<PAGE>
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, 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, including zip
code)
Registrant's telephone number, including area code: (801) 393-5781
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -----
There were 20,978,770 shares of common stock, $.001 par value, outstanding as of
August 18, 2000.
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
FORM 10-QSB
THREE AND SIX MONTHS ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) - June 30, 2000
and December 31, 1999............................................3
Condensed Consolidated Statements of Operations (Unaudited) for the
Three and Six Months Ended June 30, 2000 and 1999 and for the
Cumulative Period from April 30, 1990 (Date of Inception)
through June 30, 2000............................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended June 30, 2000 and 1999 and for the Cumulative Period
from April 30, 1990 (Date of Inception) through June 30, 2000....5
Notes to Condensed Consolidated Financial Statements (Unaudited)......7
Item 2. Management's Discussion and Analysis or Plan of Operation............12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................18
Item 2. Changes in Securities and Use of Proceeds............................18
Item 6. Exhibits and Reports on Form 8-K.....................................18
Signatures ................................................................20
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------- -------------
ASSETS
Current Assets
<S> <C> <C>
Cash $ 3,120,494 $ 207,934
Available-for-sale marketable securities 36,526 94,811
Accounts receivable, net 113,183 94,933
Inventory 71,116 35,262
Prepaid expenses 13,710 46,551
---------------- --------------
Total Current Assets 3,355,029 479,491
---------------- --------------
Property and Equipment
Equipment 336,873 173,532
Leasehold improvements 52,970 10,229
Less: Accumulated depreciation and amortization (46,808) (27,016)
--------------- --------------
Net Property and Equipment 343,035 156,745
---------------- --------------
Goodwill and Other Intangible Assets, net 1,128,341 18,750
---------------- -------------
Other Assets 34,750 34,883
--------------- -------------
Notes Receivable - Related Party 7,414 7,000
--------------- -------------
$ 4,868,569 $ 696,869
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Promissory note $ 150,000 $ --
Member interest purchase obligation 106,083 --
Capital lease obligation, current portion 18,394 8,850
Note payable 6,807 19,590
Accounts payable 256,079 123,352
Accrued liabilities 118,161 30,660
--------------- -------------
Total Current Liabilities 655,524 182,452
--------------- --------------
Capital Lease Obligation, net of current portion 33,426 14,197
--------------- --------------
Stockholders' Equity
Convertible redeemable preferred stock series 2000-A, $1,000 stated value
per share: 4,500 shares authorized; 3,000 shares outstanding in 2000
(aggregate liquidation preference
of $3,013,333) 2,713,333 --
Common stock, $0.001 par value: 50,000,000 shares authorized;
20,978,770 shares outstanding in 2000, and 20,219,770 shares
outstanding in 1999 20,979 20,220
Additional paid-in capital 11,859,923 7,001,564
Deficit accumulated during the development stage (10,191,067) (6,231,062)
Deferred compensation (223,549) (273,599)
Unrealized loss on investments in marketable securities -- (16,903)
--------------- -------------
Total Stockholders' Equity 4,179,619 500,220
--------------- -------------
$ 4,868,569 $ 696,869
=============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
<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
----------------------------- -------------------------------
2000 1999 2000 1999 June 30, 2000
--------------- ------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 91,444 $ 121,929 $ 156,619 $ 122,299 $ 946,246
Cost of Revenues 63,995 24,049 93,793 24,297 396,669
--------------- ------------- --------------- --------------- ------------------
Gross Profit 27,449 97,880 62,826 98,002 549,577
--------------- ------------- --------------- --------------- ------------------
Operating Expenses:
Selling, general and administrative 957,307 240,595 1,646,784 526,010 4,150,671
Research and development 118,872 9,846 171,115 16,108 4,255,647
--------------- ------------- --------------- --------------- ------------------
Total Operating Expenses 1,076,179 250,441 1,817,899 542,118 8,406,318
--------------- ------------- --------------- --------------- ------------------
Loss from Operations (1,048,730) (152,561) (1,755,073) (444,116) (7,856,741)
Other Income (Expense):
Interest income 13,920 9,024 22,950 21,170 70,275
Interest expense (11,020) (1,187) (12,773) (2,351) (111,027)
Realized loss on available-for-sale
marketable securities (75,188) -- (75,188) -- (215,534)
--------------- ------------- --------------- --------------- ------------------
Total Other Income (Expense), net (72,288) 7,837 (65,011) 18,819 (256,286)
--------------- ------------- --------------- --------------- ------------------
Loss before Income Taxes (1,121,018) (144,724) (1,820,084) (425,297) (8,113,027)
Income Tax Benefit -- -- -- -- 61,881
--------------- ------------- --------------- --------------- ------------------
Net Loss (1,121,018) (144,724) (1,820,084) (425,297) (8,051,146)
Preferred Stock Dividends 2,139,921 -- 2,139,921 -- 2,139,921
--------------- ------------- --------------- --------------- ------------------
Net Loss Attributable to Common Stockholders
$ (3,260,939) $ (144,724) $ (3,960,005) $ (425,297) $ (10,191,067)
=============== ============= =============== =============== ==================
Basic and Diluted Net Loss Per Common Share
$ (0.16) $ (0.01) $ (0.19) $ (0.02)
=============== ============= =============== ===============
Weighted Average Number of Common Shares
Outstanding 20,764,689 20,169,770 20,614,647 20,169,770
=============== ============= =============== ===============
Other Comprehensive Loss:
Net loss $ (1,121,018) $ (144,724) $ (1,820,084) $ (425,297) $ (8,051,146)
Unrealized holding loss on available for
sale marketable securities -- (77,714) -- (128,213) --
Losses included in net income 1,205 -- 16,903 -- --
--------------- ------------- --------------- --------------- ------------------
Comprehensive Loss $ (1,119,813) $ (222,438) $ (1,803,181) $ (553,510) $ (8,051,146)
=============== ============= =============== =============== ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative from
April 30, 1990
(Date of
For the Six Months Ended Inception)
June 30, Through
2000 1999 June 30, 2000
----------------- ------------- ------------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net loss $ (1,820,084) $ (425,297) $ (8,051,146)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on marketable securities 75,188 -- 215,534
Depreciation and amortization 57,392 55,605 200,658
Loss on disposal of property and equipment 5,573 -- 5,573
Amortization of deferred compensation 243,800 30,968 636,895
Interest income on related-party note receivable (414) -- (414)
Common stock issued for services -- -- 124,355
