UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB/A-2
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
June 30, 2002.
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
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Commission file number 0-27094
FIRST AMERICAN SCIENTIFIC CORP.
(Name of small business issuer in its charter)
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Nevada
State or other jurisdiction of incorporation
or organization
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88-0338315
(I.R.S. Employer Identification No.)
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811 - 100 Park Royal South
West Vancouver, British Columbia V6T 1A2
(Address of principal executive offices, including postal code.)
(604) 913-9035
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
None
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Name of each exchange on which registered
None
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Securities registered pursuant to Section 12(g) of the Act:
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Title of each class
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Common Stock
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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by referenced in Part III of this Form 10-KSB or any amendment to this Form 10-KSB [ ]
State issuer's revenues for its most recent fiscal year:
$1,634,799
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of
September 24, 2002: $8,745,895
State the number of shares outstanding of each of the issuer's classes of common equity, as of
September 24, 2002: 145,764,921
We make forward-looking statements in this document. Our forward-looking statements are subject to risks and uncertainties. You should note that many factors, some of which are described in this section or discussed elsewhere in this document, could affect our company in the future and could cause our results to differ materially from those expressed in our forward-looking statements. Forward-looking statements include those regarding our goals, beliefs, plans or current expectations and other statements regarding matters that are not historical facts. For example, when we use the words "believe," "expect," "anticipate" or similar expressions, we are making forward-looking statements. We are not required to release publicly the results of any revisions to these forward-looking statements we may make to reflect future events or circumstances.
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Item 1. DESCRIPTION OF BUSINESS
General
FIRST AMERICAN SCIENTIFIC CORP. (the "Company") was incorporated under the laws of Nevada on April 12, 1995. The Company owns a patented kinetic disintegration system (KDS). The KDS is a machine that utilizes kinetic energy and standing sound waves to disintegrate various materials such as wood waste, animal waste, mineral rock, rubber, glass, and other industrial minerals into a dry, fine, talcum-like powder. The goal of the Company is to develop commercially viable industrial applications for the KDS, then market, manufacture, and sell, lease and/or license the KDS. The Company's research and testing to date indicates that the best use for the equipment is found in converting biomass (wood waste) to a fine, dry combustible fuel that can be incinerated in specialized burners to create BTUs (heat energy), which, in turn can be converted to electrical power through conventional means. For the biomass, the critical value of the process is its ability to act as an industrial dryer which can extract water from wood at below boiling temperature, and at a significantly lower cost than through conventional methods. The Company is also experimenting with pulp sludge, and believes that significant potential exists in converting waste pulp sludge to dry powder, then to energy which could be recycled back to significantly reduce energy costs, disposal costs, and environmental problems. The Company has also had success in processing animal waste, such as chicken manure and horse manure. These forms of waste are usually mixed with sawdust (bedding) and can be processed into a combustible fuel or could be used as a high nutrient fertilizer. Other potential markets researched are rubber re-cycling, human and other animal sewage/waste processing, food waste processing, industrial mineral comminution, including minerals such as zeolite, gypsum, limestone, phosphates, sulfates, nitrates, sea shells, wallboard, and the recovery of precious metals from hard rock without the use of chemicals.
The KDS Equipment
The KDS uses a patented high speed rotary action to create sufficient kinetic energy to disintegrate and pulverize raw materials that are introduced into the chamber without cutting. The KDS machine weighs approximately five (5) tons and measures sixteen (16) feet (H), by ten (10) feet (L) by eight (8) feet (W). It is powered by a 150 or 250 hp main drive electric motor and uses 5 smaller ancillary motors to move product though the chamber and out through the taurus. The feed material is typically one inch in diameter and carried by a pneumatic lift or conveyor and material grading system, passing through the KDS system at various rates, dependent up product size, moisture content and hardness. The life span of the KDS machines is greater than ten (10) years and requires ongoing service and replacement of consumables on a daily basis. Maintenance is minimal and requires less than thirty minutes per day and twenty-four hour servicing twice a year.
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Licenses
On June 22, 1995, the Company entered into a license agreement with Spectrasonic Corp. (hereinafter "Spectrasonic"), a related party, for the worldwide license to its unpatented KDS for use in rubber and glass recycling and disposal, for a period of ninety-nine years. The purchase price of this license and one KDS machine was $550,000, with license rights valued at $250,000. Since then, modifications were made to the first KDS machine, bringing its total cost to $440,740. This machine was transferred to the Company's subsidiary, First American Power Corp., at its book value of $55,669.
On February 22, 1996, the Company entered into an additional license agreement with Spectrasonic for the worldwide license to its unpatented Ultrasound Equipment for exclusive use in gypsum disintegration, disposal, recycling, remanufacturing or manufacturing of used or new raw materials. The purchase price of this license and one KDS machine for gypsum-related use was $775,000, with the parties agreeing that the technology license was valued at $425,000 and the gypsum KDS machine was valued at $350,000. During the year ended June 30, 2002, this machine was impaired and moved to inventory and sold for $150,000.
On May 17, 1996, the Company executed another agreement with Spectrasonic for the worldwide licenses to equipment (as yet unpatented) developed by Spectrasonic for use in disintegration, disposal, recycling, remanufacturing or manufacturing "any and all kinds of materials" for a period of ninety-nine years. The purchase price of this license was $1,047,000, which the Company paid by issuing to Spectrasonic 5,500,000 shares of First American common stock (with an aggregate deemed value of $802,000) and paid $168,000 in varying installment amounts between September 30, 1996 and January 2, 1997. The Company recognized $77,000 in forgiveness of debt, which has been recorded as additional paid-in capital.
