UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998 Commission File Number: 0-24378
FIRST SCIENTIFIC, INC.
Exact name of small business issuer as specified in its charter).
DELAWARE 33-0611745
--------------------------------- -------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1877 West 2800 South, Suite 200
Ogden, Utah 84401
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including Area Code: (801) 393-5781
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
State the number of shares outstanding of each of the issuer's classes
of common equity as of the close of the period covered by this report.
18,815,241 Shares of common stock, $.001 par value
-1-
<PAGE>
FIRST SCIENTIFIC, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (unaudited) -
September 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations (unaudited)
for the three months and the nine months ended September
30, 1998 and September 30, 1997 and for the Cumulative
period from April 30, 1990 (date of inception) through
September 30, 1998 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1998 and September
30, 1997 5
Notes to Financial Statements (unaudited) 6
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION
Other Information 14
Signature Page 17
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<PAGE>
FIRST SCIENTIFIC, INC.
(FORMERLY LINCO INDUSTRIES, INC.)
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, December 31,
1998 1997
------------- ------------
Current Assets
Cash $ 744,713 $ 7,938
Trade receivables 24,162 8,425
Stock subscriptions receivable 763,903 -
Inventory 21,998 29,881
Prepaid expenses 14,000 2,934
------------ -----------
Total Current Assets 1,568,776 49,178
Property and Equipment, Net 8,001 618
Purchased Technology, Net 131,250 -
------------ -----------
Total Assets $ 1,708,027 $ 49,796
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 15,585 $ 2,399
Customer deposits 33,750 -
Accrued interest payable 41 23,171
Deferred salary payable 20,000 83,877
Deferred income tax payable 61,881 -
Notes payable, current portion - 81,688
Related party notes payable 17,905 106,939
------------ -----------
Total Current Liabilities 149,162 298,074
------------ -----------
Long-Term Notes Payable - 74,600
------------ -----------
Stockholders' Deficit
Preferred stock 1,000,000 shares authorized, no
shares outstanding - -
Common stock $.001 par value, 50,000,000
shares Authorized; issued and
outstanding: 18,815,241
shares at June 30, 1998 and 10,467,581
shares at December 31, 1997 18,588 10,468
Additional paid-in capital 5,696,403 148,887
Unearned compensation (174,194) -
Deficit accumulated during the
development stage (3,981,932) (482,233)
----------- -----------
Total Stockholders' Deficit 1,558,865 (322,878)
----------- -----------
Total Liabilities and Stockholders' Deficit $ 1,708,027 $ 49,796
=========== ===========
The accompanying notes are an integral part of these financial statements.
FIRST SCIENTIFIC, INC.
(FORMERLY LINCO INDUSTRIES, INC.)
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
From
April 30, 1990
(Date of
Inception)
For the Three Months For the Nine Months through
Ended September 30, Ended September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 60,889 $ 5,126 $ 68,501 $ 8,781 $ 221,348
Cost of Sales 38,412 3,387 43,291 5,659 142,947
----------- ----------- ----------- ----------- -----------
Gross Profit 22,477 1,759 25,210 3,122 78,401
----------- ----------- ----------- ----------- -----------
Operating Expenses
Research and development
expense 3,783,376 8,565 3,795,959 12,464 3,971,701
General and administrative
expense 141,346 16,918 189,432 37,680 456,002
Interest expense 5,706 8,029 21,751 17,163 94,863
----------- ----------- ----------- ----------- ------------
Total Operating
Expenses 3,930,428 33,512 4,007,142 67,307 4,522,566
----------- ----------- ----------- ----------- -----------
Net Loss $(3,907,951) $ (31,753) $(3,981,932) $ (64,185) $(4,444,165)
=========== =========== =========== ========== ===========
Basic and Diluted Loss Per
Common Share $ (0.36) $ (0.01) $ (0.38) $ (0.01) $ (0.45)
=========== =========== =========== ========== ===========
Weighted Average Number
of Shares Used in Per-Share
Calculation 10,888,982 10,467,581 10,467,581 10,370,800 9,971,191
=========== =========== =========== ========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
FIRST SCIENTIFIC, INC.
(FORMERLY LINCO INDUSTRIES, INC.)
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative
From
April 30, 1990
(Date of
Inception)
Ended September 30, Through
------------------------- September 30,
1998 1997 1998
------------- --------- ------------
Cash Flows From Operating Activities
Net loss $ (3,981,932) $ (64,183) $ (4,464,166)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,917 77 4,020
Common stock for services - - 74,355
Common stock for purchased research
and development 3,766,440 - 3,766,440
Changes in assets and liabilities:
Accounts receivable (15,737) 16,019 (24,162)
Inventory 7,883 1,246 (21,998)
Prepaid expenses (11,066) 2,607 (14,000)
Accounts payable 13,186 1,609 15,586
Customer deposits 33,750 - 33,750
Accrued interest payable 11,233 12,548 34,404
Deferred compensation 28,000 2,139 111,877
------------- ---------- ------------
Net Cash Used in Operating
Activities (144,326) (27,938) (483,894)
------------- ---------- ------------
Cash Flows From Investing Activities
Cash paid for equipment (7,550) (721) (8,271)
Cash received from sale of
securities available-
for-sale 302,847 - 302,847
-------------- ---------- -------------
Net Cash Used in Investing
Activities 295,297 (721) 294,576
-------------- --------- -------------
Cash Flows From Financing Activities
Proceeds from borrowing 11,050 17,179 205,975
Principal payments on
notes payable (117,338) - (155,975)
Proceeds from loans from
stockholders 19,930 - 158,934
Principal payments on loans
from stockholders (45,278) (15,850) (62,343)
Proceeds from issuance of
common stock 717,440 - 787,440
-------------- ---------- --------------
Net Cash Provided by
Financing Activities 505,804 1,329 934,031
-------------- ---------- --------------
Net Increase (Decrease) in Cash 736,775 (27,330) 744,713
Cash and Cash Equivalents at Beginning
of Period 7,938 28,033 -
-------------- ---------- --------------
Cash and Cash Equivalents at
End of Period $ 744,713 $ 703 $ 744,713
============== ========== ==============
Supplemental cash flow information and noncash investing and financing
activities - Note 3
The accompanying notes are an integral part of theses financial statements.
