UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
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
Check whether the issuer (1) filed all reports required to be
filed by Sections 13 or 15(d) of the Exchange Act during the past 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
These were 20,169,770 shares of common stock, $.001 par value, outstanding as
of July 31, 1999.
FIRST SCIENTIFIC, INC.
FORM 10-QSB
QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
June 30, 1999 and December 31, 1998. . . . . . . . 3
Condensed Consolidated Statements of Operations
(Unaudited) for the Three Months and Six Months
Ended June 30, 1999 and 1998 and for the Cumulative
Period from April 30,
1990 (Date of Inception) through June 30, 1999 . . 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the Six Months Ended June 30,
1999 and 1998 and for the Cumulative Period
from April 30, 1990 (Date of Inception) through
June 30, 1999 . . . . . . . . . . . . . . . . . . . 5
Notes to the Condensed Consolidated Financial
Statements (Unaudited) . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis and Plan of
Operation. . . . . . . . . . . . . . . . . . . . . 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 12
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1999 1998
------------ ------------
ASSETS
Current Assets
Cash $ 696,736 $ 1,286,299
Investment in securities
available-for-sale 116,571 194,784
Trade receivables 121,104 614
Inventory 46,863 26,619
Prepaid expenses 12,817 29,356
------------ ------------
Total Current Assets 994,091 1,537,672
Property and Equipment 140,089 95,378
Less: accumulated depreciation (13,587) (2,982)
------------ ------------
Net Property and Equipment 126,502 92,396
Purchased Technology, Net 63,750 108,750
Investment in Equiy Securities, at Cost - 50,000
------------ ------------
Total Assets $ 1,184,343 $ 1,788,818
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts Payble $ 32,232 $ 54,334
Customer deposits 33,750 33,750
Accrued liabilities 16,678 75,979
Capital lease obligation -
current portion 4,696 2,070
Related party notes payable 16,026 22,693
------------ ------------
Total Current Liabilities 103,382 188,826
------------ ------------
Long-Term Capital Lease Obligation 8,296 4,784
------------ ------------
Stockholders' Equity
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 June 30, 1999 and
December 31, 1998 20,170 20,170
Additional paid-in-capital 6,429,114 6,429,114
Unearned compensation (53,088) (84,056)
Accumulated other comprehensive loss (135,489) (7,275)
Deficit accumulated during the
development stage (5,188,042) (4,762,745)
------------ ------------
Total Stockholders' Equity 1,072,665 1,595,208
------------ ------------
Total Liabilities and Stockholders'
Equity $ 1,184,343 $ 1,788,818
============ ============
The accompanying notes are an integral part of these financial statements.
-3-
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative From
April 30, 1990
For the Three Months For the Six Months (Date of Inception)
Ended June 30, Ended June 30, Through
------------------------ ------------------------- June 30,
1999 1998 1999 1998 1999
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales $ 121,929 $ 7,341 $ 122,299 $ 7,612 $ 358,295
Cost of Sales 24,049 4,771 24,297 4,879 178,949
---------- ----------- ----------- ----------- -----------
Gross Profit 97,880 2,570 98,002 2,733 179,346
---------- ----------- ----------- ----------- -----------
Operating Expenses
General and administrative
expense 240,595 33,288 526,010 48,085 1,363,342
Research and development
expense 9,846 8,013 16,108 12,583 4,005,658
---------- ----------- ----------- ----------- -----------
Total Operating Expenses 250,441 41,301 542,118 60,668 5,369,000
---------- ----------- ----------- ----------- -----------
Loss from Operations (152,561) (38,731) (444,116) (57,935) (5,189,654)
Other Income and (Expense)
Interest income 9,024 - 21,170 - 35,852
Interest expense (1,187) (8,023) (2,351) (16,045) (96,121)
---------- ----------- ----------- ----------- -----------
Loss Before Income Taxes (144,724) (46,754) (425,297) (73,980) (5,249,923)
Benefit from Income Taxes - - - - 61,881
---------- ----------- ----------- ----------- -----------
Net Loss $ (144,724) $ (46,754) $ (425,297) $ (73,980) $(5,188,042)
========== =========== =========== =========== ===========
Basic and Diluted Loss Per
Common Share $ (.01) $ (0.00) $ (.02) $ (.01) $ (.48)
========== =========== =========== =========== ===========
Weighted Average Number of
Shares Used in Per-Share
Calculation 20,169,770 10,467,581 20,169,770 10,467,581 10,845,214
========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
-4-
</FN>
</TABLE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Cumulative From
April 30, 1990
(Date of
For the Six Months Inception)
