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 MARCH 31, 2000
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 20,735,436 shares of common stock, $.001 par value,
outstanding as of May 10, 2000.
<PAGE>
FIRST SCIENTIFIC, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
- March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations (Unaudited)
for the Three Months Ended March 31, 2000 and 1999 and for the
Cumulative Period from April 30, 1990 (Date of Inception)
through March 31, 2000 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 2000 and 1999 and
for the Cumulative Period from April 30, 1990 (Date of
Inception) through March 31, 2000 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 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 6. Exhibits and Reports of Form 8-K 14
Signatures 16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTIONS>
March 31, December 31,
2000 1999
---------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash $ 881,528 $ 207,934
Investment in securities available-for-sale 110,509 94,811
Trade accounts receivable 8,496 94,933
Inventory 35,112 35,262
Prepaid expenses 23,480 46,551
---------- ----------
Total Current Assets 1,059,125 479,491
---------- ----------
Property and Equipment
Equipment 215,824 173,532
Leasehold improvements 10,229 10,229
Less: Accumulated depreciation (35,427) (27,016)
---------- ----------
Net Property and Equipment 190,626 156,745
---------- ----------
Notes Receivable - Related Party 7,248 7,000
Purchased Technology, Net - 18,750
Forfeitable Deposit on PureSoft Purchase 611,779 -
Other Assets 34,750 34,883
---------- ----------
Total Assets $1,903,528 $ 696,869
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 113,503 $ 123,352
Accrued liabilities 13,987 30,660
Capital lease obligation - current portion 9,207 8,850
Note payable 13,289 19,590
---------- ----------
Total Current Liabilities 149,986 182,452
---------- ----------
Long-Term Capital Lease Obligation 11,970 14,197
---------- ----------
Stockholders' Equity
Preferred stock - $0.001 par value;
1,000,000 shares authorized; no shares
issued or outstanding - -
Common stock - $0.001 par value; 50,000,000
shares authorized; issued and outstanding:
2000 - 20,721,436 shares, 1999 - 20,219,770
shares 20,721 20,220
Additional paid-in capital 8,961,591 7,001,564
Unearned compensation (309,408) (273,599)
Deficit accumulated during the
development stage (6,930,127) (6,231,062)
Unrealized loss on investment in securities (1,205) (16,903)
---------- ----------
Total Stockholders' Equity 1,741,572 500,220
---------- ----------
Total Liabilities and Stockholders' Equity $1,903,528 $ 696,869
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended Cumulative from
March 31, (Date of Inception)
-------------------------- Through
2000 1999 March 31, 2000
------------ ----------- --------------
<S> <C> <C> <C>
Revenues $ 65,175 $ 370 $ 854,802
Cost of Revenues 29,798 247 332,674
------------ ----------- -------------
Gross Profit 35,377 123 522,128
------------ ----------- -------------
Operating Expenses
General and administrative expense 689,477 285,415 3,193,363
Research and development expense 52,243 6,262 4,136,775
------------ ----------- -------------
Total Operating Expenses 741,720 291,677 7,330,138
------------ ----------- -------------
Loss from Operations (706,343) (291,554) (6,808,010)
Other Income and (Expense)
Realized loss on investment in securities -- -- (140,346)
Interest income 9,030 12,146 56,355
Interest expense (1,753) (1,165) (100,007)
----------- ----------- -------------
Loss Before Income Taxes (699,066) (280,573) (6,992,008)
Benefit from Income Taxes -- -- 61,881
----------- ------------ ------------
Net Loss $ (699,066) $ (280,573) $ (6,930,127)
=========== ============ =============
Basic and Diluted Loss Per Common Share $ (0.03) $ (0.01) $ (0.60)
=========== =========== ============
Weighted Average Number of Shares Used
in Per-Share Calculation 20,481,015 20,169,770 11,562,056
=========== =========== =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative from
April 30, 1990
(Date of
For the Three months Ended Inception)
March 31, Through
2000 1999 March 31, 2000
---------- ---------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (699,066) $ (280,573) $ (6,930,127)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on investments in securities available-for-sale - - 140,346
Depreciation and amortization 27,161 27,344 170,427
Common stock issued for services - - 124,355
Common stock issued for purchased research
and development - - 3,766,440