FIRST SCIENTIFIC INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Condensed Financial Statements - The accompanying condensed
consolidated financial statements are unaudited. In the opinion of
management, all necessary adjustments (which include only normal recurring
adjustments) have been made to present fairly the financial position,
results of operations and cash flows for the periods presented. Certain
information and note disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the December 31, 1997 annual
financial statements of the Company as reflected in the Form 8-K/A
Amendment No. 1 dated September 15, 1998. The results of operations for the
nine month period ended September 30, 1998 are not necessarily indicative
of the operating results to be expected for the full year.
Principles of Consolidation - The accompanying condensed consolidated
financial statements include the accounts and transactions of First
Scientific Corporation (formerly Linco Industries, Inc.) for all periods
presented and the accounts and transactions of First Scientific, Inc. from
the date of its acquisition on September 15, 1998. Intercompany accounts
and transactions have been eliminated in consolidation. The consolidated
entities are collectively referred to herein as the Company.
Organization - On September 15, 1998, Linco Industries, Inc. ("Linco")
entered into a reorganization agreement with SPPS Financial Corporation
("SPPS"), a publicly held Delaware corporation, whereby a newly-formed,
wholly-owned subsidiary of SPPS was merged into Linco. Under the terms of
the agreement, the Linco shareholders exchanged all of the 3,710 issued and
outstanding common stock of Linco for 8,798,080 shares of SPPS common
stock. SPPS had no assets, liabilities or operations and had 3,333,330
common shares outstanding at the date of the agreement. The agreement has
been accounted for as the reorganization of Linco, with a related
2,371.45-for-1 stock split, and the issuance by Linco of 3,333,330 common
shares recorded at zero. The accompanying financial statements have been
restated for all periods presented for the effects of a stock split. SPPS
changed its name to First Scientific, Inc.
Basic and Diluted Loss per Share - Basic loss per common share is computed
by dividing net loss by the number of common shares outstanding during the
period. Diluted loss per share is calculated to give effect to potentially
issuable common shares except during loss periods when those potentially
issuable common shares would decrease the loss per share. There were
125,000 potentially issuable common shares which were excluded from the
calculation of diluted loss per common share.
NOTE 2 ACQUISITION OF TECHNOLOGY
In connection with the reorganization agreement with SPPS, the Company
issued 5,201,920 shares of common stock to an officer/director for the
transfer of all rights and ownership of technology relating to three
scientific formulations and the cancellation of the Company's obligation
under a royalty agreement relating to the use of the technology. The
scientific formulations were developed by the officer/director and the
Company and the common shares were issued to fully transfer the
officer/director's interest in the technology to the Company. The
technology relates to three scientific formulations, a non-alcohol based
antibacterial sanitizing formulation that removes bacteria while
moisturizing the skin and a topical rash prevention and treatment
formulation that cleanses and moisturizes the skin for use with incontinent
and other skin rash situations.
The acquired technology was valued and recorded at $3,901,440 based upon
the fair value of the shares of common stock issued. The fair value of the
common stock was $0.75 per share based upon the price at which stock was
issued for cash at the time the technology was transferred. There has been
no public market of the Company's common stock. The acquired technology was
allocated $135,000 to purchased technology and $3,766,440 to research and
development expense based upon an evaluation of the status of the
components of the technology at the acquisition date and the estimated net
future cash flows from the portion of the technology currently being used
in products for sale.
NOTE 3 CASH FLOW INFORMATION
Supplemental Cash Flow Information -
For the Nine Months
Ended Sepetember 30,
----------------------
1998 1997
---------- ---------
Interest paid $ 21,710 $ 17,163
========== =========
Noncash Investing and Financing Activities - As mentioned in Note 2, First
Scientific Corporation entered into an agreement with SPPS pursuant to
which SPPS issued 8,798,080 shares of its common stock in exchange for 100%
of the issued and outstanding common stock of First Scientific Corporation.
In connection with the agreement, the Company issued 5,201,920 shares of
common stock in exchange for the rights and technology and the cancellation
of a license and royalty agreement central to the Company's product.
In contemplation of the reorganization with SPPS, the Company received an
advance in the amount of $50,000 from an investor on August 6, 1998 in
order to meet short-term operating expenses. The advance was converted into
66,667 shares of common stock at the date of the reorganization.
On September 14, 1998, $91,877 of deferred salary was converted into
additional paid-in capital without the issuance of additional shares.