Ended June 30, Through
----------------------- June 30,
1999 1998 1999
---------- ---------- -----------
Cash Flows From Operating Activities
Net loss $ (425,297) $ (73,980) $(5,188,042)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 55,605 52 84,837
Common stock issued for services - - 74,355
Common stock issued for purchased
Research and development - - 3,766,440
Compensation from stock
options granted 30,968 - 121,106
Deferred tax benefit - - (61,881)
Changes in operating assets and
and liabilities:
Accounts receivable (120,490) 8,425 (121,104)
Inventory (20,244) (2,043) (46,863)
Prepaid expenses 16,539 2,934 (12,817)
Accounts payable (22,102) 671 32,232
Customer deposits - 33,750 33,750
Accrued liabilities (59,302) 10,960 149,109
Deferred compensation - 2,450 -
---------- --------- -----------
Net Cash Used in Operating
Activities (544,323) (16,781) (1,168,878)
---------- --------- -----------
Cash Flows From Investing Activities
Cash paid for equipment (40,983) - (128,644)
Cash received from sale of
securities available-for-sale - - 302,847
---------- --------- -----------
Net Cash Provided by (Used in)
Investing Activities (40,983) - 174,203
---------- --------- -----------
Cash Flows From Financing Activities
Proceeds from borrowing 4,336 11,050 260,311
Principal payments on notes
payable - (15,814) (155,975)
Proceeds from loans from
stockholders - 20,030 158,934
Principal payments on loans
from stockholder (6,667) - (70,474)
Principal payment under capital
lease obligation (1,926) - (2,788)
Proceeds from issuance of
common stock - 6,250 1,501,403
---------- --------- -----------
Net Cash Provided by Financing
Activities (4,257) 21,516 1,691,411
---------- --------- -----------
Net Increase (Decrease) in Cash (589,563) 4,735 696,736
Cash and Cash Equivalents at
Beginning of Period 1,286,299 7,938 -
---------- --------- -----------
Cash and Cash Equivalents at
End of Period $ 696,736 $ 12,673 $ 696,736
========== ========= ===========
The accompanying notes are an integral part of these financial statements.
-5-
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
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 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 First Scientific financial statements and notes
thereto included in the Form 10-KSB dated December 31,
1998. The results of operations for the six month period
ended June 30, 1999 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 for all
periods presented and the accounts and transactions of
First Scientific, Inc. from September 15, 1998 .
Intercompany accounts and transactions have been eliminated
in consolidation. The consolidated entities are
collectively referred to herein as "First Scientific."
NOTE 2-INVESTMENT IN SECURITIES AVAILABLE-FOR-SALE
Changes in investments in securities available-for-sale
were as follows:
Balance - December 31, 1998 $ 194,784
Reclassification from investment
in equity securities at cost for
expiration of restriction 50,000
Unrealized loss on securities
available-for-sale (128,213)
---------
Balance - June 30, 1999 $ 116,571
NOTE 3-COMPREHENSIVE LOSS
Other comprehensive loss of First Scientific consists of
an unrealized loss on investment in securities
available-for-sale. Comprehensive loss is computed as follows:
<TABLE>
<CAPTION>
Cumulative from
April 30, 1990
(Date of
For the Three Months For the Six Months Inception)
Ended June 30, Ended June 30, Through
---------------------- ---------------------- June 30,
1999 1998 1999 1998 1999
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net Loss $ (144,724) $ (46,754) $ (425,298) $ (73,980) $(5,188,042)
Other Comprehensive Loss
Unrealized loss on investment in
securities available-for-sale (77,714) - (128,213) - (135,488)
---------- ---------- ---------- ---------- -----------
Comprehensive Loss $ (222,438) $ (46,754) $ (553,511) $ (73,980) $(5,323,530)
========== ========== ========== ========== ===========
</TABLE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4-SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the six months ended June 30, 1999 and
1998, was $2,351 and $16,045, respectively, and $96,121 for
the period from April 30, 1990 (date of inception) through
June 30, 1999. During 2nd quarter 1999 First Scientific
acquired computer equipment with a fair market value of
$3,727 and incurred a capital lease obligation of $3,727.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Capital Lease - During the first six months of 1999, First
Scientific entered into two capital lease agreements for
computer equipment. The first lease agreement is for a
3-year term requiring monthly payments of $177 and a
present value of $4,336 at inception of the lease. The
second agreement is for a 3-year term requiring monthly
payments of $150 and a present value of $3,727.