Compensation from stock options 157,942 15,484 551,037
Deferred tax benefit - - (61,881)
Changes in operating assets and liabilities:
Deposits 134 - (34,750)
Accrued interest income (248) - (248)
Accounts receivable 86,437 539 (8,496)
Inventory 150 (25,290) (35,112)
Prepaid expenses 23,071 8,269 6,520
Accounts payable (9,849) 5,016 113,503
Accrued liabilities (16,672) (46,622) 146,417
----------- ---------- -------------
Net Cash Used in Operating Activities (430,940) (295,833) (2,051,569)
----------- ---------- -------------
Cash Flows From Investing Activities
Cash paid for property and equipment (42,293) (29,309) (198,108)
Cash received from sale of securities available-for-sale - - 302,847
Forfeitable deposit on PureSoft purchase (350,000) - (350,000)
Cash paid for notes receivable - related party - - (7,000)
----------- ---------- -------------
Net Cash Provided by (Used in) Investing Activities (392,293) (29,309) (252,261)
----------- ---------- -------------
Cash Flows From Financing Activities
Proceeds from borrowing - 4,336 275,565
Principal payments on notes payable (6,301) - (162,276)
Proceeds from loans from stockholders - - 158,934
Principal payments on loans from stockholders - - (86,500)
Principal payment under capital lease obligation (1,871) (886) (6,767)
Proceeds from issuance of common stock 1,504,999 - 3,006,402
----------- --------- -------------
Net Cash Provided by Financing Activities 1,496,827 3,450 3,185,358
----------- --------- -------------
Net Increase (Decrease) in Cash 673,594 (321,692) 881,528
Cash at Beginning of Period 207,934 1,286,299 -
Cash at End of Period $ 881,528 $ 964,607 $ 881,528
=========== ========== =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
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 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 Company's financial statements and notes thereto
included in the Form 10-KSB dated December 31, 1999. The results of
operations for the three month period ended March 31, 2000 are not
necessarily indicative of the operating results to be expected for the
full year.
NOTE 2-COMPREHENSIVE LOSS
Other comprehensive loss 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 Ended Inception)
March 31, Through
2000 1999 March 31, 2000
---------- ---------- --------------
<S> <C> <C> <C>
NET LOSS $ (699,066) $ (280,573) $ (6,992,008)
OTHER COMPREHENSIVE LOSS
Change in unrealized loss on investment
in securities available-for-sale 15,698 (50,500) (1,205)
---------- ---------- -------------
COMPREHENSIVE LOSS $ (683,368) $(331,073) $ (6,993,213)
========== ========= =============
NOTE 3-SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid during the three months ended March 31, 2000 and 1999,
was $1,753 and $1,165, respectively, and $ 100,007 for the period from
April 30, 1990 (date of inception) through March 31, 2000.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE - During the first quarter 2000, First Scientific added
additional office and laboratory space and renegotiated the lease for
its current office space. The new lease is for a three-year term, is
renewable on an annual basis and currently requires lease payments of
$7,325 per month with annual escalations equal to the lessor of the
change in the consumer price index or 5%.
EMPLOYMENT AGREEMENT - Effective January 3, 2000, First Scientific
established a one-year employment agreement with its new sales and
marketing vice president for an annual minimum of $100,000 plus
options to purchase 100,000 common shares at $1.75 per share.
PURESOFT PURCHASE AGREEMENT - On March 15, 2000, the Company entered
into an agreement to acquire an 80% interest in PureSoft Solutions
L.L.C. ("PureSoft"), a New Hampshire limited liability company
involved in manufacturing and distribution of health care products. On
that date, the Company paid $50,000, issued options to purchase 87,534
common shares at $0.01 per share, and signed a $450,000 promissory
note to the owners of PureSoft. In addition, the Company advanced
$300,000 to PureSoft. The agreement provides for the Company to
advance PureSoft $300,000 on June 15, 2000 and on August 15, 2000. The
promissory note bears interest at 8.5% per annum with a $300,000
payment due on June 15, 2000 and quarterly payments of $50,000
thereafter through September 15, 2000. The options were recorded at
their fair value of $261,779, or $2.99 per share, based on the
Black-Scholes option pricing model using the following assumptions:
6.2% risk-free interest rate, 0% yield, 0% volatility, and estimated
life of 5 years.