On July 2, 1997, the Company finalized negotiations with Spectrasonic for all patents to be issued or pending, including all data pertaining to the patent process with respect to the KDS whose worldwide rights had been previously acquired by the Company. In the negotiations, the Company acquired all manufacturing rights applicable to the KDS machine technology. The Company has sole right and responsibility for manufacturing the machinery. Consideration to Spectrasonic was 1,000,000 common shares of the Company's stock at $0.25 per share issued on December 1, 1999.
Applications
When micronizing bio-mass, hog fuel and waste wood, the system produces a fine dry combustible powder that will burn extremely efficiently in a specially designed dust burner. The process also acts as a dryer of moist waste wood such as hog-fuel or pulp sludge creating an alternative green energy fuel.
When micronizing pulp sludge, the KDS is capable of reducing moisture content from 80% moisture down to 13% moisture in two passes through the KDS. In some instances, a re-circulation of material has proven successful. Research is ongoing, however commercial viability has not been achieved.
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When micronizing human and animal manures, the system has proven its ability to kill 99% of all pathogens and coliforms during processing earning it an EPA rating as a pesticide device with registered establishment number 73753 CAN - 001 granted to the Company in January 2001. This "cleansing" of these types of waste products could bring large animal and poultry producers into compliance with EPA regulations as well as creating nutrient rich "clean" end products suitable for recycling as fertilizer.
When micronizing mineral rock, the process reduces mineral rock to a fine dry powder as small as -600 mesh which is sufficient to separate and release precious metals without the use of chemicals. Research continues to increase the durability the working mechanism of the equipment to withstand the heavy wear imposed when processing hard rock. Although the process is 97% efficient, commercially viable processing rates have not yet been achieved. The process has a separate patent pending.
When micronizing a mixture of food waste, wood waste and chicken manure, a fine dry powder is produced which is suitable as a fertilizer base, a filler, or, depending on the content, as cattle feed. Experimentation with various mixtures and moisture contents is ongoing.
When micronizing rubber, a cryogenic cooling process can facilitate the re-cycling of scrap rubber by pre-freezing it in a cooling chamber and injecting it through a pneumatic feed system into a pulverizing chamber. The method has proven that the KDS system can pulverize (shatter) rubber into a fine mesh suitable for re-cycling as a base material for other rubber based products. Commercially viable quantities are not yet proven. The process has a separate patent pending, but, at present, no further work is being done of this application
Patents - Device
A patent was issued the KDS as for a "device for comminution" on November 24, 1998, and its U.S. patent number is 5,839,671. Patent registration in other jurisdictions in the EEC, Australia, New Zealand, Mexico, the UK are pending.
Patents Pending - Processes
Rubber
On April 20, 2001, the Company filed a patent application to protect its research into developing a process for cryogenically freezing non-tire scrap rubber and processing in into a microfine powder using the KDS equipment
Precious Metal Extraction
On May 4, 2001, the Company filed a patent application to protect its research into developing a process for disintegrating and separating precious metal from hard rock without the use of chemicals.
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Research and Testing
The Company continues research with other materials to improve operating efficiencies; increase volume throughput to economically viable levels; and identify markets where profitable operation of the equipment can be achieved. Of particular interest is adapting the equipment to dry out heavily moisture laden materials such as biomass from the forest industry, and pulp sludge. Testing is being carried out in Vancouver, British Columbia, and in Montreal by Alternative Green Energy Systems, Inc., a Canadian federal corporation ("AGES") of which 43.48% of the outstanding shares are owned by the Company. Significant progress has been made converting biomass to a fine dry fuel which can be combusted in the dust burning system. Limited progress has been made with pulp sludge. Other testing includes strengthening bars and rotor to withstand the impact when processing hard rock, dewatering of food waste, and grinding of other materials. All research on rubber processing has been discontinued. While some results have been very promising, there is no assurance that any operations will ever be initiated as a result of these tests. Further, the Company has no contracts with anyone to buy or sell any KDSs or buy, sell or dispose of any waste products or powders of any kind.
Manufacturing
Manufacturing of the KDS is contracted out to Vancouver Blower and Sheet Metal Fabrication Limited (VBS) in Vancouver, British Columbia. When the Company wants to acquire a machine, a turn key contract is executed and the machine is built. Two other backup manufacturers have been identified should demand increase beyond the capacity of VBS or VBS is unwilling or unable to manufacture the KDSs.
Summary of Agreements
In 1998, the Company entered into a research agreement with Green Leaf Fibre Company Ltd. of Northern Ireland and continued its research into sludge and animal waste processing at GLF's research site. The project was funded by Green Leaf and the Irish government under the Radian program. Some progress was made with animal waste, but not sufficient to meet economical viability. Further experimentation with various forms of waste/garbage is ongoing. Should economic viability be achieved, then arrangements would be made with GLF to form a joint venture operation in Ireland and the UK. As of the date of this report, this project has proven unsuccessful and the KDS is now being stored in a warehouse in Castleblaney, Ireland.
