FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: DECEMBER 31, 2003
Commission File Number: 001-04026
LIFESTYLE INNOVATIONS, INC.
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(Exact name of small business issuer as specified in its charter)
NEVADA 82-6008727
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(State of Incorporation) (IRS Employer ID No)
4700 LAKESHORE CT, COLLEYVILLE, TX 76034
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(Address of principal executive office)
817-307-6591
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(Issuer's telephone number)
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 [ ].
The number of shares outstanding of registrant's common stock, par value $.001
per share, as of January 31, 2004 was 20,819,325 shares.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF RCG COMPANIES INCORPORATED)
INDEX
Page
No.
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Part I. Financial Information (unaudited)
Item 1. Condensed Consolidated Balance Sheet - December 31, 2003 3
Condensed Consolidated Statements of Operations - 4
Three Months Ended December 31, 2003 and 2002
Condensed Consolidated Statements of Operations - 5
Six Months Ended December 31, 2003 and 2002
Condensed Consolidated Statement of Stockholders' Deficit - 6
Six Months Ended December 31, 2003
Condensed Consolidated Statements of Cash Flows - 7
Six Months Ended December 31, 2003 and 2002
Notes to Condensed Consolidated Financial Statements - 8-22
Six Months Ended December 31, 2003 and 2002
Item 2. Management's Discussion and Analysis of Financial Condition 23-26
and Results of Operations
Item 3. Controls and Procedures 26-27
Part II. Other Information 27-30
2
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A Majority Owned Subsidiary of RCG Companies Incorporated)
Condensed Consolidated Balance Sheet
December 31, 2003
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 32,307
Accounts receivable, net of allowance of $152,734 173,340
Inventories 20,787
Prepaid expenses and other assets 6,189
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Total current assets 232,623
Property and equipment, net 141,092
Other assets 15,000
Goodwill, net 1,207,849
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Total assets $ 1,596,564
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable $ 1,248,919
Notes payable - related parties 979,866
Accounts payable 384,738
Accrued expenses 916,485
Unearned income 15,743
Due to affiliates 1,963,799
Current liabilities of discontinued operations 1,069,269
-------------
Total current liabilities 6,578,819
Note payable, non-current 127,000
-------------
Total liabilities 6,705,819
Commitments and contingencies
STOCKHOLDERS' DEFICIT
Series A Convertible Preferred stock, $.10 par value; 1,000,000 shares
authorized issued and outstanding; liquidation preference $2,750,000;
convertible into from
1,000,000 to 2,200,000 shares of common stock 100,000
Common stock, $.001 par value; authorized 250,000,000 shares; issued -
20,819,325 shares; outstanding - 20,712,930 shares 20,819
Additional paid in capital 13,446,838
Common stock warrants 206,295
Deferred expenses (265,988)
Stock subscription receivable (4,000)
Accumulated deficit (18,613,219)
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Total stockholders' deficit (5,109,255)
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Total liabilities and stockholders' deficit $ 1,596,564
=============
See accompanying notes to condensed consolidated financial statements
3
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF RCG COMPANIES INCORPORATED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
2003 2002
Sales and revenues
Products $ 226,001 $ 126,750
Services and other 51,433 130,877
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277,434 257,627
COST OF SALES 102,678 39,282
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GROSS PROFIT 174,756 218,345
OPERATING EXPENSES:
Selling, general and administrative expense 257,966 363,206
Stock option and warrant compensation (243,748) 7,125
Depreciation and amortization 17,496 26,271
Management fee - parent 10,000 17,500
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Total operating expenses 41,714 414,102
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EARNINGS (LOSS) FROM OPERATIONS 133,042 (195,757)
OTHER INCOME (EXPENSE):
