Form 10QSB for FIRST AMERICAN SCIENTIFIC CORP \NV
9-Feb-2005
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 which are operating in Canada, the Unites States, Poland, Malaysia, and have recently shipped one machine to a pulp mill in the UK.
On December 31, 2004, we had current assets of $209,595 and current liabilities of $43,482 compared to the previous year on December 31, 2003 when we had $258,228 in current assets and $181,776 in current liabilities . Our working capital ratio on December 31, 2004 was 4.8:1, which represents a significant improvement over last year when the working capital ratio was 1.42:1 on December 31, 2003.
Sustainable Development Technology Canada (SDTC) Funding
In October 2004, Sustainable Development Technology Canada (SDTC) awarded a CDN$600,000 research grant to AGES to construct and install a complete waste to energy KDS 3000 system at a Canadian pulp mill. The approved location will be announced when agreements are finalized.
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 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 London, England on December 27, 2004
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 Department 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 first organizational meeting to establish priorities was attended by our Vice President of Research in December 2004.
US Department of Energy Grant
Although we were selected for a further US Department of Energy (DOE) Phase II grant, that application did not proceed as we did not have a principle place of business in the USA.
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After remedying the deficiency, we subsequently reapplied for a new Phase I grant on December 14, 2004.
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 met the target for fiscal year 2005.
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 $250,000 as of this date. This cannot be expected to continue indefinitely.
As of December 31, 2004, there were 174,673,865 shares issued and outstanding.
Results of Operations - Quarter ending December 31, 2004
Revenue for the quarter ended December 31, 2004 was $180,058 compared to $61,210 for the same period last year. This quarter's revenue included the sale of one system to WRAP in England. 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 December 31, 2004 were $230,381or less than $0.01 per share compared to $230,508 for the same period last year. Efforts increase revenue and to control and reduce operating costs are continual.
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 CDN$5,000,000 contract to supply of micronized zeolite to Halliburton Group Canada. In August 2004, Thelon Ventures Ltd., a Canadian company committed CDN$450,000 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. KDS equipment has been delivered in is operational. Delays were experienced in receiving electrical service to the site and recent road closures due to severe winter weather, but this has now been resolved and the first production runs are expected to begin in shortly.
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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.
Alternative Green Energy Systems Inc - Joint Venture
In February 2004, AGES received was granted a new 21 year exclusive license to design, manufacture and sell a large scale KDS machine for exclusive use in the pulp & paper industry in Canada, the USA and Europe. FASC owns 40 % of AGES. Plans for a new KDS Model 3000 have been finalized with the first sale pending. The smaller Model 250 test machine remains at Atlantic Packaging Ltd.'s paper recycling facility in Whitby, Ontario for experimentation and demonstration purposes.
Other material contracts :
Waste Resourses Action Program - UK
Under agreement with FASC, WRAP has agreed to provide up to US$1,000,000 for the purchase and installation of one complete KDS system to be located at a local pulp mill in the UK and for market research, scientific research and re-design of supplementary systems for industry-specific applications. The site will be announced when details are finalized. FASC engineering staff will be working with WRAP for the duration of the project which will run for approximately 18 months. For the project, the KDS will be the key technology to dewater sludge and enable the separation and recycling of fiber and clay for a variety of applications.
Mitsui Engineering & Shipbuilding Co. Ltd - Collaboration Agreement for Japan
In July 2004, FASC signed a collaboration with Mitsui Engineering and Shipbuilding Co. Ltd. (MES) wherein Mitsui will conduct a feasibility study into the marketability of the KDS Micronex System in Japan and evaluate the opportunity of venturing into a licensing agreement with us to introduce the KDS technology to the Japanese market. It was further agreed that MES would undertake all necessary steps to file and protect First American's patents in Japan. Patent applications have been filed and the agreement was extended in order to allow time to negotiate an exclusive marketing agreement. More details will be provided when they materialize.
Research and Development
We continue to focus on improving the KDS equipment's processing capacity and improve efficiencies for several different applications. We have determined that processing of softer materials such as biomass and pulp sludge currently represent the highest and best use for our technology and the most probable to generate sales. With the funding provided by SDTC, WRAP, the USDA, and possibly DOE, our research will continue into developing commercially viable applications for our technology.
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Summary of accomplishments this fiscal year:
July 2004 USDA grant participation with University of Tennessee
July 2004 Sign Collaboration Agreement with Mitsui - Japan
September 2004 Sale to WRAP and grant awarded/sign funding agreement
September 2004 Sale of KDS to FASC Malaysia/sign JV agreement
October 2004 UZP/Halliburton $450,000 Cdn project funding secured
October 2004 CDN$600,000 SDTC grant awarded to AGES
October 2004 file patent applications in Malaysia
November 2004 Equipment commissioned at UZP Princeton site
December 2004 Construct and ship machine to England for WRAP project
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
We rent office space in West Vancouver, British Columbia, Canada which serve as administrative and rent a sales offices and demonstration facility in Delta, British Columbia. AGES rents office space in Montreal, Quebec.
Trends
Sales efforts are beginning to bring results with one system sold in each of the last four quarters and several new major projects in the final stage of negotiation, however, as of the date of this report we have no firm contracts to purchase any machines. Based upon the sale of a minimum of eight machines over a one year period, we have projected sales of at least $2,000,000 next year.
Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity" (hereinafter "SFAS No. 150"). SFAS No. 150 establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those instruments were classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. At September 30, 2003, the Company determined that there was no impact to the adoption of this statement.
In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (hereinafter "SFAS No. 149"). SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material impact on the financial position or results of operations of the Company.
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In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- Transition and Disclosure" (hereinafter "SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The provisions of the statement effective for financial statements for fiscal years ending after December 15, 2002, are not expected to impact the Company's financial statements. The Company currently reports stock issued to employees under the rules of SFAS No. 123. Accordingly, there is no change in disclosure requirements due to SFAS No. 148.
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