<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 September 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 21,045,436 shares of common stock, $.001 par value, outstanding as of
November 14, 2000.
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARIES
FORM 10-QSB
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as of
September 30, 2000 and December 31, 1999........................3
Condensed Consolidated Statements of Operations and Comprehensive
Loss (Unaudited) for the Three and Nine Months Ended September
30, 2000 and 1999 and for the Cumulative Period from April 30,
1990 (Date of Inception) through September 30,
2000..................................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended September 30, 2000 and 1999 and for the
Cumulative Period from April 30, 1990 (Date of Inception) through
September 30, 2000....................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)......7
Item 2. Management's Discussion and Analysis or Plan of Operation............13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................22
Item 2. Changes in Securities and Use of Proceeds............................22
Item 6. Exhibits and Reports on Form 8-K.....................................23
Signatures ................................................................25
<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>
September 30, December 31,
2000 1999
--------------- -------------
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 2,702,510 $ 207,934
Available-for-sale marketable securities 10,997 94,811
Accounts receivable, net 183,411 94,933
Inventory 177,748 35,262
Prepaid expenses and other assets 70,585 46,551
---------------- --------------
Total Current Assets 3,145,251 479,491
---------------- --------------
Property and Equipment:
Equipment 550,917 173,532
Leasehold improvements 81,419 10,229
Less: Accumulated depreciation and amortization (75,396) (27,016)
--------------- --------------
Net Property and Equipment 556,940 156,745
---------------- --------------
Goodwill and Other Intangible Assets, net 1,149,292 18,750
---------------- -------------
Other Assets -- 34,883
--------------- -------------
Notes Receivable - Related Party 7,861 7,000
--------------- -------------
$ 4,859,344 $ 696,869
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Promissory note $ 100,000 $ --
Member interest purchase obligation 190,000 --
Capital lease obligation, current portion 15,100 8,850
Note payable -- 19,590
Accounts payable 367,776 123,352
Accrued liabilities 178,567 30,660
--------------- -------------
Total Current Liabilities 851,443 182,452
--------------- --------------
Capital Lease Obligation, net of current portion 32,871 14,197
--------------- --------------
Commitments and Contingencies (see note 7)
Stockholders' Equity:
Convertible redeemable preferred stock series 2000-A, $1,000 stated value
per share; 4,500 shares authorized; 4,000 shares outstanding in 2000
(aggregate liquidation preference
of $ 4,081,444) 3,681,444 --
Common stock, $0.001 par value; 50,000,000 shares authorized,
21,045,436 shares outstanding in 2000 and 20,219,770 shares
outstanding in 1999 21,045 20,220
Additional paid-in capital 12,978,783 7,001,564
Deficit accumulated during the development stage (12,608,497) (6,231,062)
Deferred compensation (97,745) (273,599)
Unrealized loss on investments in marketable securities -- (16,903)
--------------- -------------
Total Stockholders' Equity 3,975,030 500,220
--------------- -------------
$ 4,859,344 $ 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 Nine Months Inception)
Ended September 30, Ended September 30, Through
----------------------------- -------------------------------
2000 1999 2000 1999 September 30,
2000
--------------- ------------- --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 226,489 $ 303,784 $ 383,108 $ 426,083 $ 1,172,735
Cost of Revenues 126,804 49,650 220,597 73,947 523,473
--------------- ------------- --------------- --------------- ------------------
Gross Profit 99,685 254,134 162,511 352,136 649,262
--------------- ------------- --------------- --------------- ------------------
Operating Expenses:
Selling, general and administrative 1,399,426 600,638 3,095,537 1,126,647 5,599,424
Research and development 97,046 25,983 218,834 42,091 4,303,366
--------------- ------------- --------------- --------------- ------------------
Total Operating Expenses 1,496,472 626,621 3,314,371 1,168,738 9,902,790
--------------- ------------- --------------- --------------- ------------------
Loss from Operations (1,396,787) (372,487) (3,151,860) (816,602) (9,253,528)
Other Income (Expense):
Interest income 38,094 6,993 61,044 28,163 108,369
