UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.
FORM 10-QSB/A
AMENDMENT NO. 1
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)
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.
20,169,770 Shares of common stock, $.001 par value
FIRST SCIENTIFIC, INC.
FORM 10-QSB/A
AMENDMENT NO. 1
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 the Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST SCIENTIFIC, INC.
(FORMERLY LINCO INDUSTRIES, INC.)
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1998 1997
---------- ----------
ASSETS
Current Assets
Cash $ 744,713 $ 7,938
Trade receivables 24,161 8,425
Stock subscriptions receivable 1,015,963 -
Inventory 21,998 29,881
Prepaid expenses 14,000 2,934
---------- ----------
Total Current Assets 1,820,835 49,178
Property and Equipment, Net 8,001 618
Purchased Technology, Net 131,250 -
---------- ----------
Total Assets
$1,960,086 $ 49,796
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 15,584 $ 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 149,161 298,074
---------- ----------
Long-Term Notes Payable - 74,600
---------- ----------
Stockholders' Equity (Deficit)
Preferred stock 1,000,000 shares authorized,
no shares outstanding - -
Common stock $.001 par value, 50,000,000
shares authorized; issued and outstanding:
20,169,770 shares at September 30, 1998
and 10,467,581 shares at December 31, 1997 20,170 10,468
Additional paid-in capital 6,429,114 148,887
Unearned compensation (153,457) -
Deficit accumulated during the development
stage (4,484,902) (482,233)
---------- ---------
Total Stockholders' Equity (Deficit) 1,810,925 (322,878)
---------- ---------
Total Liabilities and Stockholders'
Equity (Deficit) $1,960,086 $ 49,796
========== =========
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
FIRST SCIENTIFIC, INC.
(FORMERLY LINCO INDUSTRIES, INC.)
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION> Cumulative From
April 30, 1990
For the Three Months For the Nine Months (Date of Inception)
Ended September 30, Ended September 30, Through
------------------------- ------------------------- 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 3,367 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 162,083 16,918 210,169 37,680 476,002
Interest expense 5,706 8,029 21,751 17,163 115,600
----------- ----------- ----------- ----------- -----------
Total Operating Expenses 3,951,165 33,512 4,027,879 67,307 4,563,303
----------- ----------- ----------- ----------- -----------
Net Loss $(3,928,688) $ (31,753) $(4,002,669) $ (64,185) $ (4,484,902)
=========== =========== =========== =========== ============
Basic and Diluted Loss Per
Common Share $ (0.37) $ (0.01) $ (0.39) $ (0.01) $ (0.45)
=========== =========== =========== =========== ============
Weighted Average Number
of Shares Used in Per-Share
Calculation 10,570,842 10,467,581 10,317,667 10,467,581 10,017,375
=========== =========== =========== =========== ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE> -4-
<PAGE>
FIRST SCIENTIFIC, INC.
(FORMERLY LINCO INDUSTRIES, INC.)
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative From
For the Nine Months Ended April 30, 1990
Ended September 30, Through
------------------------- September 30,
1998 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $(4,002,669) $ (64,183) $ (4,484,902)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,917 77 4,020
Common stock issued for services - - 74,355
Common stock issued for purchased
research and development 3,766,440 - 3,766,440
Compensation from stock options granted 20,737 - 20,737
Changes in operating 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)
Customer deposits 33,750 - 33,750
Accounts payable 13,186 1,609 15,585
Accrued interest payable (5,642) 12,548 17,529
Deferred compensation 28,000 2,139 111,877
----------- ----------- -----------
Net Cash Used in Operating Activities (161,201) (27,938) (500,769)
----------- ----------- -----------
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 Provided by (Used in)
Investing Activities 295,297 (721) 294,576
----------- ----------- -----------
Cash Flows From Financing Activities
Proceeds from borrowing 61,050 17,179 255,975
Principal payments on notes payable (117,338) - (155,975)
Proceeds from loans from stockholders 19,930 - 158,934
Principal payments on loans from stockholder (28,403) (15,850) (45,468)
Proceeds from issuance of common stock 667,440 - 737,440
----------- ----------- -----------
Net Cash Provided by Financing Activities 602,679 1,329 950,906
----------- ----------- -----------
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
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE> -5-
<PAGE>
FIRST SCIENTIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- As a result of the reorganization
agreement between Linco Industries, Inc. and SPPS Financial
Corporation on September 15, 1998, the reporting entity for
accounting purposes changed from SPPS Financial Corporation to
Linco Industries, Inc. ("Linco"). Accordingly, the accompanying
condensed consolidated financial statements include the accounts
and transactions of Linco for all periods presented and the
accounts and transactions of SPPS Financial Corporation from
September 15, 1998. Intercompany accounts and transactions have
been eliminated in consolidation. The consolidated entities are
collectively referred to herein as the Company.
