnote No. 13 "Subsequent Events", for information on legal
proceedings terminated and considered a reportable event during this third
quarter of 1998 filing or a reportable event reported in a prior filings in
which there has been a material development during the third quarter.
ITEM NO. 2. CHANGES IN SECURITIES.
The Registrant hereby makes reference to Part I of this Form 10-QSB Item 1
Financial Statement Footnote No. 9 "Contingencies" under the caption Resolved
Litigation Proceedings (j) - (k), and Part I Item 1 Footnote No. 10 "Convertible
Debentures", for information on 600,000 shares issued to a third-party investor
in a legal settlement. A fairness hearing held September 23, 1998 approved these
shares to be exempt from registration.
ITEM NO. 3. DEFAULTS UPON SENIOR SECURITIES.
The Registrant hereby references the description of any Default upon Senior
Securities regarding the securities of the Registrant to the financial
information provided in Part I of this Form 10Q-SB. Reference should be made to
the disclosure provided in Part I in the "Notes to the Financial Statements",
Note 9 "Contingencies" No. (j) and (k), and in Note 10 "Convertible Debentures".
ITEM NO 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) An Annual Meeting of the Stockholders of registrant was held on July 9,
1998.
(b) The meeting involved the election of the following directors:
1) Thomas E. Waite
2) Dr. Jackie R. See
3) Curtis A. Orgill
4) Robert T. Hayden
5) Martin J. Holloran
(c) At the Annual Meeting the votes was with respect to the election of
directors and each other matter considered was as follows:
1) The Election of Directors of 4,611,721 shares voted of the 5,240,547
shares issued and outstanding on the record date of May 29, 1998, of
which: 4,592,345 voted "FOR" the election of Thomas E. Waite and 19,535
shares voted to "WITHHOLD" for Thomas E. Waite; 4,598,841 voted "FOR"
the election of Jackie R. See, M.S. F.A.C.C. and 12,880 shares voted to
"WITHHOLD" for Jackie R. See; 4,597,721 shares voted "FOR" the election
of Curtis A. Orgill and 14,000 shares voted to "WITHHOLD" for Curtis A.
Orgill; 4,597,671 shares voted "FOR" the election of Martin J. Holloran
and 14,050 shares voted to "WITHHOLD" for Martin J. Holloran; and
4.,597,625 voted "FOR" the election of Robert T. Hayden and 14,096
shares voted to "WITHHOLD" for Robert T. Hayden.
<PAGE> 34
2) The Financing Agreement between Dr. Jackie R. See and Thomas E. Waite
and Registrant (see Note 8, #1 in the Notes to the financial statements
in Part I of this filing). 3,568,928 voted "FOR", 167584 voted
"AGAINST", and 7,193 voted to "ABSTAIN".
3) Amendment of the Company's Articles of Incorporation to increase the
number of authorized shares of Common Stock from 10,000,000 to
100,000,000 shares, and to authorize 10,000,000 shares of serial or
"blank check" Preferred Stock. 3,560,305 voted "FOR", 175,463 voted
"AGAINST", and 7,937 voted to "ABSTAIN".
4) Ratification of the appointment of Ronald D. Simpkins and Associates,
CPA, P.A. as the Company's principal accountants to audit the Company's
financial statements for the fiscal year ending December 31, 1998.
4,584,616 voted "FOR", 21,065 voted "AGAINST", and 7,000 voted to
"ABSTAIN".
ITEM NO. 5. OTHER INFORMATION.
None.
ITEM NO. 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
(3) (i) Articles of Incorporation , including amendments to April 30,
1996, incorporated by reference ***
Amendments to Articles of Incorporation June 18, 1996, July
9, 1996 and July 13, 1998. *
(ii) By-laws - incorporated by reference ***
(4) Instruments, defining the rights of holders, incl.
indentures *, **
(10) Material contracts:
(i) Securities Purchase Agreement dated March 21, 1997 between
the Registrant and Springrange Investment Group, Ltd. ****
(ii) Financing Agreement between Thomas E. Waite and Dr.Jackie R.
See and the Company- incorporated by reference *****
(iii) Employment Contract between Thomas E. Waite and the Company*
(27) Financial Data Schedule -Attached
* Incorporated by reference from the Registrant's Registration
Statement Form SB-2 filed July 20, 1998 with the U.S. Securities and
Exchange Commission, effective July 28, 1998.
** Incorporated by references from the Registrant's Proxy Statement 14D
filed with the U.S. Securities and Exchange Commission on June 5, 1998,
for the annual shareholder meeting held July 9, 1998.
*** Incorporated by reference from the Registrant's Registration
Statement on Form 10-SB filed on April 30, 996.
**** Incorporated by reference from the Registrant's Registration
Statement on Form SB-2 filed on April 21, 1997, and Amendments Nos.
1,2,3 and 4 thereto, which became effective on August 14, 1997.
***** Incorporated by reference to Form 8-K filed on January 26, 1998.
B. Reports on Form 8-K.
None filed during this reporting period.
<PAGE> 35
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: October 14, 1998
HARVARD SCIENTIFIC CORP
(Registrant)
Date: October 14, 1998 By: /s/Thomas E. Waite
--------------------- -------------------------------
Thomas E. Waite
President & CEO
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