Unasserted Claim - On January 5, 1999 First Scientific was
advised of a claim against it allegedly arising out of an
Agreement in Principle made in 1991 (the "1991 Agreement")
by Linco Industries, Inc. ("Linco" now known as First
Scientific Corporation, a wholly owned subsidiary or First
Scientific, Inc.). The 1991 Agreement purported to promise
shares of Linco common stock to an individual (the
Claimant) if certain conditions were met by the Claimant
in representing Linco to potential customers. As of June
30,1999 no legal proceeding has been filed with respect to
this claim by the Claimant, nor has First Scientific made
any settlement offer in an attempt to resolve the matter.
First Scientific's management maintains that the 1991
Agreement is no longer valid because the conditions in the
1991 Agreement were not met in a reasonable time and
because of the failure of other material terms.
Additionally, an indemnification agreement in favor of
First Scientific by the former founding Linco shareholders
requires the latter to satisfy any obligations Linco may
have incurred prior to the reorganization. Consequently,
First Scientific would require that any eventual settlement
or award resulting from the 1991 Agreement be satisfied
entirely by the founding shareholders of Linco. The Linco
founders have assured First Scientific that they will
defend this matter in the event any legal proceedings
should be filed against First Scientific. During the
quarter ended June 30, 1999, the Claimant has persisted in
his claim. Subsequent to the end of the reporting quarter,
June 30, 1999, in response to the Claimant's demands, the
Linco founders filed with the District Court of Weber
County, State of Utah (Civil Case No. 99090484) an action,
including First Scientific, Inc., First Scientific
Corporation, and Linco Industries, Inc as co-Plaintiffs,
for declaratory judgement that the Claimant (the Defendant
in said action) has no entitlement against any of the
Plaintiffs, including First Scientific. The Claimant has
recently been served, but has not yet responded to the
complaint in this action.
Item 2. Managements's Discussion and Analysis and
Plan of Operation.
The following discussion and analysis provides
information which management believes is relevant to an
assessment and understanding of First Scientific's
consolidated results of operations and financial condition.
The discussion should be read in conjunction with the
unaudited condensed consolidated financial statement, as of
June 30, 1999, together with the annual financial
statements as of December 31,1998. Whenever in this
discussion the term "First Scientific" is used, it should
be understood to refer to First Scientific, Inc. and its
wholly owned subsidiary on a consolidated basis, except
where the context clearly indicates otherwise.
Plan of Operation
First Scientific is a development stage company which,
since inception, has incurred losses from operations. As of
June 30, 1999, the cumulative net losses of First
Scientific since inception total $5,188,042 of which
$3,766,440 is attributable to a non-recurring charge for
acquired research and development, as described in First
Scientific's annual report on Form 10-KSB dated December
31, 1998. First Scientific is engaged primarily in the
development of chemical formulations that management feels
will have worldwide sales opportunities. First Scientific
has had no significant sales from its products but intends
to initially market its products through private label
relationships with companies that are major distributors in
the medical, healthcare, over-the-counter, and multi-level
arenas. Development of First Scientific's own brands, may
also be sold through regional distributors, especially in
medical markets, and will only be pursued on a case-by-case
basis as profitable opportunities are identified and
evaluated.
First Scientific has developed two unique
formulations. The first is a moisturizing, antimicrobial
sanitizing formulation that removes 99.99% of bacteria from
the skin without the harsh effects of alcohol, CHG, PCMX,
triclosan, or iodine (this product can be delivered in
wipe, spray, lotion or soap forms). The second is a
topical rash prevention and treatment formulation that
cleanses and moisturizes the skin. It is used for
treatment against skin rashes caused by incontinence as
well as other skin rashes (in wipe form).
The potential worldwide market for products similar to
First Scientific's has grown significantly in recent years
and is projected to continue growing at a substantial rate.
Regarding growth of the market for products similar to
First Scientific's antimicrobial formulation, the growth in
demand is due to the increase in bacteria related disease,
sickness and death from methicillin-resistant and other
bacteria, the demands of government and healthcare
agencies/providers to create healthier treatment
environments and the insistence of the public in general
for healthier living and working conditions. The potential
market growth for products similar to First Scientific's
rash formulation is primarily a function of the growth
rates in the incontinent geriatric population, as baby
boomers grow older. The product appears to also have
application in the infant care market. Management believes
the markets for products similar to First Scientific's
products will continue to expand and that the potential of
First Scientific to become a significant participant in
such markets is a reasonable expectation.