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 disclosures
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 Linco
financial statements and notes thereto included 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.
Reorganization -- On September 15, 1998, 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 shares of 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 of 3,333,330 common
shares to the SPPS shareholders. Those shares were recorded at
zero. The accompanying financial statements have been restated for
all periods presented for the effects of the stock split from the
reorganization of Linco. In connection with the reorganization,
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 weighted-average 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 1,050,000
potentially issuable common shares which were excluded from the
calculation of diluted loss per common share for the three and nine
months ended September 30, 1998 and none for the three and nine
months ended September 30, 1997.
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 two non-alcohol based antibacterial sanitizing formulations that
remove bacteria while moisturizing the skin and a topical rash
prevention and treatment formulation that cleanses and moisturizes
the skin for treatment of skin rashes caused by incontinence and
other irritations.
The acquired technology was valued and recorded at $3,901,440 based
upon the fair value of the shares of common stock issued. Since there
has been no public market of the Company's common stock, the fair
value of the common stock was determined to be $0.75 per share based
upon the price at which stock was issued for cash at the time the
technology was transferred. 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 --During the nine months ended
September 30, 1998 and 1997, the Company paid $44,881 and $4,615
for interest.
Noncash Investing and Financing Activities --In contemplation of
the reorganization, the Company received an advance in the amount
of $50,000 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, related party notes payable in the amount of
$90,000 were converted into additional paid-in capital without the
issuance of additional shares.
On September 15, 1998, the Company issued 5,201,920 shares of
common stock in exchange for the rights to technology valued at
$3,901,440 and the cancellation of a license and royalty agreement
central to the Company's product.
On September 15, 1998, for accounting purposes, the Company was
deemed to have issued 3,333,330 common shares, valued at $0, to the
shareholders of SPPS in connection with the reverse acquisition of
SPPS. No liabilities were assumed in connection with this acquisition.
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.
On September 30, 1998, the Company issued 403,796 shares of common
stock in exchange for $254,387 of marketable securities, net of
deferred tax.
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 December 31, 1997, the Company had
notes payable to banks in the amount of $156,288. The balances of
all these notes were paid in full during September 1998.
NOTE 5-LEASE COMMITMENTS
During the fourth quarter of 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 Capital Operating
December 31, Leases Leases
------------------- -------- ---------
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 May 1998, the Company issued 21,343 shares of common stock
to a third party in exchange for $6,249 in cash at $0.29 per share.
During July of 1998, the Company issued 87,744 shares of common
stock to a third party in exchange for $30,000 in cash at $0.34 per
share.
During June 1998, the Company redeemed 1,778,588 common shares from
Dr. Ed Walker in connection with termination of his service on the
Board of Directors.
On September 15, 1998, the Company issued 5,201,920 shares of
common stock to Dr. Ed Walker for the transfer of all rights and
ownership of technology relating to three scientific formulations
Valued at $3,901,440. Also, for accounting purposes, the Company
was deemed to have issued 3,333,330 shares of common stock, valued
at $0, to the shareholders of SPPS.
During September 1998, the Company issued (or received
subscriptions for) 2,666,659 shares of common stock for
approximately $1,951,540, or $0.73 per share, received or
receivable in cash and marketable securities, net of tax. The
capital contribution was in connection with the reorganization
agreement which allowed the transfer to be tax free to the
investors. The investors' tax basis in the contributed marketable
securities became the Company's tax basis; accordingly, deferred
income tax of $48,460 was recognized 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
$885,577 in cash and marketable securities, net of tax, and the
conversion of a $50,000 pre-acquisition advance. The marketable
securities received were immediately sold at no gain or loss. An
additional $1,015,963 has been reflected as a stock subscription
receivable at September 30, 1998, which was subsequently received
and the related 1,354,529 common shares were subsequently issued.
