- -
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number 0-24378
First Scientific, Inc.
(Name of small business issuer in its charter)
DELAWARE 33-0611745
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1877 West 2800 South, Suite 200
Ogden, Utah 84401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 393-5781
Securities to be registered under Section 12(g) of the Act:
Name of each exchange
Title of each Class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-B is not contained herein, and will not
be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year were $553,631.
The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of December 3, 1997:
Not applicable, shares not traded.
As of March 13, 2000 Registrant had outstanding 20,711,436 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
FIRST SCIENTIFIC, INC.
INDEX-FORM 10-KSB
PART I
Page
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . 9
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 9
PART II
Item 5. Market for the Common Equity and Related Stockholder Matters 9
Item 6. Management's Discussion and Analysis and Plan of Operations.10
Item 7. Financial Statements . . . . . . . . . . . . . . . . . . . .15
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance
with Section 16(a) of the Exchange Act . . . . . . . . . . . . .15
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . .17
Item 11. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Item 12. Certain Relationships and Related Transactions . . . . .20
PART IV
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . .21
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Index to Financial Statements and Schedules. . . . . . . . . . . . .23
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Forward Looking Statements and Information May Prove Inaccurate
When used in this Form 10-KSB and in other filings by the Company
with the SEC, in the Company's press releases or in other public or
stockholder communications or oral statements made with the approval
of an authorized executive officer of the Company, the words or
phrases "would be," "will allow," "intends to," "believes," "plans,"
"will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," or similar expressions are
intended to identify "forward looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward looking statements, which speak only as of the date made,
are based on certain assumptions and expectations which may or may
not be valid or actually occur, and which involve risks of product
demand, market acceptance, economic conditions, competitive products
and pricing, difficulties in product development, commercialization,
and technology, and other risks. In addition, sales and other
revenues may not commence and /or continue as anticipated due to
delays or otherwise. As a result, the Company's actual results for
future periods could differ materially from those anticipated or
projected.
The Company does not intend to update the forward looking statements
contained in this report, except as may occur as part of its ongoing
periodic reports filed with the Securities and Exchange Commission.
Organization and General Development
Whenever in this discussion the term"Company" is used, it should be
understood to refer to First Scientific, Inc. ("First Scientific")
and its wholly owned subsidiary, First Scientific Corporation, on a
consolidated basis, except where the context clearly indicates
otherwise.
First Scientific, Inc. is a Delaware corporation organized on June
11, 1992 under the name of SPPS Financial Corporation ("SPPS").
SPPS was a corporation without operations until September 15,1998
when it entered into a reorganization with Linco Industries, Inc.
First Scientific Corporation was incorporated as a Utah corporation
on April 30, 1990 under the name of Linco Industries, Inc.
("Linco"). Linco was formed to take advantage of a linseed oil
based soap formula. After limited success with this product, Linco
began to focus its resources on developing a rash treatment and
prevention baby wipe solution. This product was marketed through a
private label agreement with a national distributor. In 1994, Linco
recruited Dr. Edward Walker, a chemistry professor at nearby Weber
State University and director of the Utah State Center for
Excellence for Chemical Technology at Weber State University, as a
shareholder and director. In March of 1998 Dr. Walker, at his own
request, relinquished his stock ownership in Linco in exchange for
a royalty agreement. This royalty agreement was subsequently
acquired by the Company during the reorganization with SPPS, as
described below. Through the acquisition of his technology, Dr.
Walker became a major shareholder in the Company and now serves as
Director of Research and Development and as a member of the Board of
Directors of the Company.
On September 15, 1998, Linco entered into and completed an agreement
with SPPS pursuant to which SPPS issued 8,798,080 shares of its
common stock in exchange for 100% of the issued and outstanding
common stock of Linco. Concurrently, SPPS changed its name to First
Scientific, Inc. In connection with the agreement, First Scientific
issued 5,201,920 shares of common stock to Dr. Edward Walker for the
cancellation of a royalty agreement and for rights to technology
relating to an instant chemical skin sanitizer formulation and
issued or received subscriptions for 2,666,659 shares of common
stock in exchange for approximately $2,000,000 of cash and
marketable securities through a private placement memorandum. The
agreement between Linco and SPPS has been accounted for as the
reorganization of Linco and the issuance of shares to the SPPS
shareholders at historical cost. Concurrent with the reorganization
Linco changed its name to First Scientific Corporation.
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Linco developed a proprietary formula for an antibacterial cleansing
and moisturizing solution in 1996. Products from this formulation
can be produced in the form of wipes or bottle sprays. In 1996,
Linco also invented a second proprietary formulation, a
Dimethicone-based solution that can be delivered to the
incontinent/geriatric market in wipe form. In 1998, Linco developed
a third proprietary formula, a lotion/ soap antimicrobial cleansing
and moisturizing solution that can be dispensed in tubes or bottles.
These products were developed with market differentiating
characteristics. First, neither the antibacterial nor the
dimethicone formulations contained alcohol and therefore could be
used repetitively without damaging or drying the skin. Second, the
formulas combine FDA approved active chemical agents with natural
botanical oils, preservative, and fragrance ingredients.
Benzethonium Chloride is used in the antimicrobial cleansing and
moisturizing formulas, and Dimethicone, a proven drug for treating
and preventing diaper rash, is used in the rash product. To the
knowledge of management, no competitor has been able to develop such
combinations.
Testing, Research, and Product Development
First Scientific's relationship with the State of Utah's Center of
Excellence for Chemical Technology at Weber State University (the
"Center") allows convenient access for testing of the ingredients
and chemical solutions it formulates. Chemical testing expenses are
paid by the Company to the university on a fee-for-service basis.
This kind of agreement is similar to those that the Center enters
into with other companies. The university has no proprietary rights
in the Company's products. This relationship enables the Company to
conduct mandated tests for good manufacturing practice ("GMP") and
to test incoming raw materials to determine if they meet the strict
specifications demanded for Food and Drug Administration ("FDA")
registered products. Without this arrangement, the Company would
need to invest a large amount for testing equipment. It is
anticipated that the Company will maintain its relationship with
Weber State University.
Efficacy tests, which are particularly mandated by the FDA,
Environmental Protection Agency ("EPA") and Occupational Safety and
Health Administration ("OSHA") and required by the sellers of the
Company's products, are performed by independent certified labs
which adhere to government established protocols. The Company will
also continue to test its own products, or to have them tested by
outside FDA compliant labs, to determine new uses, such as showing
efficacy in combating HIV, hepatitis, the flu, and athletic rashes.
Independent FDA-compliant laboratories have tested the Company's
antimicrobial products with respect to in-vivo efficacy, in-vitro
time kill, in-vitro Minimum Inhibitory Concentration,
trans-epidermal moisture gain/loss and skin irritation, surpassing
FDA testing protocols. These tests conducted following FDA protocols
found that First Scientific's antimicrobial products deliver:
- - High pathogenic efficacy by removing 99.99% of bacteria, fungi,
yeast and viruses in 15 seconds or less.
- - Improved skin condition with frequent use vs. the skin degrading
actives found in leading antimicrobial products that contain
alcohol, CHG, PCMX, Triclosan(R) and iodine.
- - Continued bacteria killing efficacy for hours after use.
- - Fast-acting efficacy against a broad spectrum of microorganisms,
including MRSA and VRE.
Independent laboratories have also tested and validated the
Company's Dimethicone-based skin protection products with favorable
results.
The three formulations the Company has invented are unique, and are
used to produce distinct products. First Scientific has another
company's chemical formulation for a fourth product available to
market: a hard surface antibacterial disinfectant. The Company's
three formulations are FDA registered and proprietary, while the
fourth formulation, an antimicrobial hard-surface disinfectant
cleaner, is EPA registered.
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Products
First Scientific is primarily engaged in commercializing
patent-pending formulations originally developed by Linco. These
include:
Antimicrobial Formulation
First Scientific's patent-pending antimicrobial formulation was
completed following several years of rigorous development and
testing. Independent laboratory testing has proven this
formulation's ability to soothe and condition the skin while
eliminating 99.99% of pathogens. The 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 (FDA tentative final monograph 21 CFR 333). The
Company's antimicrobial formula can be used as a facility-wide
product appropriate for patient, public and staff handwashing. This
formulation can be delivered in a variety of package types as an
antimicrobial handwash, antimicrobial lotion, antibacterial spray
and antibacterial towelettes. The Company is initially marketing its
antimicrobial formula to domestic and international professional
health care distributors and manufacturers wanting to sell such a
formula under their own private label. Other markets, including
foodhandling, hospitality, government, education institutions,
e-commerce, retail, network marketing and select niche markets have
also been identified by the Company and are targeted for market
expansion. These markets will be penetrated through private label
sales or through regional distributors selling the Company's own
Fresh Cleanse(R) brand.
Skin Protection Formulation
First Scientific's patent-pending, skin protection formulation
brings together Dimethicone with skin-conditioning emollients and
botanical oils to create a unique solution for the treatment and
prevention of rashes due to incontinence. The Company has
demonstrated shelf life of this stable Dimethicone oil-in-water
emulsion for periods in excess of two years. In addition to meeting
the required protocols, as outlined by the FDA, the formulation
meets the requirements as an over-the-counter drug product. This
product, in towelette form, is used for the treatment and prevention
of skin rashes caused by infant and adult incontinence. The Company
currently supplies the skin protection formula to a third-party
manufacturer, which produces a waterless, patient-bathing product
for ConvaTec, a division of Bristol-Myers Squibb Company.
Product Uses and Benefits
First Scientific's patent-pending formulations can be used in the
following manner:
Product and Primary Delivery Mode Benefits
- ---------------------------------------- ----------------------------------
Antimicrobial and antibacterial products Aseptic sanitizing while improving
including handwashes, lotions, sprays and skin/hand condition
towelettes
Skin protective, Dimethicone-based Cleansing plus treatment and protec-
towelettes and sprays tion of skin rashes caused by infant
and adult incontinence
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Product Forms / Types
First Scientific's antimicrobial and skin protection formulas are
available in the following forms / types:
First Scientific Product Forms: Types:
- ------------------------------- --------------------------
Antimicrobial Formula:
Antimicrobial Soap / Health Care - Pump bottles
Personnel Handwash - Tubes
- Cartridge pouches
- Refill bulk containers
Antimicrobial Hand-sanitizing Lotion - Pump bottles
- Squeeze bottles
- Cartridges
- Refill bulk containers
Antibacterial Sanitizing Spray - Spray bottles
Antibacterial Towelettes - Individual packets
- Bulk containers (plastic tubs)
- Flow wrap packaging
Skin Protection Formula:
Towelettes - Bulk containers (plastic tubs)
- Flow wrap packaging
Markets for the Company's Products
The market for antimicrobial products is growing
rapidly. This trend is a result of new strains of bacteria
that, once they infiltrate the body, are in many cases
resistant to, or even totally unaffected by, existing drugs.
Moreover, hospital-acquired infections are leading to
increasing insurance settlements.
As a result of these and other trends in infection
control, FDA and EPA requirements for cleanliness are becoming
increasingly important issues every day in the industries
affected by bacteria and other infectious microorganisms. In
response, more stringent and regular inspections are routinely
conducted.
Antimicrobial and antibacterial products are now relied
on to protect personal health and workplace environments from
illnesses and deaths caused by a variety of pathogens. This
is also developing into a major concern for the hospitality
industry, schools, government, money-handling businesses and
other significant markets. The mass media is chronicling
these cases on a frequent basis. The media is warning and
educating people regarding the spread of bacteria. The FDA,
EPA and other national and international public regulatory
agencies, along with private watchdog groups, are also
demanding higher standards to fight the pathogens that
threaten the world's population.
Several manufacturers have responded to this demand by
marketing antimicrobial and antibacterial products. However,
independent testing reveals that of these products contain
skin irritating active ingredients, such as alcohol, PCMX,
CHG, Triclosan and iodine, causing skin degradation.
Management believes First Scientific is uniquely positioned to
deliver to health care providers, food handlers, and even the
consumer at home, more effective, gentle-to-use antimicrobial
and skin protection products.
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The Company's Dimethicone-based skin protection
formula sales are targeted at hospitals and long-term care
facilities, as well as the infant care market. Additionally,
with people living longer and professional and family in-home
care becoming more prevalent due to skyrocketing health care
costs, predictable market growth is anticipated. However,
there can be no assurance as to future levels of sales or
market share the Company can obtain or sustain. First
Scientific also plans to pursue the infant diaper rash
treatment and prevention market where there is substantial
competition, yet likely sales potential.