Rent and other income 5,175 --
Interest expense (52,303) (12,451)
Interest expense - related parties (21,961) --
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(69,089) (12,451)
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EARNINGS (LOSS) FROM CONTINUING OPERATIONS 63,953 (208,208)
Discontinued operations:
Loss from operation of discontinued operations (5,745,624) (277,501)
Income tax benefit -- --
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(5,745,624) (277,501)
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NET LOSS $ (5,681,671) $ (485,709)
============= =============
NET EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ 0.00 $ (0.01)
DISCONTINUED OPERATIONS (0.27) (0.01)
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NET LOSS PER SHARE, BASIC AND DILUTED $ (0.27) $ (0.02)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 20,819,053 20,306,191
============= =============
See accompanying notes to condensed consolidated financial statements
4
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF RCG COMPANIES INCORPORATED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
2003 2002
Sales and revenues
Products $ 401,274 $ 159,484
Services and other 119,827 245,758
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521,101 405,242
COST OF SALES 232,374 66,531
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GROSS PROFIT 288,727 338,711
OPERATING EXPENSES:
Selling, general and administrative expense 556,295 798,859
Stock option and warrant compensation (133,039) 14,250
Depreciation and amortization 35,497 36,789
Management fee - parent 25,000 35,000
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Total operating expenses 483,753 884,898
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LOSS FROM OPERATIONS (195,026) (546,187)
OTHER INCOME (EXPENSE):
Rent and other income 7,950 --
Interest expense (78,554) (24,637)
Interest expense - related parties (39,139) --
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(109,743) (24,637)
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LOSS FROM CONTINUING OPERATIONS (304,769) (570,824)
Discontinued operations:
Loss from operation of discontinued operations (6,390,081) (477,838)
Income tax benefit -- --
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(6,390,081) (477,838)
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NET LOSS $ (6,694,850) $ (1,048,662)
============= =============
NET LOSS PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.01) $ (0.03)
DISCONTINUED OPERATIONS (0.31) (0.03)
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NET LOSS PER SHARE, BASIC AND DILUTED $ (0.32) $ (0.06)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 20,763,129 18,727,648
============= =============
See accompanying notes to condensed consolidated financial statements
5
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF RCG COMPANIES INCORPORATED)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED DECEMBER 31, 2003
(UNAUDITED)
Additional Common
Preferred Stock Common Stock Paid-in Stock
Shares Par Value Shares Par Value Capital Warrants
------------ ------------- -------------- --------------- -------------- -----------
Balance, June 30, 2003 1,000,000 $100,000 20,469,325 $ 20,469 $ 12,639,673 $ 206,295
Issue common stock - - 325,000 325 730,940 -
Issue common stock
for services - - 25,000 25 76,225 -
Deferred expenses
amortized - - - - - -
Net loss - - - - - -
------------ ------------- -------------- --------------- -------------- -----------
Balance, Dec 31, 2003 1,000,000 $100,000 20,819,325 $ 20,819 $ 13,446,838 $ 206,295
============ ============= ============== =============== ============== ===========
Unissued Stock
Common Deferred Subscription Accumulated
Stock Expenses Receivable (Deficit) Total
------------ ------------- -------------- --------------- --------------
Balance, June 30, 2003 $731,265 $ (303,488) $ (4,000) $ (11,918,369) $ 1,471,845
Issue common stock (731,265) - - - -
Issue common stock
for services - - - - 76,250
Deferred expenses
amortized - 37,500 - - 37,500
Net loss - - - (6,694,850) (6,694,850)
------------ ------------- -------------- --------------- --------------
Balance, Dec 31, 2003 $ - $ (265,988) $ (4,000) $ (18,613,219) $ (5,109,255)
============ ============= ============== =============== ==============
See accompanying notes to condensed consoliated financial statements.