During the third quarter of 1998, the Company issued 169,781 shares
of common stock 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
amount will be recognized by the Company as the options vest with
$20,737 and $69,401 being charged to operations during the third
and fourth quarters of 1998, respectively, and $61,936 and $22,120
being charged to operations during the years ending December 31,
1999 and 2000, respectively.
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 a privately held enterprise.
NOTE 8-SUBSEQUENT EVENTS
Subsequent to September 30, 1998, $1,015,963 in cash and marketable
were received in satisfaction of 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 to compensation
arrangements for consulting services from two directors. The
compensation arrangements are for a one-year period and require
cash compensation payments of $17,000 per month in the aggregate.
Services under these agreements began during August 1998.
Accordingly, compensation expense in the amount of $20,000 related
to these arrangements has been charged to third quarter operations
in the accompanying financial statements.
Item 2. Managements's Discussion and Analysis of Financial
Condition and Results 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 included in 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 a development stage company and, since inception,
has incurred losses from operations. As of September 30, 1998 the
Company has had cumulative net losses since inception totaling
$4,484,902. 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 consists of two moisturizing
antibacterial sanitizing formulations that remove 99.69% to 99.99%
of bacteria from the skin without the harsh effects of alcohol or
iodine (these products 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
treatment against skin rashes caused by incontinence and other
irritations (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. compliant 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 $1,671,673 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. The Company had an accumulated deficit
of $4,484,902 at September 30, 1998, most of which had been funded
out of proceeds received from the issuance of stock, including
$3,766,440 for acquired research and development, and from
incurring liabilities.
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 June 1998, Company revenues were generated from sporadic
sales of a Linseed oil based soap product and a rash prevention
product created for a distributor who sells this product under a
private label to an over-the-counter customer. First Scientific may
continue to sell product to this distributor, but does not expect
the revenue to be significant from this relationship. In June
1998, the Company entered into a private label supply agreement
with a multinational distributor of medical and healthcare
products. This private label transaction is for individual
antibacterial wipes that the customer will market globally. The
manufacturing of this product has not been completed as of
September 30, 1998, but is scheduled for January 1999; 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 $210,169 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 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 $16,936 and $29,519 for the
three and nine months ended September 30, 1998, before acquired
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 acquired research and development was for the transfer of all
rights and ownership of technology relating to three scientific
formulations. 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 $950,906 in net proceeds
through financing activities from inception through September 1998
of which $602,440 was generated during the nine months ended
September 30, 1998. The Company used net cash in operating
activities of $161,201 during the nine months ended September 30,
1998. Investing activities provided $295,297 net cash during the
nine months ended September 30, 1998 primarily from the sale of
securities. Those securities were received in exchange for common
stock and were sold immediately upon their receipt. As of September
30, 1998, the Company's liabilities totaled $149,162. The Company
had working capital as of September 30, 1998 of $1,671,673.
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, F.D.A. testing
requirements, 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") wherein it raised 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, $935,577,
net of deferred tax of $48,460, 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 exchanged 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 66,667 shares of 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 were recorded at $0. The
recorded value of the contributed technology is based upon the
price at which common shares were issued for cash at the time the
technology was transferred. The value of the acquired technology
was allocated $135,000 to purchased technology and $3,766,440 to
research and development expense. 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 from the reorganization of Linco
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
Operations
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 the University of Nebraska 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 the Company, which hired him as a full-time
employee in August, 1998.
Reed J. Tanner, age 43, is Vice President of Operations
for 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 1998, to present Mr. Tanner
has overseen distribution and regulatory compliance at the Company.
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 Registrant, 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 Registration Statement on Form 10-SB, file
No. 0-24378.
*** Incorporated by reference to the same numbered exhibit
to the Form 10-Q
filed November 16, 1998 by the Company with the
Securities and Exchange Commission
**** 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-K/A
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: December 11, 1998
By: /s/ Douglas R. Warren
----------------------------
Douglas R. Warren, President
DATED: December 11, 1998
By: /s/ Gordon M. Davis
-----------------------------
Gordon M. Davis, Vice President
Administration/CFO (Principal
Financial and Accounting Officer)
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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.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<COMMON> 20,170
<OTHER-SE> 1,790,755
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