Additionally, notes payable to shareholders in the amount of $90,000 were
converted into additional paid-in capital without the issuance of
additional shares.
On September 30, 1998, the Company issued 169,781 common shares upon the
conversion of a $50,000 note payable together with accrued interest in the
amount of $8,049.
NOTE 4 NOTES PAYABLE
Conversion of Notes Payable - As described in Note 6, common stock was
issued upon the conversion of a note payable in the amount of $50,000.
Related Party Notes Payable - On September 14, 1998, related party notes
payable in the amount of $90,000 were converted into additional paid-in
capital without the issuance of additional shares. The remaining related
party notes payable of $17,905 are to directors, former directors and
officers of the Company.
Notes Payable to Banks - At June 30, 1998, the Company had notes payable to
banks in the amount of $101,524. The balances of all these notes were paid
in full during September 1998.
NOTE 5 LEASE COMMITMENTS
Subsequent to June 30, 1998, the company entered into operating lease
agreements to lease office space and a copier, and a capital lease
agreement for computer equipment. The office lease is for a two year term,
is renewable on an annual basis, and currently requires lease payments of
$2,576 per month with annual escalations equal to the lesser of the change
in the consumer price index or 5%. The copier lease is for 36 months with
monthly payments of $146. The capital lease is for a 3-year term requiring
monthly payments of $294. The future minimum lease payments for these new
leases at their inception are as follows:
For the Year Ending
December Capital Operating
------------ --------- ----------
1998 $ 1,274 $ 10,994
1999 3,523 32,981
2000 3,523 22,676
2001 2,936 1,275
-------- ----------
Total Minimum Payments 11,256 67,926
-------- ----------
Less amount representing interest (3,540)
--------
Present value of net minimum lease
payments $ 7,716
========
NOTE 6 COMMON STOCK
During the third quarter of 1998, the Company issued 87,744 common shares
to a third party in exchange for $30,000 in cash.
From September 16th through September 30, 1998, the Company issued (or
received subscriptions for) 2,666,666 shares of common stock for
approximately $1,951,540, or $0.73 per share, received or receivable in
cash and marketable securities. The capital contribution was in connection
with the Linco reorganization agreement. The investors' tax basis in the
marketable securities contributed became the Company's tax basis;
accordingly, deferred income tax was recognized of $48,460 for the
difference in the fair value of the securities and their tax basis. At
September 30, 1998, the Company had issued 1,312,130 common shares in
exchange for $984,098 in cash and marketable securities, net of tax. The
marketable securities received were immediately sold for no gain or loss.
An additional $967,442 has been reflected as a stock subscription
receivable at September 30, 1998 which was subsequently received and the
related 1,354,536 common shares were subsequently issued.
During the third quarter of 1998, 169,781 shares of common stock were
issued upon conversion of a $50,000 note payable together with accrued
interest in the amount of $8,049.
NOTE 7 STOCK OPTIONS
On September 30, 1998, the Company granted stock options to two outside
directors to purchase a total of 1,050,000 shares of common stock at $0.75
per share. The options vest according to a schedule over three years and
expire September 30, 2003. 125,000 options were exercisable at September
30, 1998. The options granted were valued at their fair value on the grant
date of $174,194, which will be recognized by the Company as the options
vest with $85,355 charged to operations during the year ended December 31,
1998, and $64,452 and $24,387 charged during the years ending December 31,
1999 and 2000, respectively. No compensation expense was recognized during
the third quarter.
The options were valued based upon their fair values according to the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 0.0%, expected volatility of 0.0%, risk free interest rate of 5.0%
and expected life of 5 years. The expected volatility is assumed to be 0.0%
because at the grant date the Company is deemed to be privately held.
NOTE 8 SUBSEQUENT EVENTS
As described in Note 2, 1,312,130 common shares issued for subscriptions
received from third party investors. Subsequent to September 30, 1998,
$763,903 was received in satisfaction of the subscriptions receivable.
During October 1998, the Company obtained a $2,000,000 key man life
insurance policy on the Company's research and development director.
During October 1998, the Company agreed in principle to compensation
packages for a director and a consultant which amount to $17,000 per month
in the aggregate.
Item 2. Managements's Discussion and Analysis of Plan of Operations
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of
the Company's consolidated results of operations and financial
condition. The discussion should be read in conjunction with the
unaudited condensed consolidated financial statements, as of September
30, 1998, together with the audited Financial Statements as of
December 31,1997 and form 8-K/A Amendment No.1 dated September
15,1998. Whenever in this discussion the term "Company" is used, it
should be understood to refer to First Scientific, Inc. ("First
Scientific") and its subsidiary on a consolidated basis, except where
the context clearly indicates otherwise.
Overview
The Company is development stage company and, since inception, has
incurred losses from operations. As of September 30, 1998 the Company
has had cumulative net losses totaling $3,981,932. The Company is
primarily engaged in the development of scientific chemical
formulations that have worldwide sales application. It has chosen
initially to market its products through private label relationships
with companies that are major distributors in the over-the-counter,
medical, healthcare and multi-level arenas. Development of its own
brand, especially in the medical markets, will be pursued on a
case-by-case basis as profitable opportunities arise. First
Scientific has developed two unique formulations; the first is a
moisturizing antibacterial sanitizing formulation that removes 99.99%
of bacteria from the skin without the harsh effects of alcohol or
iodine (this product can be delivered in wipes, spray , gel-lotion and
lotion-soap form) and the second, a topical rash prevention and
treatment formulation that cleanses and moisturizes the skin for use
with incontinent patients and other rash situations (in wipe form).