Interest expense (6,221) (1,212) (18,995) (3,564) (117,248)
Realized loss on available-for-sale
marketable securities (25,530) (140,346) (100,717) (140,346) (241,064)
--------------- ------------- --------------- --------------- ------------------
Total Other Income (Expense), net 6,343 (134,565) (58,668) (115,747) (249,943)
--------------- ------------- --------------- --------------- ------------------
Loss before Income Taxes (1,390,444) (507,052) (3,210,528) (932,349) (9,503,471)
Income Tax Benefit -- -- -- -- 61,881
--------------- ------------- --------------- --------------- ------------------
Net Loss (1,390,444) (507,052) (3,210,528) (932,349) (9,441,590)
Preferred Stock Dividends 1,026,986 -- 3,166,907 -- 3,166,907
--------------- ------------- --------------- --------------- ------------------
Net Loss Attributable to Common Stockholders
$ (2,417,430) $ (507,052) $ (6,377,435) $ (932,349) $ (12,608,497)
=============== ============= =============== =============== ==================
Basic and Diluted Net Loss Per Common Share
$ (0.12) $ (0.03) $ (0.31) $ (0.05)
=============== ============= =============== ===============
Weighted Average Number of Common Shares
Outstanding 20,988,556 20,205,748 20,740,192 20,181,895
=============== ============= =============== ===============
Other Comprehensive Loss:
Net loss $ (1,390,444) $ (507,052) $ (3,210,528) $ (932,349) $ (9,441,590)
Unrealized holding loss on available for
sale marketable securities -- (4,857) -- (133,070) --
Losses included in net income -- 140,346 16,903 140,346 --
--------------- ------------- --------------- --------------- ------------------
Comprehensive Loss $ (1,390,444) $ (371,563) $ (3,193,622) $ (925,073) $ (9,441,590)
=============== ============= =============== =============== ==================
</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
For the Nine Months Ended (Date of Inception)
September 30,
Through
2000 1999 September 30, 2000
--------------------- ------------------ -------------------
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net loss $ (3,210,528) $ (932,349) $ (9,441,590)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on marketable securities 100,717 140,346 241,063
Depreciation and amortization 148,955 84,336 292,221
Loss on disposal of property and equipment 5,573 -- 5,573
Amortization of deferred compensation 329,657 158,470 722,752
Interest income on related-party note receivable (861) -- (861)
Common stock issued for services -- 80,000 124,355
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 (65,642) (261,175) (160,575)
Notes receivable (50,000) -- (50,000)
Inventory (123,684) (23,367) (158,946)
Prepaid expenses and other assets (24,035) (44,003) (40,586)
Other assets 34,884 -- --
Accounts payable 211,139 27,843 334,491
Accrued liabilities 47,462 (32,540) 210,552
--------------- -------------- ------------------
Net Cash Used In Operating Activities (2,596,363) (820,983) (4,216,992)
--------------- -------------- ------------------
Cash Flows From Investing Activities
Purchases of property and equipment (405,951) (53,716) (561,766)
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 (608,373) (53,716) (468,341)
--------------- -------------- ------------------
Cash Flows From Financing Activities
Proceeds from issuance of notes payable -- 4,336 275,565
Principal payments on notes payable (369,590) -- (525,565)
Proceeds from loans from stockholders -- -- 158,934
Principal payments on loans from stockholders -- (10,323) (86,500)
Principal payments on capital lease obligations (8,097) (2,947) (12,994)
Proceeds from the issuance of Series 2000-A
preferred stock 3,600,000 -- 3,600,000
Proceeds from issuance of common stock 2,476,999 -- 3,978,403
---------------- -------------- ------------------
Net Cash Provided By (Used In) Financing Activities 5,699,312 (8,934) 7,387,843
--------------- -------------- ------------------
Net Increase (Decrease) In Cash 2,494,576 (883,633) 2,702,510
Cash At Beginning Of The Period 207,934 1,286,299 --
--------------- -------------- ------------------
Cash At End Of The Period $ 2,702,510 $ 402,666 $ 2,702,510
================== ============== ==================
</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
(Date of Inception)
Nine Months Ended September 30, through
--------------------------------------
2000 1999 September 30, 2000
-------------------- ----------------- -------------------
Supplemental disclosure of cash flow information:
<S> <C> <C> <C>
Cash paid during the period for interest $ 18,739 $ 3,564 $ 116,994
Supplemental Schedule of Non-cash Investing and
Financing Activities:
Acquisition of PureSoft Solutions L.L.C.
