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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 DECEMBER 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 [ ]
The Company is a Shell company: Yes [ ] No [ X ]
As of January 27, 2006, we have a total amount of shares issued and outstanding of: 189,408,955
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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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These accompanying condensed notes are an integral part of these financial statements.
F-1
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The accompanying condensed notes are an integral part of these financial statements.
F-2
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The accompanying condensed notes are an integral part of these financial statements.
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FIRST AMERICAN SCIENTIFIC CORP. |
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Notes to Consolidated Financial Statements |
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December 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, 2005. 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 three month period ended December 31, 2005 are not necessarily indicative of the results that may be expected for the year ending June 30, 2006.
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.
Use of Estimates
The process of preparing financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.
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FIRST AMERICAN SCIENTIFIC CORP. |
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Notes to Consolidated Financial Statements |
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December 31, 2005 |
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 $11,776,936 through December 31, 2005 and has limited cash resources. The Company recorded minimal sales during the period ended December 31, 2005 and generated a net loss of $166,075. These factors raise substantial doubt about the Company's ability to continue as a going concern. 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 and sales resources with its joint venture partners and with its Licensees.
Management intends to seek new capital from new equity securities offerings which 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 six months ended December 31, 2005, the Company sold two licenses, sold one machine, and contracted to sell one machines in the future.
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.
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FIRST AMERICAN SCIENTIFIC CORP. |
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Notes to Consolidated Financial Statements |
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December 31, 2005 |
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 153 (hereinafter "SFAS No. 109"). 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 nonmonetary 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. During the year ended June 30, 2005, the Company adopted SFAS No. 153. The Company has determined that there was no financial impact from the adoption of this statement.
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151, "Inventory Costs C 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.
In December 2004, the Financial Accounting Standards Board issued a revision to Statement of Financial Accounting Standards No. 123R, "Accounting for Stock Based Compensations." This statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This statement does not change the accounting guidance for share based payment transactions with parties other than employees provided in Statement of Financial Accounting Standards No. 123. This statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans. 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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December 31, 2005 |
NOTE 3 - COMMON STOCK
During the three months ended December 31, 2005, the Company issued common stock shares as follows:
3,750,000 shares upon the exercise of options for management salaries with a fair market value of $150,000; 650,000 shares upon the exercise of options for commissions with a fair market value of $22,100; 250,000 shares upon the exercise of options for accounting services with a fair market value of $8,500; and 550,000 shares of common stock upon the exercise of options for rent and expenses with a fair market value of $22,000;
NOTE 4 - STOCK OPTIONS
The Company's board of directors approved the First American Scientific Corp. 2005 Non-qualified Stock Option Plan. This plan allows the Company to distribute up to 10,000,000 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 three months ended March, the Company granted 5,200,000 options of which all were immediately exercised.
NOTE 5 - RELATED PARTIES
At December 31, 2005, the Company owed two of its senior executives $75,000 for accrued salary and $ 155,736 for loans made to the Company.
NOTE 6 - 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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FIRST AMERICAN SCIENTIFIC CORP. |
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Notes to Consolidated Financial Statements |
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December 31, 2005 |
On September 26, 2005, the Company signed an exclusive license agreement for manufacturing and marketing the KDS System in Japan with JP Steelplantech Company of Yokohama, Japan. As part of the agreement JP Steel has paid an up front licensing fee and purchased and installed a fully operational KDS at its facility in Yokohama to be used for sales demonstrations and research purposes. JP Steel will also pay a royalty for each machine manufactured and sold in Japan.
On December 14, 2005, the Company signed an exclusive license agreement for the marketing of the KDS System in Korea with JNK Heaters Co. Ltd. of Seoul, Korea. As part of the agreement JNK has paid an up front deposit for a licensing fee and machine purchase, and has agreed to finalize the purchase and install a fully operational KDS at its facility in Seoul within one year to be used for sales demonstrations and research purposes. JNK may also earn the right to manufacture machines in Korea after meeting certain contractual conditions and will also pay a royalty for each machine manufactured and sold in Korea.
NOTE 7 - SUBSEQUENT EVENTS
As of January 26, 2006, the Company has withdrawn from the United Zeolite Products Ltd joint venture and has removed its equipment from the site.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - December 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, Malaysia and Korea. We have now reached commercial viability for several of our applications and have entered our marketing phase. To date, we have sold systems in Canada, the United States, Poland, Malaysia, South Korea, Japan and the UK.
On December 31, 2005 we had current assets of $ 464,350 and current liabilities of $ 204,910 compared to the previous year on December 31, 2004 when we had $ 209,595 in current assets and $ 43,482 in current liabilities. Our working capital ratio on December 31, 2005 was 2.26 : 1, compared to the working capital ratio was 4.8 : 1 on December 31, 2004. The company is maintaining 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 pulp mill in eastern Canada. (see AGES on page 3)
Waste Resources Action Program (WRAP) Research Funding
In September 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 assist in managing the project. 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 sold and paid for, then shipped to Aylesford Newsprint in London, England where it is now in operation. In January 2006, a 60 day continuous run test was commenced. Final evaluation 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 project is ongoing. No new reports are available for this quarter.
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