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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 |
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OR |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For the transition period from ________ to ________ |
Commission File Number: 000-27094
FIRST AMERICAN SCIENTIFIC CORP.
(Exact name of registrant as specified in its charter)
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NEVADA |
88-0338315 |
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(State of other jurisdiction of incorporation or organization) |
(IRS Employer Identification Number) |
100 Park Royal South
Suite 811
Vancouver, British Columbia
Canada V7T 1A2
(Address of principal executive offices)
(604) 913-9035
(Registrant's telephone number, including area code)
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 [ ]
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PART I.
ITEM 1. FINANCIAL STATEMENTS
FIRST AMERICAN SCIENTIFIC CORP.
Consolidated Financial Statements
TABLE OF CONTENTS
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Financial Statements |
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Consolidated Balance Sheets |
F-1 |
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Consolidated Statements of Operations and Comprehensive Income (Loss) |
F-2 |
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Consolidated Statements of Cash Flows |
F-3 |
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Notes to Consolidated Financial Statements |
F-4 |
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See accompanying condensed notes.
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See accompanying condensed notes.
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See accompanying condensed notes.
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FIRST AMERICAN SCIENTIFIC CORP. |
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Notes to Consolidated Financial Statements |
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March 31, 2005 |
NOTE 1 - BASIS OF PRESENTATION
The foregoing unaudited interim financial statements of First American Scientific Corp. (hereinafter "FASC" or "the Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Regulation S-B as promulgated by the Securities and Exchange Commission ("SEC"). Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. These unaudited interim financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2004. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.
The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published, and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the Company's financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of the Company's financial position and results of operations.
Operating results for the nine month period ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending June 30, 2005.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of FASC is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of operations.
As shown in the accompanying financial statements, the Company has incurred an accumulated deficit of $11,731,038 through March 31, 2005 and has limited cash resources. The Company recorded increased sales during the period ended March 31, 2005 but generated a net loss of $654,024. These factors raise substantial doubt about the Company's ability to continue as a going concern.
F-4
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FIRST AMERICAN SCIENTIFIC CORP. |
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Notes to Consolidated Financial Statements |
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March 31, 2005 |
Management plans to substantially increase sales through current channels and develop new sales opportunities. Management has also established plans designed to increase the sales of the Company's products by continued research and development and combining technology with AGES as well as the joint venture with FASC (Malaysia) SBN.BHD.
Management intends to seek new capital from new equity securities offerings that will, if successful, provide funds needed to increase liquidity, fund internal growth and fully implement its business plan. However, there is no assurance that the Company will raise the required capital. If the Company is unable to raise the required capital, then it will assess its future business viability.
The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.
Revenue and Cost Recognition
Revenues from the sale of KDS machines are recognized when there is a sales contract, all terms of the contract have been completed, collectibility is reasonably assured and the products are delivered. During the nine months ended March 31, 2005, the Company sold two machines and received a deposit for the sales of a third machine.
KDS machine costs include applicable direct material and labor costs and related indirect costs. Changes in job performance, job conditions and estimated profitability may result in revisions to product costs, which are recognized in the period in which the revisions are determined.
Reclassifications
Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2005 presentation.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4." This Statement amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ". . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . ." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this Statement will have any immediate material impact on the Company.
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FIRST AMERICAN SCIENTIFIC CORP. |
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Notes to Consolidated Financial Statements |
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March 31, 2005 |
In December 2004, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No.153. This Statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions," is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetrary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during fiscal years beginning after the date of this Statement is issued. Management believes the adoption of this Statement will have no impact on the financial statements of the Company.
NOTE 3 - COMMON STOCK
During the nine months ended March 31, 2005 the Company issued 6,750,000 shares of common stock upon the exercise of options for compensation with a fair market value of $270,000; 3,490,090 shares of common stock upon the exercise of options for services and rent with a fair market value of $141,063; and 138,889 shares of common stock for $10,000 cash.
NOTE 4 - STOCK OPTIONS
The Company's board of directors approved the First American Scientific Corp. 2004 and 2004A Non-qualified Stock Option Plan. This plan allows the Company to distribute up to 20,000,000 shares of common stock options at a maximum share price of $0.05 to persons employed or associated with the Company. This plan was not approved by the Company's security holders.