Market Category Potential
Professional Health Care
Health care workers, through patient contact, are a
leading cause of transmission of nosocomial, or
hospital-acquired, infection. In the case of Hepatitis B,
health care workers are between 5 and 15 times more likely to
contract the virus than the general U.S. population
(Association of Infection Control Professionals). Moreover,
nosocomial infection is the most common immediate cause of
death in nursing home patients, and the leading cause of
patient hospitalization. The Center for Disease Control
estimates over 1.5 million cases of nosocomial infection in
long-term care facilities and nursing homes occur each year,
or an average of one infection per year per patient. According
to the American Journal of Infection Control (June/August
1991), between 5% and 18% of all patients have an active
infection at any given time.
The large, fast-growing professional health care
market comprises a small group of dominant manufacturers and
medical supply distribution companies. They sell to
hospitals, nursing/long-term care facilities, physician and
dental offices, laboratories and other health-related
organizations or to group purchasers. The manufacturers,
distribution companies and group purchase organizations
control product flow to the market. Marketplace success in the
professional health care category will be driven by
establishing strategic alliances with manufacturers and
distribution companies to get First Scientific's products to
the end user. Hospitals (47%), physician offices (19%), and
nursing/long-term care facilities (13%) account for more than
75% of the annual handwashing occasions in the professional
health care arena.
Additionally, an annual industry study conducted by
Kovach & Associates, a leading consulting firm, confirms the
market opportunity for handwash products in the professional
heath care market with total dollars just over $408 million.
Four key segments accounting for the majority of sales includes:
Segment % Total dollars
---------------------------- ---------------
Hospital/Nursing 30.6%
Nursing homes 24.5%
Hospital operating rooms 12.2%
Hospital housekeeping 22.9%
TOTAL 90.2%
Foodhandling
Foodborne illness kills over 10,000 people each year.
Over 70% of all outbreaks originate in foodservice operations
and, as many as 40% are the result of poor handwashing and
cross-contamination. Each year over 80 million estimated cases
of food poisoning occur in the United States alone. The U.S.
spends between $7.6 and $23 billion annually on health care
and lost productivity resulting from foodborne illness. The
average incident costs for a foodservice company is over
$75,000 and results in significant future sales losses.
(Source: FDA)
The hands are particularly important in transmitting
foodborne pathogens. Food employees with dirty hands and/or
fingernails may contaminate the food being prepared.
According to the U. S. Food and Drug Administration's 1999
Food Code, employee handwashing is a Critical Control Point
under food safety plan and prevention guidelines. Therefore,
the FDA recommends that any activity which may contaminate the
hands must be followed by thorough handwashing in accordance
with the procedures outlined in the Code.
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The foodhandling category has a similar distribution
chain with specialized distribution companies like Sysco,
Monarch, Alliant, etc., providing consumable goods and
supplies to food service companies and restaurants. Dine-in
restaurants (29%), fast food restaurants (28%) and food
service companies (14%) account for 71% of the annual hand
washing in the foodhandling arena. Sources confirm a market
opportunity for handwash products in the foodhandling market
with total dollars just over $168 million.
Other Major Market Segments
There is additional market potential for the Company's
products with government, education institutions, e-commerce,
retail and select niche industries and sectors. For instance,
education institutions alone represent a $950 million market.
First Scientific also believes that international markets
could provide excellent marketing opportunities for its
products because their demands parallel those of domestic
markets.
Target End User Markets
Reflecting the constraints of limited resources and
the need for focused sales efforts, First Scientific will
proceed to generate sales revenue by focusing its
marketing/sales strategy toward the following end user
markets, both domestically and in select international markets:
Antimicrobial Formula:
Professional Health Care: material management and
purchasing personnel at hospitals, nursing homes/long-term
care facilities, medical clinic personnel, lab technicians,
infection control practitioners, nurses -all types, homecare
agency personnel, physicians, dentists, dermatologists
Food Preparation & Handling: food processing plant
personnel, restaurant workers, hospitality businesses and
their personnel, central commissary, school cafeteria
personnel and other institutions, service providers and their
patrons
e-commerce: On-line consumers
Education Institutions: Public and private
Governments: Local, state and Federal
Select Niche Industries: money-handlers,
students/faculty/administrators, custodians, daycare,
cosmetologists, law enforcement and correctional facility
personnel, EMTs
Skin Protection Formula:
Professional Health Care: material management and
purchasing personnel at hospitals, nursing homes/long-term
care facilities and homecare agency personnel
e-commerce: On-line consumers
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Marketing and Sales
First Scientific develops and markets break-through,
proprietary antimicrobial healing and skin protecting products
that advance healthy living. The Company's innovative products
are proven effective by independent laboratory testing and end
consumer analysis.
Marketing Plan
First Scientific has developed a comprehensive
two-pronged marketing plan to address its primary private
label and distribution sales targets and secondary audiences.
The plan outlines strategies and tactics for establishing
corporate and product awareness and generating sales.
Marketing campaigns during fiscal year 2000 are directed
toward establishing and building a superior market position
for First Scientific with the emphasis on the company's
break-through antimicrobial formulation. As new products are
developed, strategic marketing plans will be developed for
them to provide fast and effective market penetration.
In support of its marketing plan, the Company has
engaged outside consultants, including: Kinara Advertising,
Forthgear Design, Scribe Public Relations and Marketing, and
Kovach & Associates Inc., a nationally-recognized, St.
Louis-based health care consulting firm.
Sales Approach
First Scientific anticipates that near-term revenue
growth will result from private-label agreements within the
professional health care industry. This approach provides
quick market penetration with lower capital requirements. Due
to the large cash investment required to launch, penetrate and
sustain branded products, the Company is aligning with market
leaders that already have an established sales force,
distribution and customer base. For this reason, private
labeling is a compelling business sales tactic for the
Company. Moreover, the Company can offer proprietary products
to a number of customers by altering botanical and/or
fragrance formulations while maintaining required FDA protocols.
Additionally, as opportunities arise, the Company
simultaneously intends to promote its Fresh Cleanse brand,
which it intends to sell into several of the identified user
groups. The Company plans to carefully qualify its
distribution relationships, choosing those with an established
market presence. The Company also plans to pursue distribution
agreements in the professional health care, foodhandling,
hospitality, government, education institutions, retail,
select niche markets, as well as service e-commerce sales.
In support of this plan, First Scientific is
assembling a sales team that will be organized in alignment
with the end consumer markets as outlined above. The sales
team will concentrate its efforts on securing significant
market share in its target markets.
Pricing / Margin Strategy
Premium pricing can be realized only where/when First
Scientific has a significant product performance advantage
while being mindful of competitive pricing realities. First
Scientific's objective, across all categories, is to base
price for value delivered to achieve weighted margins that
meet or exceed industry standards.
Competition
First Scientific's competitors are those companies
already providing antimicrobial and antibacterial products,
and the promise of a bacteria-free environment, to the
professional health care, foodhandling and other
workplace/consumer environments. First Scientific's speed to
market and demonstrated capability of designing unique
products to address market opportunities and customer needs
provides the competitive edge to compete against larger,
entrenched competitors. However, the Company's competitors are
mostly large, well established marketers that have recognized
brands and customer bases that pose a significant barrier to
financial statement sales/marketing plans.
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The Company has not been able to identify a competitor
that provides a single product that simultaneously eliminates
bacteria, improves skin condition and is effective for hours
after use. Additionally, independent testing reveals that
competitive products incorporating skin irritating active
ingredients, such as alcohol, PCMX, CHG, Triclosan and
iodine, cause skin degradation. This product landscape
provides First Scientific with a critical competitive
advantage. Management believes the Company is well positioned
to deliver products that specifically address problems
associated with degradation of the skin caused by the
irritating aspects of competitors' products, while also
improving the skin's overall condition and providing
antimicrobial persistence at higher levels.
Summary of Business
The Company is considered a development stage company
for financial reporting purposes and, since inception, has
incurred losses from operations. As of December 31, 1999, the
Company has had cumulative net losses since inception totaling
$6,231,062, with $4,084,532 of this total attributable to
research and development expense. The Company is primarily
engaged in the development of scientific chemical formulations
and is currently marketing its products to private label
companies that are major distributors in the over-the-counter,
medical, health care and multi-level arenas, with nominal
sales being made by a small distributor of First Scientific's
branded products. Future development of Company's own brands,
especially in medical markets, will be pursued on a
case-by-case basis as profitable opportunities arise. The
Company has developed unique formulations; two are
moisturizing antimicrobial sanitizing formulations that remove
99.69% to 99.99% of bacteria from the skin without the harsh
effects of alcohol or iodine (these products can be delivered
in wipes, spray, lotion and lotion-soap forms) and the third,
a topical rash prevention and treatment formulation that
cleanses and moisturizes the skin for treatment against skin
rashes caused by incontinence and other irritations (in wipe
form).
Management believes the worldwide potential market for
such products has grown significantly in recent years and
could continue growing at an aggressive rate. Regarding the
Company's antimicrobial formulation, this growth is due to the
increase in bacteria related disease, sickness and death from
methicillin-resistant and other bacteria, the demands of
government and health care agencies/providers to create
healthier treatment environment and the insistence of the
public in general for healthier living and working conditions.
Potential market for the Company's diaper and other rash
formulation could result from growth of the incontinent
geriatric population, as baby boomers grow older, and the
product's application for the infant market. The Company also
markets a fourth complimentary product; an antimicrobial
hard-surface cleaner that is E.P.A. registered for use.
Management believes the potential markets for its
products will continue to expand and that the Company's
potential for becoming a significant participant in such
markets is a reasonable expectation; however, the Company has
not generated significant sales during its history. The
approximate $2,000,000 funding First Scientific received in
the third quarter of 1998 provided a strong base for expanded
and focused marketing and sales efforts. These efforts are
backed up by additional management and staff, new executive
offices, the upgrading of existing research and development,
mixing and storage facilities and expanded testing
accommodations. The Company has raised $1,475,000 under a
private placement equity offering during 2000, has a
subscription agreement for $2,000,000, and is continuing to
seek additional equity capital under similar arrangements.
Funds raised through these private placements are planned to
be used to expand the Company's sales and marketing efforts
(see Description of Property section below), to build out a
state-of-the-art research and development laboratory (see
Description of Property section below), to provide
manufacturing capacity, to acquire distribution and
complimentary products and to provide sufficient capital to
bring First Scientific to a positive working capital position.
The Company maintains its own internet web page, which can be
found at 'www.firstscientific.com.'
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ITEM 2. DESCRIPTION OF PROPERTY
The Company currently occupies space at two locations.
The Company's executive offices are located at 1877 West 2800
South, Suite 200, Ogden, Utah 84401. This location is
presently comprised of 2,012 square feet of office space on
the second level of a three-year-old office warehouse building
in the Ogden Industrial Park. Executive, administration,
finance, operations and sales/marketing are housed in this
facility. The second facility is located at 2711 Midland
Drive, Ogden, Utah 84401 (approximately one-half mile from the
executive offices). As of December 31, 1999 research and
development, stability testing, warehousing and records
storage are performed at this FDA compliant facility, which
consists of 2,200 square feet in a small office warehouse
complex. The Company also has a written agreement for the use
of laboratory and testing facilities at Weber State University
in Ogden, Utah and is in the process of leasing its own
dedicated space at the university for expanded operations.
During the first quarter of 2000, the Company entered into a
lease agreement for an additional 3,000 square feet located
adjacent (same floor to the west) to its executive offices
which will be used for sales, marketing, communications and an
employee lunch/break area and 2,000 square feet immediately
south (same floor to the south) of its executive offices that
will be occupied by a state-of-the-art research, product
development and testing lab.
ITEM 3. LEGAL PROCEEDINGS
On January 5, 1999 the Company was advised of a claim
against it allegedly arising out of an Agreement in Principle
made in 1991 (the "1991 Agreement") by Linco Industries, Inc.
("Linco", now known as First Scientific Corporation, is a
wholly owned subsidiary of the Company, first Scientific,
Inc.). The 1991 Agreement purported to promise shares of Linco
common stock to an individual (the "Claimant") if certain
conditions were met by the Claimant in representing Linco to
potential customers. The Company has not made any settlement
offer in an attempt to resolve the matter. Management
maintains that the 1991 Agreement is no longer valid because
the conditions in the 1991 Agreement were not met in a
reasonable time and because of the failure of other material
terms.