6
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF RCG COMPANIES INCORPORATED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
2003 2002
Cash flows from operating activities
Net loss $(6,694,850) $(1,048,662)
Loss from discontinued operations (6,390,081) (477,838)
------------ ------------
Loss from continuing operations (304,769) (570,824)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 35,497 36,789
Common stock option expense (135,414) --
Amortize deferred expenses 37,500 --
Common stock issued for services 76,250 --
Sale of assets 1,368 --
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts and notes receivable 264,205 (477,028)
Inventories 14,420 (2,294)
Prepaid expenses and other assets 15,690 14,420
Accounts payable and accrued expenses (141,022) 348,667
Deposits and unearned income (23,767) (10,226)
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Net cash used by continuing operations (160,042) (660,496)
Net cash used by discontinued operations (284,767) (139,067)
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Net cash used by operations (444,809) (799,563)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of subsidiary 60,000 --
Acquisition of property and equipment (1,096) (24,547)
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Net cash provided (used) by continuing operations 58,904 (24,547)
Net cash used by discontinued operations (9,871) (27,810)
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Net cash provided (used) by investing activities 49,033 (52,357)
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CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash -- 412,420
Cash received in excess of cash paid in acquisition -- 273,518
Loan proceeds 365,000 75,000
Repayment of notes payable (180,000) (18,000)
Loans from related parties 257,690 --
Loans made (15,000) --
Advances from parent 25,000 --
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Net cash provided by continuing operations 452,690 742,938
Net cash provided (used) by discontinued operations (52,364) 121,078
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Net cash provided by financing activities 400,326 864,016
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NET INCREASE IN CASH AND CASH EQUIVALENTS 4,550 12,096
CASH AND CASH EQUIVALENTS, beginning of period 27,757 12,277
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CASH AND CASH EQUIVALENTS, end of period $ 32,307 $ 24,373
============ ============
See accompanying notes to condensed consolidated financial statements
7
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A MAJORITY OWNED SUBSIDIARY OF RCG COMPANIES INCORPORATED)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
(UNAUDITED)
A. BASIS OF PRESENTATION AND ORGANIZATION
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION - The
condensed consolidated financial statements include the
accounts of Lifestyle Innovations, Inc. ("LFSI") and its
wholly owned subsidiaries LST, Inc. ("LST"), LST Integrators,
Inc. ("Integrators"), LifeStyle Technologies Franchising Corp.
("Franchising"), FutureSmart Systems, Inc. ("FutureSmart"),
SYSLYNC Colorado, Inc. ("Colorado") and Brittany Enterprises,
Inc. ("Brittany") (collectively the "Company"). All material
intercompany accounts and transactions have been eliminated.
Effective July 15, 2002 Princeton Mining Company changed its
name to Lifestyle Innovations, Inc.
At December 31, 2003 the Company has a significant working
capital deficit of $6,346,196. The major components of the
working capital deficit include: $1,963,799 due to affiliates,
$1,301,223 in accounts payable and accrued expenses, notes
payable in the amount of $1,248,919, notes payable due related
parties of $979,866 and current liabilities of discontinued
operations in the amount of $1,069,269. The Company does not
have sufficient cash flows to meet its obligations currently
due within the next 12 months. The Company is currently
exploring additional sources of liquidity, including debt and
equity financing alternatives and potential sales of its
Common Stock in private placement transactions. Additionally,
the Company plans on negotiating with its debt holders to
continue to extend or convert some or all of the debt. If the
Company is (i) unable to grow its business or improve its
operating cash flows as expected, (ii) unsuccessful in
extending a substantial portion of the debt repayments
currently past due, or (iii) unable to raise additional funds
through private placement sales of its Common Stock, then the
Company may be unable to continue as a going concern. There
can be no assurance that additional financing will be
available when needed or, if available, that it will be on
terms favorable to the Company and its stockholders. If the
Company is not successful in generating sufficient cash flow
from operations, or in raising additional capital when
required in sufficient amounts and on terms acceptable to the
Company, these failures would have a material adverse effect
on the Company's business, results of operations and financial
condition. If additional funds are raised through the issuance
of equity securities, the percentage ownership of the
Company's current shareholders would be diluted.
8
(2) ORGANIZATION - LFSI was organized in September 1950, under the
laws of the State of Idaho.
Effective November 15, 2003, pursuant to an Asset Purchase
Agreement, LFSI, through its wholly owned subsidiary,
Colorado, completed the acquisition of the majority of the
assets of HomeSync Corporation ("HomeSync") by assuming
certain liabilities of HomeSync. The purchase price was
recorded in an amount equal to the assumed liabilities of
approximately $750,000. Shortly after completing the
acquisition and prior to December 31, 2003, a significant
portion of the assets of HomeSync, which were supposedly
acquired by Colorado, were seized by the Colorado Department
of Revenue to satisfy certain unpaid tax obligations. Upon
notifying HomeSync of the seizure, the Company was informed
that HomeSync would be filing for Chapter 7 Bankruptcy. Based
upon that information, the Company was informed by counsel
that, due to the U.S. Bankruptcy rules regarding preferential
transfer, the Company was instructed to deliver control of the
HomeSync assets acquired back to HomeSync. The Company had
only nominal costs associated with the acquisition, which have
been expensed. Accordingly, the Company has treated the
transaction as if it were rescinded with the only financial
impact being the acquisition costs discussed above.