The $50,000 paid to the owners, the $300,000 advanced to PureSoft and
the options are not refundable and will be forfeited should the
Company not pay $300,000 on the promissory note and advance $300,000
on June 15, 2000. In the event the Company does not make the June 15th
payments, the agreement will be void and the Company will have no
further obligation under the promissory note. Accordingly, the
payments made and the fair value of the options issued were accounted
for as forfeitable deposits on the purchase at March 15, 2000.
The agreement also provides that after the Company has met all the
requirements set forth above, the Company will purchase an additional
7%, and remaining 13% ownership interest in PureSoft on April 1, 2001
and April 1, 2002, respectively, by issuing shares of common stock.
The number of shares to be issued is contingent upon the PureSoft net
income from operations before income taxes, and shall vary in
proportion to any over or under achievements of established
performance milestones stated in the agreement. Provided, however, an
aggregated minimum of $190,000 worth of First Scientific shares will
be delivered to the owners of PureSoft for the remaining interests.
The maximum number of shares issuable under the agreement total an
aggregated 1,100,688. The additional shares issued which are based
upon contribution of PureSoft earnings will be recorded based on the
fair value of the shares on the dates issuable and will, accordingly,
effect the recorded amount of goodwill on those dates.
LEGAL CONTINGENCIES- An individual asserted a claim against the
Company under the terms of an agreement in principal in 1991, which
purported to promise shares of Linco common stock if certain
conditions were met by the individual in representing the Company to
potential customers. First Scientific's management maintains that the
1991 agreement is no longer valid because the conditions were not met
within a reasonable time and because of the individual's failure to
fulfill other material terms of the 1991 agreement. Because of the
claim, the Linco founders and Company filed an action for declaratory
judgement that the individual has no entitlement against the Company.
The individual responded and filed a counter claim that he had "fully
performed" under the 1991 agreement. The action is now only in the
discovery phase. Management believes this claim should not ultimately
result in any potential liability to the Company based on sufficient
defenses and further on an indemnification agreement it has with the
Linco founders.
NOTE 5 - STOCKHOLDERS' EQUITY
During the quarter ended March 31, 2000, First Scientific received
cash proceeds in the amount of $1,505,000 under the terms of a private
placement offering and issued 501,666 investments units, or $3.00 per
unit. Each investment unit consists of one share of the Company's
common stock and a warrant to purchase one-half share of common stock
at $5.00 per share. The warrants expire December 31, 2001.
NOTE 6 - STOCK OPTIONS
During the quarter ending March 31, 2000, First Scientific granted
155,000 options under the 1998 Stock Option Plan to two employees.
Options for 62,000 common shares were exercisable during the quarter
ending March 31, 2000 and the remaining 93,000 options become
exercisable beginning January 10, 2001 through February 14, 2002. All
options granted during this period expire on the fifth anniversary of
its respective grant date. Compensation relating to the options of
$193,750 or $1.25 per share, is being recognized over the period the
options vest of which $31,484 was recognized in the quarter ending
March 31, 2000.
NOTE 7 - SUBSEQUENT EVENTS
During April 2000, First Scientific issued 70,000 non-qualified stock
options to purchase common shares at $3.00 per share to new directors
of the Company. Compensation relating to the grant of these options
will be $55,976 calculated based upon their fair value as determined
using the Black-Scholes option pricing model and will be recognized
over the vesting period of the options.
During April 2000, the Company issued 14,000 shares of common stock
for cash proceeds in the amount of $42,000, or $3.00 per share.
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 statements, as of March 31,
2000, together with the annual financial statements as of December 31,
1999. 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 March 31, 2000
the cumulative net losses of First Scientific since inception total
$6,930,127 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 and marketing
of chemical formulations that management feels will have worldwide
sales opportunities. As of March 31, 2000, First Scientific has had
minimal sales from its products, but intends to expand the marketing
of its products through private label relationships with companies
that are major distributors in the medical, healthcare,
over-the-counter, and multi-level arenas, both domestically and
internationally. Previous marketing materials have been refined
during the current quarter to add further support to the expanded
sales efforts of First Scientific. Development of First Scientific's
own brand, renamed ProCleanse (TM), will be handled mostly through
regional brokers and distributors, especially in medical and food
handling markets, and will 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 which can be
delivered in wipe, spray, lotion or soap forms that removes 99.99% of
bacteria from the skin, along with other pathogens, without the harsh
effects of alcohol, CHG, PCMX, triclosan, or iodine which are active
ingredients in most competitive products. The second is a topical rash
prevention and treatment formulation that cleanses and moisturizes the
skin. It is used in wipe form for the prevention and treatment
against skin rashes caused by incontinence, as well as other skin
rashes.