During the nine months ended March, the Company granted 8,270,090 options of which 8,270,090 were immediately exercised.
NOTE 5 - RELATED PARTIES
At March 31, 2005 the Company owes two of its shareholders $105,000 for accrued wages and $76,371 for loans made to the Company.
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FIRST AMERICAN SCIENTIFIC CORP. |
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Notes to Consolidated Financial Statements |
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March 31, 2005 |
NOTE 6 - JOINT VENTURE
In July 2004, the Company signed an agreement to form a joint venture with two Malaysian companies to construct a fully operational palm waste processing plant to be 100% financed by the Malaysian partners. Upon completion, the joint venture will be granted exclusive license for 21 years, to market the KDS equipment in Malaysia. In addition to earning royalties from all KDS equipment sold in Malaysia, FASC will share equally in the operating profits of the joint venture. A machine was purchased by the joint venture and shipped to Malaysia in August 2004.
NOTE 7 - CONTRACTS
On August 6, 2004, the Company entered into an agreement with The Waste and Resources Action Programme (hereinafter "WRAP") which is a U.K. Government funded program that supports research to improve markets for recycled materials and products in the U.K. WRAP intends to fund the cost of research and development (R&D), as WRAP determines appropriate, to determine the possibilities for the Company's KDS Technology and KDS Micronex Machine and ancillaries. In addition, WRAP will conduct R&D to develop a production scale ancillary sludge separation system which can be used with the KDS Micronex Machine to reduce the costs and environmental impact of the sludge produced by the paper industry. Under the terms of the agreement, WRAP has purchased a KDS Micronex Machine. Also, WRAP will provide agreed funding in the amount of ^ 540,000 to be disbursed at WRAP's sole discretion for R&D purposes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS March 31, 2005
Liquidity and Capital Resources
We were incorporated April 12, 1995 as a development stage company. We are the owner of the KDS disintegration technology which is patented in the USA, Canada, UK, Europe, Mexico, Australia, and New Zealand. In addition to the core patent, new patents for two new applications, one for the cryogenic freezing and shattering scrap rubber and one for separation of precious metals from mineral rock using our equipment have been granted. One other patent application for drying and recovery of fuel and clay from biomass has been submitted and is pending status. Further new registrations have been submitted in Japan and Malaysia. We have now reached proven commercial viability for several of our applications and have entered our marketing phase. To date, we have sold systems in Canada, the Unites States, Poland, Malaysia, Korea, and the UK.
On March 31, 2005 we had current assets of $ 203,628 and current liabilities of $ 53,764 (excluding a deposit held on the sale of a machine) compared to the previous year on March 31, 2004 when we had $ 435,695 in current assets and $ 195,341 in current liabilities ( excluding a deposit on sale). Our working capital ratio on March 31, 2005 was 3.8 : 1, (excluding a deposit) compared to the working capital ratio was 2.2 : 1 on March 31, 2004 (excluding a deposit). The company is in a positive working capital position and has no long term debt other than advances from two of its directors.
Sustainable Development Technology Canada (SDTC) Funding
In October 2004, Sustainable Development Technology Canada (SDTC) awarded a $600,000 Cdn research grant to AGES to construct and install a complete waste to energy KDS 3000 system at a Canadian pulp mill. A pulp mill in Canada has agreed to host the project. The mill location will be announced when documentation is finalized.
Waste Resources Action Program (WRAP) Research Funding
In Septemeber 2004, we signed an agreement wherein WRAP has agreed to provide funding to develop "value enhanced end-products" from the output of the KDS machine. WRAP has agreed to provide $1,000,000 USD for the purchase and installation of one complete KDS system to be located at an industrial site in England. The fund will also pay for market research, scientific research, re-design and adaptation costs for the equipment and supplementary systems for industry-specific applications. FASC engineering staff will manage the project which will run for approximately 18 months. The goals of the project are to demonstrate the KDS technology in a working environment, optimize ancillary equipment to improve its efficiency, and identify markets for recycled end products. The first machine was shipped to Aylesford Newsprint in London, England and an evaluation is now ongoing. Results will be announced when they become available.