Common stock issued for purchased research
and development -- -- 3,766,440
Deferred income tax benefit -- -- (61,881)
Changes in assets and liabilities, net of effects of
the acquisition of PureSoft Solutions L.L.C.:
Accounts receivable, net 4,586 (120,490) (90,347)
Inventory (17,052) (20,244) (52,314)
Prepaid expenses 32,841 16,539 16,290
Other assets 133 -- (34,751)
Accounts payable 99,442 (22,102) 222,794
Accrued liabilities (12,944) (59,302) 150,146
---------------- -------------- -----------------
Net Cash Used In Operating Activities (1,331,539) (544,323) (2,952,168)
--------------- -------------- -----------------
Cash Flows From Investing Activities
Purchases of property and equipment (163,449) (40,983) (319,264)
Proceeds from sale of marketable securities -- -- 302,847
Acquisition of PureSoft Solutions L.L.C.,
net of cash acquired (202,422) -- (202,422)
Issuance of related-party notes receivable -- -- (7,000)
--------------- ------------- -----------------
Net Cash Used In Investing Activities (365,871) (40,983) (225,839)
--------------- -------------- ------------------
Cash Flows From Financing Activities
Proceeds from borrowings -- 4,336 275,565
Principal payments on notes payable (362,783) -- (518,758)
Proceeds from loans from stockholders -- -- 158,934
Principal payments on loans from stockholders -- (6,667) (86,500)
Principal payments on capital lease obligations (4,248) (1,926) (9,144)
Proceeds from the issuance of Series 2000-A
preferred stock 2,700,000 -- 2,700,000
Proceeds from issuance of common stock 2,277,001 -- 3,778,404
---------------- ------------- -----------------
Net Cash Provided By (Used In) Financing Activities 4,609,970 (4,257) 6,298,501
--------------- -------------- -----------------
Net Increase (Decrease) In Cash 2,912,560 (589,563) 3,120,494
Cash At Beginning Of The Period 207,934 1,286,299 --
--------------- ------------- -----------------
Cash At End Of The Period $ 3,120,494 $ 696,736 $ 3,120,494
=============== ============= =================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative from
April 30, 1990
Six Months Ended June 30, (Date of
-------------------------------------- Inception) through
2000 1999 June 30, 2000
------------------- ------------------ -----------------
Supplemental disclosure of cash flow information:
<S> <C> <C> <C>
Cash paid during the period for interest $ 11,709 $ 2,351 $ 109,963
Supplemental Schedule of Non-cash Investing and
Financing Activities:
Acquisition of PureSoft Solutions L.L.C.
Fair value of assets acquired 1,651,592 --
Liabilities assumed 183,730 --
Promissory note 450,000 --
Fair value of stock options issued 261,779 --
Member interest purchase obligation 106,083 --
Noncash preferred stock dividends 2,139,921 --
Equipment acquired through capital lease
obligations 33,021 3,727
Stock option grants at less than fair value 193,750 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation--The accompanying condensed consolidated financial
statements are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted although the Company believes that the following
disclosures are adequate to make the information presented not misleading.
These condensed consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) that, in the opinion of
management, are necessary to present fairly the financial position and results
of operations for the periods presented. These condensed consolidated financial
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1999.
Operating results for the three months and six months ended June 30, 2000, are
not necessarily indicative of the operating results to be expected for the year
ending December 31, 2000.
Net Loss Per Common Share--Basic and diluted net loss per common share are
calculated by dividing net loss attributable to common stockholders by the
weighted average number of shares of common stock outstanding during the period.
At June 30, 2000 and 1999, there were outstanding common stock equivalents to
purchase 6,397,035 and 1,315,000 shares of common stock, respectively, that were
not included in the computation of diluted net loss per common share as their
effect would have been anti-dilutive, thereby decreasing the net loss per common
share.
NOTE 2-ACQUISITION OF PURESOFT SOLUTIONS L.L.C.
On March 15, 2000, the Company entered into an agreement (the "PureSoft
Agreement") to acquire PureSoft Solutions L.L.C. ("PureSoft"), a New Hampshire
limited liability company involved in the manufacturing and distribution of
health care products. As consideration for the purchase of 80% of the ownership
of PureSoft, the Company agreed to pay $50,000 in cash, issue options to
purchase 87,534 common shares at $0.01 per share, and issue a $450,000
promissory note bearing interest at 8.5% per year with a $300,000 payment due on
June 15, 2000, and quarterly payments of $50,000 thereafter through March 15,
2001. The PureSoft Agreement also provides that the Company will purchase an
additional 7%, and the remaining 13% ownership interest in PureSoft on April 1,
2001, and April 1, 2002, respectively, by issuing shares of its common stock.
The number of shares to be issued is contingent upon the net income before
income taxes of PureSoft, and shall vary in proportion to any over- or
under-achievements of established performance milestones stated in the PureSoft
Agreement, provided, however, that an aggregate minimum of 35,361 shares of the
Company's common stock are to be issued for the remaining 20 % ownership
interest. In addition, the PureSoft Agreement required the Company to make
working capital advances of $300,000 to PureSoft on each of March 15, 2000, June
15, 2000, and August 15, 2000. All of the working capital advances were paid on
or before the respective due date. The acquisition was accounted for as a
purchase.
On March 15, 2000, the Company paid $50,000 to the PureSoft owners and $300,000
to PureSoft and issued the options. The options were recorded at their estimated
fair value of $261,779, or $2.99 per share, based on the Black-Scholes
option-pricing model. The PureSoft Agreement would have been void in the event
the Company did not make the required $300,000 promissory note payment together
with accrued interest and the working capital advance on or before June 15,
2000, and the $50,000 paid to the PureSoft owners, the $300,000 advanced to
PureSoft, and the options would have been forfeited. On June 2, 2000, the
Company made the required payments and consummated the acquisition.
7
<PAGE>
The purchase price consisted of: (1) $50,000 paid in cash to the PureSoft
owners; (2) $600,000 paid in cash as working capital advances prior to the
purchase; (3) the $450,000 promissory note; (4) the estimated fair value of the
stock options of $261,779; and (5) the estimated fair value of $106,083 for the
minimum of 35,361 shares to be issued for the remaining 20% ownership interest,
and totaled $1,467,862. The contingent shares which may be issued based upon
PureSoft's achieving specific levels of net income before income taxes will be
recorded at the then fair value of the shares issued and will, accordingly,
affect the recorded amount of goodwill.