The potential of worldwide markets 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 microbial
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. This product appears also to 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 the manufacturing of its
products. The Company has defined relationships with several
manufacturers, and is in the process of qualifying other
manufacturers, who have U.S. Food and Drug Administration ("F.D.A.")
compliant facilities and experience in 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 has decided to share
its patent pending formulations (both for its antimicrobial and rash
prevention products) with selected manufacturers, under strict
non-disclosure/confidentially agreements, to facilitate the production
of its products and to obtain the most cost effective pricing
available. First Scientific filed for patent protection with the U.
S. Patent Office for these product formulations during the third
quarter of 1999. Said patent applications are still in the review
process by the Patent Office.
The cash requirements of First Scientific through the end of the
second quarter 2000 will vary based upon a number of factors
including, but not limited to, continuing research and development
levels, increased market development, facilities enhancement,
additional personnel, travel, a planned acquisition and other expenses
related to projected growth. With the new business First Scientific is
now actively pursuing, management believes existing cash, cash
equivalents, cash generated from anticipated sales and cash generated
from a private placement, which is presently open, there will be
sufficient cash to meet Company obligations 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 and/or if its private placement does not
proceed as anticipated, First Scientific would require other equity
funding or loans to meet its working capital needs during the third
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.
The new source of revenue reported in the 1999 third quarter Form
10-QSB and the 1999 Form 10-KSB filings by First Scientific has
produced limited revenues from testing, but only limited revenue from
the sale by the Company of ingredients during the present quarter due
to the delay in the formal launch of the product, for which this
testing is still being performed. ConvaTec, a division of
Bristol-Myers Squibb Company, has engaged First Scientific, on a fee
for service basis, to perform testing procedures to assure that this
product fulfills FDA compliance requirements. ConvaTec has reported
favorable results regarding First Scientific's testing procedures and
operating protocols. The formal launch of ConvaTec's product, which
due to manufacturing scale-up delays, is now anticipated for the late
second or third quarter of 2000, should result in increased revenues
in future quarters from pre-testing.
This relationship has allowed First Scientific to gain experience and
to develop standard operating procedures that not only satisfy this
customer's needs, but that should also withstand the most critical
evaluations and requirements of future customers, and therefore, may
provide other revenue opportunities as new customers may need similar
testing. Even though ConvaTec has designated First Scientific as its
vendor of choice for the post-testing work required by the F.D.A for
this product, it appears unlikely, at this time, that any future
revenue will be generated in connection with the testing contract. The
Company may, however, secure other testing opportunities as new
customers may need similar testing services.
Product research and development is an ongoing process at First
Scientific. Existing products are continuously being refined to meet
the needs of markets the Company is pursuing. Potential customers
present product specification requests from time to time which differ
from those of First Scientific's existing product specifications.
These circumstances often cause 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 performs research on new products that fall
within the scope of its currently defined market place and new market
places that appear to have future economic potential. Increased
spending is anticipated in future quarters for lab equipment,
furniture and fixtures.
In light of First Scientific's current outsourcing of its
manufacturing, existing plant and equipment related to this area are
projected to be sufficient to meet most of its growth needs. However,
should First Scientific be required to perform expanded testing and/or
manufacturing for its clients and/or should the Company deem it in its
best interest to undertake in-house manufacturing, additional capital
would be required to establish such activities. Management is
actively pursuing additional outsourced manufacturing capacity for its
products.
First Scientific employs 14 individuals in management,
administrative, and technical positions. As First Scientific continues
to grow, additional personnel will need to be hired to enable the
Company to meet its projected growth. During the current quarter a
Vice-President of Sales, two market specific sales managers, a lab
assistant and a part-time data base manager were hired. Management
anticipates hiring a manufacturing vice-president, additional sales
/marketing personnel, another lab technician and a senior finance
person over the next three to six months.