In August 2000, the Company entered into an agreement with Beau Pre Explorations Ltd, a Canadian mining company, to process ore from their mine through a KDS. Preliminary work to increase durability of chain system to handle hard rock was required. The Company hired Robert Salter Ph.D. to develop a new impact system, to protect the process with a new patent, and if successful, implement the program on Beau Pre's mineral claims on Valentine Mountain. The re-design and patent process was completed with patent pending status obtained in May 2001. Test work continued throughout the summer of 2001. The equipment has been moved to a staging site near the Valentine Mountain mine site to begin final testing of ore. To date, the Company cannot conclusively state that the equipment is capable of functioning continuously at commercially viable levels of production. Testing is continuing, but there is no assurance that the KDS will ever process any ore.
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In March 2001, the Company signed a letter of interest with Honeywell to determine how the KDS could fit into Honeywell's overall business plans for creation of energy from alternative green fuel sources. To date some work has been done with product provided by Honeywell's clients and initial tests have proven the systems ability to produce a useable end product, but until the Company can establish economical viability, the program has been suspended. Economic viability depends on the KDS processing a sufficient volume of product to create a positive return on investment. Discussions with Honeywell's engineers have been suspended until the Company is able to provide satisfactory proof of the equipments commercial viability. There is no assurance the Company will ever be able to establish a commerical viability for Honeywell's products.
In October 2001, the Company signed an agreement with Thermix Combustion Systems Inc, a designer and manufacturer of computer controlled dust burning furnaces and systems. Under the agreement, the Company and Thermix Combustion combined their respective technologies for micronizing and burning wood waste/powder and jointly formed a corporation named the Alternative Green Energy Systems Inc. ("AGES"). AGES goal is adapt the KDS system to create a continuous flow of suitable micronized hog fuel/ wood dust that will be used as a fuel for Thermix's specialized dust burners.
In February 2002, AGES signed an agreement with Hydro-Quebec Capitech Inc. wherein Hydro Quebec Capitech agreed to invest CD$1,000,000 in AGES's research. Thermix and the Company will each transfer up to 10% of their shares of AGES to Hydro Quebec in return for the investment. The initial payment of CD$600,000 was received in March 2002, and the second payment of $400,000 will be paid the later of September 1, 2002 or upon the sale by AGES of a KDS to anyone, but in any case, not later than March 1, 2003. Should the second payment never be received, Hydro Quebec Capitech interest will revert to 12% of ownership in AGES. In January 2002, a KDS machine was shipped to Montreal where it has been re-designed and enhanced to adapt to processing biomas and pulp sludge. AGES is marketing the combined system to Hydro Quebec's existing clients in the forestry and pulp and paper industry. Further, AGES technical data will be made available to Honeywell International. Responsibility for continuing technical discussions and testing for the Honeywell proposal are being handled by AGES.
On September 1, 2002, the Company spun off its wholly owned subsidiary VMH VideoMovieHouse.com Inc.("VMH") a British Columbia corporation, to holders of the Company's common stock, on June 30, 2002. Each Company shareholder received one share of VMH's common stock for each ten shares of the Company's common stock held on June 30, 2002. The Company shareholders did not receive cash in lieu of fractional shares, but fractional shares were be rounded up to the next whole share.
Market
The KDS has proven economically viable for softer industrial rock, such as gypsum and zeolite, and dry wood chips or chicken manure (embedded in dry sawdust), biomass at moisture levels below 50%. The Company continues to research and seek potential markets where operation of the equipment is economically viable. Research work continues looking for solutions to increase throughput on various types of products. Each situation presents unique hurdles to be overcome. In the case of rubber, feedstock becomes elastics with rise in temperature and must be pre-frozen before processing to maintain efficient
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shattering. In the case of biomass and pulp sludge, the product must not exceed 50% moisture content to avoid clogging of the equipment. In the case of minerals rock, chains must be replaced with hardened steel bars to avoid rapid wear and breakage. In the case of human and animal waste, a de-watering is required prior to processing. Until these adaptations are successfully researched and implemented, there is no certainty that the equipment will be accepted by the market place for economically processing these materials.
Competition
The Company has competition from other producers of microfine powders, most of who have greater financial resources than the Company. The Company believes its system is more cost effective than its competitors.
Company Facilities
The Company's corporate offices are located at 811 - 100 Park Royal, West Vancouver British Columbia, Canada, V7T 1A2 and the Company's sales and demonstration site is located at 5333 176
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Street, Surrey, British Columbia V3S 0L5. The phone numbers are (604) 913-9035 and (604) 575-3006, respectively. Fax numbers are (604) 913-9036 and (604) 575-3166.
Subsidiaries
Alternative Green Energy Systems Inc (AGES)
The Company owns 5,000 shares of common stock of Alternative Green Energy Systems Inc., a Canadian federally incorporated corporation ("AGES" ) which constitutes 43.48% of the total outstanding shares (11,500) of AGES
First American Power Corp.
The Company owns 100% of the outstanding shares of common stock of First American Power Corp. ("FAPC"). FAPC was formed for the purpose of providing research and development services exclusively to the Company that are eligible for Canadian research and development credits.
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Pending Contracts
In Vancouver, the Company entered into two sales contracts during the year. The first was to B&B Poultry Waste Management, a company who planned to process of chicken waste to produce an organic fertilizer and/or BTUs to heat local greenhouses in the Fraser Valley. A deposit of US$37,500 has been received and the equipment was delivered. Subsequently, B&B Poultry Waste ran into difficulty obtaining adequate power to its site and experienced a delay in receiving funding. For a short period of time, the Company assisted B&B Poultry Waste by loaning them the use of the Company's mobile generator, but B&B Poultry Waste has now advised that they have quit their existing location and now are seeking a new location to set-up its operation. Consequently, no additional money has been received from B&B Poultry Waste, and the Company is warehousing the equipment at Cloverdale until B&B Poultry Waste can find a new site and re-establish its operation. The Company has booked a reserve against this account should it prove to be uncollectable.