The purchase price allocations to tangible assets included $447,578 of cash,
$22,836 of accounts receivable, $18,802 of inventory, and $14,911 of property
and equipment. The purchase price allocations to liabilities assumed included
$33,285 of accounts payable, $100,445 of accrued liabilities, and $50,000 of
related party notes payable. The excess of the purchase price over the estimated
fair market value of the net assets acquired was $1,147,465 and was capitalized
as goodwill to be amortized over a period of five years.
The following unaudited pro forma financial statement data presents the results
of operations of the Company as if the acquisition of PureSoft had occurred at
the beginning of each period. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of future results
or what would have occurred had the acquisitions been made at the beginning of
the applicable period.
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Revenues $ 206,466 $ 171,024
Net loss (2,044,802) (528,764)
Net loss attributable to common
stockholders (4,284,723) (528,764)
Basic and diluted net loss per
common share (0.20) (0.03)
</TABLE>
NOTE 3-AVAILABLE-FOR-SALE MARKETABLE SECURITIES
The Company has investments in marketable equity securities which are classified
as available-for-sale securities. During the three months ended June 30, 2000,
the market value of these securities declined and management determined that the
decline was other than temporary. Accordingly, a write-down of $75,189 was
recorded to adjust the carrying value of the securities to market value.
NOTE 4-SERIES 2000-A CONVERTIBLE PREFERRED STOCK
On May 16, 2000, the Company executed a securities purchase agreement (the
"Purchase Agreement") with Aspen Capital Resources, L.L.C. (the "Purchaser"),
whereby the Purchaser purchased 1,000 shares of Series 2000-A Convertible
Preferred Stock ("Series 2000-A Preferred Stock") from the Company for
$1,000,000, less a 10% placement fee payable to the Purchaser, , and warrants
exercisable for the purchase of additional shares of Company common stock by the
Purchaser. The Purchase Agreement provides for the subsequent purchases of an
additional 3,000 shares of Series 2000-A Preferred Stock with accompanying
warrants for an aggregate amount of $3,000,000. The first two subsequent
closings shall be for $1,000,000 each and the last two for $500,000 each, all of
the foregoing being subject to a similar 10% placement fee to the Purchaser. As
of June 30, 2000, the Company had issued 3,000 shares of Series 2000-A Preferred
Stock in exchange for net proceeds of $2,700,000. The placement fee was netted
against the proceeds receivable under the Purchase Agreement. Subsequent to June
30, 2000, the Company issued an additional 500 shares of Series 2000-A Preferred
Stock in exchange for net proceeds of $450,000.
Redemption - The Company may be requested to redeem all of the outstanding
shares of Series 2000-A Preferred Stock at a price equal to 125% of the stated
value per share, plus accrued and unpaid dividends and penalties, if any,
through the date of redemption if (i) an event of noncompliance as defined in
the Purchase Agreement occurs, or (ii) if, after the first date upon which the
Company's common stock is quoted in the NASDAQ Stock Market System or reported
on the National Association of Securities Dealers' ("NASD") OTC Bulletin Board,
the average of the closing quoted bid prices for the Company's common stock for
22 consecutive trading days, is less than or equal to $2.00 per share. If the
8
<PAGE>
Company opts not to make the redemption payment when due, dividends will accrue
on all outstanding Series 2000-A Preferred Stock from and after the Redemption
Date at 21% per year until paid in full and the conversion price will be reduced
by $0.50 per share.
Under the Purchase Agreement, an event of noncompliance shall have occurred if
(i) the Company fails to pay on any dividend payment date the full amount of
dividends then accrued, (ii) the Company fails to make any redemption payment
which it is required to make, (iii) the Company breaches or otherwise fails to
perform or observe any material provision of the Purchase Agreement, and such
failure is not cured within 15 days after the occurrence thereof, (iv) any
representation or warranty contained in the Purchase Agreement or required to be
furnished to any holder is false or misleading in any material respect, (v) the
Company makes an assignment for the benefit of creditors or admits in writing
its inability to pay its debts generally as they become due, or an order,
judgment or decree is entered adjudicating the Company bankrupt or insolvent,
(vi) any material provision of the Purchase Agreement shall at any time for any
reason be declared to be null and void, (vii) (A) any registration statement
required to be filed by the Company and declared effective by the Securities and
Exchange Commission (the "SEC") pursuant to the Purchase Agreement shall not
become effective as provided in the Purchase Agreement or shall cease to be
effective, (B) the SEC shall issue any stop order suspending the effectiveness
under the Securities Act of any registration statement required to be filed by
the Company and declared effective by the SEC pursuant to the Purchase Agreement
or any state securities commission suspends the qualification of the securities
covered thereby for offering for sale in any jurisdiction, (C) any proceeding
for purposes of either (A) or (B) above is initiated, or (D) after September 18,
2000 the common stock is suspended from trading on or the price for the common
stock is not quoted or reported on the NASDAQ Stock Market System or the NASD's
OTC Bulletin Board, (viii) the Company at any time shall not have the required
number of reserved and available authorized but unissued shares of common stock,
or (ix) the occurrence of any material adverse change in the business, condition
(financial or otherwise), prospects, or results of operations of the Company
taken as a whole.
After May 16, 2001, the Company has the right to redeem all or some of the
outstanding shares of Series 2000-A Preferred Stock by paying 125% of the stated
value per share, plus accrued and unpaid dividends and penalties, if any,
through the date of redemption. However, the Company may not redeem any Series
2000-A Preferred Stock unless all dividends accrued on all of the outstanding
Series 2000-A Preferred Stock through the immediately preceding dividend payment
date have been paid in full. If the Company does not make the redemption payment
when due, dividends will accrue on all outstanding Series 2000-A Preferred Stock
from and after the redemption date at 21% until paid in full and the conversion
price will be reduced by $0.50 per share.
Conversion - Holders of Series 2000-A Preferred Stock have the right, but not
the obligation to convert the stated value and any accrued and unpaid dividends
thereon into shares of the Company's common stock by dividing the stated value
of such shares to be converted together with any accrued but unpaid dividends
thereon by the conversion price (the "Conversion Price"), which is 80% of the
average of the three lowest closing bid prices for the common stock quoted on
the NASDAQ Stock Market System or reported on the NASD's OTC Bulletin Board
during the 15 trading days preceding the conversion date, subject to a maximum
conversion price of $4.00 per share and a minimum conversion price of $2.00 per
share, subject to adjustment. As of June 30, 2000, 3,000 shares of Series 2000-A
Preferred Stock were convertible into common stock. All remaining shares of
Series 2000-A Preferred Stock to be issued under the Purchase Agreement are
convertible upon issuance. Upon the occurrence of an event of noncompliance (see
above), the minimum conversion price shall not be subject to any limitations.