LFSI completed its acquisition of FutureSmart effective March
7, 2003. On May 28, 2003 the Board of Directors approved a
plan to dispose of FutureSmart. Accordingly, its operations
since March 7, 2003 have been included in discontinued
operations. The sale of all assets together with assumption
and settlement of most liabilities was consummated on October
17, 2003. See Note C.
On September 5, 2002, LFSI acquired LST, a Delaware
corporation, and its wholly owned subsidiaries, Lifestyle
Technologies Franchising Corp., Lifestyle Security, Inc. and
Lifestyle Technologies Atlanta, all organized in July 2001.
LFSI issued 16,000,000 shares of its common stock to RCG
Companies Incorporated ("RCG"), to acquire 100% interest in
LST. At December 31, 2003 RCG owns 75% of the outstanding
common stock of LFSI. On February 20, 2003 LFSI reorganized
its corporate structure. LST Integrators, Inc. became a wholly
owned subsidiary of LFSI and the company-store operations
located in Charlotte, NC and Atlanta, GA were transferred to
Integrators. Simultaneously Franchising became a wholly owned
subsidiary of LFSI and LST and LifeStyle Security, Inc. became
inactive. Effective December 1, 2003, the operations of
Lifestyle Technologies Charlotte, Inc. ("Charlotte") were
discontinued. LFSI had only nominal operations prior to the
merger, leasing two condominium units, accordingly for
accounting purposes the transaction has been treated as the
issuance of stock by LST for the net monetary assets of LFSI,
accompanied by a recapitalization of LST. The accounting
treatment is identical to accounting for a reverse
acquisition, except that no goodwill or other intangible asset
is recorded. The historical financial statements prior to
September 5, 2002 are those of LST.
On April 24, 2001, LFSI acquired Brittany, a Nevada
corporation organized on October 29, 1998. For accounting
purposes, the acquisition has been treated as the acquisition
of Brittany by LFSI with Brittany as the purchaser (reverse
acquisition). Brittany did not have operations until March 30,
2001, when it acquired two condominium units that it is
leasing.
9
Princeton Mining Company, an Idaho corporation, merged into
its wholly owned subsidiary, Princeton Mining Company, a
Nevada corporation on May 6, 2002. Princeton Mining Company, a
Nevada corporation, was the survivor.
(3) NATURE OF BUSINESS - LFSI through Integrators and Franchising
is a full service home technology integration company
providing builders, homeowners, and commercial customers with
complete installation and equipment for audio, video, home
theater, security, computer networking, central vacuum and
accent lighting. Franchising has also secured relationships
with product manufacturers, distributors and service providers
(cable, Internet service, broadband and security). The Company
launched a national franchising program in the fourth quarter
of fiscal 2001 and, has since sold 18.5 franchises.
Integrators also owns and operates a location in the Atlanta,
GA market.
Brittany is the owner of two condominium units that are
located in Dallas, Texas which are currently under lease.
(4) GENERAL - The financial statements included in this report
have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission for
interim reporting and include all adjustments (consisting only
of normal recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation. These financial
statements have not been audited.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations for interim reporting.
The Company believes that the disclosures contained herein are
adequate to make the information presented not misleading.
However, these financial statements should be read in
conjunction with the financial statements and notes thereto
included in LFSI's Annual Report for the period ended June 30,
2003, which is included in the Company's Form 10-KSB filed on
October 14, 2003.
(5) FISCAL YEARS - As used herein, fiscal 2004 refers to the
periods included in the fiscal year ended June 30, 2004 and
fiscal 2003 refers to the periods included in the fiscal year
ended June 30, 2003.