Further, the Company sold one of its used machines located in Ireland to Organic Waste Returns Ltd. A deposit of CDN$50,000 was received and the machine was delivered. The used machine was to be completely refurbished in Ireland and put into production processing a combination of food waste and chicken manure. It soon became apparent that the refurbishing would be better accomplished in Vancouver, so a decision was made to refurbish one of the Company's used machines in Vancouver first, then substitute it for the one in Ireland. This is underway. Subsequent to the date of these statements, Organic Waste Returns advised that it was experiencing difficulty raising funds to complete the transaction, and the Company is currently reviewing other possible options with Organic Waste Returns. No reserve has been taken, as management expects this transaction to complete.
Employees
The Company currently has seven full-time employees, and retains outside consultants when necessary.
Other
During the fiscal period ending June 30, 2002, the Company settled various accounts owing by issuance of common stock. See Item 12 - Recent Sales of Unregistered Securities.
Risk Factors
1.
Going Concern Opinion.
At this time, the Company cannot be sure that it will be successful in its operations. Therefore the Company's independent certified public accountants have issued an opinion that there is substantial doubt about the Company's ability to continue in business as a going concern.
2.
Development and Market Acceptance of New Products.
The Company's success and growth will depend upon its ability to improve and market its KDS and KDS processes and to successfully develop, and generate revenues from its processes. To date the Company has been unable to achieve the foregoing.
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3.
Liquidity; Need for Additional Financing.
The Company believes that it will need additional cash during the next twelve months. If the Company is unable to generate a positive cash flow before its cash is depleted, it will need to seek additional capital. There is no assurance that the Company will be able to obtain additional capital if required, or obtain the capital on terms and conditions acceptable to it. The Company is currently suffering from a lack of liquidity although its current obligations are not significant, in spite of this, the Company continues its sales efforts while it continuously seeks out additional capital. The Company's auditors have also issued a going concern opinion.
4.
Dependence on Suppliers.
The Company relies on a number of suppliers to provide certain raw materials for its products. The interruption of certain sources of supply or the failure to adapt materials to the Company's changing technological requirements could disrupt the Company's ability to manufacture products or cause the Company to incur costs associated with the development of alternative sources, either of which could adversely affect the Company's financial performance.
5.
Technology Risk.
All manufacturers, including the Company, utilize different applications of known technology. Should a competitor develop a technology breakthrough that cannot be adapted to the Company's systems or develop a more effective application of existing technology, the KDS and its processes would be at risk of becoming obsolete.
6.
Competition.
Most of the competition are companies with substantially greater financial, technical and marketing resources than the Company. If the market for the KDS or its process are established, the Company expects that additional competition will emerge and that existing competitors may commit more resources to those markets.
7.
Issuance of Additional Shares.
At June 30, 2002, there were 142,213,018 shares of common stock or 71.6% of the 200,000,000 authorized shares of Common Stock of the Company outstanding and 57,786,982 shares remain unissued. The Board of Directors has the power to issue such shares, subject to shareholder approval, in some instances. Although the Company presently has no commitments, contracts, or intentions to issue any additional shares to other persons, other than in the exercise of options, the Company may in the future attempt to issue shares to acquire products, equipment, or properties, or for other corporate purposes. Any additional issuance by the Company, from its authorized but unissued shares, would have the effect of diluting the interest of existing shareholders.
8.
Indemnification of Officers and Directors for Securities Liabilities.
The Articles of Incorporation of the Company provide that any Director, Officer, agent and /or employee will be indemnified as to those liabilities and on those terms and conditions as are specified in the Company Act of the State of Nevada. Further, the Company may purchase and maintain insurance on behalf of any such persons whether or not the Corporation would have the power to indemnify such person against the liability insured against. The foregoing could result in substantial expenditures by the Company and prevent any recovery from such Officers, Directors, agents and employees for losses incurred by the Company as a result of their actions. Further, the Company has been advised that in the opinion of the Securities and Exchange Commission, indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable.
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9.
Cumulative Voting, Preemptive Rights and Control
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There are no preemptive rights in connection with the Company's Common Stock. Shareholders may be further diluted in their percentage ownership of the Company in the event additional shares are issued by the Company in the future. Cumulative voting in the election of Directors is not provided for. Accordingly, the holders of a majority of the shares of Common Stock, present in person or by proxy, will be able to elect all of the Company's Board of Directors.
10.
No Dividends Anticipated.
At the present time the Company does not anticipate paying dividends, cash or otherwise, on its Common Stock in the foreseeable future. Future dividends will depend on earnings, if any, of the Company, its financial requirements and other factors. See "Dividend Policy" The Company's Board of Directors has approved a resolution to prepare its subsidiary, VMH VideoMovieHouse for spin-off as a separate company. If proceeded with, each shareholder will receive a pro-rata interest in the new company by way of stock dividend.
11.
Lack of Market Research.
The Company has neither conducted nor has the Company engaged other entities to conduct market research such that management has assurance market demand exists for the transactions contemplated by the Company. See "Business"
12.