On or after November 16, 2001, the Company may require the holder of Series
2000-A Preferred Stock to convert all of the shares of Series 2000-A Preferred
Stock into shares of common stock by delivering to the holder 30-days prior
written notice of the exercise of this right.
During the six months ended June 30, 2000, the Company recorded a preferred
stock dividend of $750,000 related to the 20% discount on the shares of Series
2000-A Preferred Stock then convertible.
On August 17, 2000, the Company agreed to allow the holder of the Series 2000-A
Preferred Stock to convert up to $1,000,000 in stated value of Series 2000-A
Preferred Stock at a conversion price of $2.00 per share and will, subsequent to
June 30, 2000, record a preferred stock dividend of $250,000 related to the
reduction in the conversion price.
Adjustment of the conversion price - If after May 16, 2000, the Company issues
or sells any shares of common stock or grants any rights or options to purchase
common stock or any stock or other securities convertible into or exchangeable
9
<PAGE>
for common stock or issues or sells any convertible securities, and the value
per share for such common stock issuable is less than the fair market value per
share, the conversion price of the Series 2000-A Preferred Stock is reduced
according to a formula defined in the Purchase Agreement.
Registration Rights - The Company was required to use its best efforts to
register or qualify under applicable federal and state securities laws the
resale by the Purchaser of (i) all shares of common stock issuable upon
conversion of the Series 2000-A Preferred Shares, (ii) all of the shares of the
common stock issuable upon exercise of the related warrants, and (iii) all of
the additional shares of common stock issued or issuable to the Purchaser
pursuant to the Purchase Agreement and to maintain such registrations or
qualifications effective for all periods during which any Series 2000-A
Preferred Share may be converted or any related warrants may be exercised.
Accordingly, the Company filed a registration statement with the SEC covering
the required number of shares, which was declared effective on July 7, 2000.
If such registration statement ceases to remain effective as provided in the
Purchase Agreement, the Company is required to issue to the Purchaser on such
date and on every date which is 30 days or a multiple thereof after such date,
until such registrations or qualifications shall become effective, additional
shares of common stock equal in number to 5% of the total number of shares of
common stock issued or issuable upon conversion of all issued and outstanding
Series 2000-A Preferred Shares and to cause the resale of all such additional
shares to be included in the registrations or qualifications.
Dividends - The holder of Series 2000-A Preferred Stock is entitled to receive
cumulative dividends equal to 8% per year and payable quarterly within 5 days
after the last business day of each calendar quarter provided, however, that if
there is an event of noncompliance, as defined in the Purchase Agreement, the
holder of Series 2000-A Preferred Stock shall be entitled to receive cumulative
dividends equal to 21% per year. The holder of Series 2000-A Preferred Stock at
its option may elect to receive payment of dividends in cash or in shares of the
Company's common stock at the Conversion Price. Unless all accrued dividends and
interest thereon, if any, have been paid in full, no dividend on any other stock
shall be declared, paid, or made.
The Company recorded $13,333 in Series 2000-A Preferred Stock dividends for the
six months ended June 30, 2000. This is in addition to the $750,000 dividends
related to the beneficial conversion feature.
Warrants - The Purchase Agreement provides for the issuance of Series 2000-A
Warrants (the "Warrants") in connection with each closing of the purchase of
Series 2000-A Preferred Stock. Each Warrant entitles the holder to purchase one
share of common stock at an exercise price of $3.00 per share.
The number of Warrants ultimately issued by the Company will vary depending on
the conversion price of the Series 2000-A Preferred Stock. The holder of the
Warrants will be entitled to receive one warrant for every share of Common Stock
received on the conversion of the Series 2000-A Preferred Stock. Because the
number is variable, the number of Series 2000-A Warrants to be issued is also
variable. However, pursuant to the Purchase Agreement, the number of such
Warrants to be issued will be fixed no later than November 16, 2000, assuming no
event of default has occurred. The Purchase Agreement provides that the ultimate
number of warrants shall be determined by dividing the aggregate stated value of
the shares of Series 2000-A Preferred Stock by the Conversion Price determined
as of the earlier of November 16, 2000, the date on which the holder of the
Warrants converts its shares of Series 2000-A Preferred Stock, or the date on
which the shares of Series 2000-A Preferred Stock are redeemed.
The Warrants are exercisable from December 1, 2000, or earlier upon the
occurrence of an event of default, as defined in the Warrants, or a change in
control of the Company, and may be exercised through May 16, 2004, provided that
at the time of exercise a registration statement relating to the common stock is
then in effect and the common stock is qualified for sale or exempt from
qualification under applicable state securities laws. The Warrants are not
subject to early redemption by the Company.
The Company recorded $1,376,588 in Series 2000-A Preferred Stock dividends
related to the potential issuance of the Warrants during the six months ended
June 30, 2000. This is in addition to the $750,000 dividends related to the
beneficial conversion feature and the $13,333 related to the 8% dividend rate.
Voting Rights - Each share of Series 2000-A Preferred Stock issued and
outstanding shall have the number of votes equal to the number of shares of
common stock into which the share of Series 2000-A Preferred Stock is
convertible.
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Reserved Shares - The Company is required to reserve shares of its common stock,
solely for the purpose of issuance upon the conversion of all outstanding Series
2000-A Preferred Stock.
NOTE 4-STOCKHOLDERS' EQUITY
During the six months ended June 30, 2000, the Company received cash proceeds in
the amount of $2,277,000 under the terms of a private placement offering by
issuing 759,000 investment units, at $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 $4.50 per share. The warrants expire December
31, 2001.
NOTE 5-STOCK OPTIONS
During the six months ended June 30, 2000, the Company granted 225,000 options
under its 1998 Stock Option Plan. Of the options granted, 155,000 options have
an exercise price of $1.75 per share and 70,000 options have an exercise price
of $3.00 per share. The options are exercisable as follows: 40% on the date of
grant and 60% over a two-year period from the date of grant. All options granted
during this period expire on the fifth anniversary of their respective grant
date. The Company recorded $193,750 of deferred compensation related to options
that have exercise prices below the fair market value on the date of grant.
Amortization of deferred compensation amounted to $243,799 and $85,857 for the
six months and the three months ended June 30, 2000, respectively.
Additionally, the Company granted options to purchase 87,534 common shares at
$0.01 per share in connection with the acquisition of PureSoft. These options
are exercisable immediately and have no expiration date.
NOTE 6-COMMITMENTS AND CONTINGENCIES
Operating Lease - On March 1, 2000, the Company 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 lesser of the change in the consumer price index or 5%.