10
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents any investments which can be
readily converted to cash and have an original maturity of less than
three months. At times cash and cash equivalent balances at a limited
number of banks and financial institutions may exceed insurable
amounts. The Company believes it mitigates its risks by depositing cash
or investing in cash equivalents in major financial institutions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
o Cash and cash equivalents: The carrying amount reported in the
balance sheet for cash approximates its fair value.
o Accounts receivable and accounts payable: Due to their short
term nature, the carrying amounts reported in the balance
sheet for accounts receivable and accounts payable approximate
their fair value. The Company provides for any losses through
its allowance for doubtful accounts.
o Notes payable: The carrying amount of the Company's notes
payable approximate their fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, accounts
receivable, investments, and notes payable. The Company places its cash
with high credit quality financial institutions. The Company performs
periodic credit evaluations of its customers' financial condition and
generally does not require collateral. Although due dates of
receivables vary based on contract terms, credit losses have been
within management's estimates in determining the level of allowance for
doubtful accounts. Overall financial strategies are reviewed
periodically.
INVENTORIES
Inventories for the LifeStyle company owned store consists of purchased
components, which are recorded at the lower of cost or market with cost
being determined on a first-in, first-out (FIFO) method.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, net of accumulated
depreciation. Depreciation is calculated by using the straight-line
method over the estimated useful lives of the assets, which is five to
seven years for all categories except for computer software, with is
depreciated over 3 years. Leasehold improvements are amortized over the
life of the lease if it is shorter than the estimated useful life.
Repairs and maintenance are charged to expense as incurred.
Expenditures for betterments and renewals are capitalized. The cost of
property and equipment and the related accumulated depreciation are
removed from the accounts upon retirement or disposal with any
resulting gain or loss being recorded as other income or expenses.
Equipment under capital lease is recorded at the lesser of the fair
value of the asset or the present value of minimum lease payments.
11
GOODWILL AND INTANGIBLE ASSETS
The Company records goodwill and intangible assets arising from
business combinations in accordance with FAS No. 141 "Business
Combinations" ("FAS 141") which requires that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001. FAS 141 also specifies the criteria applicable to intangible
assets acquired in a purchase method business combination to be
recognized and reported apart from goodwill.
The Company accounts for goodwill and intangible assets in accordance
with FAS 142. The Company adopted FAS 142 effective July 1, 2001. In
completing the adoption of FAS 142, LST allocated its previously
existing goodwill as of July 1, 2001 to its reporting units, as defined
in FAS 142, and performed an initial test for impairment as of that
date.
In accordance with FAS 142, the Company no longer amortizes goodwill.
FAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested at least
annually for impairment. FAS 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and be reviewed for
impairment. The Company discontinued its "Company Owned Location" in
Charlotte, NC effective December 1, 2003 and wrote off the associated
goodwill in the amount of $5,691,604.
STOCK OPTIONS AND WARRANTS
The Company accounts for stock-based awards to employees using the
intrinsic value method described in Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees" and its
related interpretations. Accordingly, no compensation expense has been
recognized in the accompanying consolidated financial statements for
stock-based awards to employees when the exercise price of the award is
equal to or greater than the quoted market price of the stock on the
date of the grant.
On March 7, 2003, pursuant to her employment agreement, Jacqueline E.
Soechtig, Chief Executive Officer until October 14, 2003, was granted
(1) an incentive stock option to purchase 500,000 shares of Common
Stock at an exercise price equal to the trading price of such stock on
the last trading day prior to Board approval ($5.10), with 166,666
option shares to vest and become exercisable on the effective date of
the agreement and 166,667 option shares to vest and become exercisable
on each of the first and second anniversaries of the effective date,
subject to her continued employment and (2) a non-qualified stock
option to purchase 500,000 shares at an exercise price equal to $2.50,
with 166,666 option shares to vest and become exercisable on the
effective date of this agreement and 166,667 option shares to vest and
become exercisable on each of the first and second anniversaries of the
effective date, subject to her continued employment. Both options will
expire ten years from the effective date. The options which were not
vested were forfeited as a result of Ms. Soechtig's resignation.
Accordingly, the accrued option expense associated with her un-vested
options in the amount of $243,748 was reversed in October 2003.
12
On September 5, 2002, Paul Johnson, President of the Company and Chief
Executive Officer of the Company until March 7, 2003, was granted an
option to acquire 400,000 shares of Common Stock at an exercise price
of $2.20, the trading price on that day. The option will expire three
years from the effective date.
SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123" require
disclosures as if the Company had applied the fair value method to
employee awards rather than the intrinsic value method. The fair value
of stock-based awards to employees is calculated through the use of
option pricing models, which were developed for use in estimating the
fair value of traded options, which have no vesting restrictions and
are fully transferable. These models also require subjective
assumptions, including future stock price volatility and expected time
to exercise, which greatly affect the calculated values. The Company's
fair value calculations for awards from stock option plans were made
using the Black-Scholes option pricing model with the following
weighted average assumptions: expected term, three and ten years from
the date of grants in fiscal 2003; stock price volatility, 104% to
122%; risk free interest rate, 4.5% to 4.67%; and no dividends during
the expected term as the Company does not have a history of paying cash
dividends.
If the computed fair values of the stock-based awards had been
amortized to expense over the vesting period of the awards, net income
(loss) and net income (loss) per share, basic and diluted, would have
been as follows:
Three Months Ended December 31, 2003 and 2002
---------------------------------------------
Fiscal 2004 Fiscal 2003
------------- ------------
Net loss, as reported $ (5,681,671) $ (485,709)
Add: Stock-based employee compensation
included in reported net loss (243,748) 7,125
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards (0) (7,125)
------------- ------------
Net loss, proforma $ (5,925,389) $ (485,709)
============= ============
Net loss per share, basic and diluted $ (.28) $ (.02)
============= ============
13
Six Months Ended December 31, 2003 and 2002
-------------------------------------------
Fiscal 2004 Fiscal 2003
------------- ------------
Net loss, as reported $ (6,694,850) $(1,048,662)
Add: Stock-based employee compensation
included in reported net loss (133,039) 14,250
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards (0) (590,250)
------------- ------------
Net loss, proforma $ (6,827,889) $(1,624,662)
============= ============
Net loss per share, basic and diluted $ (.33) $ (.09)
============= ============
Options and warrants issued to non-employees are accounted for under
FAS No. 123, "Accounting for Stock Based Compensation". For the options
and warrants issued to non-employees, the fair value of each award is
calculated using the Black-Scholes Model in accordance with FAS No.
123.
On May 7, 2002 the Board of Directors adopted and the shareholders
approved by majority consent the Princeton Mining Company 2002 Stock
Option Plan. The Plan provides for the issuance of up to 2 million
shares of the Company's $.001 par value Common Stock in connection with
stock options and other awards under the Plan. The Plan authorizes the
grant of incentive stock options and non-statutory stock options. At
December 31, 2003 there were options granted under the Plan for 716,666
shares (net of forfeitures), all of which are vested and 1,283,334
shares available for grant.
REVENUE RECOGNITION
Integrator's home technology services work is completed in three phases
- pre-wiring, trim-out and hardware installation. Integrator invoices
its customers and records revenue as work is completed on each project.
For alarm monitoring service contracts sold by Integrator, revenue is
recognized only when the contracts are sold to third party finance
companies or as earned if Integrator holds and services the contract.
Sales of franchise licenses are recognized as revenue when the
obligations under the franchise agreement are "substantially complete."
Franchising generally defines "substantially complete" as the
completion of training by the franchisee's General Manager and the
approval of the franchise location plan.
Royalties are based on a percentage of the sales recorded by
franchisees and are recorded as earned. Procurement fees charged to
franchisees are recorded in the month that the related product is
shipped to the franchisee.
14
NET LOSS PER COMMON SHARE
The Company has adopted SFAS No. 128 which establishes standards for
computing and presenting earnings per share (EPS) for entities with
publicly held common stock. The standard requires presentation of two
categories of EPS - basic EPS and diluted EPS. Basic EPS excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the year. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Company. All potential dilutive securities are antidilutive as a result
of the Company's net loss for the three and six month periods ended
December 31, 2003 and 2002, respectively. Accordingly, basic and
diluted EPS are the same for each period.
ADVERTISING COSTS
Advertising costs are generally charged to operations in the period
incurred and totaled $2,290 and $11,238 for the three months ended
December 31, 2003 and 2002, respectively and $2,290 and $20,103 for the
six months ended December 31, 2003 and 2002, respectively.
MARKETING FUND
Franchising's franchise agreement required franchisees to pay 1.25% of
their sales into a general marketing fund to be used to promote the
Lifestyle name and home technology concept on a national basis.