Product Liability.
The Company could incur liability for product defects, which result in damage from the use of its equipment and products. Any such claims, if successful, could result in substantial losses to the Company.
13.
No Insurance Coverage.
The Company, like other companies in its industry, is finding it increasingly difficult to obtain adequate insurance coverage against possible liabilities that may be incurred in conducting its business activities. At present, the Company has not secured any liability insurance. The Company has potential liability from its general business activities, and accordingly, it could be rendered insolvent by serious error omission.
14.
Non-arms Length Transactions and Conflicts of Interest.
The Company has engaged in transactions with its Officers, Directors and principal shareholders. Such transactions may be considered as not having occurred at arms length. The Company will be engaged in transactions with management and others involving conflicts of interest, including conflicts on salaries and other payments to such parties.
15.
Reliance Upon Current Management.
The Company's current operations and future success are greatly dependent upon the participation of its officers, Cal Kantonen, Brian Nichols and David L. Gibson.
16.
Lack of Key Man Insurance.
The Company has not obtained key man life insurance on the life of its officers and directors. The death or unavailability of any one of them could have a material adverse impact on the operation of the Company.
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ITEM 2. DESCRIPTION OF PROPERTIES
The Company owns no real property. It leases a 300 square feet of office space at 811 - 100 Park Royal, West Vancouver, West Vancouver, British Columbia V6T 1A2. The office is leased from Smyth Ratcliffe, Chartered Accountants, on a month-to-month basis. The rent is $1,100 per month. The lease is oral and there is no written agreement covering the same.
In July 2001, the Company leased an additional sales office at 5933 176
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Street, Surrey, British Columbia, Canada containing 600 square feet. The sales office is leased from Supper Soil, Inc. on a month-to-month basis. The monthly rental is $600. The lease is oral and there is no written agreement covering the same.
The Company owns eight KDS machines. The first two KDS systems were acquired as part of the licensing agreement with Spectrasonic and are recorded at a lower of cost or fair market value of $300,000 . These machines are currently held in Hungtington Beach, California. One machine is being held in Northern Ireland pending finalization of negotiations with Organic Waste Returns Ltd. Three machines are located in Vancouver and are being used as test and demonstration machines. One machine is complete and was delivered to Sooke BC as part of the Beau Pre mining joint venture. ,, one machine is held as inventory, and a ninth machine has been sold but not yet delivered.
The Company had other fixed assets located in California. The net book value of these assets at June 30, 2002 was US$112,176 and consisted of bagging equipment, hoppers, electrical paneling, site preparation, paving, construction of building, and general storage bins. These have been written off. The Company has office furniture and equipment costing $47,874 located in Cloverdale, Canada and West Vancouver, Canada.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings are pending to which the Company is a party or of which any of the Company's property is the subject matter other than as described below. Further no legal proceedings are known to be contemplated by governmental authorities and no officer or director of the Company is a party to any litigation other than as described below:
Ford Motor Credit Company v. First American Scientific Corp.
,
Kern County Municipal Court, Bakersfield Judicial District, Case No. 148129, filed on October 10, 1998. This complaint seeks $3,549.96, plus attorneys' fees and costs for failure to pay on a lease executed by the Company. No trial date has been set and discovery has been propounded by plaintiff. Management would like to settle this matter prior to trial. Plaintiff has made an offer to settle for $3,549.60 and this offer was not accepted by the Company's management. It is likely that plaintiff will prevail at trial and thus out of court settlement is sought. Not settled.
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The Company was the plaintiff in a lawsuit against Paul Marino and the Opal Christian Family Trust (Landlord at 4100 Burr Street, Bakersfield, California), wherein the Company was denied access to its equipment located at that address. The Company settled all claims for $23,500. The equipment is now in the Company's possession at a warehouse in Hungtington Beach, California.
The Company has a number of other commercial creditors who have the ability to bring actions to recover money due them. Some of these claims will entitle the creditor to attorneys' fees spent in recovering these funds. The Company offered settlements on approximately $24,000 of trade payables which were outstanding for more than five years. None of these creditors have initiated lawsuits or further claims. There are currently no further discussions or actions contemplated concerning these disputed trade payables.
PART II
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Liquidity and Capital Resources
As of June 30, 2002, the Company had current assets of $868,560 and current liabilities of $280,072 providing for a positive working capital ratio of 3.10 to 1. This compares to current assets of $384,838 and current liabilities of $171,548 as of June 30, 2001 or a working capital ratio of 2.23 to 1. As of June 30, 2002, the company had $126,144 cash on hand, however, approximately $125,000 is held by AGES and is designated for research. This compares to $175,147 on June 30, 2001. Consequently, there is not sufficient cash for the Company to maintain its operation for the next year, and management will have to seek additional capital from new equity securities offerings, loans, or other fund raising activities to maintain its operation should sales and receipt of receivables not materialize. In the short term, some funding has come from loans from Company officers and by deferring the payment of salaries to Company officers. This is unlikely to continue. Another outstanding source of funds for the Company will materialize if AGES is successful in selling at least one KDS system before March 1, 2003, then Hydro Quebec is expected to make an additional investment of CDN$400,000 in AGES, and in turn, US$100,000 will be due from AGES to the Company as payment of amounts due for equipment already supplied.