Capital Lease - On June 2, 2000, the Company entered into a capital lease
arrangement for telephone and computer equipment in the amount of $33,021. The
lease is for a five-year term and requires lease payments of $735 per month.
Legal Contingencies- An individual asserted a claim against the Company under
the terms of an agreement allegedly entered into in 1991, which purported to
promise shares of common stock of Linco Industries, Inc. ("Linco"), the
predecessor of the Company prior to its reorganization on September 15, 1998, if
certain conditions were met by the individual in representing Linco to potential
customers. Company management maintains that the alleged 1991 agreement is no
longer valid because the conditions were not met within a reasonable time and
because the individual failed to fulfill other material terms of the 1991
agreement. Because of the claim, Linco's founders and the Company filed an
action for declaratory judgment seeking a determination that the individual has
no legal rights against the Company. The individual responded and filed a
counterclaim that he had "fully performed" under the 1991 agreement. The parties
are conducting discovery. Company management believes this claim should not
ultimately result in any liability to the Company based on sufficient defenses
and an indemnification agreement it has with Linco's founders.
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Item 2. Management's Discussion and Analysis or Plan of Operation.
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 March 31, 2000, together with the annual financial
statements as of December 31, 1999. Whenever in this discussion the term "First
Scientific" or the "Company" is used, it should be understood to refer to First
Scientific, Inc. and its wholly owned subsidiaries on a consolidated basis,
except where the context clearly indicates otherwise.
Plan of Operation
First Scientific, Inc. is a development stage company engaged in the research,
development and commercialization of patent-pending topical skin care
technologies. The Company sells its technologies and products, both domestically
and internationally, into four active market segments, including professional
health care, food service, hospitality, and janitorial/sanitation, with
additional target market opportunities in the retail and health and fitness
segments. The Company's operations are located in Utah and New Hampshire.
The Company maintains information concerning its business, its products, test
results, media coverage and investor relations at the Company's Web site,
www.firstscientific.com. Additional information on PureSoft Solutions LLC is
located at www.puresoft.ws. Reference to these URLs is not intended and should
not be construed as incorporation of information contained on these sites as
part of this report.
First Scientific is primarily engaged in commercializing the following
technology platforms and products:
Antimicrobial Technology - MicrobNZ(TM), Protection at the Microbial Level
MicrobNZ is highly efficacious, long-lasting with a high degree of persistence,
and fast-acting against a broad spectrum of pathogens, including Escherichia
coli, Pseudomonas aeruginosa, Staphylococcus aureus and drug resistant bacteria
such as Methicillin resistant Staphylococcus aureus (MRSA) and Vancomycin
resistant Enterococcus (VRE). The MicrobNZ formulation does not contain any
irritating or degrading active ingredients such as Triclosan(R), CHG
(Chlorhexidine Gluconate), PCMX (Chloroxlyenol), iodine, or alcohol. Unlike
these other degrading active ingredients, products formulated with MicrobNZ
significantly improve and moisturize the skin.
First Scientific's antimicrobial formulation has exceeded the Food and Drug
Administration ("FDA") protocols required for classification as a Health Care
Personnel Handwash and as a First-Aid Antiseptic (21 CFR 333).
MicrobNZ can be used facility-wide and is appropriate for patient, public and
staff handwashing. This technology can be packaged as an antimicrobial handwash,
antimicrobial first-aid antiseptic lotion, antimicrobial first-aid antiseptic
spray, and antimicrobial first-aid antiseptic towelettes. First Scientific
markets its antimicrobial technology under the MicrobNZ brand.
Skin Healing Technology
First Scientific's patent-pending, skin healing technology brings together
Dimethicone with skin-conditioning emollients and botanical oils to create a
unique formulation for the treatment and prevention of rashes. The Company has
demonstrated shelf life of this stable Dimethicone oil-in-water emulsion for
periods in excess of two years. This technology meets FDA requirements for an
over-the-counter drug product. This formulation in towelette form is used for
the treatment and prevention of skin rashes caused by infant and adult
incontinence. First Scientific currently supplies a version of this skin healing
technology as a waterless, rinse-free, patient-bathing product to ConvaTec, a
division of Bristol-Myers Squibb Company.
Manufacturing
The Company currently contracts the manufacturing of its products to carefully
selected facilities that meet both GMP (Good Manufacturing Practices) and FDA
standards. These contract manufacturers supply product to various customers who
require GMP and FDA compliant facilities for the manufacturing of their
products.
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First Scientific employs in-house regulatory experts that work closely with
contract manufacturers to establish and monitor product specific quality
standards, and also to design and implement more efficient manufacturing
processes.
Outlook
The cash requirements of First Scientific through the end of 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, and other expenses related to
projected growth. Management believes existing cash, marketable securities, cash
generated from anticipated sales, and cash generated from a currently pending
private placement of the Company's securitie will be sufficient to meet Company
obligations through the end of 2000.
Product research and development is an ongoing process at First Scientific.
Existing products are continuously being refined and new technology developed to
solve unmet market needs. Ongoing spending is anticipated in future quarters for
lab equipment, furniture, and fixtures.
The Company's existing facilities and equipment are projected to be sufficient
to meet most of its growth needs. However, should First Scientific be required
to perform expanded testing or manufacturing for its customers 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 benefits from an experienced executive management team and a
board of directors comprising several senior-level business executives and
medical professionals. The Company has assembled an in-house team of respected,
results-oriented research and development, marketing, sales and operations
professionals, as well as outside advertising, public relations and health-care
market consultants to advise management on business strategy and product
innovation.
Recent Developments
PureSoft Solutions L.L.C. Acquisition - On March 15, 2000, the Company entered
into an agreement (the "PureSoft Agreement") to acquire PureSoft Solutions
L.L.C. ("PureSoft"), a New Hampshire limited liability company involved in the
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 issued a $450,000 promissory note to the owners of PureSoft. 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. In addition, the Company advanced $300,000 to PureSoft. The PureSoft
agreement provides for the Company to advance to PureSoft $300,000 on June 15,
2000, and on August 15, 2000, all of which were paid on or before the respective
due date. The PureSoft Agreement also provides that the Company will purchase an
additional 7%, and the remaining 13% ownership interest in PureSoft on April 1,
2001, and April 1, 2002, respectively, by issuing shares of its common stock.
The number of shares to be issued is contingent upon PureSoft's achieving
certain levels of the net income before income taxes, and shall vary in
proportion to any over-or underachievements of established performance
milestones stated in the PureSoft Agreement, provided however that an aggregate
minimum of 35,361 shares of the Company's common stock are to be issued for the
remaining 20% ownership interest.