Additionally, an indemnification agreement in favor of
the Company by the former founding Linco shareholders requires
the latter to satisfy any obligations which Linco may have
incurred prior to the reorganization. Consequently, the
Company would require that any eventual settlement or award
resulting from the 1991 Agreement be satisfied entirely by the
founding shareholders of Linco. The Linco founders have
assured the Company that they will defend this matter in the
event any legal proceedings should be filed against the
Company. In response to the Claimant's demands, the Linco
founders filed an action in the District Court of Weber
County, State of Utah (Civil Case No. 99090484) including
First Scientific, Inc., First Scientific Corporation and Linco
Industries, Inc., as co-Plaintiffs, for declaratory judgement
that the Claimant (the Defendant in said action) has no
entitlement against any of the Plaintiffs, including the
Company. The Claimant was served and responded by filing with
the court for a change of venue from Weber County, Utah to
Utah County, Utah, which the court granted.
On December 3, 1999, the Claimant answered the
complaint and filed a counterclaim against the Company and
other plaintiffs claiming he had "fully performed" under the
199 Agreement. The declaratory judgment action is now in the
discovery phase, and has not yet been adjudicated. To the
knowledge of the Company, as of December 31, 1999, no
subsequent legal or court action has been taken by the Claimant.
<PAGE>
-9-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Securities of the Company
The reorganization of the Company completed in 1998
left the Company with 20,169,770 shares of common stock
outstanding as of December 31, 1998, and 20,219,770 common
shares outstanding at December 31, 1999. The Company also has
1,000,000 preferred shares authorized with no shares issued.
There is currently no public market for any of the Company's
common shares.
There are approximately 288 shareholders of record of
the Company's common stock as of December 31, 1999.
Sales of Unregistered Securities
On April 30, 1999 the Company agreed to issue 10,000
shares of common stock to Weldon Phillips for marketing
services during 1997 and 1998. The services were valued at
$10,000 based upon the fair value of the common stock in April
1999. The fair value of the common stock was established by
management based upon an evaluation of the perceived
performance of the Company to date. The shares were issued in
reliance upon Section 4(2) of the Securities Act of 1933, as
amended (the "Act") and Rule 506 of Regulation D promulgated
thereunder. The Company believes that Mr. Phillips is an
accredited investor.
On August 7, 1999, the Company agreed to issue 40,000
shares of common stock to Kinara Graphics, Inc. for their
creative services in developing and presenting promotional and
other materials regarding First Scientific and its products.
The services were valued at $70,000, or $1.75 per share, based
upon an evaluation by management of the perceived fair value
of the Company's common stock on the date of the agreement.
The shares were issued in reliance upon Section 4(2) of the
Act and Rule 506 of Regulation D promulgated thereunder. Based
on information obtained by the Company in connection with its
business relationship with Kinara Graphics, Inc., management
believes, that Kinara Graphics, Inc., through its
representatives, has such knowledge on business and financial
matters as to be able to evaluate the merits and risks of an
investment in First Scientific.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Selected Financial Data
The following selected financial data of the Company
as of December 31,1999 and 1998 and cumulative from April 30,
1990 (date of inception) through December 31, 1999, are
derived from, and are qualified by reference to, the financial
statements of the Company, included elsewhere in this Form
10-KSB. The information set forth below should be read in
conjunction with Management's Discussion and Analysis.
Revenue $ 553,631 $ 83,149 $ 789,627
Net Loss (1,468,317) (4,280,512) (6,231,062)
<PAGE>
-10-
Basic and Diluted Loss per share (0.07) (0.33) (0.55)
Weighted Average Shares
Outstanding 20,182,373 12,800,937 1,332,280
Cash Dividends Declared per
Common Share - - -
Summary Consolidated Balance
Sheet Data
Working Capital $ 297,039 $ 1,348,846
Total Assets 696,869 1,788,818
Stockholder's Equity 500,220 1,595,208
Accumulated Deficit 6,231,062 4,762,745
Management's Discussion and Analysis and Plan of Operation
General
This discussion should be read in conjunction
with the annual financial statements included elsewhere in
this document ("the accompanying financial statements").
Whenever in this discussion the term "First Scientific" or
"Company" is used, it should be understood to refer to First
Scientific, Inc. and its wholly owned subsidiary on a
consolidated basis, except where the context clearly indicates
otherwise.
The following Management's Discussion and
Analysis of Financial Condition and Plan of Operation contains
forward-looking statements which involve risks and
uncertainty. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of certain factors discussed in this section. The
Company is a development stage company engaged in the
research, development and commercialization of unique
formulations for sale in the professional health care, food
handling, hospitality, government, education, e-commerce,
retail, network marketing and other niche markets. Linco
Industries, Inc.,("Linco") was reorganized into First
Scientific, Inc. during September 1998. The first of the
Company's patent-pending formulations is a moisturizing
antimicrobial formula that combines skin-softening emollients
and botanicals proven to soothe and condition while
eliminating 99.99% of pathogens. This formulation can be
packaged as an antimicrobial handwash, antimicrobial lotion,
antibacterial spray and antibacterial towelettes. The second
formulation is a skin protection formula that brings together
Dimethicone with skin-conditioning emollients and botanical
oils to create a solution for the treatment and prevention of
rashes. This product, in towelette form, is used for the
treatment and prevention of skin rashes caused by infant and
adult incontinence. The Company currently supplies the skin
protection formula to a third-party manufacturer, which
produces a waterless, patient-bathing product for ConvaTec, a
division of Bristol-Myers Squibb Company.
Plan of Operation
First Scientific is a development stage company
which, since inception, has incurred losses from operations.
As of December 31, 1999, the cumulative net losses of First
Scientific since inception total $6,231,062 of which
$3,766,440 is attributable to a non-recurring charge for
acquired research and development, as described in Note 3 to
the accompanying financial statements. First Scientific is
engaged primarily in the development and marketing of chemical
formulations that management feels will have worldwide sales
opportunities. As of December 31, 1999, First Scientific has
had minimal sales from its products and testing services, but
is in the process expanding the marketing of its products
through private label relationships with companies that are
major distributors in the medical, healthcare,
<PAGE>
-11-
over-the-counter, and multi-level arenas, both domestically
and internationally. Marketing materials have been produced
to assist with a formal product launch of its antimicrobial
formulation that took place during the third quarter of 1999.
Development of First Scientific's own brands will be handled
mostly through regional distributors, especially in medical
markets, and will be pursued on a case-by-case basis as
profitable opportunities are identified and evaluated. The
Company anticipates meeting its contractual obligations with
ConvaTec which should produce increasing revenue in the
future. Subsequent to year end 1999, in January of 2000,
First Scientific signed a private label distribution agreement
with PureSoft Solutions, LLC, a leading New Hampshire-based
manufacturer and supplier of hard surface disinfectants and
skin care products. PureSoft plans to market the Company's
antimicrobial handwash and other products under the PureSoft
product label to specialty niche markets already serviced by
PureSoft and to long-term care, professional health care and
other professional markets.
ConvaTec has engaged First Scientific, on a fee
for service basis, to perform testing procedures that fulfill
FDA compliance requirements relating to product sales to this
customer. ConvaTec has reported favorable results regarding
First Scientific's testing procedures and operating protocols.
The prospects for ongoing testing work with this customer
appears likely. This relationship has allowed First Scientific
to gain experience and to develop standard operating
procedures that satisfy, not only this customer's needs, but
that should withstand the most critical evaluations and
requirements of future customers, and therefore, may provide
new revenue opportunities.
First Scientific currently outsources
manufacturing of its products. The Company has developed
relationships with three manufacturers, and is in the process
of qualifying another, who have U.S. Food and Drug
Administration ("F.D.A.") compliant facilities and experience
in manufacturing in accordance with F.D.A. requirements and
Good Manufacturing Practices ("GMP") standards. These
companies are generally in the business of manufacturing for
various customers who require F.D.A. compliant facilities for
their products. First Scientific is able to produce a
concentrate of its antimicrobial formulation at its own
facility under F.D.A. protocols; however, in most cases, the
Company's outsourced manufacturers will produce the Company's
formulations and package products according to pre-defined
specifications. First Scientific filed for patent protection
with the U. S. Patent Office for its antimicrobial formulation
during the third quarter of 1999. First Scientific uses this
same outsourced manufacturing procedure in the production of
its dimethicone-based rash prevention and treatment
formulation and product because currently First Scientific
cannot economically mix concentrate itself for this product.
First Scientific has also filed a patent for this formulation
with the U. S. Patent Office. Strict confidentiality
agreements are in place with the Company's outsourced
manufacturers to further protect its product formulations.
For the foreseeable future, the Company plans to
outsource its manufacturing and has discontinued the pursuit
of its own production facility. It is anticipated that new
and existing outsourced manufacturing relationships will
become more cost effective as increased business is run
through these facilities.
The cash requirements of First Scientific through
the end of first quarter 2000 will vary based upon a number of
factors including, but not limited to, continuing research and
development levels, increased market development, facilities
enhancement and/or acquisitions, additional personnel, travel
and other expenses related to projected growth. With the new
business First Scientific is now actively pursuing, management
believes existing cash, cash equivalents and cash generated
from anticipated sales will be sufficient to meet obligations
over the next 30-60 days. First Scientific will need
additional equity funding to meet its working capital and
expansion needs until projected positive cash flow is reached
in the third quarter of 2000. In order to meet these
projected cash needs, a Regulation D 506 Private Placement
Memorandum was initiated by the Company in the fourth quarter
on 1999. As of the date of this filing, $1,475,000 cash has
been received under the private placement, and an additional
$2,000,000 has been subscribed for. Even though management
believes that funding sufficient to meet its operating needs
will be raised in a timely manner, there is no assurance that
all of such funding will be raised.
<PAGE>
-12-
Employees and Consultants
As of December 31, 1999, the Company had 11
full-time employees in management, administrative, and
technical positions. This number does not include contract
distributors who are independent contractors rather than First
Scientific employees. The Company also utilize several
consultants and advisors. As First Scientific continues to
grow, additional personnel will need to be added to enable the
Company to meet its projected growth. Subsequent to year end
1999, the Company has hired a vice-president of logistics,
three sales managers to handle specific markets, a chemist and
a part-time database specialist. Management anticipates
hiring additional sales /marketing and lab personnel, one
finance specialist and an executive assistant during year
2000. There can be no assurance that First Scientific will be
successful in recruiting or retaining key personnel. None of
our employees is a member of a labor union and we have never
experienced any business interruption as a result of any labor
disputes.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Position
First Scientific had $207,934 in cash as of
December 31, 1999. This represents a decrease of $1,078,365
from December 31, 1998. Working capital, as of December
31,1999, decreased to $297,039 compared to working capital of
$1,348,846 at December 31, 1998.
Results of Operations
Results of Operations
During the 12 months ended December 31, 1999, the
Company had total operating revenues of $553,631, comprised
primarily of product testing, raw materials sales and a
licensing fee from a major customer, compared with total
operating revenues of $83,149 for 1998, comprised primarily
of product sales. Cumulative operating revenue from inception
(April 30, 1990) through December 31, 1999 totaled $789,627.
Gross profits for 1999 and 1998 were $405,408 and $28,152
respectively. As of December 31, 1999, the cumulative net
losses of First Scientific since inception total $6,231,062 of
which $3,766,440 is attributable to a non-recurring charge for
acquired research and development.
Prior to December 1998, Company revenues were
generated from sporadic sales of a Linseed oil based soap
product and a rash prevention product created for a
distributor who sells this product under private labels to an
over-the-counter customer. First Scientific decided to
discontinue the sale of these products and to concentrate on
marketing of its antimicrobial and rash treatment/prevention
products.
On August 12, 1999, First Scientific signed a
supply agreement with ConvaTec, a division of Bristol-Myers
Squibb Company. The agreement provides for First Scientific to
provide raw materials to a third party manufacturer who will
deliver the finished product to ConvaTec. The contract also
provides for a license fee to be paid to First Scientific and
for First Scientific to provide testing services for
contracted on a fee-for-service basis. Revenues under this
contract were $305,358 for the year ended December 31, 1999.
During the third and forth quarters of 1999, the
Company began initial negotiations, including the exchange of
non-disclosure agreements, with several professional health
care market share leaders concerning its professional health
care handwash. These negotiation are continuing as of the
filing of this document and are expected to finalize with
signed contracts during the second quarter of 2000.
First Scientific's regional distribution
agreement with WelMed, Inc., produced minimal revenues during
the year ended December 31, 1999. Initial warehousing
inventory shipped to WelMed during the fourth quarter of 1999.
This agreement covers several western states. WelMed has a
non-exclusive distribution rights to First Scientific's
products in these states and exclusive rights to First
Scientific's Fresh Cleanse(R) branded products to hospitals,
nursing homes, medical clinics and doctors offices in this
territory.
