Texas
|
|
86-0837077
|
(State
of Incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
14505
North Hayden Road, Suite 305
|
|
|
Scottsdale,
AZ
|
|
85260-6951
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
Page
|
||
Part I | Financial Information |
3
|
Item 1. | Financial Statements (unaudited) |
3
|
3
|
||
4
|
||
5
|
||
7
|
||
|
8
|
|
Item 2. |
17
|
|
Item 3. | Controls and Procedures |
21
|
Part II | Other Information |
22
|
Item 1. | Legal Proceedings |
22
|
Item 2. |
22
|
|
Item 3. | Defaults Upon Senior Securities |
22
|
Item 4. |
22
|
|
Item 5. | Other Information |
22
|
Item 6. | Exhibits and Reports on Form 8-K |
22
|
Signatures |
23
|
|
Exhibit 31 - Certification Pursuant to Section 302 of the Sarbanes-Oxley Act | ||
Exhibit 32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act |
Item 1. |
Financial
Statements
|
|
March
31, 2006
|
September
30, 2005
|
|||||
ASSETS
|
(Unaudited)
|
(Audited)
|
|||||
Current
Assets:
|
|
||||||
Cash
and cash equivalents
|
$
|
218
|
$
|
1,616
|
|||
Trade
receivables, net
|
1,266
|
9,968
|
|||||
Inventory,
net
|
17,827
|
23,735
|
|||||
Other
assets
|
19,296
|
68
|
|||||
Total
current assets
|
38,607
|
35,387
|
|||||
|
|||||||
Property
and equipment, net
|
4,359
|
7,680
|
|||||
Deposits
|
2,000
|
2,000
|
|||||
Deferred
offering costs, net
|
22,000
|
—
|
|||||
Investment
|
289,100
|
289,100
|
|||||
|
$
|
356,066
|
$
|
334,167
|
|||
|
|||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|||||||
Current
Liabilities:
|
|||||||
Accounts
payable - related parties
|
$
|
89,442
|
$
|
72,914
|
|||
Accounts
payable - other
|
172,569
|
183,664
|
|||||
Accrued
expenses
|
696,267
|
519,132
|
|||||
Notes
payable - related party
|
159,000
|
159,000
|
|||||
Notes
payable - other
|
45,750
|
60,150
|
|||||
Total
current liabilities
|
1,163,028
|
994,860
|
|||||
|
|||||||
Notes
payable, net of current portion
|
118,595
|
—
|
|||||
Total
liabilities
|
1,281,623
|
994,860
|
|||||
|
|||||||
Commitments
and contingencies
|
—
|
—
|
|||||
|
|||||||
Shareholders’
equity (deficit):
|
|||||||
Preferred
stock, par value $0.10; 4,000,000 shares authorized, and no shares
issued
and outstanding
|
—
|
—
|
|||||
Common
stock, par value $0.01; 187,000,000 shares authorized, and shares
issued
and outstanding 96,225,459 and 94,095,459 at March 31, 2006 and
September
30, 2005, respectively
|
962,255
|
940,955
|
|||||
Additional
paid-in capital
|
22,322,097
|
22,248,814
|
|||||
Accumulated
deficit prior to the development stage
|
(2,394,680
|
)
|
(2,394,680
|
)
|
|||
Accumulated
deficit during the development stage
|
(21,815,229
|
)
|
(21,455,782
|
)
|
|||
Total
shareholders’ equity (deficit)
|
(925,557
|
)
|
(660,693
|
)
|
|||
|
|||||||
|
$
|
356,066
|
$
|
334,167
|
|||
|
|
Three
Months
Ended
March
31, 2006
|
Three
Months
Ended
March
31, 2005
|
Six
Months
Ended
March
31, 2006
|
Six
Months
Ended
March
31, 2005
|
Development
Stage
|
|||||||||||
|
|
|
|
|
|
|||||||||||
Revenues
|
$
|
10,152
|
$
|
3,609
|
$
|
87,831
|
$
|
5,472
|
$
|
1,188,259
|
||||||
|
||||||||||||||||
Cost
of Sales
|
4,120
|
2,118
|
56,959
|
3,231
|
1,058,823