The $50,000 paid to the owners, the $300,000 advanced to PureSoft, and the
options were not refundable and would have had to be forfeited had the Company
failed to pay $300,000 on the promissory note and advance $300,000 on or before
June 15, 2000. In the event the Company did not make the June 15, 2000,
payments, the PureSoft Agreement would have been void and the Company would have
no further obligation under the promissory note. The Company made the required
$300,000 promissory note payment and advanced $300,000 to PureSoft on June 2,
2000.
The significance of the PureSoft Agreement for the Company is the introduction
of new markets into which the Company can sell, and which can provide
significant revenue to the Company in future periods. Additionally, PureSoft has
introduced the Company to manufacturers whose pricing is considerably lower than
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previously attained by the Company. Development of such manufacturing
relationships may provide greater operating margins and may give the Company
negotiating leverage regarding pricing with other manufacturers with whom it is
dealing now or in the future.
Tianjin ZhongZin Pharmaceutical Group Corporation Limited - The Company has
signed a letter of intent with Tianjin ZhongZin Pharmaceutical Group Corporation
Limited of Tianjin, the People's Republic of China ("Tianjin"). This letter of
intent describes due diligence, product surveys, market feasibility studies and
product registration preparation to be performed which may serve as a basis for
a joint venture between the Company and Tianjin for the sale and distribution of
the Company's products in China. There can be no assurance that the information
obtained pursuant to the letter of intent will be favorable or will serve as the
basis of forming a joint venture or other agreement between the Company and
Tianjin.
Financial Position
First Scientific had $3,120,494 in cash as of June 30, 2000, representing an
increase of $2,912,560 from December 31, 1999. Working capital, as of June 30,
2000, increased to $2,686,172 compared to working capital of $297,039 at
December 31, 1999. The Company had an accumulated deficit of $10,191,067 at June
30, 2000, most of which had been funded out of proceeds received from the
issuance of stock.
Results of Operations
Three months ended June 30, 2000, compared to the three months ended June 30,
1999
During the three months ended June 30, 2000, the Company recorded revenues of
$91,444, reflecting a decrease of $30,485, or 25%, compared to the same period
in the previous year. Revenues in 1999 resulted primarily from contracts to test
products for customers, while in 2000 the source of revenue has shifted to the
sale of product, with such sales representing 77% of total revenues.
Selling, general and administrative expenses were $957,307 and $240,595 for the
three months ended June 30, 2000 and 1999, respectively, representing an
increase of $716,712, or 298%, from 2000 to 1999. The increase over the prior
year is due to expenses incurred in June 2000 related to the acquisition of
PureSoft, which totaled $81,450, and the expansion of operations reflecting
increases in payroll expenses of $226,087 due to the addition of an enhanced
sales force in the year 2000 as well as the addition of administrative support
personnel, non-cash compensation associated with the issuance of stock options
of $80,749, and consulting, legal, and professional fees of $120,666. The
remaining increase was primarily attributable to growth-related advertising,
promotional, travel, and living expenses.
The Company incurred research and development expenses of $118,872 during the
three months ended June 30, 2000, an increase of $109,026 from the same period
in the previous year. This increase was due to the expansion of the Company's
testing facilities, including a new lab and personnel to support testing at the
lab. Management anticipates an increase in research and development expenses for
future periods as First Scientific expands its product offerings.
The Company recorded a loss of $75,189 related to the decrease in market value
of its marketable securities. The value has decreased consistently since the
time of purchase and the Company has no reason to believe that the near-term
prospects of the issuer will change.
Net interest income was $2,901 and $7,837 for the three months ended June 30,
2000 and 1999, respectively. This represents a decrease of $4,936 and is due
primarily to interest expense that the Company has incurred through the capital
lease obligations that have been entered into primarily for office equipment.
Six months ended June 30, 2000, compared to the six months ended June 30, 1999
During the six months ended June 30, 2000, the Company recorded revenues of
$156,619, reflecting an increase of $34,320 or 28% compared to the same period
in the previous year. Revenues in 1999 resulted primarily from contracts to test
products for customers, while in 2000 the source of revenue has shifted to the
sale of product, with such sales representing 45% of total revenues.
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Selling, general and administrative expenses were $1,657,159 and $526,010 for
the six months ended June 30, 2000 and 1999, respectively, representing an
increase of $1,131,149, or 215%, from 2000 to 1999. The increase over the prior
year is due to expenses incurred in June 2000 related to the acquisition of
PureSoft, which totaled $81,450, and the expansion of operations reflecting
increases in payroll expenses of $287,539 due to the addition of an enhanced
sales force in the year 2000 as well as the administrative support personnel,
non-cash compensation charges associated with the issuance of stock options of
$223,206, and consulting, legal, and professional fees of $211,088. The
remaining increase was primarily attributable to growth-related advertising,
promotional, travel, and living expenses.
The Company incurred research and development expenses of $171,115 during the
six months ended June 30, 2000, an increase of $155,007 from the same period in
the previous year. This increase was due to the expansion of the Company's
testing facilities including a new lab and personnel to support the testing at
the lab. Management anticipates an increase in research and development expenses
for future periods as First Scientific expands its product offerings.
The Company recorded a loss of $75,188 related to the decrease in market value
of its marketable securities. The value has decreased consistently since the
time of purchase and the Company has no reason to believe that the near-term
prospects of the issuer will change.
Net interest income was $10,178 and $18,819 for the six months ended June 30,
2000 and 1999, respectively. This represents a decrease of $8,641 and is due
primarily to interest expense that the Company has incurred through capital
lease obligations that have been entered into primarily for office equipment.
Liquidity and Capital Resources
Historically, the Company has financed its operations principally through loans,
private placements of equity securities, and minimal product sales. First
Scientific used net cash of $1,331,539 in operating activities during the six
months ended June 30, 2000. As of June 30, 2000, the Company's current and
long-term liabilities totaled $688,950. The Company had working capital of
$2,699,505 as of June 30, 2000. In the short term, the Company will be dependent
on a few large customers for the bulk of the Company's sales. Until a broader
base of customers is established, the loss of one such customer could have a
serious, material adverse effect on the Company's operating viability. Because
the Company presently has limited revenue from operations, it will rely
primarily on the sale of its equity and debt securities to satisfy future
capital requirements until such time as sufficient revenue can satisfy its
operating requirements. There can be no assurance that the Company will be able
to secure this funding or that the terms of such financing will be favorable to
the Company. Furthermore, the issuance of equity or debt securities which are or
may become convertible into equity securities of the Company may result in
substantial dilution to the stockholders of the Company.