<PAGE>
-13-
Should anticipated sales from the Company's existing
agreement with ConvaTec or from other negotiations now taking
place or other potential sales opportunities which First
Scientific anticipates materializing, not come to fruition,
the ability of First Scientific to sustain operations beyond
the first quarter of 2000 wold be seriously impacted. To
mitigate such circumstances and to provide working capital to
hire needed personnel, to lease additional space and to outfit
a research/testing lab, the Company has received cash
proceeds of $1,475,000 and subscriptions for an additional
$2,000,000 under a private placement offering.
Private label agreements, such as those discussed
above, create certain risks for First Scientific. These risks
include (i) reliance for sales of products on other parties,
and therefore reliance on the other parties' marketing
ability, marketing plans and credit-worthiness; (ii) if First
Scientific's products are marketed under other parties'
labels, goodwill associated with use of the products generally
inures to the benefit of the other parties rather than First
Scientific; (iii) First Scientific may have only limited
protection from changes in manufacturing costs and raw
material costs; and (iv) if First Scientific continues to rely
on other parties for all or substantially all of its sales,
First Scientific may be limited in its ability to negotiate
with such other parties upon eventual renewals of their
agreements. It is the belief of management that these risks
are mitigated by initial market demands, the apparent
uniqueness of the Company's formulations, large existing and
expanding markets for its products and the caliber of
customers with whom First Scientific is currently negotiating.
However, First Scientific recognizes that, in the short run,
it will be dependent on a few large customers where the bulk
of its sales are envisioned to be generated. Until a broader
base of customers has been established, the loss of one such
customer could have a serious material adverse impact on the
operating viability of First Scientific.
First Scientific uses as many as 20 specific
chemical and botanical ingredients to formulate each of its
products. In most cases, supplies of ingredients for First
Scientific's formulations continue to remain readily available
from multiple sources. First Scientific continues to maintain
very good relationships with its suppliers and does not
anticipate problems that would cause significant interruption,
delay or availability of any ingredients.
General and administrative expenses were
$1,666,555 for the twelve months ended December 31, 1999,
compared with $550,449 for the comparable period from the
prior year. Cumulative general and administrative expenses
from inception through December 31, 1999 were $2,503,887. The
increase in expenditures between the 1999 and 1998 periods was
due to the continued transition of First Scientific from a
one-man product development entity, with minimal sales, to an
increased operational staff capable of administrating
anticipated growth. Executive office space into which First
Scientific moved during 1998 is being augmented as the
finance, sales/marketing and research and development
functions increase to match anticipated growth.
Research and development expenses were $94,982
for the 12 months ended December 31, 1999 compared to $47,368
after acquired purchased technology in the amount of
$3,766,440 is eliminated from the prior year ended December
31, 1998. The increase in expenditures between the 1999 and
net amounts for the 1998 periods resulted from the continued
refinement of First Scientific's formulations and the
development of new product variations to meet customer
requests. Management anticipates an increase in research and
development expenses for future periods, as First Scientific
expands its research capabilities and product offerings.
Liquidity and Capital Resources
Prior to the Merger on September 15, 1998, the
Company had financed its operations principally through
founder loans, small private placements of equity securities
and sporadic product sales. On September 15, 1998 an
additional private placement of approximately $2,000,000 was
received by the company in cash and marketable equity
securities. During the year ended December 31, 1999, sales,
testing fees and a licensing fee constituted the source of the
majority of funds from the operations of First Scientific. The
Company used net cash in operating activities of $996,074
during the twelve months ended December 31, 1999 and
$1,620,629 since inception, while $284,987 was used in 1998.
Investing activities used $75,154 net cash during the twelve
months ended December 31, 1999, primarily for the purchase of
equipment, while $215,907 was provided in 1998, primarily from
the sale of marketable securities, and a net of $140,032
cumulatively was provided since inception. The mentioned
<PAGE>
-14-
securities were received in exchange for common stock. A
portion of these securities were sold immediately upon their
receipt while the Company retained as an investment marketable
securities valued at $94,811 at December 31, 1999. As of
December 31, 1999, the First Scientific's liabilities totaled
$196,649 compared to $193,610 at December 31,1998. The Company
had working capital as of December 31, 1999 of $297,039
compared to $1,348,846 on December 31,1998.
The Company's working capital and other
capital requirements for the foreseeable future will
vary based upon a number of factors, including
expenditures related to continuing research and
development, FDA testing requirements, market
development, facilities enhancement, control of
manufacturing, additional personnel, travel and other
costs related to projected growth. Management is
presently projecting average monthly cash requirements
of approximately $371,000 for the next 12 months,
however, since the Company lacks experience at its
projected level of activity, this number could change
substantially. Management further projects that cash
on hand, together with funds generated from sales the
Company is now in the process of negotiating, together
with the proceeds from the aforementioned private
placement offering, will be sufficient to meet
projected operating requirements during year 2000.
Should sales not materialize as anticipated, the
Company would need revenue from sales to customers that
have not yet been identified to meet its projected
operating needs over the next twelve months. There is
no assurance that any sales, presently or yet to be
identified, will come to fruition or that any debt or
equity funding will be available to the Company, or if
available, at terms favorable to the Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements are set forth
immediately following the signature page.
PART III
ITEM 9. MANAGEMENT AND CERTAIN SECURITY HOLDERS
Directors and Executive Officers
The table below sets forth the name, age
and positions or offices of each director and executive
officer of First Scientific, Inc. and its wholly owned
subsidiary, First Scientific Corporation. The Board of
Directors and officers of First Scientific, Inc. also
serve as the Board of Directors and Officers of First
Scientific Corporation.
Name Age Position
---------------- --- ----------------------
Randall L. Hales 32 President, CEO,
Director
Gordon M. Davis 55 CFO, VP
Administration, Secretary
Reed J. Tanner 45 VP Operations
Jerral R. Pulley 65 Chairman, Board of Directors
Doug R. Warren 66 Director, Vice Chairman of the Board
Edward B. Walker Ph.D. 46 Director
Peter J. Sundwall Jr., M.D. 3 Director
Darrell J. Saunders, D.D.S. 5 Director
Gary L. Crittenden 46 Director
Dan C. Jorgensen 61 Director
<PAGE>
-15-
The directors are elected for one-year terms, which
expire at the next annual meeting of shareholders.
Executive Officers are elected annually by the Board of
Directors to hold office until the first meeting of the
Board following the next annual meeting of shareholders
and until their successors have been elected and
qualified.
Randall L. Hales - President, CEO, Director
-------------------------------------------
Randall L. Hales received his bachelor's degree
from the school of engineering at Brigham Young
University. He began his career working at David
Weekley homes in 1990, and before leaving in 1995 was
general manager of operations. Mr. Hales joined
Daltile International in March of 1995 and served as
managing director of its $300 million glazed wall tile
division in Dallas, Texas. In 1999, Mr. Hales began
employment with First Scientific as VP of Sales and
Marketing and became CEO and president in November of
1999. Throughout his career, he has been responsible
for company operations, manufacturing, sales, marketing
and general management.
Gordon M. Davis - CFO, VP Administration, Corporate
Secretary
---------------------------------------------------
Gordon M. Davis obtained a Bachelor of Science
degree in business management from the University of
Utah and has spent his career in banking, finance,
management, and consulting. Over the past five years,
Mr. Davis was president of Satellite Image Systems,
Salt Lake City, Utah in 1992 and 1993 and President of
EE Multimedia, Inc., Salt Lake City, Utah in 1995.
During 1996 Mr. Davis was part owner of a solarium
company in Salt Lake City, Utah. During 1997 and 1998,
he was a consultant to a real estate development
project in South America and served as a management and
financial consultant to other early stage development
ventures, including First Scientific, which hired him
as a full-time employee in August, 1998.
Reed J. Tanner - VP Operations
------------------------------
Reed J. Tanner was formerly a career U.S. Air
Force non-commissioned officer. He served as supervisor
of U.S. Air Force Ammunition Control Point, responsible
for inventory, location, and logistical support of Air
Force non-nuclear munitions stockpile. Mr. Tanner was
employed from June 1996 to September 1996 by BDM
Corporation, identifying ozone-depleting chemicals in
Air Force maintenance manuals as specified by EPA. He
also has experience as a subject matter expert for
technical writing of U.S. Air Force munitions technical
manuals for Sverdrup Technology, ASG where he was
employed during 1997 and 1998. He joined First
Scientific in May1998.
Jerral R. Pulley - Chairman, Board of Directors
-----------------------------------------------
Jerral R. Pulley is an experienced executive
skilled at providing strategic direction, innovative
marketing solutions and creating new streams of
business revenue. Since 1997, Mr. Pulley has been a
partner in the consulting firm, The Client Synergy
Group, and immediately prior to that while in Boston,
he served as senior vice president and general manager
of S.C. Publishing, and as CEO of Polymerics, a leading
art/craft company with $90 million in revenue. Mr.
Pulley's background includes serving in senior
executive roles at several prominent corporations
including: Binnery & Smith (Crayola), as VP Corporate
Development; Ryder, as senior VP Strategic
Planning/Corporate Development; Bordon, Group VP
(Consumer Products Division); Life Savers, EVP;
Pepsico, VP Marketing Planning. Mr. Pulley also spent
12 years at Procter & Gamble where his last assignment
was starting up a Toilet Goods Division in the United
Kingdom. Mr. Pulley has served on several boards of
directors and presently is a director of Sundog
Technologies, Inc., a software provider in Salt Lake
City; UB Networks, a high-speed access provider in
Newport Beach, Calif.; and also served as vice chairman
of the Henry's Fork Foundation, a non-profit
organization concerned with proper watershed
stewardship. Mr. Pulley holds a bachelor's degree from
the University of Utah and an MBA from UCLA.
Douglas R. Warren - Director, Vice Chairman of the Board
--------------------------------------------------------
Douglas R. Warren, was the president of First
Scientific since its acquisition of Linco Industries,
Inc in 1998. He served as president of Linco since its
founding in 1990 and directed all aspects of operations
including manufacturing, distribution and sales. Prior
to the acquisition of Linco by the Company, Mr. Warren
developed several important business relationships with
suppliers and potential customers. Mr. Warren was also
the founder and owner of Warren's Restaurants, Ogden,
Utah and a principal in the development of the Park
Meadows golf course and condominium development, Park
City, Utah.
<PAGE>
-16-
Dr. Edward B. Walker - Director
-------------------------------
Dr. Edward B. Walker graduated from Weber State
University and obtained his doctorate degree in
chemistry from Texas Tech University. After completing
a post-doctoral fellowship in the Stanford University
Department of Biochemical Pharmacology, Dr. Walker
returned to Weber State University in 1981, where he is
currently a professor of chemistry and director of the
Utah Center of Excellence for Chemical Technology. Dr.
Walker's basic research interests over the years have
focused on the biochemistry of natural products and
their effects on living systems. In addition, he spends
a significant portion of his time in applied research,
helping Utah inventors and corporations develop new and
enhanced products, refine their quality assurance
programs, and improve manufacturing methods. Dr. Walker
has been issued various U.S. and foreign patents for
his inventions, ranging from novel drugs derived from
plants to flow cells used in spectrophotometers. Dr.
Walker has received the Utah Governor's Medal for
Science and Technology, Weber State University's Master
Teacher Award, and is a Cortez Professor in the Honors
Program at WSU. He has authored many scientific
publications and two university-level chemistry
textbooks. Dr. Walker is also director of research and
development for First Scientific.
Dr. Peter V. Sundwall, Jr. - Director
-------------------------------------
Dr. Peter V. Sundwall, Jr., graduated cum laude
from the University of Utah with a degree in
Psychology. He went on to earn a master's degree in
Educational Psychology from the University of Utah. Dr.
Sundwall received his Doctor of Medicine degree from
the University of Utah Medical School where he
graduated with honors in Family Medicine and received
the Golden Cane award for excellence in patient care.
Dr. Sundwal1 completed his Family Practice Residency at
St. Peters Hospital in O1ympia, Washington. In June of
1997, Dr. Sundwall started practicing family medicine
at Intermountain Health Care in Highland, Utah. He is
currently an associate physician with the American Fork
Clinic, American Fork, Utah.
Dr. Darrell J. Saunders - Director
----------------------------------
Dr. Darrell J. Saunders graduated from the
University of Nebraska with a D.D.S. degree in 1961.
Dr. Saunders has practiced dentistry in Ogden, Utah
since the 1960s. He served on the Ogden City Council
for 18 years, serving one term as assistant mayor and
another as chairman of the City Council. Dr. Saunders
also was on the Board of Directors for the Utah League
of Cities and Towns and was a member and Chairman of
the Board for the Central Weber Sewer District. He was
recently appointed by the mayor of Ogden to serve on
the Sesquicentennial Advisory Committee to help plan
the activities for Ogden's sesquicentennial celebration
in 2001.