|
|||||||||||
Gross
profit
|
6,032
|
1,491
|
30,872
|
2,241
|
129,436
|
|||||||||||
|
||||||||||||||||
Costs
and expenses
|
||||||||||||||||
Salaries
and benefits
|
46,562
|
61,113
|
129,689
|
164,914
|
3,037,501
|
|||||||||||
Research
and development
|
46,465
|
124,051
|
134,543
|
197,534
|
4,492,526
|
|||||||||||
Stock
compensation
|
—
|
—
|
—
|
4,437
|
3,142,288
|
|||||||||||
Consulting
fees, related party
|
—
|
—
|
—
|
—
|
8,175,973
|
|||||||||||
Other
|
44,369
|
60,694
|
87,187
|
116,682
|
3,010,829
|
|||||||||||
Inventory
obsolescence charge
|
—
|
—
|
—
|
—
|
46,775
|
|||||||||||
Total
costs and expenses
|
137,396
|
245,858
|
351,419
|
483,567
|
21,905,892
|
|||||||||||
|
||||||||||||||||
Loss
from operations
|
(131,364
|
)
|
(244,367
|
)
|
(320,547
|
)
|
(481,326
|
)
|
(21,776,456
|
)
|
||||||
|
||||||||||||||||
Other
income (expense)
|
||||||||||||||||
Interest
and other income
|
—
|
—
|
—
|
—
|
178,972
|
|||||||||||
Gain
on settlement
|
—
|
—
|
—
|
—
|
89,403
|
|||||||||||
Interest
expense
|
(20,491
|
)
|
(4,253
|
)
|
(36,900
|
)
|
(7,970
|
)
|
(118,657
|
)
|
||||||
Amortization
of deferred offering costs
|
(1,200
|
)
|
—
|
(2,000
|
)
|
—
|
(2,000
|
)
|
||||||||
Loss
on disposal of assets
|
—
|
—
|
—
|
—
|
(30,960
|
)
|
||||||||||
Loss
on impairment of investment
|
—
|
—
|
—
|
—
|
(91,344
|
)
|
||||||||||
Loss
on impairment of equipment
|
—
|
—
|
—
|
—
|
(64,187
|
)
|
||||||||||
|
(21,691
|
)
|
(4,253
|
)
|
(38,900
|
)
|
(7,970
|
)
|
(38,773
|
)
|
||||||
|
||||||||||||||||
Loss
before income taxes
|
(153,055
|
)
|
(248,620
|
)
|
(359,447
|
)
|
(489,296
|
)
|
(21,815,229
|
)
|
||||||
Income
tax expense
|
—
|
—
|
—
|
—
|
—
|
|||||||||||
Net
los Net loss
|
$
|
(153,055
|
)
|
$
|
(248,620
|
)
|
$
|
(359,447
|
)
|
$
|
(489,296
|
)
|
$
|
(21,815,229
|
)
|
|
Six
Months
Ended
March
31,
2006
|
Six
Months
Ended
March
31,
2005
|
Development
Stage
|
|||||||
Cash
flows from operating activities:
|
||||||||||
Net
loss
|
$
|
(359,447
|
)
|
$
|
(489,296
|
)
|
$
|
(21,815,229
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||||
Depreciation
|
3,321
|
6,671
|
94,992
|
|||||||
Loss
on disposal of assets
|
—
|
—
|
30,960
|
|||||||
Impairment
loss on equipment
|
—
|
—
|
64,187
|
|||||||
Stock
and options issued for services, net
|
—
|
4,437
|
11,639,616
|
|||||||
Impairment
of inventory
|
—
|
—
|
46,775
|
|||||||
Impairment
of investment
|
—
|
—
|
91,344
|
|||||||
Warrant
expense
|
—
|
—
|
4,691
|
|||||||
Amortization
of deferred offering costs
|
2,000
|
—
|
2,000
|
|||||||
Amortization
of debt discount
|
4,300
|
—
|
4,300
|
|||||||
Amortization
of beneficial conversion feature
|
828
|
—
|
828
|
|||||||
Changes
in assets and liabilities:
|
||||||||||
Decrease
(increase) in inventory
|
5,908
|
78
|
(64,602
|
)
|
||||||
(Increase)
decrease in deferred offering costs
|
—
|
—
|
(85,171
|
)
|
||||||
Decrease
(increase) in receivables
|
8,702
|
(31,115
|
)
|
130,365
|
||||||
Decrease
(increase) in other assets
|
(19,228
|
)
|
11,647
|
(12,356)
|
)
|
|||||
Increase
(decrease) in accounts payable and accrued expenses
|
215,618
|
22,774
|
1,297,974
|
|||||||