PureSoft Solutions L.L.C. Acquisition - On March 15, 2000, the Company entered
into an agreement (the "PureSoft Agreement") to acquire PureSoft Solutions
L.L.C. ("PureSoft"), a New Hampshire limited liability company involved in the
manufacturing and distribution of health care products. As consideration for the
purchase of 80% of the ownership of PureSoft, the Company agreed to pay $50,000
in cash, issue options to purchase 87,534 common shares at $0.01 per share, and
issue a $450,000 promissory note bearing interest at 8.5% per year with a
$300,000 payment due on June 15, 2000 and quarterly payments of $50,000
thereafter through March 15, 2001. The PureSoft Agreement also provides that the
Company will purchase an additional 7%, and the remaining 13% ownership interest
in PureSoft on April 1, 2001 and April 1, 2002, respectively, by issuing shares
of its common stock. The number of shares to be issued is contingent upon
PureSoft's achieving certain levels of net income before income taxes, and shall
vary in proportion to any over or under achievements of established performance
milestones stated in the PureSoft Agreement, provided however, that an aggregate
minimum of 35,361 shares of the Company's common stock are to be issued for the
remaining 20 % ownership interest. In addition, the PureSoft Agreement required
the Company to make working capital advances of $300,000 to PureSoft on each of
March 15, 2000, June 15, 2000, and August 15, 2000.
On March 15, 2000, the Company paid $50,000 to the owners and $300,000 to
PureSoft and issued options as provided in the PureSoft Agreement. The options
were recorded at their estimated fair value of $261,779, or $2.99 per share,
based on the Black-Scholes option-pricing model. On June 2, 2000, the Company
made the required $300,000 promissory note payment together with accrued
interest and the $300,000 working capital advance.
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The purchase price allocations to tangible assets included $447,578 of cash,
$22,836 of accounts receivable, $18,802 of inventory and $14,911 of property and
equipment. The purchase price allocations to liabilities assumed included
$33,285 of accounts payable, $100,445 of accrued liabilities and $50,000 of
related-party notes payable.
Series 2000-A Preferred Stock - On May 16, 2000, the Company executed a
securities purchase agreement ("Purchase Agreement") with Aspen Capital
Resources, L.L.C., ("Aspen"), whereby Aspen purchased 1,000 shares of Series
2000-A Convertible Preferred Stock ("Series 2000-A Preferred Stock") from the
Company for $1,000,000, less a 10% placement fee payable to Aspen, and warrants
exercisable for the purchase of additional shares of Company common stock by
Aspen. The Purchase Agreement provides for the subsequent purchases of an
additional 3,000 shares of Series 2000-A Preferred Stock with accompanying
warrants for an aggregate amount of $3,000,000. The first two subsequent
closings shall be for $1,000,000 each and the last two for $500,000 each, all of
the foregoing being subject to a similar 10% placement fee to Aspen. As of June
30, 2000, the Company has issued 3,000 shares of Series 2000-A Preferred Stock
in exchange for net proceeds of $2,700,000. Subsequent to June 30, 2000, the
Company has issued 500 shares of Series 2000-A Preferred Stock in exchange for
net proceeds of $450,000.
The Company may be requested to redeem all of the outstanding shares of Series
2000-A Preferred Stock at a price equal to 125% of the stated value per share,
plus accrued and unpaid dividends and penalties, if any, thereon through the
date of redemption if (i) an event of noncompliance, as defined in the Purchase
Agreement, occurs, or (ii) if, after the first date upon which the Company's
Common Stock is quoted in the NASDAQ Stock Market System or reported on the
National Association of Securities Dealers' ("NASD") OTC Bulletin Board, the
average of the closing quoted bid prices for the Company's Common Stock for 22
consecutive trading days, is less than or equal to $2.00 per share.
Additionally, after May 16, 2001, the Company has the right, to redeem all or
some of the outstanding shares of Series 2000-A Preferred Stock by paying 125%
of the stated value per share, plus accrued and unpaid dividends and penalties,
if any, thereon through the date of redemption.
The holder of Series 2000-A Preferred Stock has the right, but not the
obligation to convert the stated value and any accrued and unpaid dividends
thereon into shares of the Company's common stock by dividing the stated value
of such shares to be converted, together with any accrued and unpaid dividends
thereon, by the conversion price (the "Conversion Price"), which is 80% of the
average of the three lowest closing bid prices for the Common Stock quoted on
the NASDAQ Stock Market System or reported on the NASD's OTC Bulletin Board
during the 15 trading days preceding the conversion date, subject to a maximum
conversion price of $4.00 per share and a minimum conversion price of $2.00 per
share, subject to adjustment. As of June 30, 2000, 3,000 shares of Series 2000-A
Preferred Stock were convertible. The remaining shares became convertible on
July 15, 2000. Upon the occurrence of an event of noncompliance, all of the
Series 2000-A Preferred Stock shall be immediately convertible and the minimum
conversion price shall not be subject to any limitations. On or after November
16, 2001, the Company may require the holder of Series 2000-A Preferred Stock to
convert all of the shares into shares of common stock by delivering to the
holder 30-days prior written notice of the exercise of this right.
The Company is required to use its best efforts to register or qualify under
applicable federal and state securities laws the sale and resale by the
Purchaser of (i) all shares of common stock issuable upon conversion of the
Series 2000-A Preferred Shares (ii) all of the shares of the common stock
issuable upon exercise of the related warrants and (iii) all of the additional
shares of common stock issued or issuable to the Purchaser pursuant to the
Purchase Agreement and to maintain such registrations or qualifications
effective for all periods during which any Series 2000-A Preferred Share may be
converted or any related warrants may be exercised. If such registrations or
qualifications have not become effective on or before September 13, 2000, or on
any date thereafter cease to remain effective as provided herein, the Company is
required to issue to the holders on such date and on every date which is 30 days
or a multiple thereof after such date, until such registrations or
qualifications shall become effective, additional shares of common stock equal
in number to 5% of the total number of shares of common stock issued or issuable
upon conversion of all issued and outstanding Series 2000-A Preferred Shares and
to cause the sale and resale of all such additional shares to be included in the
registrations or qualifications.
The holder of Series 2000-A Preferred Stock is entitled to receive cumulative
dividends equal to 8% per year and payable quarterly within 5 days after the
last business day of each calendar quarter provided, however, that if there is
an event of noncompliance, as defined, the holder of Series 2000-A Preferred
Stock shall be entitled to receive cumulative dividends equal to 21% per year.