Gary L. Crittenden - Director
-----------------------------
Gary L. Crittenden joined Monsanto Chemical
Company in 1999 as senior vice president and CFO.
Previously, Mr. Crittenden was executive vice president
and chief financial officer of Sears Roebuck and
Company from 1996 through 1998. Prior to joining
Sears, he was senior vice president and chief financial
officer at Melville Corporation, Rye, New York from
1994. Mr. Crittenden has also served as a consultant
to Bain & Company in Boston, where he also held senior
management and marketing positions. Mr. Crittenden
serves on the board of directors for Ryerson-Tull and
Wilson's, The Leather Expert. Mr. Crittenden earned a
bachelor's degree from Brigham Young University and an
MBA degree from Harvard University.
Dan C. Jorgensen - Director
---------------------------
Former Citicorp senior executive Dan C.
Jorgensen has been president of Jorgensen and
Associates since 1994, which is involved with energy,
financial services and investment projects in
developing countries and Russia. In addition to
founding Citicorp Insurance USA and Citicorp Insurance
Bermuda, Mr. Jorgensen has also served as senior vice
president Special Finances Division at AIG. Mr.
Jorgensen serves on several boards including: Institute
for Professional Medical Education, Calif.; Conseco
Bank, Utah; Utah Symphony, Utah; Snow College
Foundation, Utah; and Foundation Jean Monnet pour l'
Europe, Lausanne, Switzerland. Mr. Jorgensen holds a
bachelor's degree from Brigham Young University and an
MBA degree from Harvard University.
<PAGE>
-17-
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table
sets forth, for the three fiscal years ended December
31, 1999, the compensation paid to the Company's Chief
Executive Officer and all other officers and directors
(collectively, the "Named Executive Officers") at
December 31, 1999 whose salary and bonus for all
services in all capacities exceed $100,000 for the
fiscal year ended December 31, 1999.
Long-term
Annual Compensation Compensation
--------------------------- ------------
Other
Annual Securities
Name and Compensa- Underlying
Principal Position Year Salary Bonus tion Options
- --------------------- ------- -------- ------- --------- ----------
Douglas R. Warren 1999 $ 81,327 $ - $ 10,000 100,000
President, CEO (1) 1998 29,298 - - 120,000
1997 - - - -
Randall L. Hales 1999 $ 58,650 $ - $ - 500,000
President, CEO 1998 - - - -
1997 - - - -
Jerral R. Pulley 1999 $ - $ - $ 95,000 -
Chairman of the 1998 - - 50,000 1,000,000
Board 1997 - - - -
(1) Mr. Warren resigned as President, CEO of First
Scientific on November 17, 1999
Options Grants in the Last Fiscal Year
The following table sets forth the options granted to
named executive officers in the last fiscal year.
<TABLE>
<CAPTION>
Position Granted Granted Year Price Date
--------------------- ----------- ---------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C>
Douglas R. Warren 8/25/99 100,000 11% $ 0.7 September 2004-
September 2006
Randall L. Hales 08/15/99 250,000 28% $0.75 May 2005-
May 2007
11/22/99 250,000 28% $1.25 November 2004-
November 2006
</TABLE>
(1) Mr. Warren resigned as President, CEO of First Scientific on
November 17, 1999
Aggregated Option Exercises in Last Fiscal Year and Year End Option Values
<PAGE>
-18-
The following table sets forth information
concerning the exercise of options to acquire shares of
the Company's Common Stock by the Named Executive
Officers during the fiscal year ended December 31,
1999, as well as the aggregate number and value of
unexercised options held by the Named Executive
Officers on December 31, 1999
<TABLE>
<CAPTION>
Underlying unexercised Value of unexercised
Options at Inn-the-money options at
Acquired On Value December 31, 1999 (#) December 31, 1999 ($)
Exercise Realized ------------------------- ---------------------------
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
--------------------- -------- ------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas R. Warren (1) None N/A 148,000 72,000 148,000 72,000
Randall L. Hales None N/A 100,000 400,000 50,000 325,000
Jerral R. Pulley None N/A 400,000 600,000 400,000 600,000
</TABLE>
(1) Mr. Warren resigned as President, CEO of First Scientific on
November 17, 1999
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table lists the number of shares
of Common Stock beneficially owned as of December 31,
1999, by each person known by the Company to be the
beneficial owner of more the five percent (5%) of the
Common Stock, by each director of the Company, by the
Chief Executive Officer, and by all officers and
directors of the Company as a group. Unless noted
otherwise, each person named has sole voting and
investment power with respect to the shares indicated.
Percentage
Number of of Class
Names of Beneficial Owners Shares Outstanding
-------------------------- ------------ -----------
Edward B. Walker 5,434,170 25.5%
Darrell J. Saunders 2,191,450 10.3%
Douglas R. Warren (1) 2,086,118 9.8%
Charles L. Crittenden 1,991,452 9.4%
Jerry Pulley (2) 500,000 2.4%
Peter Sundwall (3) 50,000 .2%
Randall L. Hales (4) 100,000 .5%
Dan C Jorgensen (5) 14,000 .1%
Gary Crittenden (6) 14,000 .1%
All officers and directors
as a group (11 persons) (7) 10,617,738 49.9%
The percentages set forth above have been
computed based on 21,273,770 shares, which is the
number of shares of the Common Stock outstanding and
exercisable options held by officers and directors
outstanding as of December 31, 1999.
(1) Includes 148,000 shares issuable upon presently
exercisable options
(PAGE)
-19-
(2) Includes 500,000 share issuable upon presently
exercisable options and options which become
exercisable in the next 60 days.
(3) Includes 50,000 shares issuable upon presently
exercisable options.
(4) Includes 100,000 shares issuable upon presently
exercisable options.
(5) Includes 14,000 shares issuable upon presently
exercisable options.
(6) Includes 14,000 shares issuable upon presently
exercisable options.
(7) Includes 1,054,000 shares issuable upon presently
exercisable options and options which become
exercisable in the next 60 days.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
One-year renewable agreements were entered into
with two directors of the Company, one for $10,000 per
month, effective August 1, 1998 for marketing and sales
consulting, and one for $7,000 per month, effective
October 1, 1998, for consulting on product research,
development and testing. The $10,000 agreement has
been reduced to $7,500 per month commencing August 1,
2000 and the $7,000 agreement has been increased to
$8,000 per month beginning October 1, 1999.
During November 1999, the company advanced
$7,000 cash to an officer and shareholder in exchange
for a note with an interest rate of 9.5% per annum. the
loan is to be reduced from 33% of any bonuses paid to
the officer.
PART IV
EXHIBITS AND REPORTS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
The following Exhibits are filed herewith
pursuant to Rule 601 of Regulation S-B or are
incorporated by reference to previous filings.
Exhibit # Description
2.1 Agreement and Plan of Reorganization, dated
August 10, 1998, between the Registrant, Linco,
Linco Acquisition Corp. and Edward Walker*
3.1 Articles of Incorporation **
3.2 Bylaws**
3.3 Amendment to articles of Incorporation changing
name to First Scientific, Inc.
and effecting a forward stock split.*
10.1 Non-qualified Stock Option Agreement with
Jerral R. Pulley***
10.2 Non-qualified Stock Option Agreement with Peter
Sundwall, M.D.***
10.3 1998 Stock Incentive Plan****
10.4 Agreement with Weldon Phillips*****
10.5 Employment Agreement with Randy Hales*****
10.6 Consulting Agreement with Jerral R. Pulley*****
<PAGE>
-20-
10.7 Consulting Agreement with Edward Walker*****
10.8 Exclusive License and Supply Agreement with
Convatec
(Confidential Treatment Requested for Certain
Portions)******
27 Financial data schedule*******
______________________
* Incorporated by reference to the same-numbered exhibit
to the form 8-K filed October 2, 1998 by the Company
with the Securities and Exchange Commission.
** Incorporated by reference to the same-numbered
exhibit to the Company's Registration Statement on Form
10-SB, file No. 0-24378.
*** Incorporated by reference to the same-numbered
exhibit to the Form 10-QSB filed November 16,1998 with
the Securities and Exchange Commission.
**** Incorporated by reference from Quaarter Report on Form
10-QSB, as filed on June 15, 1999.
***** Incorporated by reference to the same numbered
exhibit to the form 10-QSB filed November 16, 1999 with
the Securities and Exchange Commission.
****** Incorporated by reference from Amended Quarter
Report on Form 10-QSB/A as filed on March 8, 2000.
******* Filed herewith
(b) Reports on Form 8-K
A report on Form 8-K was filed during the reporting
quarter on December 6, 1999.
<PAGE>
-21-
SIGNATURES
Pursuant to the requirements of the Securities
and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REGISTRANT
FIRST SCIENTIFIC, INC.
Registrant
DATED: March 13, 2000
By: /s/ Randall L. Hales
------------------------------
Randall L. Hales, President
DATED: March 13, 2000
By: /s/ Gordon M. Davis
--------------------------------
Gordon M. Davis, Vice President
Administration/CFO (Principal
Financial and Accounting Officer
<PAGE>
-22-
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants . . . . . . . . . F-1
Consolidated Balance Sheets - December 31, 1999 and 1998 . . . . . . F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 and for the Cumulative
Period from April 30, 1990 (Date of Inception) through
December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders' Equity for
the Cumulative Period from April 30, 1990 (Date of
Inception) through December 31, 1997 and for the Years
Ended December 31, 1998 and 1999. . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998, and for the Cumulative Period
from April 30, 1990 (Date of Inception) through December
31, 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . F-7
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
Certified Public Accountants
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East 300 South, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Shareholders
First Scientific, Inc.