The world wide market for such products has grown significantly in
recent years and is projected to continue growing at an aggressive
rate. Regarding the Company's antibacterial formulation, this growth
is due to the increase in the bacteria related disease, sickness and
death from methicillin-resistant and other bacteria, the demands of
government and healthcare agencies/providers to create healthier
treatment enviroments and the insistence of the public in general for
healthier living and working conditions. Increasing market growth for
the Company's diaper and other rash formulation is primarily a
function of the tremendous growth rate of the incontinent geriatric
population, as baby boomers get older, and the product's application
for the infant market. Management believes the markets for its
products will continue to expand and that the potential for becoming a
significant participant in such markets is a reasonable expectation.
First Scientific outsources the manufacture of its products. The
company currently has developed relationships with two such
manufacturers who both have F.D.A approved facilities. These
manufacturers are in the business of manufacturing for various
customers who require F.D.A. compliant facilities for their products
and have years of experience performing according to F.D.A. standards.
The Company produces a concentrate of its antibacterial formulation
at its own facility, or at nearby contract facilities, under F.D.A.
protocols. The concentrate is then shipped to its manufacturers for
production runs according to customer specifications. This
procedure protects the trade secret status of this formulation. The
Company does not use this procedure in the production of its rash
prevention and treatment formulation because its cannot economically
mix concentrate for this product; however, strict confidentiality
agreements are in place with the manufacturer to protect the trade
secret status of this product formulation.
Financial Position
The Company had $744,713 in cash as of September 30, 1998. This
represented an increase of $736,775 from December 31, 1997. Working
capital as of September 30,1998, increased to $1,419,614 as compared
to a negative working capital of $248,896 at December 31,1997. This
increase was largely due to funding from a private placement of
securities by the Company, as more fully described elsewhere in this
document.
Results of Operations
During the three months and nine months ended September 30, 1998,
the Company had total operating revenues of $60,889 and $68,501
respectively, comprised primarily of product sales; compared with
total operating revenues of $5,126 and $8,781 for the comparable
periods from the prior year, comprised also primarily of product sales.
Prior to June1998 Company revenues were generated from
sporadic sales of a Linseed oil based soap product and rash
prevention product created for a distributor who sells this product
under private labels to an over-the-counter customer. First Scientific
may continue to sell product to these clients, but does not expect the
revenue to be significant from these relationships. In June 1998 the
Company entered into a private label supply agreement with a
multinational distributer of medical and healthcare products. This
private label transaction is for individual antibacterial wipes that
the customer will export. The manufacturing of this product has not
been completed as of September 30,1998, but is scheduled for December
1998; however, the customer has paid 50% down according to the terms
of the transaction. Serious negotiations are currently in process
with other potential domestic private label customers and an
international customer that are projected to conclude during the forth
quarter of 1998 or during the first quarter of 1999.
Private label agreements, such as those discussed above,
create certain risks for the Company, including (i) reliance for sales
of products on other parties, and therefore reliance on the other
parties' marketing ability, marketing plans and credit-worthiness;
(ii) if the Company's products are marketed under other parties'
labels, goodwill associated with use of the products may inure to the
benefit of the other parties rather than the Company; (iii) the
Company may have only limited protection from changes in manufacturing
costs and raw materials costs; and (iv) if the Company is reliant on
other parties for all or substantially all of its sales, the Company
may be limited in its ability to negotiate with such other parties
upon any renewals of their agreements. Management believes these
risks are mitigated by initial markets demands, the apparent
uniqueness of its formulations, the large existing and expanding
markets for its products and the caliber of customers with which it
is negotiating currently.
The Company uses as many as twenty specific chemical and
botanical ingredients to formulate its products. Supplies of these
ingredients remain readily available from multiple sources. The
Company currently maintains very good relationships with its suppliers
and does not anticipate problems that would cause the interruption,
delay or availability of such ingredients
General and administrative expenses were $141,346 and $189,432
for the three and nine months ended September 30, 1998, respectively,
compared with $16,918 and $37,680 for the comparable periods from the
prior year. The increase in expenditures between the 1998 and 1997
periods were due to the transition, the Company experienced from
basically a one man product development entity, with minimal sales, to
an adequately staffed operation capable of administrating anticipated
growth. In September 1998 the Company moved into new executive office
space which should meet growth needs for the foreseeable future. The
space it had been occupying will be kept for research, testing, mixing
and warehousing.
Research and development expenses were $16,396 and $25,519 for
the three and nine months ended September 30, 1998, before purchased
research and development in the amount of $3,766,440, compared with
$8,565 and $12,464 for the comparable periods from the prior year.
The increase in expenditures between the 1998 and 1997 periods
resulted from the refinement of such formulations and development of
new formulations. Net of technology acquisition costs incurred in
previous periods, management expects an increase in research and
development expenses for future periods, as the Company expands its
product offerings and customer base.
Liquidity and Capital Resources
To date, the Company has financed its operations principally
through founder loans, private placements of equity securities and
product sales. The Company generated $1,236,878 in net proceeds
through financing activities from inception through September 1998.