First Scientific continues to contract with Kinara Graphics for
advertizing, web creation and creative marketing, with Scribe Public
Relations for general public relations, press and media relations and
with Kovach and Associates for industry consulting and introductions.
The Company has also has retained consultants in the areas of
international sales/marketing development, government affairs (in
Washington, DC) and fund raising (in Boston/New York). Management
feels these professionals are enhancing First Scientific's
professionalism, market presence , potential customer contacts and
funding capacity. Under the leadership of in-house sales and marketing
management, collateral and sales presentation materials have been
produced to promote First Scientific's antimicrobial healthcare
personnel handwash and first aid antiseptic products to potential
customers and to introduce the company to the media. Management
considers the ongoing results of these efforts to be positive and feel
they will lead to significant sales in the coming quarters.
Recent Developments
Two potentially significant events transpired during the quarter
ending March 31, 2000 resulting from the Company's business operations
planning. On March 15, 2000, the Company entered
into an agreement to acquire an 80% interest in PureSoft Solutions
L.L.C. ("PureSoft"), a New Hampshire limited liability company
involved in manufacturing and distribution of health care products. On
that date, the Company paid $50,000, issued options to purchase 87,534
common shares at $0.01 per share, and signed a $450,000 promissory
note to the owners of PureSoft. In addition, the Company advanced
$300,000 to PureSoft. The agreement provides for the Company to
advance PureSoft $300,000 on June 15, 2000 and on August 15, 2000. The
promissory note bears interest at 8.5% per annum with a $300,000
payment due on June 15, 2000 and quarterly payments of $50,000
thereafter through September 15, 2000. The options were recorded at
their fair value of $261,779, or $2.99 per share, based on the
Black-Scholes option pricing model using the following assumptions:
6.2% risk-free interest rate, 0% yield, 0% volatility, and estimated
life of 5 years.
The $50,000 paid to the owners, the $300,000 advanced to PureSoft and
the options are not refundable and will be forfeited should the
Company not pay $300,000 on the promissory note and advance $300,000
on June 15, 2000. In the event the Company does not make the June 15th
payments, the agreement will be void and the Company will have no
further obligation under the promissory note. Accordingly, the
payments made and the fair value of the options issued were accounted
for as forfeitable deposits on the purchase at March 15, 2000.
In connection with the PureSoft agreement, the Company entered into an
Employment Agreement with David Wilich, President of PureSoft, and a
Stock Option Agreement with David Wilich, Frank Wilich and Gene
DuBois. The significance of this agreement for the Company is that
new markets will be sold into that, although niche oriented, can
provide significant revenue to the Company in future periods and that
PureSoft has introduced First Scientific to manufacturers whose
pricing is considerably lower than the Company had been able to
attain. Development of such manufacturing relationships may provide
greater operating margins and give the Company negotiating leverage
regarding pricing with other manufacturers with whom it is dealing
with now or in the future. Management believes that the closing of
the PureSoft agreement can have a very positive effect on the Company
and should it not close, operations would be negatively impacted.
The second event was the signing of a "Letter of Intent" with
Tianjin ZhongZin Pharmaceutical Group Corporation Limited of Tianjin,
the People's Republic of China. This letter of intent calls for due
diligence, product surveys, market feasibility studies and product
registration preparation to be performed which will serve as a basis
for a joint venture to be formed. If both parties agree such a
relationship would be in their individual and joint economic best
interests, the contemplated joint venture would be negotiated and
entered into in a timely manner. Should the joint venture come to
fruition, First Scientific would have access to this vast market
opportunity which should yield a fair return to the Company.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Position
First Scientific had $881,528 in cash as of March 31, 2000. This
represents an increase of $673,594 from December 31, 1999. Working
capital, as of March 31,2000, increased to $919,139 compared to
working capital of $297,039 at December 31, 1999. The Company had an
accumulated deficit of $6,930,127 at March 31, 2000, most of which had
been funded out of proceeds received from the issuance of stock.
Results of Operations
During the three months ended March 31, 2000 and 1999, First
Scientific had total operating revenues of $65,175 and $370
respectively. Revenue for the quarter ending March 31, 2000 primarily
resulted from product testing and minimal product sales.