We have audited the accompanying consolidated balance sheets of First
Scientific, Inc. and Subsidiary, a development stage enterprise, as
of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended and for the cumulative period from
April 30, 1990 (date of inception) through December 31, 1999. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of First Scientific, Inc. and Subsidiary as of December 31,
1999 and 1998, and the results of their operations and their cash
flows for the years then ended and for the cumulative period from
April 30, 1990 (date of inception) through December 31, 1999, in
conformity with generally accepted accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 2, 2000
F-1
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1999 1998
------------ ------------
ASSETS
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . $ 207,934 $ 1,286,299
Investment in securities available-for-sale 94,811 194,784
Trade receivables . . . . . . . . . . . . . 94,933 614
Inventory . . . . . . . . . . . . . . . . . 35,262 26,619
Prepaid expenses. . . . . . . . . . . . . . 46,551 29,356
------------ ------------
Total Current Assets . . . . . . . . . . 479,491 1,537,672
------------ ------------
Property and Equipment
Property and equipment. . . . . . . . . . . 173,532 95,378
Leasehold improvements. . . . . . . . . . . 10,229 -
Less: accumulated depreciation. . . . . . . (27,016) (2,982)
------------ ------------
Net Property and Equipment . . . . . . . 156,745 92,396
------------ ------------
Notes Receivable - Related Party. . . . . . . . 7,000 -
Purchased Technology, Net . . . . . . . . . . . 18,750 108,750
Long-Term Investments . . . . . . . . . . . . . - 50,000
Other Assets. . . . . . . . . . . . . . . . . . 34,883 -
------------ ------------
Total Assets. . . . . . . . . . . . . . . . . . $ 696,869 $ 1,788,818
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable. . . . . . . . . . . . . . $ 123,352 $ 54,334
Customer deposits . . . . . . . . . . . . . - 33,750
Accrued liabilities . . . . . . . . . . . . 30,660 75,979
Capital lease obligation - current portion. 8,850 2,070
Notes payable - related party . . . . . . . - 22,693
Note payable. . . . . . . . . . . . . . . . 19,590 -
------------ ------------
Total Current Liabilities. . . . . . . . 182,452 188,826
------------ ------------
Long-Term Capital Lease Obligation. . . . . . . 14,197 4,784
Stockholders' Equity
Preferred stock - $0.001 par value;
1,000,000 shares authorized; no shares
issued or outstanding. . . . . . . . . . . - -
Common stock - $0.001 par value;
50,000,000 shares authorized; issued
and outstanding: 1999 - 20,219,770
shares, 1998 - 20,169,770 shares . . . . . 20,220 20,170
Additional paid-in capital. . . . . . . . . 7,001,564 6,429,114
Unearned compensation . . . . . . . . . . . (273,599) (84,056)
Deficit accumulated during the
development stage. . . . . . . . . . . . . (6,231,062) (4,762,745)
Unrealized loss on investment in
securities . . . . . . . . . . . . . . . . (16,903) (7,275)
------------ ------------
Total Stockholders' Equity . . . . . . . 500,220 1,595,208
------------ ------------
Total Liabilities and Stockholders' Equity. . . $ 696,869 $ 1,788,818
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative from
April 30, 1990
For the Years Ended (Date of Inception)
December 31, Through
-------------------------- December 31,
1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues from services. . . . . . . . . . . . . $ 194,947 $ - $ 194,947
Product Sales . . . . . . . . . . . . . . . . . 358,684 83,149 594,680
------------ ------------ ------------
Total Sales . . . . . . . . . . . . . . . . 553,631 83,149 789,627
Cost of Sales . . . . . . . . . . . . . . . . . 148,223 54,997 302,876
------------ ------------ ------------
Gross Profit. . . . . . . . . . . . . . . . 405,408 28,152 486,751
------------ ------------ ------------
Operating Expenses
General and administrative expense. . . . . 1,666,555 550,449 2,503,887
Research and development expense. . . . . . 94,982 3,813,808 4,084,532
------------ ------------ ------------
Total Operating Expenses. . . . . . . . . 1,761,537 4,364,257 6,588,419
------------ ------------ ------------
Loss from Operations. . . . . . . . . . . . . . (1,356,129) (4,336,105) (6,101,668)
Other Income and (Expense)
Realized loss on investment in securities . (140,346) - (140,346)
Interest income . . . . . . . . . . . . . . 32,643 14,682 47,325
Interest expense. . . . . . . . . . . . . . (4,485) (20,970) (98,254)
------------ ------------ ------------
Loss Before Income Taxes. . . . . . . . . . . . (1,468,317) (4,342,393) (6,292,943)
Benefit from Income Taxes . . . . . . . . . . . - 61,881 61,881
------------ ------------ ------------
Net Loss. . . . . . . . . . . . . . . . . . . . $ (1,468,317) $ (4,280,512) $ (6,231,062)
============ ============ ============
Basic and Diluted Loss Per Common Share . . . . $ (0.07) $ (0.33) $ (0.55)
============ ============ ============
Weighted Average Number of Shares Used
in Per-Share Calculation. . . . . . . . . . . . 20,182,373 12,800,937 11,332,280
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit Accumulated
Accumulated Total
Common Stock Additional Receivable During the Other Stockholders'
------------------------- Paid-in From Development Comprehensive Equity
Shares Amount Capital Shareholder Stage Loss (Deficit)
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - April 30, 1990 (Date
of Inception). . . . . . . . . - $ - $ - $ - $ - $ - $ -
Net loss for the period from
April 30, 1990 (Date of
Inception) through December
31, 1997 . . . . . . . . . . . - - - - (482,233) - (482,233)
Issuance for receivable from
shareholder, April 30, 1990,
$0.00 per share. . . . . . . . 7,114,350 7,114 7,886 (15,000) - - -
Issuance for services:
April 30, 1990, $0.00
per share. . . . . . . . . . 2,371,450 2,371 2,629 - - - 5,000
January 1993, $0.07
per share. . . . . . . . . . 284,574 285 19,070 - - - 19,355
January 1995, $0.02
per share. . . . . . . . . . 2,371,450 2,371 47,629 - - - 50,000
Issuance for cash:
October 7, 1993, $0.07
per share. . . . . . . . . . 514,605 515 34,485 - - - 35,000
March 27, 1996, $0.12
per share. . . . . . . . . . 83,001 83 9,917 - - - 10,000
October 10, 1996, $0.25
per share. . . . . . . . . . 99,601 100 24,900 - - - 25,000
Set off notes receivable
from shareholders against
loans payable to shareholders,
December 31, 1993. . . . . . . - - - 15,000 - - 15,000
Shares redeemed in exchange
for release of personal
guarantee of Company debt,
December 31, 1994, $0.00
per share. . . . . . . . . . . (2,371,450) (2,371) 2,371 - - - -
------------ ------------ ------------ ------------ ------------ ------------- -----------
Balance - December 31, 1997 . . 10,467,581 10,468 148,887 - (482,233) - (322,878)
-----------
Net Loss. . . . . . . . . . . . - - - - (4,280,512) - (4,280,512)
Unrealized loss on securities
available-for-sale . . . . . . - - - - - (7,275) (7,275)
-----------
Comprehensive Loss. . . . . . . (4,287,787)
Stock redeemed in exchange for
release of personal guarantee
of Company debt and upon
execution of license and
royalty agreement, June 1,
1998, $0.00 per share. . . . . (1,778,588) (1,779) 1,779 - - - -
Issuance for cash:
May 7, 1998, $0.29 per share 21,343 21 6,229 - - - 6,250
July 9, 1998, $0.34 per share 87,744 88 29,912 - - - 30,000
September through December
1998, $0.75 per share. . . . 1,860,203 1,860 1,393,293 - - - 1,395,153
Conversion of shareholder loans
and a liability for deferred
salaries, September 14, 1998
to capital without issuance
of additional shares . . . . . - - 181,877 - - - 181,877
(Continued)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
Deficit
Accumulated Accumulated Total
Common Stock Additional During the Other Stockholders'
------------------------- Paid-in Unearned Development Comprehensive (Deficit)
Shares Amount Capital Compensation Stage Loss Equity
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance to acquire SPPS,
September 15, 1998, $0.00
per share. . . . . . . . . . . 3,333,330 $ 3,333 $ (3,333) $ - $ - $ - $ -
Issuance upon conversion of debt:
September 17, 1998, $0.75
per share. . . . . . . . . . 66,667 67 49,933 - - - 50,000
September 30, 1998, $0.34
per share. . . . . . . . . . 169,781 170 57,880 - - - 58,050
Issuance in exchange for
available-for-sale securities,
(less $48,460 deferred income
tax) September 17, and November
18, 1998, $0.75 per share
before tax . . . . . . . . . . 673,123 673 455,713 - - - 456,386
Issuance for cancellation of
royalty agreement and
contribution of technology
(less $13,421 deferred income
tax) September 17, 1998,
$0.75 per share. . . . . . . . 5,201,920 5,202 3,882,817 - - - 3,888,019
Compensation related to grant
of stock options, September
17, 1998 . . . . . . . . . . . - - 174,194 (174,194) - - -
Issuance for restricted equity
securities, November 18, 1998,
$0.75 per share. . . . . . . . 66,666 67 49,933 - - - 50,000
Amortization of unearned
compensation . . . . . . . . . - - - 90,138 - - 90,138
------------ ------------ ------------- ----------- ------------ ------------ ------------
Balance - December 31, 1998 . . 20,169,770 20,170 6,429,114 (84,056) (4,762,745) (7,275) 1,595,208
------------
Net Loss. . . . . . . . . . . . - - - - (1,468,317) - (1,468,317)
Unrealized loss on securities
available-for-sale . . . . . . - - - - - (149,974) (149,974)
Reclassification adjustment for
realized losses on securities
included in net loss . . . . . - - - - - 140,346 140,346
------------
Comprehensive Loss. . . . . . . (1,477,945)
Issuance for Services:
April 30, 1999; $1.00 per
share. . . . . . . . . . . . 10,000 10 9,990 - - - 10,000
September 30, 1999; $1.75
per share. . . . . . . . . . 40,000 40 69,960 - - - 70,000
Compensation related to grant
of stock options:
May 12, 1999. . . . . . . . . - - 62,500 (62,500) - - -
August 30, 1999 . . . . . . . - - 220,000 (220,000) - - -
November 22, 1999 . . . . . . - - 210,000 (210,000) - - -
Amortization of unearned
compensation . . . . . . . . . - - - 302,957 - - 302,957
------------ ------------ ------------ ------------- ----------- ------------ -------------
Balance - December 31, 1999 . . 20,219,770 $ 20,220 $ 7,001,564 $ (273,599) $(6,231,062) $ (16,903) $ 500,220
============ ============ ============ ============= =========== ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative from
April 30, 1990
For the Years Ended (Date of Inception)
December 31, Through
-------------------------- December 31,
1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss . . . . . . . . . . . . . . . . . . . $ (1,468,317) $ (4,280,512) $ (6,231,062)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss on investments in securities
available-for-sale. . . . . . . . . . . . 140,346 - 140,346
Depreciation and amortization. . . . . . . 114,034 29,129 143,266
Common stock issued for services . . . . . 50,000 - 124,355
Common stock issued for purchased
research and development. . . . . . . . . - 3,766,440 3,766,440
Compensation from stock options
granted . . . . . . . . . . . . . . . . . 302,957 90,138 393,095
Deferred tax benefit . . . . . . . . . . . - (61,881) (61,881)
Changes in operating assets and liabilities:
Deposits . . . . . . . . . . . . . . . . (34,884) - (34,884)
Accounts receivable. . . . . . . . . . . (94,319) 7,811 (94,933)
Inventory. . . . . . . . . . . . . . . . (8,643) 3,262 (35,262)
Prepaid expenses . . . . . . . . . . . . 12,805 (26,422) (16,551)
Accounts payable . . . . . . . . . . . . (69,018) 52,035 123,352
Accrued liabilities. . . . . . . . . . . 45,321 101,263 163,090
Customer deposits. . . . . . . . . . . . (33,750) 33,750 -
------------ ------------ ------------
Net Cash Used in Operating Activities. . (996,074) (284,987) (1,620,629)
------------ ------------ ------------
Cash Flows From Investing Activities
Cash paid for property and equipment . . . . . (68,154) (86,940) (155,815)
Cash received from sale of securities
available-for-sale. . . . . . . . . . . . . . - 302,847 302,847
Cash paid for note receivable - related party. (7,000) - (7,000)
------------ ------------ ------------
Net Cash Provided by (Used in)
Investing Activities. . . . . . . . . . (75,154) 215,907 140,032
------------ ------------ ------------
Cash Flows From Financing Activities
Proceeds from borrowing . . . . . . . . . . . 19,590 61,050 275,565
Principal payments on notes payable. . . . . . - (117,338) (155,975)
Proceeds from loans from stockholders. . . . . - 19,930 158,934
Principal payments on loans from stockholders. (22,693) (46,742) (86,500)
Principal payment under capital lease
obligation. . . . . . . . . . . . . . . . . . (4,034) (862) (4,896)
Proceeds from issuance of common stock . . . . - 1,431,403 1,501,403
------------ ------------ ------------
Net Cash Provided by Financing
Activities. . . . . . . . . . . . . . . (7,137) 1,347,441 1,688,531
------------ ------------ ------------
Net Increase (Decrease) in Cash. . . . . . . . . (1,078,365) 1,278,361 207,934
Cash at Beginning of Period. . . . . . . . . . . 1,286,299 7,938 -
------------ ------------ ------------
Cash at End of Period. . . . . . . . . . . . . . $ 207,934 $ 1,286,299 $ 207,934
============ ============ ============
Supplemental Cash Flow Information - See Note 10
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FIRST SCIENTIFIC, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS - On April 30, 1990, Linco Industries, Inc.
(Linco) was incorporated under the laws of the State of Utah. Linco
developed, manufactured, and distributed a linseed oil based soap on
a very limited basis. More recently, Linco developed and acquired two
scientific formulations: a non-alcohol based antibacterial
sanitizing formulation that removes bacteria while moisturizing the
skin and a topical rash prevention and treatment formulation that
cleanses and moisturizes the skin for use with incontinent and other
skin rash situations. During the year ended December 31, 1999, a
majority of the Company's sales were from services related to
validation testing for other companies in order to verify their
products are in compliance with FDA requirements.
REORGANIZATION - On September 15, 1998, Linco entered into a
reorganization agreement with SPPS Financial Corporation ("SPPS"), a
publicly held Delaware corporation, whereby a newly-formed,
wholly-owned subsidiary of SPPS was merged into Linco. Under the
terms of the agreement, the Linco shareholders exchanged all of the
3,710 issued and outstanding shares of common stock of Linco for
8,798,080 shares of SPPS common stock. SPPS had no assets,
liabilities or operations and had 3,333,330 common shares outstanding
at the date of the agreement. The agreement has been accounted for as
the reorganization of Linco, with a related 2,371.45 -for-1 stock
split, and the issuance of 3,333,330 common shares to the SPPS
shareholders. Those shares were recorded at zero. The accompanying
financial statements have been restated for all periods presented for
the effects of the stock split from the reorganization of Linco. In
connection with the reorganization, SPPS changed its name to First
Scientific, Inc. This reorganization was not deemed to be the
acquisition of a business; accordingly no pro forma information is
presented.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts and transactions of Linco (now First
Scientific Corporation) for all periods presented and the accounts
and transactions of First Scientific, Inc. from September 15, 1998.
Intercompany accounts and transactions have been eliminated in
consolidation. The consolidated entities are collectively referred to
herein as the "Company" or "First Scientific."