First Scientific currently outsources manufacturing of
its products. First Scientific has developed relationships
with manufacturers, and is in the process of qualifying
other manufacturers, who have U.S. Food and Drug
Administration ("F.D.A.") approved facilities and
experience manufacturing in accordance with F.D.A.
standards. These companies are generally in the business of
manufacturing for various customers who require F.D.A.
compliant facilities for their products. First Scientific
is able to produce a concentrate of its antimicrobial
formulation at its own facility, or at contract facilities,
under F.D.A. protocols. The concentrate can then be shipped
to its contract manufacturers for production runs according
to customer specifications. This procedure helps protect
the trade secret status of this proprietary formulation.
However, First Scientific does not use this same
concentrate mixing procedure in the production of its
dimethicone-based rash prevention and treatment
formulation, because currently First Scientific cannot
economically mix concentrate itself for this product.
Strict confidentiality agreements are in place with the
manufacturer to protect the trade secret status of this
product formulation.
The cash requirements of First Scientific through the
end of first quarter 2000 will vary based upon a number of
factors including, but not limited to, continuing research
and development levels, market development, facilities
enhancement, additional personnel, travel and other
expenses related to projected growth. With the new business
First Scientific is now negotiating, management believes
that existing cash, cash equivalents and cash generated
from anticipated sales will be sufficient to meet the
obligations of First Scientific over the next nine
months. However, in light of management's cash consumption
projections for this period, if anticipated sales do not
materialize in a timely manner at projected volumes, First
Scientific would likely need a bank line of credit and/or
additional equity funding to meet its working capital needs
by the end of the first quarter of 2000. There is no
assurance that any funding will be available or that, if
available, the terms of such funding will be favorable to
First Scientific.
A new source of revenue has developed for First
Scientific. A major division of a large multinational drug
company recently engaged First Scientific, on a fee for
service basis, to perform testing procedures that fulfill
FDA compliance requirements relating to potential product
sales to this customer. Initial responses from this
customer were favorable regarding First Scientific's
testing procedures and operating protocols. Actual testing
for this customer began during the quarter ended June 30,
1999. The prospects for ongoing testing work with this
customer appear likely. This relationship has allowed First
Scientific to gain experience and to develop standard
operating procedures that satisfy, not only this customer's
needs, but that should withstand the most critical
evaluations and requirements of future customers, and
therefore, may provide new revenue opportunities.
Product research and development is an ongoing process
at First Scientific. Existing products are continuously
being refined to meet the needs of markets being pursued.
Potential customers have presented product specification
requests from time to time which were different from those
of First Scientific's existing product specifications.
These circumstances caused additional research and
development to be performed in order to meet the required
specifications. Similar requests from potential customers
are also anticipated in the future. First Scientific
likewise researches new products that fall within the scope
of its currently defined market place and new market places
that appear to have future economic potential.
In light of First Scientific's current mode of
operations of outsourcing its manufacturing, existing plant
and equipment are projected to be sufficient to meet most
of its growth needs. However, should First Scientific
decide, or be required, to perform expanded testing for its
clients and/or should it undertake in-house manufacturing,
additional capital would be required to fund the
establishment of such activities.
First Scientific now employs 10 individuals in
management, administrative, and technical positions. As
First Scientific continues to grow, additional personnel
will need to be added to enable the Company to meet its
projections. A Vice President of Sales and Marketing was
added to the Company's management team during the quarter
ended June 30, 1999, as were an executive secretary and one
lab technician. These hires represent a forty-three
percent increase in First Scientific's workforce.
Management also plans to add a lab testing/quality control
manager and another lab technician by year end.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Position
First Scientific had $696,736 in cash as of June 30,
1999. This represents a decrease of $589,563 from December
31, 1998. Working capital, as of June 30,1999, decreased to
$890,709 compared to working capital of $1,348,846 at
December 31, 1998.
Results of Operations
During the three months and six months ended June 30,
1999, the First Scientific had total operating revenues of
$121,929 and $122,299 respectively, compared with total
operating revenues of $7,341 and $7,612 for the comparable
periods from the prior year. Revenue for 1999 has
primarily resulted from contracts to test products for
customers.