The Company used net cash in operating activities of $144,326 during
the nine months ended September 30, 1998 compared to $27,938 for the
comparable period from the prior year. As of September 30, 1998, the
Company's liabilities totaled $129,163. The Company had working
capital as of September 30, 1998 of $1,439,613.
The Company's working capital and other capital requirements
for the foreseeable future will vary based upon a number of factors,
including continuing research and development, market development,
facilities enhancement, additional personnel, travel and other
expenses related to projected growth. With the new business the
Company is now negotiating , management believes that existing funds
and funds generated from these sales will be sufficient to meet
current obligations and ultimately to establish profitable operations.
However, should payment terms on private label sales deviate from
the normal 50% down payment with the order and the balance of 50%
before shipping and/or should sales increase at a higher than
anticipated rate, the Company will likely need a bank line of credit,
purchase order/accounts receivable financing or additional equity
capital to meet its working capital needs in the future. There is no
assurance that any funding will be available or that, if available,
the terms of such offering or funding will be favorable to the Company.
Year 2000
The Company uses computers principally for scientific modeling
and calculation, product/market research and administrative functions
such as communications, word processing, accounting and management and
financial reporting. The Company's computer system was purchased
September, 1998. The software utilized by the Company is generally
standard "off the shelf" software, typically available from a number
of vendors. While the Company believes it has taken all appropriate
steps to assure year 2000 compliance, it is dependent substantially on
vendor compliance. Should vendor assurances that the Company's systems
are 2000 compliant be incorrect, management believes systems failures
would not have a material adverse impact on its operations.
In addition to its own computer systems, in connection with
its business activities, the Company interacts with suppliers,
customers, creditors and financial service organizations domestically
and globally who use computer systems. It is impossible for the
Company to monitor all such systems, and there can be no assurance
that the failure of such systems would not have a material adverse
impact on the Company's business and operations. The Company is
currently evaluating what contingency plans it may adopt in order to
make in the event the Company or parties with whom the Company does
business experience year 2000 problems.
Forward-Looking Statements
When used in this Form 10-Q and in other filings by the
Company with the SEC, in the Company's press releases or other public
or stockholder communications, or in oral statements made with the
approval of an authorized executive officer of the Company, the words
or phrases "would
be," "will allow," "intends to," "will likely result," "are expected
to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995.
The Company cautions readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made,
are based on certain assumptions and expectations which may or may not
be valid or actually occur, and which involve various risks and
uncertainties, including but not limited to risk of product demand,
market acceptance, economic conditions, competitive products and
pricing, difficulties in product development, commercialization, and
technology, and other risks. In addition, sales and other revenues may
not commence and/or continue as anticipated due to delays or
otherwise. As a result, the Company's actual results for future
periods could differ materially from those anticipated or projected.
Unless otherwise required by applicable law, the Company does
not undertake, and specifically disclaims any obligation, to update
any forward-looking statements to reflect occurrences, developments,
unanticipated events or circumstances after the date of such statement.
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not currently involved in any legal proceedings.
Item 2. Changes in Securities.
In September 1998, the Company initiated a private placement
(the "Private Placement") anticipating raising gross proceeds of
$2,000,000 through the sale of 2,666,666 shares of common stock to
qualified investors for $.75 per share. As of September 30, 1998,
$984,098 had been raised and 1,312,130 shares of common stock has been
issued under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). The Company
did not use an underwriter in connection with the Private Placement.
On September 15, 1998, the Company, then known as Linco
Industries, Inc.(Linco), entered into a reorganization agreement with
SPPS Financial Corporation (SPPS) whereby Linco would become a wholly
owned subsidiary of SPPS. Under the terms of the agreement, a newly
formed wholly-owned subsidiary of SPPS was merged into Linco. The
shareholders of Linco exhanged each of their shares of common stock
for 2,371.45 shares of SPPS common stock in connection with the
reorganization agreement, which resulted in SPPS issuing 8,798,080
shares of its common stock to the Linco shareholders. Concurrent with
the reorganization, SPPS issued 5,201,920 common shares in exchange
for the rights to technology and the cancellation of a license and
royalty agreement central to the Company's products. As a result of
the reorganization, the Linco shareholders became shareholders of the
Company in a transaction intended to qualify as a tax-free
reorganization. Concurrent with the reorganization, SPPS changed its
name to First Scientific, Inc.
In contemplation of the reorganization, the Company received a
pre-merger advance in the amount of $50,000 on August 6, 1998, in
order to meet short term operating expenses. The advance from an
investor was converted into common stock at the date of the
reorganization.
The merger has been considered the reorganization of Linco and
the acquisition of SPPS in a purchase business combination. There was
no market for SPPS's common stock, which corporation had minimal
assets; therefore, the 3,333,330 shares of common stock outstanding at
the date of the reorganization will be recorded at $0. The fair value
of the contributed technology is based upon the fair value of common
shares issued for cash following the reorganization and was
preliminarily valued at $3,901,440, or $0.75 per share. The merger
has been accounted for as the reorganization of Linco with a related
2,371.45 for 1 stock split. The accompanying financial statements
have been restated for the effects of the stock split for all periods
presented.