The holder of Series 2000-A Preferred Stock at its option may elect to receive
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payment of dividends in cash or in shares of the Company's common stock at the
Conversion Price. Unless all accrued dividends and interest thereon, if any,
have been paid in full, no dividend on any other stock shall be declared, paid,
or made.
The Purchase Agreement provides for the issuance of Series 2000-A Warrants (the
"Warrants") in connection with each closing of the purchase of Series 2000-A
Preferred Stock. Each Warrant entitles the holder to purchase one share of
common stock at an exercise price of $3.00 per share. The number of Warrants
ultimately issued by the Company will vary depending on the conversion price of
the Series 2000-A Preferred Stock. The holder of the Warrants will be entitled
to receive one warrant for every share of Common Stock received on the
conversion of the Series 2000-A Preferred Stock. Because the number is variable,
the number of Series 2000-A Warrants to be issued is also variable. However,
pursuant to the Purchase Agreement, the number of such Warrants to be issued
will be fixed no later than November 16, 2000, assuming no event of default has
occurred. The Purchase Agreement provides that the ultimate number of warrants
shall be determined by dividing the aggregate stated value of the shares of
Series 2000-A Preferred Stock by the Conversion Price determined as of the
earlier of November 16, 2000, the date of which the holder of the Warrant
converts its shares of Series 2000-A Preferred Stock, or the date on which the
preferred shares are redeemed. The Warrants are exercisable from December 1,
2000, or earlier upon the occurrence of an event of default or a change in
control of the Company, and may be exercised through May 16, 2004, provided that
at the time of exercise a registration statement relating to the common stock is
then in effect and the common stock is qualified for sale or exempt from
qualification under applicable state securities laws. The Warrants are not
subject to early redemption by the Company.
Common stock and warrants- During the six months ended June 30, 2000, the
Company received cash proceeds in the amount of $1,505,000 by issuing 501,666
investments units, at $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. Additionally,
the Company received cash proceeds in the amount of $772,001 and issued 257,334
shares of common stock at $3.00 per share.
Stock options - During the six months ended June 30, 2000, First Scientific
granted 225,000 options under the 1998 Stock Option Plan. Of the options
granted, 155,000 options have an exercise price of $1.75 per share and 70,000
options have an exercise price of $3.00 per share. The options are exercisable
as follows: 40% on the date of grant and 60% over a two-year period from the
date of grant. All options granted during this period expire on the fifth
anniversary of its respective grant date. The Company recorded $193,750 of
deferred compensation related to options that have exercise prices below the
estimated fair market value on the measurement date. Additionally, the Company
granted options to purchase 87,534 common shares at $0.01 per share in
connection with the acquisition of PureSoft. These options are exercisable
immediately and have no expiration date.
Marketable Securities - The Company has investments in marketable equity
securities that are classified as available-for-sale securities. During the
three months ended June 30, 2000, the market value of the securities declined
and management determined that the decline was other than temporary.
Accordingly, a write-down of $75,188 was recorded to adjust the carrying value
of the securities to their market value.
Operating Lease - On March 1, 2000, the Company entered into an agreement to
renegotiate its present lease and to lease an additional 5,300 square feet of
space adjacent to its existing space to house it's expanded testing, research
and development and sales/marketing functions. Contracts for furniture, fixtures
and equipment were entered into during the current quarter to adequately outfit
this space. The Company presently has no plans to add additional research and
development or office facilities.
Capital Lease - On June 2, 2000, the Company entered into a capital lease
arrangement for telephone and computer equipment in the amount of $33,021. The
lease is for a five-year term and requires lease payments of $735 per month.
Year 2000
First Scientific did not experience any significant Year 2000 problems with its
systems or its vendors, contractors or customers.
Forward-Looking Statements
When used in this Form 10-QSB and in other filings by First Scientific with the
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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 safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and Section
21E of the Securities Exchange Act of 1934, as amended.
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 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 common
stock of Linco Industries, Inc. ("Linco"), a predecessor entity of the Company
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 seeking a determination
that the individual has no entitlement against the Company. The individual filed
a counter claim that he had "fully performed" under the 1991 agreement. The
parties are conducting discovery. Management believes this claim should not
ultimately result in any substantial 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 June 30, 2000, First Scientific sold 759,000 shares of
common stock to four accredited investors for $2,277,000 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
undertaken by the Company, which continues as of the date of this Report. First
Scientific did not use an underwriter in connection with the Private Placement.
The offer and sale of the shares of common stock issued in connection with the
private placement was not registered under the Securities Act of 1933, as
amended (the "Act"), or under any state securities "blue sky" laws in reliance
upon exemptions from the registration provisions of the Act and those laws for
transactions involving non-public offers and sales of restricted securities to
accredited investors. All shares sold in these transactions are restricted
securities and their resale is subject to restrictions and limitations under
applicable law. Certificates evidencing the shares sold to these investors were
marked with a restrictive legend and each holder was required to execute a
representation and warranty to the effect that the shares were acquired for
investment purposes and not with a view to distribution or resale of the
securities.
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)
18
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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)
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(1) Incorporated by reference to the same-numbered exhibit to the Form 8-K
filed with the Securities and Exchange Commission October 2, 1998, by
First Scientific.
(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 with the Securities and Exchange Commission November 16,
1998.
(4) Incorporated by reference from Quarterly Report on Form 10-QSB, filed
on June 15, 1999.
(5) Incorporated by reference to the same numbered exhibit to the form
10-QSB filed November 16, 1999.
(6) Incorporated by reference from Amended Quarter Report on Form 10/QSB/A
filed on March 8, 2000.
(7) Incorporated by reference from Report on Form 8-K, filed on March 30,
2000.
(8) Filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was filed on March 31, 2000, relating to the
acquisition of PureSoft Solutions, L.L.C., a New Hampshire limited
liability company.
A report on Form 8-K was filed on May 31, 2000, relating to the sale to
Aspen Capital Resources, LLC, of shares of the Company's Series 2000-A
Preferred Stock.
A report on Form 8-K was filed on June 8, 2000, and amended on June 14,
2000, amending the Form 8-K filed on March 30, 2000, and providing certain
financial information required under Form 8-K.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIRST SCIENTIFIC, INC.
Registrant
DATED: August 21, 2000 By: /s/ Randall L. Hales
Randall L. Hales, CEO and President
DATED: August 21, 2000
By: /s/ John L. Theler
John L. Theler, Vice President
Finance/CFO (Principal
Financial and Accounting Officer)