Franchising recorded these receipts into the marketing fund liability,
classified in accrued expenses, which Franchising administers. The
marketing fund was managed by a committee consisting of management of
Franchising and representatives from certain franchises. The marketing
fund was discontinued in October 2003.
INCOME TAXES
Income taxes are accounted for in accordance with FAS 109, "Accounting
for Income Taxes", which prescribes the use of the asset/liability
method. Deferred taxes represent the expected future tax consequences
when the reported amounts of assets and liabilities are recovered or
paid. They arise from differences between the financial reporting and
tax basis of assets and liabilities and are adjusted for changes in tax
laws and tax rates when those changes are enacted. The provision for
income taxes represents the total of income taxes paid or payable for
the current year, plus the change in deferred taxes during the year.
Management of the Company elected to provide a reserve against the
potential future income tax benefits from its current net operating
loss, due to the uncertainty of its realization.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
15
C. ACQUISITIONS AND DISCONTINUED OPERATIONS
FUTURESMART SYSTEMS, INC.
- -------------------------
LFSI completed its acquisition of FutureSmart effective March 7, 2003. On May
28, 2003 the Board of Directors approved a plan to dispose of FutureSmart.
Accordingly, its operations since March 7, 2003 have been included in
discontinued operations.
The purchase price of $801,910 consisted of the issuance of 1,000,000 shares of
LFSI's $.10 par value preferred stock, a bridge loan by LFSI to FutureSmart of
$224,830 and $477,080 in direct transaction costs.
The acquisition of FutureSmart was accounted for as a purchase in accordance
with SFAS No. 141, and the Company has accordingly allocated the purchase price
of FutureSmart based upon the fair values of the net assets acquired and
liabilities assumed.
Pursuant to the acquisition agreement, the shareholders of FutureSmart could
have received "Earn out Consideration" of up to 1,200,000 LFSI common shares if
FutureSmart achieved certain "Performance Milestones."
In connection with LFSI's acquisition of FutureSmart, RCG agreed until March 3,
2005, or one year from the registration of the shares of common stock for the
FutureSmart shareholders if sooner, if RCG proposes to transfer 15% or more of
the shares of LFSI owned by RCG (excluding registered offerings, sales to
certain investors and related party sales) then certain of the FutureSmart
shareholders shall have the right to participate in such transfer of stock on
the same terms and conditions for up to 25% of the total sale.
On October 17, 2003 the Company completed its sale of all of the assets of
FutureSmart for an "Initial Purchase Price" of $1,500,000, which is subject to
adjustment as provided in the Asset Purchase Agreement to the "Final Purchase
Price." The Initial Purchase Price is allocated to the secured creditors of
FutureSmart; $200,000 to the Company, and $1,300,000 to the other secured
creditors. Thirty percent ($450,000) of the Initial Purchase Price was paid at
Closing pro rata to the secured creditors ($60,000 to the Company) and the
remainder of $1,050,000 was placed in escrow. The escrowed amount is subject to
various adjustments, including determination of the final net assets as of the
Closing Date and settlement of certain other obligations. The remaining balance
will be disbursed by the Escrow Agent no later than one year and one day after
the Closing Date. Due to the uncertainty of the amount, the Company has not
recorded the escrowed amount ($140,000) in earnings.
LIFESTYLE TECHNOLOGIES CHARLOTTE, INC.
- --------------------------------------
Effective December 1, 2003, the Board of Directors of Charlotte voted
unanimously to discontinue the operations of the company. Accordingly, the
operations of Charlotte are included in discontinued operations for all periods
presented.
16
DISCONTINUED OPERATIONS
- -----------------------
Discontinued operations include the result of operations for Charlotte for both
the three and six month periods in both fiscal 2003 and fiscal 2004. The results
of FutureSmart are included for the period it was owned, March 7, 2003 through
October 17, 2003.