Item 5: Other Information
Directors and Executive Officers
On September 15, 1998, the stockholders of the Company elected
new directors. The members of the Board of Directors of the Company
serve until the next annual meeting of stockholders, or until their
successors have been elected. The officers serve at the pleasure of
the Board of Directors. The following are the directors and executive
officers of the Company:
Name Position
----------------- ----------------------
Douglas R. Warren President and Director
Edward B. Walker Director
Jerral R. Pulley Director
Dr. Peter J. Sundwall Jr., M.D. Director
Darrell J. Saunders, D.D.S. Director
Gordon M. Davis Vice President
Administration/CFO
Reed Tanner Vice President Distribution,
Regulatory Compliance
Douglas R. Warren, age 65, has been President of the Company
since its acquisition of Linco Industries, Inc., of which he was one
of the founders. As President of Linco, he directed all aspects of
operations including manufacturing, distribution and sales. Prior to
acquisition of Linco by the Company, Mr. Warren developed many
important business relationships within suppliers and potential
customers.
Edward B. Walker, age 46, is a native of Ogden, Utah. He
graduated from Weber State University and obtained his Ph.D in
chemistry from Texas Tech University. After completing a
post-doctoral fellowship in the Stanford University Department of
Biochemical Pharmacology, Dr. Walker returned to Weber State
University in 1981, where he is currently a professor of chemistry and
Director of the Utah Center of Excellence for Chemical Technology.
Dr. Walker's basic research interests over the years have
focused on the biochemistry of natural products, and their effects on
living systems. In addition, he spends a significant portion of his
time in applied research, helping Utah inventors and corporations
develop new and enhanced products, refine their quality assurance
programs, and improve manufacturing methods. Dr. Walker has been
issued various U.S. and foreign patents for his inventions, ranging
from novel drugs derived from plants to flow cells used in
spectrophotometers. Dr. Walker has received the Utah Governor's Medal
for Science and Technology, Weber State University's Master Teacher
Award, and is a Cortez Professor in the Honors Program at WSU. He has
authored many scientific publications and two university-level
chemistry textbooks.
Jerral R. Pulley, age 64, is an experienced executive skilled
at providing strategic direction, innovative marketing solutions and
creating new streams of business revenue. Mr. Pulley is a partner in
the consulting firm, The Client Synergy Group, and immediately prior
to that while in Boston, he served as Senior Vice President and
General Manager of S.C. Publishing 1995-1997 and 1990-1994 as CEO of
Polymerics, a leading art/craft company with $90 million in revenue.
Mr. Pulley's background includes serving in senior executive
roles at several prominent corporations including: Binnery & Smith
(Crayola), as VP Corporate Development; Ryder, as Senior VP Strategic
Planning/Corporate Development; Bordon, Group VP (Consumer Products
Division); LifeSavers, EVP; Pepsico, VP Marketing Planning. Mr.
Pulley also spent twelve years at Procter & Gamble where his last
assignment was starting a Toilet Goods Division in the United Kingdom.
Mr. Pulley has served on several Boards of Directors and
presently is a Director of The Thorsden Group, Ltd., a software
provider in Salt Lake City, and Vice Chairman of the Henry's Fork
Foundation, a non-profit organization concerned with proper watershed
stewardship. Mr. Pulley holds a B.S. from the University of Utah and
an MBA from UCLA.
Dr. Peter V. Sundwall Jr., M.D., age 34, graduated Cum Laude
from the University of Utah with a degree in Psychology. He went on
to earn a Masters degree in Educational Psychology from the University
of Utah. Dr. Sundwall received his Doctor of Medicine degree from the
University of Utah Medical School where he graduated with Honors in
Family Medicine and received the Golden Cane award for excellence in
patient care. Dr. Sundwall completed his Family Practice Residency at
St. Peters Hospital in Olympia, Washington. Currently he is
practicing Family Medicine at Intermountain Health Care in Highland,
Utah.
Dr. Darrel J. Saunders, age 65, is a native of Ogden, Utah.
He graduated from Weber State University with a D.D.S. degree in 1961.
Dr. Saunders has practiced dentistry in Ogden, Utah since the 1960s.
He was a L.C.D.R. in the Navy Reserve, serving as the Dental Officer
for 12 years. Dr. Saunders was a member of the Ogden City Public
Works Advisory Committee and served twice as a District Chairman for
the Boy Scouts. He was a member of the Executive Committee for the
Lake Bonneville Council of the BSA. He served on the Ogden City
Council for 18 years, serving one term as Assistant Mayor and another
as Chairman of the City Council. Dr. Saunders also was on the Board
of Directors for the Utah League of Cities and Towns and was a member
and Chairman of the Board for the Central Weber Sewer District. He
was recently appointed by the mayor of Ogden to serve on the
Sesquicentennial Advisory Committee to help plan the activities for
Ogden's sesquicentennial celebration in 2001.
Gordon M. Davis, age 53, is Vice President Administration/CFO
of the Company. He received a bachelor's degree in business
management from the University of Utah and has spent his career in
banking, finance and management consulting. Over the past five years
Mr. Davis was president of Satellite Image Systems, Salt Lake City,
Utah in 1992 and 1993 and President of EE Multimedia, Inc., Salt Lake
City, Utah in 1995. During 1996, Mr. Davis was part owner of a
solarium company in Salt Lake City, Utah. During 1997 and 1998, he
was a consultant to a real estate development project in South America
and served as an independent business and financial consultant to
other early stage development ventures, including Linco Industries,
Inc., which hired him as a full-time employee in August, 1998.