Fair value of assets acquired 1,735,509 --
Liabilities assumed 183,730 --
Promissory note 450,000 --
Fair value of stock options issued 261,779 --
Member interest purchase obligation 190,000 --
Noncash preferred stock dividends 2,139,921 --
Equipment acquired through capital lease
obligations 33,021 8,063
Stock option grants at less than fair value 193,750 --
Stock option forfeitures 39,947 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<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. 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 pursuant to the rules and regulations of the Securities and Exchange
Commission. 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 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 and nine months ended September 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 September 30, 2000 and 1999, there were outstanding common stock equivalents
to purchase 6,223,135 and 1,785,000 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.
Reclassifications - Certain reclassifications have been made in the prior period
condensed consolidated financial statements to conform with the current period
presentation.
NOTE 2-ACQUISITION OF PURESOFT SOLUTIONS L.L.C.
On March 15, 2000, the Company entered into an agreement (the "PureSoft
Agreement") to acquire 100% of the common stock of 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, 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, on April 1, 2001 and
April 1, 2002, issue additional 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
the aggregate minimum number of shares have a market value of no less than
$190,000. 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 dates and the $50,000 quarterly payments have been
made on schedule.
The acquisition was accounted for as a purchase. The purchase price totaled
$1,551,779 and 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) stock options with an estimated fair value of
$261,779 based on the Black-Scholes option-pricing model; and (5) $190,000
representing the minimum earn-out value of shares to be awarded. 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 to
the extent the fair value of the shares issued exceeds $190,000.
7
<PAGE>
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 value of the net assets acquired was $1,231,382 and was capitalized as
goodwill to be amortized over 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 Nine Months Ended September 30,
---------------------------------------------
2000 1999
------------------ --------------------------
<S> <C> <C>
Revenues $ 432,955 $ 497,950
Net loss (3,442,728) (1,125,204)
Net loss attributable to common
stockholders (6,609,635) (1,125,204)
Basic and diluted net loss per
common share (0.32) (0.06)
</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 nine months ended September 30,
2000, the market value of these securities declined and management determined
that the decline was other than temporary. Accordingly, a write-down of $100,717
was recorded to adjust the carrying value of the securities to market value.
NOTE 4-SERIES 2000-A CONVERTIBLE PREFERRED STOCK (See NOTE 8)
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 provided for the subsequent purchases of an
additional 3,000 shares of Series 2000-A Preferred Stock with accompanying
warrants for an aggregate purchase price of $3,000,000. The first two subsequent
closings were 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
September 30, 2000, the Company had issued 4,000 shares of Series 2000-A
Preferred Stock in exchange for net proceeds of $3,600,000. The placement fee
was netted against the proceeds receivable under the Purchase Agreement.
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
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.
8
<PAGE>
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.
As of September 30, 2000, the Company's common stock was not listed and trading
on the NASDAQ Stock Market System or the NASD OTC Bulletin Board. The purchaser
has waived any penalty or event of non-compliance resulting from such event. The
Company's common stock began trading on the NASD's OTC Bulletin Board on October
26, 2000.
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 September 30, 2000, no shares of Series
2000-A Preferred Stock had been converted into common stock. 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 nine months ended September 30, 2000, the Company recorded a
preferred stock dividend of $1,000,000 related to the 20% discount on the shares
of Series 2000-A Preferred Stock then convertible. Additionally, 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 recorded an additional
preferred stock dividend of $250,000 related to this reduction in the Conversion
Price.
9
<PAGE>
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
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 - On June 14, 2000, the Company filed a registration
statement to registration statement with the SEC 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. The registration statement 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 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.
The Company has recorded $81,444 in Series 2000-A Preferred Stock dividends from
the date of issue through September 30, 2000. This is in addition to the
$1,250,000 of dividends related a beneficial conversion feature of the Series
2000-A Preferred Stock.
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 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, 2001,
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 June 1, 2001, 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. The Warrants are not
subject to early redemption by the Company.
The Company recorded $1,835,463 in Series 2000-A Preferred Stock dividends
related to the potential issuance of the Warrants during the nine months ended
September 30, 2000. This is in addition to the $1,250,000 of dividends related
to a beneficial conversion feature and the $81,444 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.
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.