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University of Tennessee - USDA Funding
In July 2004, we were selected to participate with the University of Tennessee in a Biomass Research Initiative project funded by the US Dept of Agriculture. First American Scientific Co. was identified as a key industry partner for its history of developing novel size reduction and separation processes. The research is underway. Results will be announced when they become available.
US Department of Energy Grant
Although we were selected for a further US Dept of Energy (DOE) Phase II grant, that application did not proceed as we did not have a principle place of business in the USA.
After remedying the deficiency, we subsequently reapplied for a new Phase I grant on December 14, 2004. Successful applicants are due to be announced in May 2005.
Accounting issues
Management believes that the carrying value of its technology licenses, patents and manufacturing rights are fairly stated at cost less amortization using the straight line method over 15 years based upon the estimated present value of cash flows and the Company's projections to sell at least two machines each year through 2006. The Company met this minimum sales target in fiscal year 2004, and has already exceeded the target for fiscal year 2005 with three sales so far and a fourth contract signed awaiting deposit. Sales are booked when the equipment is delivered.
Our auditors have issued a going concern statement because we do not have sufficient cash flow for us to maintain our operation for the next year. Consequently, our management will have to seek additional capital from new equity securities offerings, loans, or other fund raising activities to maintain our operation should new sales and receipt of receivables not materialize. Some relief has come from deferment of payment of salaries and loans due to our senior management which aggregate approximately $ 181,000 USD as of this date.
As of March 31, 2005 there were 179,943,955 shares issued and outstanding.
Results of Operations - Quarter ending March 31, 2005
Revenue for the quarter ended March 31, 2005 was $ 69,418 compared to $292,464 for the same period last year. This quarter's revenue included consulting and license fees. In addition, a contract to sell one machine was signed and a deposit was received. The machine is now being fabricated and will be shipped in Mayy 2005. There were no equipment sales in the same period last year. Sales efforts are ongoing with several major projects in final stage of negotiation.
Net losses for the quarter ending March 31, 2005 were $ 246,074 or less than $0.01 per share compared to a profit of $ 155,735 for the same period last year. Last year's profit was a result of a $ 323,776 addition to income resulting from the change in method of accounting for our equity investment in AGES. Exclusive of that change, March 31, 2004 quarter losses were $ 168,031. Efforts increase revenue and to control and reduce operating costs are continual.
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The company will participate in profits and royalties from three separate joint venture agreements as follows:
United Zeolite Products Ltd. Joint Venture - Halliburton contract
In February 2004, FASC became a 1/3rd partner, along with C2C Zeolite Corp and Zeotech Enviro Corp, in United Zeolite Products Ltd, a BC company formed to build and operate a specialty zeolite processing plant in Princeton, B.C. UZP has a $ 5,000,000 Cdn contract to supply of micronized zeolite to Halliburton Group Canada. In August 2004 Thelon Ventures Ltd., a Canadian company committed $ 450,000 Cdn in cash to UZP as a condition to become a fourth equal partner in UZP, thereby by reducing each of the existing partners' equity position to 25 % each of UZP's outstanding shares, but providing the balance of funds needed to complete the construction of the Princeton facility. As of the date of writing this report the building construction is complete and KDS equipment has been delivered is operational. Rock blasting is underway at the Zeotech mine in Princeton and raw material is expected to be delivered for processing shortly.
Malaysian Joint Venture
In September 2004 the Company signed an agreement to form a new Malaysian company, FASC (Malaysia) Sdn. Bhd to construct a fully operational palm waste processing plant to be 100 % financed by the Malaysian partners. Upon completion, FASC (Malaysia) Sdn. Bhd. will be granted exclusive license to market the KDS equipment in Malaysia. In addition to earning royalties for all KDS equipment sold in Malaysia, FASC will share equally in the operating profits of the joint venture and retain a 50 % ownership in FASC (Malaysia) Sdn. Bhd. A machine was purchased by FASCMBS and shipped to Malaysia in August 2004. Operation of the equipment is now ongoing with and sampling runs of empty bunch, shell & coconut fibre underway. A quote has bee given for the sale of two systems has been issued, with a reply