Net
cash (used in) operating activities
|
(137,998
|
)
|
(474,804
|
)
|
(8,569,326
|
)
|
||||
|
||||||||||
Cash
flows from investing activities:
|
||||||||||
Acquisition
of property and equipment
|
—
|
—
|
(155,766
|
)
|
||||||
Repayment
of loans
|
—
|
—
|
200,000
|
|||||||
Proceeds
from the sale of furniture and equipment
|
—
|
—
|
6,050
|
|||||||
Loans
issued
|
—
|
—
|
(400,000
|
)
|
||||||
Net
cash (used in) provided by investing activities
|
—
|
—
|
(349,716
|
)
|
||||||
|
||||||||||
Cash
flows from financing activities:
|
||||||||||
Proceeds
from notes payable
|
177,500
|
—
|
442,000
|
|||||||
Loan
from (to) officer , related party
|
—
|
100,000
|
65,079
|
|||||||
Draws
on the line of credit
|
—
|
—
|
430,000
|
|||||||
|
||||||||||
(Continued)
|
|
Six
Months
Ended
March
31,
2006
|
Six
Months
Ended
March
31,
2005
|
Development
Stage
|
|||||||
Repayment
of notes payable
|
(16,900
|
)
|
—
|
(225,500
|
)
|
|||||
Repayment
of line of credit
|
—
|
—
|
(430,000
|
)
|
||||||
Repayment
of capital lease obligations
|
—
|
—
|
(1,819
|
)
|
Proceeds
from the exercise of options
|
—
|
—
|
208,265
|
|||||||
Proceeds
from the exercise of warrants
|
—
|
—
|
92,460
|
|||||||
Proceeds
from equity line of credit
|
—
|
—
|
414,824
|
|||||||
Proceeds
from the issuance of preferred stock
|
—
|
—
|
482,500
|
|||||||
Payment
of financing costs
|
(24,000
|
)
|
—
|
(24,000
|
)
|
|||||
Proceeds
from securities exchange agreement
|
—
|
240,000
|
240,000
|
|||||||
Proceeds
from issuance of common stock
|
—
|
—
|
7,221,833
|
|||||||
Net
cash provided by financing activities
|
136,600
|
340,000
|
8,915,642
|
|
|
|
|
|||||||
Net
(decrease) increase in cash and cash equivalents
|
(1,398
|
)
|
(134,804
|
)
|
(3,400
|
)
|
||||
Cash
and cash equivalents, beginning of period
|
1,616
|
160,214
|
3,618
|
|||||||
|
||||||||||
Cash
and cash equivalents, end of period
|
$
|
218
|
$
|
25,410
|
$
|
218
|
||||
|
||||||||||
Supplementary
Disclosure of Cash Flow Information
|
||||||||||
Cash
paid for interest
|
$
|
625
|
$
|
11
|
$
|
37,338
|
||||
Cash
paid for income taxes
|
$
|
—
|
—
|
$
|
50
|
|||||
Conversion
of accounts payable and accrued expenses to equity
|
$
|
33,050
|
$
|
—
|
$
|
115,240
|
||||
Common
stock exchanged for investment
|
—
|
—
|
289,100
|
|||||||
Debt
discount and beneficial conversion feature
|
$
|
61,533
|
$
|
—
|
$
|
61,533
|
||||
|
|
Common
Stock
|
Preferred
Stock
|
|
|
|
|
|||||||||||||||||||
|
Number
of Shares
|
Par
Value
|
Number
of Shares
|
Par
Value
|
Additional
Paid-In
Capital
|
Accumulated
Deficit
Prior
to Development Stage
|
Accumulated
Deficit
During
the Development Stage
|
Total
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance,
September 30, 2005
|
94,095,459
|
$
|
940,955
|
—
|
$
|
—
|
$
|
22,248,814
|
$
|
(2,394,680
|
)
|
$
|
(21,455,782
|
)
|
$
|
(660,693
|
)
|
||||||||
|
|||||||||||||||||||||||||
Issuance
of common stock as part of financing program
|
1,200,000
|
12,000
|
—
|
—
|
49,533
|
—
|
—
|
61,533
|
|||||||||||||||||
|
|||||||||||||||||||||||||
Issuance
of common stock in exchange for accounts payable and accrued
expenses.