The Company is the owner of a US patent on its KDS technology. The patent is also registered in the UK, EEC, Mexico, Australia, and New Zealand. Applications for two new process patents, one for the cryogenic freezing and shattering scrap rubber, and the other for extraction of precious metals using the KDS equipment are patent pending status. The Company is also making preparation to file for a further process patent for "converting bio-mass and pulp sludge to a combustible fuel."
Results of Operations - Year Ended June 30, 2002
Revenue for the year was $453,655 compared to $-0- last year. This consisted of equipment sales by the Company of $453,655.
Net operating losses for the year ending June 30, 2002 were $2,137,651 or US$0.02 per share compared to last year when operating losses were $2,481,764, also US$0.02 per share. Management expects this trend to reverse in the next year as equipment sales begin to come on line and investments in research decrease.
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In June 2002, the Company's subsidiary AGES, received a request to prepare a detailed proposal to install a turnkey power generating system for Hollywood Park Racetrack of Inglewood California which would be fueled by horse manure processed through the Company's KDS system. The preliminary report was successfully presented in August 2002, and the final quotation will be ready for presentation shortly. The Company's engineering staff is confident that they have designed an economically viable solution for handling racetrack waste and management is optimistic that it will be able to close this sale in the near future. As of the date of this report, there is no assurance that any contract will be entered into with Hollywood Park Racetrack.
In Vancouver, the Company entered into two sales contracts during the year. The first was to B&B Poultry Waste Management, a company who planned to process of chicken waste to produce an organic fertilizer and/or BTUs to heat local greenhouses in the Fraser Valley. A deposit of US$37,500 has been received and the equipment was delivered. Subsequently, B&B Poultry Waste ran into difficulty obtaining adequate power to its site and experienced a delay in receiving funding. For a short period of time, the Company assisted B&B Poultry Waste by loaning them the use of the Company's mobile generator, but B&B Poultry Waste has now advised that they have quit their existing location and now are seeking a new location to set-up its operation. Consequently, no additional money has been received from B&B Poultry Waste, and the Company is warehousing the equipment at Cloverdale until B&B Poultry Waste can find a new site and re-establish its operation. The Company has booked a reserve against this account should it prove to be uncollectible.
Further, the Company sold one of its used machines located in Ireland to Organic Waste Returns Ltd. A deposit of CDN$50,000 was received and the machine was delivered. The used machine was to be completely refurbished in Ireland and put into production processing a combination of food waste and chicken manure. It soon became apparent that the refurbishing would be better accomplished in Vancouver, so a decision was made to refurbish one of the Company's used machines in Vancouver first, then substitute it for the one in Ireland. This is underway. Subsequent to the date of these statements, Organic Waste Returns advised that it was experiencing difficulty raising funds to complete the transaction, and the Company is currently reviewing other possible options with Organic Waste Returns. No reserve has been taken as management expects this transaction to complete.
The Company is now focusing on increasing the KDS equipment's capacity to reach commercially economic processing volumes. With the injection of capital provided by Hydro Quebec Capitech, this research is being conducted in Montreal by the Company's engineers at the AGES facility. Management believes the processing of biomass and, possibly pulp sludge, currently represent the highest and best use for the Company's technology. Research is also being done in Vancouver with animal waste, food waste and sewage. The Company has achieved economically viable production levels with chicken and horse manures, and are currently seeking suitable candidates interested in purchasing its equipment.
-14-
Management strongly believes that the Company's technology is unique and has the potential to transform the waste management industry. To this end, the Company has applied for and received EPA designation as a "pesticide device" indicating that the Company's process is capable of killing most pathogens and coliforms contained in animal wastes. However, the expected environmental push has not yet generated the anticipated sales and the Company continues to re-evaluate its marketing strategies. The Company has determined that the equipment is generally not going to be used as a stand-alone system. Therefore, the Company has begun to develop relationships with suppliers of ancillary equipment, such as pelletizers, heat log manufacturers, product handling equipment suppliers, boiler and generator manufacturers, etc, with the view to offering the Company's equipment as part of an integrated turnkey system designed to fulfill a specific need. The Company believes this will expand its exposure to a wider market and generate sales.
Construction of the new Cloverdale demonstration and sales center was completed in April 2002 and is now in full operation. The sales offices, located adjacent to the demonstration center on the same property, was completed and occupied by the Company in July 2001.
During the year ended June 30, 2002, the Company determined that the value of three of its KDS machines was impaired. These machines were written down to the estimated market value of $150,000 each and reclassified as inventory. The Company also impaired all of its assets at its former facility in California. The Company recoginized an impairment of $371,870 for both of these events.
As of June 30, 2002, there were 142,213,018 shares issued and outstanding.
Inflation
Inflation has not been a factor effecting current operations, and is not expected to have any material effect on operations in the near future.
Foreign Operations
The Company rents office space in West Vancouver and Cloverdale, British Colombia, Canada which serve as administrative, sales offices and a demonstration facility.
ITEM 7. FINANCIAL STATEMENTS
|
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
|
F-1
|
|
FINANCIAL STATEMENTS
|
|
|
|
Consolidated Balance Sheets
|
F-2
|
|
|
Consolidated Statements of Operations and Comprehensive Loss
|
F-3
|
|
|
Consolidated Statement of Stockholders' Equity
|
F-4
|
|
|
Consolidated Statement of Cash Flows
|
F-5
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-6 - F-22
|
-15-
To the Board of Directors and Stockholders
First American Scientific Corp.