10
<PAGE>
NOTE 5-STOCKHOLDERS' EQUITY
During the nine months ended September 30, 2000, the Company received cash
proceeds in the amount of $2,476,999 under the terms of a private placement
offering by issuing 825,666 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
on December 31, 2001.
NOTE 6-STOCK OPTIONS
During the nine months ended September 30, 2000, the Company granted 461,000
options under its 1998 Stock Option Plan. Of the options granted, 155,000
options have an exercise price of $1.75 per share and 306,000 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 $85,858 and
$329,657 for the three months and nine months ended September 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 7-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. Management believes that the alleged 1991 agreement is no longer
enforceable because the conditions were not met within a reasonable time and
because the individual failed to fulfill other material terms of the alleged
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. Management believes that the individual's claim is
without merit and should not ultimately result in any liability to the Company
based on sufficient defenses and an indemnification obligation of Linco's
founders in favor of the Company.
NOTE 8-SUBSEQUENT EVENT-SERIES 2000-A PREFERRED STOCK
On November 13, 2000, the Company entered into an agreement (the "Modification
Agreement") with Aspen Capital Resources, L.L.C. (the "Purchaser"), whereby the
Purchaser and the Company agreed to modify certain terms of a securities
purchase agreement dated May 16, 2000 (the "Purchase Agreement") pursuant to
which the Purchaser purchased 4,000 shares of Series 2000-A convertible
Preferred Stock ("Series 2000-A Preferred Stock") from the Company for
$4,000,000, and warrants (the "Warrants") exercisable for the purchase of
additional shares of Company common stock by the purchaser. As modified, the
Purchase Agreement provides that 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; (ii) if, after January 31, 2001, 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 $1.00 per share, or (iii) if
(A) the aggregate balance of the Company's cash and cash equivalent accounts is
less than $1,000,000 at any time after November 13, 2000 and on or before
January 31, 2001 and (B) at
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any time thereafter, the average closing bid price for the Company's common
stock for the previous 22 consecutive trading days is less than or equal to
$1.00 per share. If the 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 terms of the Modification Agreement, the Company waived its right to
redeem after May 16, 2001 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.
Further, as modified, the Purchase Agreement grants holders of Series 2000-A
Preferred Stock the right 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, 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
$1.20 per share.
On June 14, 2000, the Company filed a registration statement with the SEC to
register or qualify under applicable federal and state securities laws the
resale by the Purchaser of (i) 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. The registration statement was declared effective on
July 7, 2000. The Company has agreed to file an additional registration
statement covering additional shares issuable upon conversion of the Series
2000-A Preferred Shares as a result of reducing the maximum conversion price
from $4.00 to $1.20.
Finally, as modified, the Purchase Agreement provides for the issuance of
2,000,000 Warrants. Each Warrant entitles the holder to purchase one share of
common stock at an exercise price of $2.25 per share. The Warrants are
exercisable from November 1, 2001, 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. The Warrants are not subject to early
redemption by the Company.
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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 September 30, 2000 for the three and nine months then
ended together with the December 31, 1999 annual financial statements. 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 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 L.L.C. is
located at www.puresoft.ws. Reference to these websites 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)
MicrobNZ(TM) is a highly effective, long-lasting and fast-acting treatment
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). MicrobNZ(TM) does not contain irritating or degrading
ingredients and improves and moisturizes the skin with use.
MicrobNZ(TM) 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). Additionally, MicrobNZ can be used
facility-wide and is appropriate for patient, public, and staff handwashing.
First Scientific markets its antimicrobial technology under the MicrobNZ(TM)
brand.
Skin Healing Technology
First Scientific's markets its patent-pending, skin healing technology for the
treatment and prevention of rashes. The Company has demonstrated shelf life of
its products for periods in excess of two years. This technology meets FDA
requirements for an over-the-counter drug product. First Scientific currently
supplies a version of this 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. 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.
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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 and cash generated from
anticipated sales will be sufficient to meet the Company's obligations through
at least 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 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 healthcare
market consultants to advise management on business strategy and product
innovation.
In late September 2000, the Company shipped $304,000 of product to Alliegence
Corporation, a large distributor that serves the professional medical market.
The shipments were initial stocking orders of MicrobNZ(TM) technology products.