Shares issued for:
|
|||||||||||||||||||||||||
$0.036
|
500,000
|
5,000
|
—
|
—
|
13,000
|
—
|
—
|
18,000
|
|||||||||||||||||
$0.035
|
430,000
|
4,300
|
—
|
—
|
10,750
|
—
|
—
|
15,050
|
|||||||||||||||||
|
|||||||||||||||||||||||||
Net
loss
|
—
|
—
|
—
|
—
|
—
|
—
|
(359,447
|
)
|
(359,447
|
)
|
|||||||||||||||
|
|||||||||||||||||||||||||
Balance,
March 31, 2006
|
96,225,459
|
$
|
962,255
|
—
|
$
|
—
|
$
|
22,322,097
|
$
|
(2,394,680
|
)
|
$
|
(21,815,229
|
)
|
$
|
(925,557
|
)
|
||||||||
|
1. |
Basis
of Presentation
|
2. |
Issuance
of Common Stock
|
3.
|
Development
Stage Operations
|
4. |
Stock
Options and Warrants
|
|
|
Weighted
|
Weighted
|
|||||||
|
Number
|
Average
|
Average
|
|||||||
|
of
|
Exercise
|
Fair
|
|||||||
|
Shares
|
Price
|
Value
|
|||||||
|
|
|
|
|||||||
Options
Outstanding, September 30, 2005
|
3,789,257
|
$
|
0.81
|
$
|
0.02
|
|||||
Granted
|
—
|
—
|
—
|
|||||||
Exercised
|
—
|
—
|
—
|
|||||||
Canceled
|
—
|
—
|
—
|
|||||||
Options
Outstanding, March 31, 2006
|
3,789,257
|
$
|
0.81
|
$
|
0.02
|
|
Stock
Options Outstanding
|
Stock
Options Exercisable
|
||||||||||||||
|
|
Weighted
|
|
|
|
|||||||||||
|
|
Average
|
|
|
|
|||||||||||
|
|
Remaining
|
Weighted
|
|
Weighted
|
|||||||||||
|
|
Contractual
|
Average
|
|
Average
|
|||||||||||
|
Number
|
Life
|
Exercise
|
Number
|
Exercise
|
|||||||||||
Range
of Exercise Prices
|
of
Shares
|
(In
Years)
|
Price
|
of
Shares
|
Price
|
|||||||||||
|
|
|
|
|
|
|||||||||||
$0.05
to $0.46
|
2,479,257
|
7.04
|
$
|
0.18
|
2,479,257
|
$
|
0.18
|
|||||||||
$0.47
to $1.84
|
1,000,000
|
4.67
|
$
|
1.84
|
1,000,000
|
$
|
1.84
|
|||||||||
$1.85
to $3.00
|
310,000
|
4.81
|
$
|
2.49
|
310,000
|
$
|
2.49
|
|||||||||
Total
|
3,789,257
|
5.92
|
$
|
0.81
|
3,789,257
|
$
|
0.81
|
Six
Months Ended
|
Six
Months Ended
|
||||||
March
31, 2006
|
March
31, 2005
|
||||||
Net
loss as reported
|
$
|
(359,447
|
)
|
$
|
(489,296
|
)
|
|
Deduct:
Total stock based compensation expense as determined under the
fair value
method
|
—
|
(5,637
|
)
|
||||
Add:
Total stock based compensation recorded in the statement of
operations
|
—
|
4,437
|
|||||
|
|||||||
Pro
forma net loss
|
$
|
(359,447
|
)
|
$
|
(490,496
|
)
|
|
|
|||||||
Loss
per share as reported
|
(0.00
|
)