Prior to December 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 private labels to an
over-the-counter customer. First Scientific has decided to
discontinue the sale of these products, but does expect
minimal revenue as existing inventory is liquidated. In
June 1998, First Scientific entered into a private label
supply agreement with a multinational distributer of
medical and healthcare products. This agreement was for
individual antimicrobial wipes that the customer had
planned to export, however, based on the latest
communications with this customer, it is doubtful the
manufacture of this product will ever take place or that
any future business will materialize.
Ongoing negotiations with a major division of a
Fortune 100 company for a dimethicone wipe product have not
formally concluded, but a letter of intent and
manufacturer's purchase order have been received by First
Scientific. Management believes a significant contract
will be signed with this customer during the third quarter
of 1999 which will immediately begin to recognize revenue.
Testing revenue from this company, regarding F.D.A.
compliance, began during the quarter ended June 30, 1999
and accounted for the majority of the revenue during the
quarter. Negotiations with two other large domestic private
labelers began during the reporting quarter which could
lead to orders being placed during the third or fourth
quarters of 1999. First Scientific also concluded a
regional distribution agreement with Welmed Specialties
during the quarter ended June 30, 1999 which should begin
to generate revenue during the fourth quarter of 1999.
This agreement covers six western states; California,
Nevada, Oregon, Washington, Utah and Hawaii. Welmed will
have non-exclusive distribution rights to First
Scientific's products in these states and exclusive rights
to First Scientific's Fresh Cleanse(R) brand products to
hospitals, nursing homes, medical clinics and doctors
offices in this territory. Should anticipated sales from
customers with whom First Scientific has agreements in
place or is negotiating or other potential sales
opportunities which First Scientific anticipates
materializing, not come to fruition, the ability of First
Scientific to sustain operations into the second quarter of
2000, without additional debt or equity financing, would be
questionable.
Private label agreements, such as those discussed
above, create certain risks for First Scientific. These
risks include (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 First Scientific's products are marketed under
other parties' labels, goodwill associated with use of the
products generally inures to the benefit of the other
parties rather than First Scientific; (iii) First
Scientific may have only limited protection from changes in
manufacturing costs and raw material costs; and (iv) if
First Scientific continues to rely on other parties for all
or substantially all of its sales, First Scientific may be
limited in its ability to negotiate with such other parties
upon eventual renewals of their agreements. It is the
belief of management that these risks are mitigated by
initial market demands, the apparent uniqueness of the
Company's formulations, large existing and expanding
markets for its products and the caliber of customers
with which it is currently negotiating. However, First
Scientific recognizes that, in the short run, it will be
dependent on a few large customers where the bulk of its
sales are envisioned to be generated. Until a broader base
of customers has been established, the loss one such
customer could have a serious material adverse impact on
the operating viability of First Scientific.
First Scientific uses as many as twenty specific
chemical and botanical ingredients to formulate each of its
products. In most cases, supplies of ingredients for
First Scientific's formulations continues to remain readily
available from multiple sources. First Scientific
continues to maintain very good relationships with its
suppliers and does not anticipate problems that would cause
significant interruption, delay or availability of such
ingredients.
General and administrative expenses were $240,595 and
$526,011 for the three months and six months ended June 30,
1999, respectively, compared with $33,288 and $48,085 for
the comparable periods from the prior year. The increase in
expenditures between the 1999 and 1998 periods was due to
the continued transition of First Scientific from a
one-man product development entity, with minimal sales
during the second quarter of 1998, to an adequately staffed
operation, in the second quarter of 1999, capable of
administrating anticipated growth. Executive office
space into which First Scientific moved during 1998 should
meet growth needs for the foreseeable future.
Research and development expenses were $9,846 and
$16,108 for the three and six months ended June 30, 1999,
respectively, compared with $8,013 and $12,583 for the
comparable periods from the prior year. The increase in
expenditures between the 1999 and 1998 periods resulted
from the continued refinement of First Scientific's
formulations and the development of new product variations
to meet customer request. Management anticipates an
increase in research and development expenses for future
periods, as First Scientific expands its product offerings.
Liquidity and Capital Resources
Historically, First Scientific has financed its
operations principally through loans, private placements
of equity securities and sporadic product sales. During
the six month period, ending June 30, 1999, sales
constituted the source of the majority of funds from the
operations of First Scientific. First Scientific used net
cash of $544,323 in operating activities during the six
months ended June 30, 1999. As of June 30, 1999, First
Scientific's liabilities totaled $111,678. The Company had
working capital of $890,709 as of June 30,1999.