DEVELOPMENT STAGE ENTERPRISE - Since inception, the Company has spent
most of its efforts in developing and marketing various products and
is considered to be in the development stage. It has not yet had
sufficient sales to sustain operations and has relied upon cash flows
from financing activities (primarily debt and equity issuances) to
sustain operations.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts in these financial statements and accompanying notes. Actual
results could differ from those estimates.
FINANCIAL INSTRUMENTS - The amounts reported as cash, securities
available-for-sale, trade receivables, accounts payable, customer
deposits, accrued liabilities, and notes payable and capital lease
obligation are considered to be reasonable approximations of their
fair values. The fair value estimates presented herein were based on
market information available to management at the time of preparation
of the financial statements.
CONCENTRATION OF RISK - The concentration of business with a small
number of customers subjects the Company to a concentration of risk
such that the loss of a customer could significantly effect revenues.
Historically, the Company has relied on sales to a small group of
domestic customers but has not been limited by geographic region.
During the year ended December 31, 1999, sales totaling of $202,656
and $305,458, totaling $508,014 or 92% of sales were to the two
respective customers. During the year ended December 31, 1998, sales
totaling $53,531 or 64% were to one different customer.
INVESTMENTS -Investment in marketable equity securities were
categorized as available for sale at December 31, 1999 and 1998.
Available-for-sale securities are stated at fair value, with
unrealized gains and losses, net of deferred income taxes, reported
as a component of accumulated other comprehensive loss.
INVENTORY - Inventory is stated at the lower of cost or market. Cost
is determined using the first-in, first-out method.
PROPERTY & EQUIPMENT - Property and equipment are stated at cost.
Maintenance and repairs of equipment are charged to operations and
major improvements are capitalized. Upon retirement, sale, or other
disposition, the cost and accumulated depreciation are eliminated
from the accounts and gain or loss is included in operations.
Depreciation is computed using the straight-line method over the
estimated useful lives of the property and equipment, which are three
to seven years. Depreciation expense was $24,034 and $2,879 for the
years ended December 31, 1999 and 1998, respectively.
SALES RECOGNITION - Sales are recognized upon shipment of products.
Revenue from services provided under contracts are recognized as the
services are performed. Customers' pre-payments are recorded as a
liability pending completion and shipment of the order.
RESEARCH AND DEVELOPMENT EXPENSE - Current operations are charged
with all research and product development expenses.
BASIC AND DILUTED LOSS PER SHARE - Basic loss per common share is
computed by dividing net loss by the weighted-average number of
common shares outstanding during the period. Diluted loss per share
is calculated to give effect to potentially issuable common shares
except during loss periods when those potentially issuable common
shares would decrease the loss per share. There were 2,205,000 and
1,315,000 potentially issuable common shares which were excluded from
the calculation of diluted loss per common share for the years ended
December 31, 1999 and 1998, respectively.
NOTE 2 - BUSINESS CONDITION
First Scientific has incurred losses from operations for the two
years ended December 31, 1999 and 1998 of $1,468,317 and $4,280,512,
respectively, and has accumulated deficits since inception in the
amount of $6,231,062 through December 31, 1999. First Scientific has
had negative cash flows from operations of $996,074 and $284,987 for
the years ended December 31, 1999 and 1998 and $1,620,629 since
inception.
The Company's ability to move from the development stage is
dependent upon its ability to generate sufficient cash flow from
operations to meet its obligations on a timely basis, to obtain
additional financing, and ultimately to attain successful operations.
Management believes it will be able to obtain sufficient equity
financing to continue marketing efforts and continue to expand
Company operations. During the year ended December 31, 1999 the
Company completed testing, completed brand promotional and collateral
materials, and began shipments of its products to new customers.
Subsequent to December 31, 1999, First Scientific has issued stock
for cash proceeds of $1,475,000, and has entered into a letter of
intent to acquire control of an operating marketing and distribution
enterprise. Although recent and potential orders or the successful
acquisition of operating subsidiaries are not assured, management
believes these recent orders, other similar potential sales, and
sales by acquired companies will provide sufficient cash flows to
sustain operations.
NOTE 3 - ACQUISITION OF TECHNOLOGY
In connection with the reorganization agreement with SPPS during
1998, the Company issued 5,201,920 shares of common stock valued at
$3,901,440, or $0.75 per share, to a director for the transfer of all
rights and ownership of technology relating to scientific
formulations and the cancellation of the Company's obligation under a
royalty agreement relating to the use of the technology. The value of
the contributed technology was determined based upon the fair value
of common stock issued for cash following the reorganization with
SPPS. The scientific formulations were developed by the director and
the Company and the common shares were issued to fully transfer the
director's interest in the technology to the Company. The technology
relates to two non-alcohol based antibacterial sanitizing
formulations that remove bacteria while moisturizing the skin and a
dimethicone-based topical rash prevention and treatment formulation
that cleanses and moisturizes the skin for treatment of skin rashes
caused by incontinence and other irritations. The technology was in
process except for one formulation valued at $135,000. The cost of
the completed technology was capitalized and is being amortized over
a period of 18 months. In process technology was valued at $3,766,440
and was charged to operations at the date acquired. Amortization
expense for the purchased technology for the years ended December 31,
1999 and 1998 was $90,000 and $26,250, respectively.
NOTE 4-INVESTMENT IN SECURITIES AVAILABLE-FOR-SALE AND OTHER
COMPREHENSIVE LOSS
The Company has investments in marketable equity securities which are
classified as available-for-sale securities. During the year ended
December 31, 1999, equity securities which were previously restricted
from resale, with a cost of $50,000, were reclassified to securities
available-for-sale when the restriction of resale expired, and were
transferred at their fair value of $50,000. The market value of all
available-for-sale securities held by the Company declined during
1999 and, at September 30, 1999, management determined that the
decline was other-than-temporary. Accordingly, a write-down was
recognized of $140,346 to adjust the carrying value of the
available-for-sale securities to their market value of $111,714.
At December 31, 1999 and 1998 available-for-sale securities consisted
of the following:
December 31,
----------------------
1999 1998
---------- ----------
Cost. . . . . . . . . . . . . . . . $ 111,714 $ 202,059
Gross unrealized losses . . . . . . (16,903) (7,275)
---------- ----------
Estimated Fair Value. . . . . . . . $ 94,811 $ 194,784
========== ==========
NOTE 5 - RELATED PARTY TRANSACTIONS
NOTES PAYABLE TO RELATED PARTIES - Since inception, the Company has
partially relied on funds advanced by shareholders to meet its
obligations and fund its development activities. These advances have
been classified as related party notes payable and accrue interest
at the rate of 10% per year. Notes payable to related parties were
none and $22,693 at December 31, 1999 and 1998, respectively. During
September 1998, the shareholders converted $90,000 of outstanding
notes payable, together with accrued interest, to additional paid-in
capital.
NOTES RECEIVABLE - RELATED PARTY - During November 1999, the Company
loaned $7,000 to an officer and shareholder in exchange for a note
with an interest rate of 9.5% per annum. The loan is to be reduced
from 33% of any bonuses payable to the officer.
NOTE 6 - NOTES PAYABLE
December 31,
----------------------
1999 1998
---------- ----------
SHORT-TERM NOTES PAYABLE
Note payable to a finance company,
interest at 12.75%, unsecured. . . . . $ 19,590 $ -
SHORT-TERM ADVANCE - During August 1998, an investor advanced $50,000
to the Company to meet current expenses. During September 1998, the
advance was converted into 66,667 shares of common stock at $0.75 per
share.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
CONSULTING AND EMPLOYMENT AGREEMENT - Effective October 1, 1999,
First Scientific entered into a five-year consulting agreement with a
shareholder and director to provide scientific, product development
and regulatory consulting to the Company. The agreement automatically
renews yearly unless either party elects not to extend the agreement.
Payments under the agreement are $8,000 monthly, which monthly amount
will increase by $1,000 each anniversary date. First Scientific also
has a consulting agreement with a director who provides marketing and
sales consulting to the Company. The one-year agreement is for $10,000
per month through July 2000, and $7,500 thereafter.
CAPITAL LEASES - The Company leases various equipment under capital
lease agreements. Equipment under capital leases as of December 31,
1999 and 1998 was as follows:
1999 1998
---------- ----------
Equipment. . . . . . . . . . . . . . $ 20,478 $ 7,716
Less accumulated depreciation. . . . (1,971) (750)
---------- ---------
$ 18,507 $ 6,966
========== =========
The following is a schedule by year of future minimum lease payments
under capital leases together with the present value of the net
minimum lease payments as of December 31, 1999:
Year Ending December 31
2000. . . . . . . . . . . . $ 11,895
2001. . . . . . . . . . . . 11,014
2002. . . . . . . . . . . . 5,490
2003. . . . . . . . . . . . -
2004. . . . . . . . . . . . -
----------
Total minimum lease payments. . . . 28,399
Less amount representing
executory costs. . . . . . . . . . 644
----------
Net minimum lease payments. . . . . 27,755
Less amount representing interest . 4,708
----------
Present value of net minimum
lease payments . . . . . . . . . . 23,047
Less current portion. . . . . . . . 8,850
----------
Obligations Under Capital Leases
- Long-Term. . . . . . . . . . . . $ 14,197
==========
OPERATING LEASES - The Company leases its office space, warehouse
space and storage space under operating leases. The office space
lease is for a two-year term, once the lease term is up, it is
renewable on an annual basis, and currently requires lease payments
of $2,602 per month with annual escalations equal to the lesser of
the change in the consumer price index or 5%. The warehouse space
lease is a month to month lease. The storage space lease is for a
14-month period with the full payment being paid in advance. Rent
expense for the years ended December 31, 1999 and 1998 was $42,229
and $20,571, respectively.
Future minimum rental payments required under the operating leases
described above, as of December 31, 1999, are $22,102 during the year
ending December 31, 2000.
LEGAL ACTION - An individual has filed a claim against the Company
under the terms of an agreement in principal allegedly made by the
Linco Founders in 1991, which purported to promise shares of common
stock if certain conditions were met by the individual in representing
the Company to potential customers. First Scientific's management
maintains that the 1991 agreement is no longer valid because the
conditions were not met in a reasonable time and because the
individual failed to fulfill other material terms. During the quarter
ended December 31, 1999, the Company filed an action for declaratory
judgement that the individual has no entitlement against the Company.
In December 1999, the individual responded that he had "fully performed"
under the 1991 agreement, and filed a counter-claim against the Linco
founders and the Company. The action is now only in the discovery
phase. Management believes this claim should not ultimately result in
any potential liability to the Company based upon sufficient defenses
and also upon an indemnification agreement from the Linco founders.
NOTE 8 - COMMON STOCK
On April 30, 1990, the Company issued 7,114,350 common shares in
exchange for promissory notes from shareholders in the amount of
$15,000. Concurrently, 2,371,450 common shares, valued at $5,000
based upon the value of the promissory notes, were issued for legal
and accounting services. The founding shareholders thereafter made
loans to the Company to fund operations. On December 31, 1993, the
notes receivable from shareholders were set off against notes payable
to the shareholders.
On January 20, 1993, the Company issued 284,574 shares of common
stock valued at $19,355 in exchange for laboratory and technical
services provided to the Company. The shares were valued at $0.07
per share based upon the value of an outside private placement on
October 7, 1993 in which 514,605 common shares were issued in
exchange for cash in the amount of $35,000, or $0.07 per share.
During 1994, the Company redeemed 2,371,450 common shares in exchange
for the release by a bank of an original shareholder's personal
guarantee of $75,000 in notes payable. The shares were valued at
zero. There were no unstated rights or privileges in connection with
this transaction. On January 20, 1995, the Company issued 2,371,450
common shares for technical and director services, as well as for
compensation relating to a new shareholder's personal guarantee of
notes payable. The Company determined the fair value of the services
provided to be $50,000.
The Company issued 83,001 and 99,601 common shares to a private
investor for cash proceeds of $10,000 and $25,000, or $0.12 and $0.25
per share, on March 27, and October 10, 1996, respectively. On May
7, 1998, an additional 21,343 common shares were issued in a private
placement for cash in the amount of $6,250.
On June 1, 1998, the Company redeemed 1,778,588 common shares from an
individual who had served on the Board of Directors and had developed
certain technology for use by the Company, including the primary
formulas used by the Company in its products. The Company also
obtained the release of the individual's personal guarantee of
Company debt. The common stock was also redeemed in exchange for the
release by the Company of any ownership claim it may have had to
certain technology. The technology was deemed worthless at that time
and the common stock had no significant value. The individual vacated
his position on the board of directors. Whether the transferred
technology had any value was in question. Accordingly, the shares
redeemed were valued at zero and no gain was recognized on the
transfer of the technology. There were no unstated rights or
privileges associated with the redemption. In connection with the
redemption, the Company entered into a license and royalty agreement
with the individual which provided the Company with the use of the
technology. The royalty agreement granted a 25% gross profits
interest in the products the Company sells which are based upon the
technology. The agreement also provided for a minimum annual royalty
of $60,000 regardless of the Company's sales volume.