Reed J. Tanner, age 43, is Vice President Distribution,
Regulatory Compliance of the Company. From 1993 to May 1996 he was
supervisor of US Air Force Ammunition Control Point, responsible for
inventory, location, and logistical support of Air Force non-nuclear
munitions stockpile. Mr. Tanner was employed from June 1996 to
September 1996 by BDM Corporation, identifying ozone depleting
chemicals in Air Force maintenance manuals as specified by EPA. From
October 1996 to May 1998, Mr. Tanner was subject matter expert for
technical writing of US Air Force munitions technical manuals for
Sverdrup Technology, ASG. From May 98 to present Mr. Tanner is the
VP Distribution, regulatory compliance at Linco Industries, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed herewith pursuant to Rule 601
of Regulation S-B or are incorporated by reference to previous filings.
Exhibit # Description
----------------------------
2.1 Agreement and Plan of Reorganization, dated August 10,
1998, between the Registratnt, Linco, Linco
Acquisition Corp. and Edward Walker*
3.1 Articles of Incorporation**
3.2 Bylaws**
3.3 Amendment to Articles of Incorporation changing name
to First Scientific, Inc. and effecting a forward
stock split.*
10.1 Non-qualified Stock Option Agreement with Jerral R. Pulley***
10.2 Non-qualified Stock Option Agreement with Peter Sundwall, M.D.***
27 Financial data schedule***
_____________________
* Incorporated by reference to the same-numbered exhibit to the
Form 8-K filed October 2, 1998 by the Company with the
Securities and Exchange Commission.
** Incorporated by reference to the same-numbered exhibit to the
Company's Regisration Statement on Form 10-SB, file No. 0-24378.
*** Filed herewith
(b) Reports on Form 8-K
On October 2, 1998, the Company filed a report on Form 8-K
regarding the reorganization of the Company.
On October 23, 1998, the Company filed a report on Form 8-KA
regarding pro forma financial statements as of June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange
Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
REGISTRANT
FIRST SCIENTIFIC, INC.
Registrant
DATED: November 16 , 1998
By: /s/ Douglas R. Warren
-----------------------------
Douglas R. Warren, President
DATED: November 16, 1998
By: /s/ Gordon M. Davis
-----------------------------
Gordon M. Davis, Vice President
Administration/CFO (Principal
Financial and Accounting Officer)
\
</TABLE>
FIRST SCIENTIFIC, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
OPTION GRANT
1. Name of Optionee: JERRAL R. PULLEY
2. Maximum Number of Shares Granted Hereunder: One million (1,000,000)
3. Exercise Price: Seventy-five cents ($0.75) per share
4. Terms of Grant:
Options Exercisable covering
Exercise Dates Number of Shares
-------------- -----------------------------
* On or after October 1, 1998 - 100,000
* On or after January 1, 1999 - an additional 300,000
* On or after January 1, 2000 - an additional 300,000
* On or after January 1, 2001 - an additional 100,000
* On or after the earlier of
January 1, 2001 - an additional 200,000
or the date when the Company
has achievedbacklog of valid
purchase orders
aggregating $50,000,000 or more
5. Expiration of Options: Each option shall expire on the fifth
anniversary of its respective exercise date set forth above; provided,
however, that the Board of Directors shall have authority to extend
any of such expiration dates at the request of the Optionee, which
request shall not be unreasonably denied.
6. Service Requirement: Optionee shall continue to serve as Chairman of
the Board of Directors and shall continue to provide consulting
services to the Company of not less than forty percent of his
business time (two business days per week, on average), in exchange
for payment by the Company of $10,000 per month, to the extent that
the Company elects to maintain such relationship. Unless the Company
terminates Optionee's appointment as Chairman or consulting
arrangement for cause, the vesting rights remain valid for the
amounts, dates and conditions specified in the Terms of Grant in
Section 4 above.
7. Adjustments. Upon the occurrence of any of the following events, the
Optionee's rights with respect to Options shall be adjusted as
hereinafter provided:
(a) Stock Dividends and Stock Splits. If the shares of the
Company's Common Stock shall be subdivided or combined into a greater or
smaller number of shares or if the Company shall issue any shares of Common
Stock as a stock dividend on its outstanding Common Stock, the number of
shares of Common Stock deliverable upon the exercise of Options shall be
appropriately increased or decreased proportionately, and appropriate
adjustments shall be made in the purchase price per share to reflect such
subdivision, combination or stock dividend.
(b) Acceleration of Exercise Dates or Assumption of Options by
Successors. In the event of a dissolution or liquidation of the Company, a
merger in which the Company is not the surviving entity, or the sale of all
or substantially all of the Company's assets, this Option shall be
exercisable in full and all vesting shall accelerate to full vesting of the
unexercised number of shares prior to the consummation of such dissolution,
liquidation, merger or asset sale.
(c) Recapitalization or Reorganization. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in Section 6(b) above) pursuant to which securities of the Company
or of another entity are issued with respect to the outstanding shares of
Common Stock, the Optionee, upon exercising an Option, shall be entitled to
receive for the purchase price paid upon such exercise at least the
equivalent of the securities the Optionee would have received if the
Optionee had exe4cised the Option prior to such recapitalization or
reorganization.
(e) Issuances of Securities. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or of
securities convertible into shares of stock of my class, shall affect, and
no adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.