Year 2000
First Scientific 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. First Scientific's computer system
was purchased September, 1998. The software utilized by
First Scientific is generally standard "off the shelf"
software, typically available from a number of vendors.
While First Scientific believes it has taken all
appropriate steps to assure year 2000 compliance, the
Company is substantially dependent on vendor compliance.
Even if vendor assurances that First Scientific'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, First Scientific interacts
with suppliers, customers, creditors and financial service
organizations domestically and globally who use computer
systems. It is impossible for First Scientific 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 First Scientific's business and operations. The
Company continues to evaluate what contingency plans it may
adopt in order to make in the event First Scientific or
parties with whom it does business experience year 2000
problems.
Forward-Looking Statements
When used in this Form 10-Q and in other filings by
First Scientific with the SEC, in First Scientific's press
releases or other public or stockholder communications, or
in oral statements made with the approval of an authorized
executive officer of First Scientific, 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.
First Scientific 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, First Scientific's actual results for future
periods could differ materially from those anticipated or
projected.
Unless otherwise required by applicable law, First
Scientific 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 statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
First Scientific is not involved in, nor has it been
involved as a defendant in, any legal proceedings as of the
end of the reporting quarter, June 30, 1999. However, on
January 5, 1999 First Scientific was advised of a claim
against it allegedly arising out of an Agreement in
Principle made in 1991 (the "1991 Agreement") by Linco
Industries, Inc. ("Linco" now known as First Scientific
Corporation, a wholly owned subsidiary or First Scientific,
Inc.). The 1991 Agreement purported to promise shares of
Linco common stock to an individual (the Claimant) if
certain conditions were met by the Claimant in representing
Linco to potential customers. As of June 30,1999 no legal
proceeding has been filed with respect to this claim by the
Claimant, nor has First Scientific made any settlement
offer in an attempt to resolve the matter. First
Scientific's management maintains that the 1991 Agreement
is no longer valid because the conditions in the 1991
Agreement were not met in a reasonable time and because of
the failure of other material terms.
Additionally, an indemnification agreement in favor of
First Scientific by the former founding Linco shareholders
requires the latter to satisfy any obligations Linco may
have incurred prior to the reorganization. Consequently,
First Scientific would require that any eventual settlement
or award resulting from the 1991 Agreement be satisfied
entirely by the founding shareholders of Linco. The Linco
founders have assured First Scientific that they will
defend this matter in the event any legal proceedings
should be filed against First Scientific. During the
quarter ended June 30, 1999, the Claimant has persisted in
his claim. Subsequent to the end of the reporting quarter,
June 30, 1999, in response to the Claimant's demands, the
Linco founders filed with the District Court of Weber
County, State of Utah (Civil Case No. 99090484) an action,
including First Scientific, Inc., First Scientific
Corporation, and Linco Industries, Inc as co-Plaintiffs,
for declaratory judgement that the Claimant (the Defendant
in said action) has no entitlement against any of the
Plaintiffs, including First Scientific. The Claimant has
recently been served, but has not yet responded to the
complaint in this action.
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: August 4, 1999 By: /s/ Douglas R. Warren
-----------------------
Douglas R. Warren, President
DATED: August 4, 1999 By: /s/ Gordon M. Davis
-----------------------
Gordon M. Davis, Vice President
Administration/CFO (Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1999, AND STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 696,736
<SECURITIES> 116,571
<RECEIVABLES> 121,104
<ALLOWANCES> 0
<INVENTORY> 46,863
<CURRENT-ASSETS> 994,091
<PP&E> 140,089
<DEPRECIATION> (13,587)
<TOTAL-ASSETS> 1,184,343
<CURRENT-LIABILITIES> 103,382
<BONDS> 8,296
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0
<COMMON> 20,170
<OTHER-SE> 1,052,395
<TOTAL-LIABILITY-AND-EQUITY> 1,184,343
<SALES> 122,299
<TOTAL-REVENUES> 143,469
<CGS> 24,297
<TOTAL-COSTS> 542,118
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,351
<INCOME-PRETAX> (425,297)
<INCOME-TAX> 0
<INCOME-CONTINUING> (425,297)
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<EXTRAORDINARY> 0
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