|
(0.01
|
)
|
|||
|
|||||||
Loss
per share, pro forma
|
(0.00
|
)
|
(0.01
|
)
|
|
Warrants
Outstanding
|
Warrants
Exercisable
|
||||||||||||||
Range
of Exercise Prices
|
Number
of Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Life (Years)
|
Number
of Shares
|
Weighted
Average Exercise Price
|
|||||||||||
|
|
|
|
|
|
|||||||||||
$0.062
to $0.062
|
135,000
|
$
|
0.062
|
2.24
|
135,000
|
$
|
0.062
|
|||||||||
$0.090
to $0.090
|
1,250,000
|
$
|
0.090
|
2.47
|
1,250,000
|
$
|
0.090
|
|||||||||
$0.100
to $0.100
|
3,108,497
|
$
|
0.100
|
4.60
|
3,108,497
|
$
|
0.100
|
|||||||||
$0.110
to $0.110
|
7,750,700
|
$
|
0.110
|
3.02
|
7,750,700
|
$
|
0.110
|
|||||||||
$0.130
to $0.130
|
640,000
|
$
|
0.130
|
0.77
|
640,000
|
$
|
0.130
|
|||||||||
$0.350
to $0.350
|
1,000,000
|
$
|
0.350
|
0.25
|
1,000,000
|
$
|
0.350
|
|||||||||
$0.500
to $0.500
|
1,275,000
|
$
|
0.500
|
0.25
|
1,275,000
|
$
|
0.500
|
|||||||||
$0.750
to $0.750
|
275,000
|
$
|
0.075
|
0.25
|
275,000
|
$
|
0.075
|
|||||||||
|
15,434,197
|
15,434,197
|
||||||||||||||
|
5. |
Notes
payable and Long Term debt
|
|
March
31, 2006
|
September
30, 2005
|
|||||
|
(Unaudited)
|
(Audited)
|
|||||
|
|
|
|||||
Note
payable to shareholder; unsecured; non-interest
|
|||||||
bearing;
matures in June 2006; repayment may be made by the
|
|||||||
Company
with either cash or its restricted common stock
|
|||||||
or
a combination of cash and stock.
|
$
|
43,250
|
$
|
43,250
|
|||
Note
payable to an Officer of the Company; interest
|
|||||||
at
6%; principal and interest payable on demand; unsecured.
|
159,000
|
159,000
|
|||||
Note
payable to shareholder; unsecured; non-interest bearing
|
—
|
3,000
|
|||||
Note
payable to shareholder; unsecured; interest at 6%
|
—
|
5,000
|
|||||
Note
payable to an employee; interest at 6%; principal and interest
|
|||||||
at
6%; principal and interest payable on demand; unsecured.
|
—
|
8,900
|
|||||
Note
payable to shareholder; unsecured; non-interest bearing
|
1,000
|
—
|
|||||
Note
payable to shareholder; unsecured; non-interest bearing
|
1,500
|
—
|
|||||
Note
payable to an investment fund; payable in full in
|
|||||||
November
2010; interest at 8% payable semi-annually in May
|
|||||||
and
November; unsecured.