The Company anticipates that these shipments are the beginning of a stream of
shipments that will represent significant sales in the coming year. The
transaction terms were FOB destination and contained certain rights of return by
the distributor. As a result of these terms and the lack of sell-through history
for MicrobNZ(TM) products, the recording of sales was deferred. The Company is
in the process of training the distributor's sales force and expect that process
to be completed in November 2000 with product sell-through beginning before the
end of 2000. Subsequent to September 30, 2000, the Company has received payment
for 80% of the above mentioned shipments.
Recent Developments
PureSoft Solutions L.L.C. Acquisition - On March 15, 2000, the Company entered
into an agreement (the "PureSoft Agreement") to acquire 100% of the common stock
of 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, 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, on April 1, 2001 and April 1, 2002, issue additional 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 the aggregate minimum number of shares have a
market value of no less than $190,000. 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 dates and the $50,000
quarterly payments have been made on schedule.
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
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.
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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.
Results of Operations
Three months ended September 30, 2000 compared to the three months ended
September 30, 1999
During the three months ended September 30, 2000, the Company recorded revenues
of $226,489, reflecting a decrease of $77,295, or 25%, compared to the same
period in the previous year. Revenues in 1999 included $156,337 from contracts
to qualify and test products for customers. In 2000 the source of revenue has
shifted to the sale of product, representing 100% of total revenues.
Selling, general and administrative expenses were $1,399,426 and $600,638 for
the three months ended September 30, 2000 and 1999, respectively, representing
an increase of $798,788, or 133%. The increase over the prior year is due to
growth and development related expenses including an increase in marketing,
sales and travel related expenses of $149,000 and the expansion of operations
reflecting increases in payroll expenses of $404,000 due to the addition of an
enhanced sales force in the year 2000 as well as the addition of administrative
support personnel; and consulting, legal, investor relations and professional
fees of $156,000.
The Company incurred research and development expenses of $97,046 during the
three months ended September 30, 2000, an increase of $71,063 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 the Company expands its product
offerings.
The Company recorded a loss of $25,530 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 $31,873 and $5,781 for the three months ended September
30, 2000 and 1999, respectively. This represents an increase of $26,092 and is
due primarily to interest income that the Company has realized from a higher
cash balance generated from issuance of common and preferred stock.
Nine months ended September 30, 2000 compared to the nine months ended September
30, 1999
During the nine months ended September 30, 2000, the Company recorded revenues
of $383,108, reflecting a decrease of $42,975, or 10%, compared to the same
period in the previous year. Revenues in 1999 included $271,247 from contracts
to qualify and test products for customers, while in 2000 the source of revenue
has shifted to the sale of product, representing 79% of total revenues.
Selling, general and administrative expenses were $3,095,537 and $1,126,647 for
the nine months ended September 30, 2000 and 1999, respectively, representing an
increase of $1,968,890, or 175%, from 1999 to 2000. The increase over the prior
year is due to growth and development related expenses in marketing, sales and
travel of $271,000. and the expansion of operations reflecting increases in
payroll expenses of $775,000 due to the addition of an enhanced sales force in
the year 2000 as well as administrative support personnel, non-cash compensation
charges associated with the issuance of stock options of $171,000, and
consulting, legal, and professional fees of $439,000.
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The Company incurred research and development expenses of $218,834 during the
nine months ended September 30, 2000, an increase of $176,743 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 the Company expands its product
offerings.
The Company recorded a loss of $100,717 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 $42,049 and $24,599 for the nine months ended September
30, 2000 and 1999, respectively. This represents an increase of $17,450 and is
due primarily to interest income that the Company has realized from a higher
cash balance generated from issuance of common and preferred stock, partially
offset by interest expense incurred through capital lease obligations that have
been entered into primarily for office equipment.
Liquidity and Capital Resources
First Scientific had cash of $2,702,510 as of September 30, 2000, representing
an increase of $2,494,576 from December 31, 1999. Working capital, as of
September 30, 2000, increased to $2,293,808 compared to working capital of
$297,039 at December 31, 1999. The Company had an accumulated deficit of
$12,608,497 at September 30, 2000, most of which had been funded out of proceeds
received from the issuance of stock.