On August 12, 1999 First Scientific signed a supply agreement with
ConvaTec, a division of Bristol-Myers Squibb Company. Under this
agreement, First Scientific provides raw materials to a third party
manufacturer designated by ConvaTec, who manufactures a dimethicone
based cleansing and diaper rash treatment and prevention product for
this customer. Testing revenue for this product from ConvaTec,
regarding F.D.A. compliance, which began during the quarter ended June
30, 1999, continued during the quarter ending March 31, 2000. Testing
revenue relating to this product accounted for the majority of the
revenue during the quarter. However, this revenue diminished during
the current quarter because of a delay in the formal product launch of
this product by ConvaTec due to manufacturing scale-up issues. The
delay in the formal launch of ConvaTec's product also delayed revenue
from sales thereof.
Ongoing negotiations are continuing with several market share leaders
in the healthcare personnel handwash market where First Scientific is
currently focusing it marketing efforts. Initial meetings with other
domestic and international companies in the food handling and
hospitality/direct marketing and retail markets have been held during
the current quarter; however, no sales were finalized. Because the
Company has experienced a longer sales cycle than it originally
anticipated, delays in revenue generation have been experienced.
First Scientific's regional distribution agreement with Welmed
Specialties produced minimal revenues during the quarter ended March
31, 2000. Additional warehousing inventory was shipped to Welmed
during the current quarter. 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 distribution
rights to First Scientific's Fresh Cleanse(R) brand products to
hospitals, nursing homes, medical clinics and doctors offices in this
territory.
The Company's agreement to acquire PureSoft required a cash payment
by the Company of $350,000 during the current quarter (see "Recent
Events" in the Plan of Operations section of this document for
details).
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 in the
second quarter of 2000 not come to fruition, the ability of First
Scientific to sustain operations beyond the third 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 for 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 whom
First Scientific 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 of
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
continue 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 $689,477 for the three
months ended March 31, 2000, compared with $285,415 for the comparable
period from the prior year. The increase in expenditures between years
2000 and 1999 was due to the continued transition of First Scientific
from a product development entity, with minimal sales during the
first quarter of 1999, to an adequately staffed operation in the first
quarter of 2000, which is capable of administrating the Company's
aggressive go-to-market sales and marketing strategy and the
commensurate requirement for research and product development.
Executive office space into which First Scientific moved during 1998
reached capacity during the first quarter of 2000. During the current
quarter First Scientific entered into an agreement with its present
landlord to renegotiate its present lease and to lease an additional
5,300 square feet of space adjacent to its existing space to house the
expanded testing, research and development and sales/marketing
functions to accommodate present and anticipated growth. Contracts
for furniture, fixtures and equipment were entered into during the
current quarter to adequately outfit this space and to meet the
business needs of Company's employees and the demands of its
customers.
Research and development expenses were $52,243 for the three ended
March 31, 2000 compared with $6,262 for the comparable periods from
the prior year. The increase in expenditures between 2000 and 1999
resulted from the continued refinement of First Scientific's
formulations and the development of new product variations to meet
customer requests. 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 three month period ending
March 31, 2000, sales and testing revenues constituted the source of
the majority of funds from the operations of First Scientific. First
Scientific used net cash of $430,940 in operating activities during
the three months ended March 31, 2000. As of March 31, 2000, First
Scientific's current and long-term liabilities totaled $161,956. The
Company had working capital of $919,139 as of March 31. 2000. Without
additional equity capital from a private placement or some other
source of capital, First Scientific anticipates experiencing severe
liquidity problems during the third quarter of 2000.
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 in September, 1998 and is planned to be updated during
the second quarter of 2000. The software utilized by First Scientific
is generally standard "off the shelf" software, typically available
from a number of vendors. First Scientific did not experience any
significant year 2000 problems.
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. No year 2000
problems were experienced by the Company's vendors, contractors or
customers that negatively affected the Company.
Forward-Looking Statements
When used in this Form 10-QSB 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.