|
175,000
|
—
|
|||||
|
379,750
|
219,150
|
|||||
Less:
|
|||||||
Current
portion of long term debt
|
(204,750
|
)
|
(219,150
|
)
|
|||
Discount
|
(47,300
|
)
|
—
|
||||
Beneficial
conversion feature
|
(9,105
|
)
|
—
|
||||
Long-term
debt, net of current portion
|
$
|
118,595
|
$
|
—
|
|||
|
2006
|
$
|
204,750
|
||
2007
|
—
|
|||
2008
|
—
|
|||
2009
|
—
|
|||
2010
|
175,000
|
|||
$
|
379,750
|
6.
|
Investment
|
7.
|
Inventory,
net
|
|
|
|
March
31, 2006
|
September
30, 2005
|
|||
(Unaudited)
|
|
(Audited)
|
|||||
Inventory,
gross
|
$
|
64,602
|
$
|
70,510
|
|||
Less:
reserve for obsolescence
|
(46,775
|
)
|
(46,775
|
)
|
|||
Inventory,
net
|
$
|
17,827
|
$
|
23,735
|
8.
|
Accrued
Expenses
|
March
31, 2006
|
September
30, 2005
|
||||||
(Unaudited)
|
(Audited)
|
||||||
Salaries
& vacation pay - current management and staff
|
$
|
478,726
|
$
|
332,391
|
|||
Salaries
& vacation pay - former employee
|
29,375
|
29,375
|
|||||
Payroll
taxes for back pay
|
29,634
|
27,952
|
|||||
Interest
|
78,887
|
48,189
|
|||||
Employee
stock retainage pool
|
50,250
|
50,250
|
|||||
Other
liabilities
|
29,395
|
30,975
|
|||||
$
|
696,267
|
$
|
519,132
|
9.
|
Earnings
Per Share
|
|
March
31,
2006
|
March
31,
2005
|
|||||
|
|
|
|||||
Net
(loss)
|
$
|
(359,447
|
)
|
$
|
(489,296
|
)
|
|
Weighted
average shares:
|
|||||||
Average
shares outstanding
|
95,479,030
|
86,665,878
|
|||||
Effect
of diluted shares
|
—
|
—
|
|||||
|
|||||||
Average
shares outstanding, adjusted for dilutive effect
|
95,479,030
|
86,665,878
|
|||||
|
|||||||
(Loss)
per share - basic
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
|
|
|||||||
(Loss)
per share - diluted
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
|
|
March
31,
2006
|
March
31,
2005
|
||||||
|
|
|
|||||
Options
|
3,789,257
|
3,749,257
|
|||||
Warrants
|
15,434,197
|
14,049,197
|
|||||
Potential
common equivalents
|
19,223,454
|
17,798,454
|
|||||
|
Item 2. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Item 3. |
Controls
and Procedures
|
Item 1. |
Legal
Proceedings
|
Item 2. |
Changes
in Securities and Use of
Proceeds
|
Item 3. |
Defaults
Upon Senior Securities.
|
Item 4. |
Submission
of Matters to a Vote of Security
Holders.
|
Item 5. |
Other
Information.
|
Item 6. |
Exhibits
and Reports on Form 8-K.
|
(a) |
Exhibits
|
Exhibit
Number
|
Description
|
|
31
|
Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
32
|
Certification
Pursuant to Section 906 of the Sarbanes-Oxley
Act
|
(b) |
Reports
on Form 8-K
|
NATIONAL SCIENTIFIC CORPORATION | ||
|
|
|
Date: May 22, 2006 | By: | /s/ Michael A. Grollman |
|
||
Michael
A. Grollman
Director,
Chief Executive Officer, Acting
Chief
Financial
Officer and Chairman
|
|
|
|
Date: May 22, 2006 | By: | /s/ Graham L. Clark |
|
||
Graham
L. Clark
Director,
President, and
Secretary
|
|
|
|
Date: May 22, 2006 | By: | /s/ Gregory Szabo |
|
||
Gregory
Szabo
Director
|