Vancouver, British Columbia
CANADA
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of First American Scientific Corp., a Nevada corporation, as of June 30, 2002 and 2001 and the related statements of operations and comprehensive loss, stockholders' equity and cash flows for the years then ended. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 estimated 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 financial statements referred to above present fairly, in all material respects, the financial position of First American Scientific Corp. as of June 30, 2002 and 2001 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2, the Company has sustained losses since inception. This factor raises substantial doubt about the Company's ability to continue as a going concern. Realization of a major portion of the assets is dependent upon the Company's ability to meet its future financing requirements, and the success of future operations. Management's plans regarding those matters are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Williams & Webster, P.S.
Williams & Webster, P.S.
Certified Public Accountants
Spokane, Washington
September 12, 2002, except for Note 10, which is dated February 21, 2003.
F-1
-16-
FIRST AMERICAN SCIENTIFIC CORP.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
June 30,
2002
|
|
June 30,
2001
|
|
ASSETS
|
|
Restated
|
|
Restated
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash
|
$
|
126,144
|
$
|
175,147
|
|
|
Accounts receivable net of allowance
|
|
130,932
|
|
1,530
|
|
|
Refundable research and development tax credit
|
|
83,085
|
|
-
|
|
|
Sales tax refunds
|
|
27,957
|
|
-
|
|
|
Trust account
|
|
-
|
|
42,793
|
|
|
Prepaid expenses
|
|
10,000
|
|
32,607
|
|
|
Inventory
|
|
490,442
|
|
132,761
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
868,560
|
|
384,838
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
Property and equipment
|
|
311,631
|
|
1,455,110
|
|
|
Less: Accumulated depreciation
|
|
(90,295)
|
|
(378,886)
|
|
|
|
|
TOTAL PROPERTY AND EQUIPMENT
|
|
221,336
|
|
1,076,224
|
|
OTHER ASSETS
|
|
|
|
|
|
|
Technology rights, net of amortization
|
|
1,279,743
|
|
1,375,775
|
|
|
Patents and manufacturing rights, net of amortization
|
|
172,327
|
|
184,930
|
|
|
Deposits
|
|
|
1,432
|
|
1,432
|
|
|
|
|
TOTAL OTHER ASSETS
|
|
1,453,502
|
|
1,562,137
|
|
NET ASSETS DISTRIBUTED TO SUBSIDIARY
|
|
268,835
|
|
440,019
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
$
|
2,812,233
|
$
|
3,463,218
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
$
|
127,880
|
$
|
122,111
|
|
|
Accounts payable to related parties
|
|
152,192
|
|
31,937
|
|
|
Deposit on sale
|
|
-
|
|
17,500
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
280,072
|
|
171,548
|
|
COMMITMENTS AND CONTINGENCIES
|
|
6,127
|
|
-
|
|
MINORITY INTEREST IN SUBSIDIARY
|
|
243,590
|
|
-
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Common stock - $.001 par value, 200,000,000 shares authorized; 142,213,018 and 130,733,018 shares issued and outstanding, respectively
|
|
142,213
|
|
130,733
|
|
|
Additional paid-in capital
|
|
11,105,694
|
|
9,959,033
|
|
|
Stock options
|
|
195,780
|
|
218,210
|
|
|
Accumulated deficit
|
|
(9,151,400)
|
|
(7,013,749)
|
|
|
Accumulated other comprehensive loss
|
|
(9,843)
|
|
(2,557)
|
|
|
|
|
TOTAL STOCKHOLDERS' EQUITY
|
|
2,282,444
|
|
3,291,670
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
2,812,233
|
$
|
3,463,218
|
The accompanying notes are an integral part of these financial statements.
F-2
-17-
FIRST AMERICAN SCIENTIFIC CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
June 30,
2002
Restated
|
|
June 30,
2001
Restated
|
|
REVENUES
|
$
|
453,655
|
$
|
-
|
|
COST OF SALES
|
|
290,893
|
|
-
|
|
GROSS PROFIT
|
|
162,762
|
|
-
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
Advertising
|
|
14,775
|
|
35,822
|
|
|
Amortization
|
|
108,635
|
|
144,578
|
|
|
Depreciation
|
|
58,475
|
|
220,720
|
|
|
Professional services
|
|
186,744
|
|
398,401
|
|
|
Wages
|
|
548,640
|
|
426,326
|
|
|
Research and development
|
|
529,413
|
|
1,028,710
|
|
|
General and administration
|
|
225,791
|
|
401,704
|
|
|
Reserve for uncollectible accounts
|
|
258,383
|
|
-
|
|
|
Rent
|
|
21,164
|
|
33,485
|
|
|
Loss on impairment of assets
|
|
371,870
|
|
-
|
|
|
Patent
|
|
-
|
|
29,978
|
|
|
|
Total Operating Expenses
|
|
2,323,890
|
|
2,719,724
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
(2,161,128)
|
|
(2,719,724)
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
Miscellaneous
|
|
-
|
|
2,112
|
|
|
Research and development tax credit
|
|
83,085
|
|
-
|
|
|
Forfeiture of deposit
|
|
-
|
|
112,500
|
|
|
Gain on debt forgiveness
|
|
-
|
|
146,500
|
|
|
|
Total Other Income (Expense)
|
|
83,085
|
|
261,112
|
|
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
(2,078,043)
|
|
(2,458,612)
|
|
INCOME TAXES
|
|
-
|
|
-
|
|
NET LOSS FROM CONTINUING OPERATIONS BEFORE
|
|
|
|
|
|
|
ALLOCATION TO MINORITY INTEREST
|
|
(2,078,043)
|
|
(2,458,612)
|
|
ALLOCATION OF LOSS TO MINORITY INTEREST
|
|
133,769
|
|
-
|
|
LOSS FROM DISTRIBUTED SUBSIDIARY
|
|
(193,377)
|
|
(23,152)
|
|
NET LOSS
|
|
(2,137,651)
|
|
(2,481,764)
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
Foreign currency translation loss
|
|
(7,286)
|
|
(1,132)
|
|
COMPREHENSIVE NET LOSS
|
$
|
(2,144,937)
|
$
|
(2,482,896)
|
|
|
NET LOSS PER COMMON SHARE, BASIC AND DILUTED FROM CONTINUING OPERATIONS
|
$
|
(0.02)
|
$
|
(0.02)
|
|
|
NET LOSS PER COMMON SHARE, BASIC AND DILUTED FROM DISTRIBUTED SUBSIDIARY
|
|
nil
|
|
nil
|
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED
|
|
137,809,276
|
|
119,393,530
|
The accompanying notes are an integral part of these financial statements.