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 $2,596,363 in operating activities during the nine
months ended September 30, 2000. In the short term, the Company will be
dependent on a few large customers for the bulk of the Company's revenue. 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 will rely primarily on cash
balances and 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 100% of the common stock
of 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, 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, on April 1, 2001 and April 1, 2002, issue additional 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 the aggregate minimum number of shares have a
market value of no less than $190,000. 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 dates and the $50,000
quarterly payments have been made on schedule.
The acquisition was accounted for as a purchase. The purchase price totaled
$1,551,779 and 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) stock options with an estimated fair value of
$261,779 based on the Black-Scholes option-pricing model; and (5) $190,000
representing the minimum earn-out value of shares to be awarded. 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 to
the extent the fair value of the shares issued exceeds $190,000.
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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. The excess of the purchase price over the estimated
fair value of the net assets acquired was $1,231,382 and was capitalized as
goodwill to be amortized over five years.
Series 2000-A 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 provided for the subsequent purchases of an
additional 3,000 shares of Series 2000-A Preferred Stock with accompanying
warrants for an aggregate purchase price of $3,000,000. The first two subsequent
closings were 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
September 30, 2000, the Company had issued 4,000 shares of Series 2000-A
Preferred Stock in exchange for net proceeds of $3,600,000. The placement fee
was netted against the proceeds receivable under the Purchase Agreement.
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 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.
As of September 30, 2000, the Company's common stock was not listed and trading
on the NASDAQ Stock Market System or the NASD OTC Bulletin Board. The purchaser
has waived any penalty or event of non-compliance resulting from such event. The
Company's common stock began trading on the NASD's OTC Bulletin Board on October
26, 2000.
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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.
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 September 30, 2000, no shares of Series 2000-A Preferred Stock
had been converted into common stock. 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 nine months ended September 30, 2000, the Company recorded a
preferred stock dividend of $1,000,000 related to the 20% discount on the shares
of Series 2000-A Preferred Stock then convertible. Additionally, 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 recorded an additional
preferred stock dividend of $250,000 related to this reduction in 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 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.
On June 14, 2000, the Company filed a registration statement to registration
statement with the SEC 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. The registration statement 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.
The holder of Series 2000-A Preferred Stock is entitled to receive cumulative
dividends equal to 8% per year and payable quarterly 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.
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The Company has recorded $81,444 in Series 2000-A Preferred Stock dividends from
the date of issue through September 30, 2000. This is in addition to the
$1,250,000 of dividends related a beneficial conversion feature of the Series
2000-A Preferred Stock.
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 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, 2001,
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 June 1, 2001, 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. The Warrants are not
subject to early redemption by the Company.
The Company recorded $1,835,463 in Series 2000-A Preferred Stock dividends
related to the potential issuance of the Warrants during the nine months ended
September 30, 2000. This is in addition to the $1,250,000 of dividends related
to a beneficial conversion feature and the $81,444 related to the 8% dividend
rate.
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.
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.
On November 13, 2000, the Company entered into an agreement (the "Modification
Agreement") with Aspen Capital Resources, L.L.C. (the "Purchaser"), whereby the
Purchaser and the Company agreed to modify certain terms of a securities
purchase agreement dated May 16, 2000 (the "Purchase Agreement") pursuant to
which the Purchaser purchased 4,000 shares of Series 2000-A convertible
Preferred Stock ("Series 2000-A Preferred Stock") from the Company for
$4,000,000, and warrants (the "Warrants") exercisable for the purchase of
additional shares of Company common stock by the purchaser. As modified, the
Purchase Agreement provides that 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; (ii) if, after January 31, 2001, 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 $1.00 per share, or (iii) if
(A) the aggregate balance of the Company's cash and cash equivalent accounts is
less than $1,000,000 at any time after November 13, 2000 and on or before
January 31, 2001 and (B) at any time thereafter, the average closing bid price
for the Company's common stock for the previous 22 consecutive trading days is
less than or equal to $1.00 per share. If the 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 terms of the Modification Agreement, the Company waived its right to
redeem after May 16, 2001 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.
Further, as modified, the Purchase Agreement grants holders of Series 2000-A
Preferred Stock the right 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, 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
$1.20 per share.
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On June 14, 2000, the Company filed a registration statement with the SEC to
register or qualify under applicable federal and state securities laws the
resale by the Purchaser of (i) 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. The registration statement was declared effective on
July 7, 2000. The Company has agreed to file an additional registration
statement covering additional shares issuable upon conversion of the Series
2000-A Preferred Shares as a result of reducing the maximum conversion price
from $4.00 to $1.20.