(f) Fractional Shares. No fractional shares shall be issued
under this Option. The Optionee shall receive cash from the Company in lieu
of such fractional shares.
IN WITNESS WHEREOF, the Company has caused this Option to be granted and
executed. The Optionee whose signature appears below acknowledges receipt of
a copy of the Option Plan related to this Option and related Terms and
Conditions this 30th day of September, 1998.
The Company:
First Scientific, Inc.
By: /s/ Douglas R. Warren
Name: Douglas R. Warren
Title: President
Accepted and acknowledged:
/s/ Jerral R. Pulley
Jerral R. Pulley, Optionee
FIRST SCIENTIFIC, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
OPTION GRANT
1. NAME OF OPTIONEE: PETER SUNDWALL, M.D.
2. MAXIMUM NUMBER OF SHARES GRANTED HEREUNDER: 50,000
3. EXERCISE PRICE: Seventy-five cents ($0.75)
4. TERMS OF GRANT:
Options Exercisable covering
Exercise Dates Number of Shares
* On or after October 1, 1998 - 25,000
* On or after January 1, 1999 - an additional 25,000
5. EXPIRATION OF OPTIONS: Each option shall expire on the fifth
anniversary of its respective exercise date set forth above;
provided, however, that the Board of Directors shall have
authority to extend any of such expiration dates at the request
of the Optionee, which request shall not be unreasonably denied.
6. SERVICE REQUIREMENT: Optionee shall remain an active member of
the Board of Directors of the Company in order to remain vested
at each of above exercise dates. Unless the Company terminates
Optionee's appointment as a Director for cause, the vesting
rights remain valid for the amounts, dates and conditions
specified in the Terms of Grant in Section 4 above.
7. ADJUSTMENTS: Upon the occurrence of any of the following
events, an optionee's rights with respect to Options granted to
the optionee hereunder shall be adjusted as hereinafter
provided, unless otherwise specifically provided in the written
agreement between the optionee and the Company regarding such
Option:
(a) Stock Dividends and Stock Splits. If the shares of
the Company's Common Stock shall be subdivided or combined into a
greater or smaller number of shares or if the Company shall issue
any shares of Common Stock as a stock dividend on its outstanding
Common Stock, the number of shares of Common Stock deliverable upon
the exercise of Options shall be appropriately increased or
decreased proportionately, and appropriate adjustments shall be made
in the purchase price per share to reflect such subdivision,
combination or stock dividend.
(b) Acceleration of Exercise Dates or Assumption of
Options by Successors. In the event of a dissolution or liquidation
of the Company, a merger in which the Company is not the surviving
entity, or the sale of all or substantially all of the Company's
assets, this Option shall be exercisable in full and all vesting
shall accelerate to full vesting of the unexercised number of shares
prior to the consummation of such dissolution, liquidation, merger
or asset sale.
(c) Recapitalization or Reorganization. In the event of
a recapitalization or reorganization of the Company (other than a
transaction described in Section (b) above) pursuant to which
securities of the Company or of another entity are issued with
respect to the outstanding shares of Common Stock, an optionee, upon
exercising an Option, shall be entitled to receive for the purchase
price paid upon such exercise the securities the optionee would have
received if the optionee had exercised the Option prior to such
recapitalization or reorganization.
(d) Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, each Option will
terminate immediately prior to the consummation of such proposed
action or at such other time and subject to such other conditions as
shall be determined by the Committee or the Board.
(e) Issuances of Securities. Except as expressly
provided herein, no issuance by the Company of shares of stock of
any class, or of securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be
made with respect to, the number or price of shares subject to
Options. No adjustments shall be made for dividends paid in cash or
in property other than securities of the Company.
(f) Fractional Shares. No fractional shares shall be
issued under this Plan and each optionee shall receive cash from the
Company in lieu of such fractional shares.
IN WITNESS WHEREOF, the Company and the Optionee have caused this
Option Agreement to be executed, and the Optionee whose signature
appears below acknowledges receipt of a copy of the Plan and of an
original copy of this Cover Sheet and the attached Terms and
Conditions this 30th day of September, 1998.
THE OPTIONEE: THE COMPANY:
/s/ Peter V. Sundwall, M.D. FIRST SCIENTIFIC, INC.
--------------------------- a Delaware corporation
Signature
Peter V. Sundwall Jr. By: /s/ Douglas R. Warren
--------------------------- ---------------------------
Printed Name Its: President
---------------------------
553 Arnold Street
---------------------------
Street Address
Alpine Utah 84004
---------------------------------
City State Zip Code
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF SEPTEMBER 30, 1998, AND STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 744,713
<SECURITIES> 0
<RECEIVABLES> 788,065
<ALLOWANCES> 0
<INVENTORY> 21,998
<CURRENT-ASSETS> 1,568,776
<PP&E> 8,001
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,708,027
<CURRENT-LIABILITIES> 149,162
<BONDS> 0
0
0
<COMMON> 18,588
<OTHER-SE> 1,540,277
<TOTAL-LIABILITY-AND-EQUITY> 1,708,027
<SALES> 68,501
<TOTAL-REVENUES> 68,501
<CGS> 43,291
<TOTAL-COSTS> 3,985,391
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,751
<INCOME-PRETAX> (3,981,932)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,981,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,981,932)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