An individual asserted a claim against the Company under the terms
of an agreement in principal in 1991, which purported to promise
shares of Linco common stock if certain conditions were met by the
individual in representing the Company to potential customers. First
Scientific's management maintains that the 1991 agreement is no longer
valid because the conditions were not met within a reasonable time and
because of the individual's failure to fulfill other material terms of
the 1991 agreement. Because of the claim, the Linco founders and
Company filed an action for declaratory judgement that the individual
has no entitlement against the Company. The individual responded and
filed a counter claim that he had "fully performed" under the 1991
agreement. The action is now only in the discovery phase. Management
believes this claim should not ultimately result in any potential
liability to the Company based on sufficient defenses and further on
an indemnification agreement it has with the Linco founders.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities
During the quarter ended March 31, 2000, First Scientific issued
501,666 shares of common stock to five accredited investors for
$1,505,000 in cash or $3.00 per share pursuant to Rule 506 of
Regulation D under the Securities Act of 1933, as amended. The
capital contribution was in connection with a private placement
memorandum the company is in the process of funding. First Scientific
did not use an underwriter in connection with the Private Placement.
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(1)
2.2 Purchase
Agreement dated
as of March 15,
2000 among the
Registrant and
David Wilich,
Frank Wilich,
Jr., Gene Dubois
and PureSoft
Solutions,
L.L.C., a New
Hampshire limited
liability
company. (7)
3.1 Articles of
Incorporation(2)
3.2 Bylaws(2)
3.3 Amendment to Articles of Incorporation changing name to
First Scientific, Inc. and effecting a forward stock split.(1)
10.1 Non-qualified Stock Option Agreement with Jerral R. Pulley(3)
10.2 Non-qualified Stock Option Agreement with Peter Sundwall,
M.D.(3)
10.3 1998 Stock Incentive Plan(4)
10.4 Agreement with Weldon Phillips(5)
10.5 Employment Agreement with Randy Hales(5)
10.6 Consulting Agreement with Jerral R. Pulley(5)
10.7 Consulting Agreement with Edward Walker(5)
10.8 Exclusive License and Supply Agreement with Convatec
(Confidential Testament Requested for Certain Portions) (6)
10.9 Employment Agreement with David Wilich (7)
10.10 Stock Options Agreement with David Wilich, Frank Wilich and
Gene Dubois.(6)
27 Financial data schedule(8)
_____________________
(1) Incorporated by reference to the same-numbered exhibit
to the Form 8-K filed October 2, 1998 by First
Scientific with the Securities and Exchange Commission.
(2) Incorporated by reference to the same-numbered exhibit to
the Company's Registration Statement on Form 10-SB, file No.
0-24378.
(3) Incorporated by reference to the same-numbered exhibit to
the Form 10-QSB filed November 16, 1998 with the Securities
and Exchange Commission.
(4) Incorporated by reference from Quarterly Report on Form
10-QSB, as filed on June 15, 1999.
(5) Incorporated by reference to the same numbered exhibit to
the form 10-QSB filed November 16, 1999 with the Securities
and Exchange Commission.
(6) Incorporated by reference from Amended Quarter Report on
Form 10/QSB/A as filed on March 8, 2000.
(7) Incorporated by reference from Report on Form 8-K, as filed
on March 30, 2000.
(8) Filed herewith.
(b) Reports on Form 8-K
On March 30, 2000, the Company filed a report on Form 8-K.
A report on Form 8-K was filed during the reporting quarter on
March 30, 2000.
<PAGE>
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: May 15,2000 By: /s/ Randall L. Hales
Randall L. Hales, CEO and
President
DATED: May 15, 2000 By: /s/ Gordon M. Davis
Gordon M. Davis, Vice President
Administration/CFO
(Principal
Financial and Accounting
Officer)
</TABLE>
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 2000, AND STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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<SECURITIES> 110,509
<RECEIVABLES> 8,496
<ALLOWANCES> 0
<INVENTORY> 35,112
<CURRENT-ASSETS> 1,059,125
<PP&E> 226,053
<DEPRECIATION> (35,427)
<TOTAL-ASSETS> 1,093,528
<CURRENT-LIABILITIES> 149,986
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<COMMON> 20,721
<OTHER-SE> 1,720,851
<TOTAL-LIABILITY-AND-EQUITY> 1,903,528
<SALES> 65,175
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<CGS> (29,798)
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<OTHER-EXPENSES> (52,243)
<LOSS-PROVISION> 0
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