Finally, as modified, the Purchase Agreement provides for the issuance of
2,000,000 Warrants. Each Warrant entitles the holder to purchase one share of
common stock at an exercise price of $2.25 per share. The Warrants are
exercisable from November 1, 2001, 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. The Warrants are not subject to early
redemption by the Company.
Common stock and warrants- During the nine months ended September 30, 2000, the
Company received cash proceeds in the amount of $2,477,000 by issuing 825,666
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 $4.50 per share. The warrants expire December 31, 2001.
Stock options - During the nine months ended September 30, 2000, First
Scientific granted 461,000 options under the 1998 Stock Option Plan. Of the
options granted, 155,000 options have an exercise price of $1.75 per share and
306,000 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 September 30, 2000, the market value of the securities
declined and management determined that the decline was other than temporary.
Accordingly, a write-down of $25,530was 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 its 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 years and requires lease payments of $735 per month.
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 safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and Section
21E of the Securities Exchange Act of 1934, as amended.
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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.
21
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
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. Management
believes that the alleged 1991 agreement is no longer enforceable because the
conditions were not met within a reasonable time and because the individual
failed to fulfill other material terms of the alleged 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. Management believes that the individual's claim is without merit and
should not ultimately result in any liability to the Company based on sufficient
defenses and an indemnification obligation of Linco's founders in favor of the
Company.
Item 2. Changes in Securities and Use of Proceeds
(a) Amendment to the Rights of the Holders of Series 2000-A Convertible
Preferred Stock.
On November 13, 2000, the Company entered into an agreement (the "Modification
Agreement") with Aspen Capital Resources, L.L.C. (the "Purchaser"), whereby the
Purchaser and the Company agreed to modify certain terms of a securities
purchase agreement dated May 16, 2000 (the "Purchase Agreement") pursuant to
which the Purchaser purchased 4,000 shares of Series 2000-A convertible
Preferred Stock ("Series 2000-A Preferred Stock") from the Company for
$4,000,000, and warrants (the "Warrants") exercisable for the purchase of
additional shares of Company common stock by the purchaser. As modified, the
Purchase Agreement provides that 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; (ii) if, after January 31, 2001, 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 $1.00 per share, or (iii) if
(A) the aggregate balance of the Company's cash and cash equivalent accounts is
less than $1,000,000 at any time after November 13, 2000 and on or before
January 31, 2001 and (B) at any time thereafter, the average closing bid price
for the Company's common stock for the previous 22 consecutive trading days is
less than or equal to $1.00 per share. If the 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 terms of the Modification Agreement, the Company waived its right to
redeem after May 16, 2001 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.
Further, as modified, the Purchase Agreement grants holders of Series 2000-A
Preferred Stock the right 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, 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
$1.20 per share.
On June 14, 2000, the Company filed a registration statement with the SEC to
register or qualify under applicable federal and state securities laws the
resale by the Purchaser of (i) 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. The registration statement was declared effective on
July 7, 2000. The Company has agreed to file an additional registration
statement covering additional shares issuable upon conversion of the Series
2000-A Preferred Shares as a result of reducing the maximum conversion price
from $4.00 to $1.20.
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<PAGE>
Finally, as modified, the Purchase Agreement provides for the issuance of
2,000,000 Warrants. Each Warrant entitles the holder to purchase one share of
common stock at an exercise price of $2.25 per share. The Warrants are
exercisable from November 1, 2001, 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. The Warrants are not subject to early
redemption by the Company.
(c) Sales of Unregistered Securities
During the three months ended September 30, 2000, First Scientific sold 66,666
shares of common stock to one accredited investor for $200,000 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. 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)
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)
10.10Stock 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 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, LLC, 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.
A report on Form 8-K was filed on August 1, 2000, relating to engaging
Arthur Andersen LLP as independent public accountants.
<PAGE>
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: November 14, 2000 By: /s/ Randall L. Hales
-----------------------------------------
Randall L. Hales, CEO and President
DATED: November 14, 2000 By: /s/ John L. Theler
-----------------------------------------
John L. Theler, Vice President
Finance/CFO (Principal
Financial and Accounting Officer)