Independent of the above redemption and because of the cash
investment in common stock by a third party, on September 15, 1998,
in compliance with the third party's request, the individual came
back to being a member of the board of directors, terminate the
license and royalty agreement and transferred the entire ownership of
the technology to the Company, all in exchange for 5,201,920 common
shares. The technology, and the shares issued, were valued at
$3,888,019 net of deferred taxes of $13,421, or $0.75 per share as
further described in Note 2.
On July 9, 1998, the Company issued 87,744 shares of common stock to
a private investor for $30,000 in cash or $0.34 per share.
On September 15, 1998, for accounting purposes, the Company was
deemed to have issued 3,333,330 common shares, valued at $0, to the
shareholders of SPPS in connection with the reverse acquisition of
SPPS. No assets were received nor were any liabilities assumed in
connection with this acquisition.
On September 14, 1998, related party notes payable together with
accrued interest in the amount of $90,000 and $91,877 of deferred
salary were converted into additional paid-in capital without the
issuance of additional shares. No unstated rights or privileges were
granted in connection with these contributions to capital.
In contemplation of the reorganization of the Company, an advance in
the amount of $50,000 was received from an investor on August 6, 1998
in order to meet short-term expenses. The advance was converted into
66,667 shares of common stock at $0.75 per share on September 17,
1998.
The Company issued 169,781 shares of common stock at $0.34 per share
on September 30, 1998 upon conversion of a $50,000 convertible note
payable, together with interest in the amount of $8,050. The note was
convertible at the rate on the date that an outside investment of
more than $25,000 was received by the Company. Such an outside
investment occurred during July 1998 at $0.34 which established the
conversion price of the note. No beneficial conversion feature is
ascribed to the conversion because at the measurement date the rate
per share was not priced below market.
The Company issued 1,860,203 shares of common stock in a private
placement offering for cash proceeds of $1,395,153 or $0.75 per share
from September through December 1998.
On September 17, and November 18, 1998, the Company issued 403,796
and 269,327 shares of common stock in exchange for securities
available-for-sale valued at $254,387 net of deferred tax and
$201,999, respectively. The shares were shares issued at $0.75 per
share before deferred income tax of $48,460. Additionally, the
Company issued 66,666 shares of common stock at $0.75 per share in
exchange for restricted securities valued at $50,000 on November 18,
1998.
On April 30, 1999 the Company agreed to issue 10,000 shares of common
stock to an individual for marketing services during 1997 and 1998.
The Company awarded the individual an exclusive distributorship in
the Western United States for the Company's Fresh Cleanse Brand to
the professional health care market. The marketing services were
valued at $10,000 based upon the fair value of the common stock
issued. The fair value of the common stock was established by
management based upon an evaluation of the perceived performance of
the Company to date. The shares were issued on September 30, 1999.
On August 7, 1999, the Company agreed to issue 40,000 shares of
common stock to an outside service provider for their creative
services in developing and presenting promotional and other materials
regarding First Scientific and its products. The services were valued
at $70,000, or $1.75 per share, based upon an evaluation by
management of the perceived fair value of the Company's common stock
on the date of the agreement.
NOTE 9 - STOCK OPTIONS
On September 30, 1998, the Company granted stock options to two
outside directors to purchase a total of 1,050,000 shares of common
stock at $0.75 per share. The options vest according to a schedule
over three years and expire September 30, 2003. The options granted
were valued at their fair value of $174,194 on the grant date, which
amount will be recognized by the Company as the options vest.
The fair value of the options was determined by using the
Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0.0%, expected volatility of 0.0%, risk-free
interest rate of 5.0% and expected life of 5 years. The expected
volatility was assumed to be 0.0% because, at the grant date, the
Company was a privately held enterprise and there was no market for
its common stock.
The Board of Directors approved the 1998 Stock Option Plan (the
"Plan") during December 1998, which authorized options to purchase
2,500,000 shares of common stock. Options granted under the Plan
generally expire 10 years from the date of grant. Options to purchase
265,000 common shares were granted under the Plan on December 31,
1998, with an exercise price of $0.75 per share.
During the year ended December 31, 1999, options to purchase 890,000
common shares were granted under the 1998 Stock Option Plan to
various employees.
A summary of the status of the Company's stock options as of December
31, 1999 and 1998 and changes during the years then ended are
presented below:
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Weighted-Average Weighted-Average
Share Exercise Price Share Exercise Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year . . . 1,315,000 $ 0.75 - $ -
Granted. . . . . . . . . . . . . . . . 890,000 0.99 1,315,000 0.75
---------- ----------
Outstanding at end of year . . . . . . 2,205,000 0.85 1,315,000 0.75
========== ==========
Options exercisable at end of year . . 928,250 0.84 221,000 0.75
========== ==========
Weighted-average fair value of
options granted during the year . . . $ 1.54 $ 0.13
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------------------------
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Prices At 12/31/99 Contractual Life Exercise Price At 12/31/99 Exercise Price
------------ ---------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.75 - $1.25 2,205,000 7.3 years $0.85 928,250 $ 0.84
</TABLE>
The Company measures compensation to employees under stock-based
options and plans using the intrinsic value method prescribed in
Accounting Principles Board Opinion 25, Accounting for Stock Issued
to Employees, and related interpretations. Compensation for options
to outside directors is measured using the fair value method set
forth under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation. Stock-based compensation
charged to operations was $241,021 and $61,936 for the year ended
December 31, 1999 from options granted to employees and to outside
directors, respectively. Stock-based compensation charged to
operations was $0 and $90,138 for the year ended December 31, 1998
from options granted to employees and to outside directors,
respectively. Had compensation cost for the Company's options granted
to employees been determined based on the fair value at the grant
dates consistent with the alternative method set forth under
Statement of Financial Accounting Standards No. 123, net loss and
loss per share would have increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Cumulative from
April 30, 1990
For the Years Ended (Date of Inception)
December 31, Through
-------------------------- December 31,
1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss:
As reported . . . . . . . . . $ (1,468,317) $ (4,280,512) $ (6,231,062)
Pro forma . . . . . . . . . . (1,631,892) (4,390,379) (6,504,504)
Basic and diluted loss per share:
As reported . . . . . . . . . $ (0.07) $ (0.33) $ (0.55)
Pro forma . . . . . . . . . . (0.08) (0.34) (0.57)
NOTE 10 - CASH FLOW INFORMATION
SUPPLEMENTAL CASH FLOW INFORMATION - Interest was paid in the amount
of $5,213 and $17,516 during the years ended December 31, 1999 and
1998, respectively.
NONCASH INVESTING AND FINANCING ACTIVITIES - During the year ended
December 31, 1998, the Company deferred compensation to employees of
$57,000. For the period from April 30, 1990 through December 31,
1999, the Company deferred compensation to employees in the amount of
$83,877. During the year ended December 31, 1993, the Company set off
receivables from the stockholders in the amount of $15,000 against
related party notes payable in the same amount.
An advance from an investor in the amount of $50,000 was converted
into 66,667 shares of common stock on September 17, 1998. On
September 14, 1998, accrued expenses of $91,877 for deferred salaries
and related party notes payable together with accrued interest in the
amount of $90,000 were converted into additional paid-in capital
without the issuance of additional shares. On September 15, 1998, the
Company issued 5,201,920 shares of common stock in exchange for the
rights to technology valued at $3,901,440 before tax and the
cancellation of a license and royalty agreement central to the
Company's products. On September 15, 1998, for accounting purposes,
the Company was deemed to have issued 3,333,330 common shares, valued
at $0, to the shareholders of SPPS in connection with the reverse
acquisition of SPPS. No assets were received nor were any liabilities
assumed in connection with this acquisition.
On September 30, 1998, the Company issued 169,781 common shares upon
the conversion of a $50,000 note payable together with accrued
interest in the amount of $8,050. During and September and December
1998, the Company issued 673,123 shares of common stock in exchange
for $456,386 of securities available-for-sale, net of deferred tax.
During December 1998 the Company issued 66,666 shares of common stock
in exchange for $50,000 of restricted equity securities. During
October 1998 the Company purchased computer equipment and incurred a
capital lease obligation in the amount of $7,716
During the year ended December 31, 1999, the Company acquired
equipment valued at $20,478 through a capital lease agreement . Also
during the year ended December 31, 1999, the Company issued 50,000
shares of common stock for services valued at $80,000 of which
$30,000 was recorded as a prepaid expense.
NOTE 11 - INCOME TAXES
The following presents the components of the net deferred tax asset
at December 31, 1999:
Purchased technology amortization . . . . . . . . . $ 6,994
Depreciation. . . . . . . . . . . . . . . . . . . . 8,803
Difference in fair value and tax basis of
contributed securities. . . . . . . . . . . . . . 89,762
---------
Total Deferred Tax Liabilities. . . . . . . . . . . 105,559
---------
Operating loss carry forwards . . . . . . . . . . . (689,993)
Unrealized loss on investment in securities
available-for-sale. . . . . . . . . . . . . . . . (58,653)
---------
Total Deferred Tax Assets. . . . . . . . . . . . (748,646)
---------
Valuation allowance for deferred tax assets . . . . 643,087
---------
Net Deferred Tax Asset. . . . . . . . . . . . . . . $ -
=========
The valuation allowance for deferred tax assets increased by
$545,906 and $120,899 during the years ended December 31, 1999 and
1998, net of $185,206 reductions from deferred taxes on acquisitions
during the year ended December 31, 1998. The valuation allowance
included $6,305 and $2,713 at December 31, 1999 and 1998,
respectively, for which subsequently recognized tax benefits will be
allocated to unrealized loss on investment in securities
available-for-sale.
The Company has U.S. Federal net operating loss carry forwards of
$1,849,846 at December 31, 1999 which expire, if unused, in years
2013 through 2015. The benefit from income taxes consisted of the
following for the years ended December 31, 1999 and 1998:
1999 1998
---------- ----------
Deferred Tax Benefit
Federal. . . . . . . . . . . . . . . $ - $ 53,586
State. . . . . . . . . . . . . . . . - 8,295
---------- ----------
Benefit from Income Taxes . . . . . . . $ - $ 61,881
========== ==========
The following is a reconciliation of the income tax benefit computed
at the federal statutory tax rate with the provision for income taxes
for the years ended December 31, 1999 and 1998:
1999 1998
---------- ----------
Income tax benefit at statutory rate (34%). . $ 499,228 $1,476,414
Non deductible expenses, primarily purchased
research and development . . . . . . . . . . (1,776) (1,439,649)
Change in valuation allowance . . . . . . . . (545,906) (118,186)
State benefit, net of federal tax . . . . . . 48,454 143,302
---------- ----------
Benefit from Income Taxes . . . . . . . . . . $ - $ 61,881
========== ==========
NOTE 12 - SUBSEQUENT EVENTS
During the first quarter of 2000 the Company received cash proceeds
in the amount of $1,475,000 under the terms of a private placement
offering and issued 491,666 investment units, or $3.00 per unit.
Each investment unit consists of one share of the Company's common
stock and a warrant to purchase one-half share of common stock at
$5.00 per share. The warrants expire December 31, 2001.
During January 2000 the Company issued 155,000 non-qualified employee
stock options to purchase common shares at $1.75 per share. The
options issued had an intrinsic value of $1.25 per share on the date
of the grant. Accordingly, the Company will recognize compensation
expense to the employees of $193,750 over the three-year vesting
period of the stock options.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial informaiton extracted from the balance
sheet as of December 31, 1999, and statement of operations for the year then
ended, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 207,934
<SECURITIES> 94,811
<RECEIVABLES> 94,933
<ALLOWANCES> 0
<INVENTORY> 35,262
<CURRENT-ASSETS> 479,491
<PP&E> 183,761
<DEPRECIATION> 27,016
<TOTAL-ASSETS> 696,869
<CURRENT-LIABILITIES> 182,452
<BONDS> 0
0
0
<COMMON> 20,220
<OTHER-SE> 480,000
<TOTAL-LIABILITY-AND-EQUITY> 696,869
<SALES> 358,684
<TOTAL-REVENUES> 553,631
<CGS> 148,223
<TOTAL-COSTS> 148,223
<OTHER-EXPENSES> 1,761,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,485
<INCOME-PRETAX> (1,468,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,468,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,468,317)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