F-3
-18-
FIRST AMERICAN SCIENTIFIC CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
|
|
|
Common Stock
|
Additional
|
|
|
Accumulated Other
|
Total
|
|
|
|
Paid-in
|
Stock
|
Accumulated
|
Comprehensive
|
Stockholders'
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Options
|
|
Deficit
|
|
Income(loss)
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2000
|
100,821,018
|
$
|
100,821
|
$
|
7,495,605
|
$
|
-
|
$
|
(4,533,197)
|
$
|
(213)
|
$
|
3,063,016
|
Issuance of options for compensation and consulting services
|
-
|
|
-
|
|
-
|
|
411,891
|
|
-
|
|
-
|
|
411,891
|
Common stock issued from options for cash, compensation, services and other expenses at an average of $0.09 per share
|
11,717,000
|
|
11,717
|
|
1,156,507
|
|
(107,809)
|
|
-
|
|
-
|
|
1,060,415
|
Common stock issued from options for cash at an average of $0.01 per share
|
2,950,000
|
|
2,950
|
|
41,100
|
|
-
|
|
-
|
|
-
|
|
44,050
|
Common stock issued from options for cash at an average of $0.05 per share
|
2,000,000
|
|
2,000
|
|
103,000
|
|
-
|
|
-
|
|
-
|
|
105,000
|
Common stock issued from options for cash and equipment inventory at $0.12 per share
|
900,000
|
|
900
|
|
110,965
|
|
-
|
|
-
|
|
-
|
|
111,865
|
Common stock issued from options for website development and video inventory at an average of $0.07 per share
|
840,000
|
|
840
|
|
60,155
|
|
(47,650)
|
|
-
|
|
-
|
|
13,345
|
Common stock issued from options for cash at $0.03 per share and services of $91,960 and inventory of $12,000
|
3,775,000
|
|
3,775
|
|
240,759
|
|
(3,000)
|
|
-
|
|
-
|
|
241,534
|
Common stock issued from options for services at $0.08 per share
|
4,730,000
|
|
4,730
|
|
386,943
|
|
(35,222)
|
|
-
|
|
-
|
|
356,451
|
Common stock issued from options for cash at $0.08 per share
|
981,818
|
|
981
|
|
81,019
|
|
-
|
|
-
|
|
-
|
|
82,000
|
Common stock issued from options for legal settlement at $0.14 per share
|
1,813,637
|
|
1,814
|
|
260,686
|
|
-
|
|
-
|
|
-
|
|
262,500
|
Common stock issued from options for commissions at $0.11 per share
|
204,545
|
|
205
|
|
22,295
|
|
-
|
|
-
|
|
-
|
|
22,500
|
Foreign currency translation loss
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
(2,344)
|
|
(2,344)
|
Net loss for the year ended June 30, 2001
|
-
|
|
-
|
|
-
|
|
-
|
|
(2,480,552)
|
|
-
|
|
(2,480,552)
|
|
Balance, June 30, 2001
|
130,733,018
|
|
130,733
|
|
9,959,034
|
|
218,210
|
|
(7,013,749)
|
|
(2,557)
|
|
3,291,671
|
Common stock issued for cash of $189,850 and services of $82,850 at $0.09 per share
|
2,885,000
|
|
2,885
|
|
269,815
|
|
-
|
|
-
|
|
-
|
|
272,700
|
Common stock issued for compensation at $0.09 per share
|
3,600,000
|
|
3,600
|
|
316,880
|
|
-
|
|
-
|
|
-
|
|
320,480
|
Common stock issued for legal services at $0.10 per share
|
250,000
|
|
250
|
|
24,750
|
|
-
|
|
-
|
|
-
|
|
25,000
|
Common stock issued for KDS machine at $0.09 per share
|
500,000
|
|
500
|
|
44,500
|
|
|
|
|
|
|
|
45,000
|
Common stock issued for equipment at $0.13 per share
|
100,000
|
|
100
|
|
12,740
|
|
|
|
|
|
|
|
12,840
|
Common stock issued for accounts payable at $0.095 per share
|
100,000
|
|
100
|
|
9,400
|
|
|
|
|
|
|
|
9,500
|
Common stock issued from options for services at $0.09 per share
|
3,925,000
|
|
< | |