The results of discontinued operations may be summarized as follows for the
three months ended December 31, 2003 and 2002:
Fiscal 2004 Fiscal 2003
------------- ------------
Revenues $ 367,392 $ 243,717
Net loss from operations (285,594) (277,501)
Asset impairment (6,089,540) --
Gain on sale of assets 629,510 --
------------- ------------
Net loss $ (5,745,624) $ (277,501)
============= ============
Net loss per share $ (.27) $ (.01)
============= ============
The results of discontinued operations may be summarized as follows for the six
months ended December 31, 2003 and 2002:
Fiscal 2004 Fiscal 2003
------------- ------------
Revenues $ 1,662,267 $ 553,000
Net loss from operations (930,051) (477,838)
Asset impairment (6,089,540) --
Gain on sale of assets 629,510 --
------------- ------------
Net loss $ (6,390,081) $ (477,838)
============= ============
Net loss per share $ (.31) $ (.03)
============= ============
Current liabilities of discontinued operations include $212,565 in accounts
payable and $856,704 in accrued expenses.
17
D. NOTES PAYABLE
Notes payable at December 31, 2003 consist of the following:
Unsecured note payable - due October 1, 2003; with
interest at 12%; past due $ 145,000
Note payable - due on August 31, 2004; with interest at 12%;
collateralized by real estate 34,919
Note payable - due in August 2003 with interest at 12% and
collateralized by certain home technology accounts receivable
and inventory; past due (1) 650,000
Unsecured note payable - due October 16, 2003; with interest
at 12.2%; past due 295,000
Unsecured note payable - due December 18, 2003; with interest
at 36%; past due 70,000
Note payable - due in monthly installments of $3,000 and a
balloon payment in July 2005; with interest at 8%;
collateralized by home technology accounts receivable; past due 181,000
------------
1,375,919
Less current maturities, including demand notes 1,248,919
------------
Long-term portion $ 127,000
============
(1) At the option of the note holder, this note can be converted into RCG's
Common Stock at a ratio of one share of Common Stock for each $4.55 of
outstanding principal and interest. RCG's Common Stock closed at $1.98 on
December 31, 2003.
E. NOTES PAYABLE - RELATED PARTIES
Notes payable due related parties at December 31, 2003 consist of the following:
Unsecured note payable to Mike Pruitt; due on demand;
with interest at 8% $ 100,000
Unsecured note payable to Mike Pruitt; due on demand;
with interest at 12% 10,658
Unsecured note payable to Mike Pruitt; due on demand;
with interest at 12% 8,051
Unsecured note payable to the wife of G. David Gordon;
due on demand; with interest at 6% 500,000
Unsecured notes payable due to G. David Gordon;
due on demand; with interest at 12% 361,157
------------
Notes payable due related parties $ 979,866
============
18
F. INCOME TAXES
Deferred income taxes at December 31, 2003 consist primarily of net operating
loss carryforwards, which amount to approximately $10,900,000 and expire between
2020 and 2024. A valuation allowance has been recorded for the full amount of
the deferred tax assets. Further, due to substantial limitations placed on the
utilization of net operating losses following a change in control, utilization
of such NOL's could be limited.
G. NON-EMPLOYEE STOCK OPTIONS AND WARRANTS
During the year ended June 30, 2003, the Company sold 31 units of a private
placement and realized net proceeds of $693,765. Each unit consists of 10,000
shares of Common Stock, $.001 par value and a Series A Warrant to purchase 3,000
shares of Common Stock for $3.33 per share. Legend Merchant Group, Inc. acted as
placement agent for the offering and received a commission of 10%. In addition,
Legend Merchant Group, Inc was granted a warrant to acquire 50,000 shares of
common stock for $2.75 per share as a part of the acquisition of FutureSmart.
As a part of a private placement offering which was closed in December 2002, the
Company sold 99.6 Units. Each Unit consisted of 4,000 shares of its Common
Stock, 4,000 Series A Warrants and 4,000 Series B Warrants. The Series A Warrant
entitles the holder to acquire the Company's Common Stock for $4.00 per share
until its expiration on August 1, 2004. The Series B Warrant expires on August
1, 2005 and entitles the holder to acquire the Company's Common Stock for $6.00
per share.
G. David Gordon has a three-year option, which was granted in June 2002, to
acquire 150,000 shares of the Company's common stock for $1.50 per share.
H. CONVERTIBLE SERIES A PREFERRED STOCK
Effective March 3, 2003 the Company amended its Articles of Incorporation to
authorize the issue of 1,000,000 shares of Series A Convertible Preferred Stock,
par value $.10 per share. The principal preferences and rights of the Series A
Preferred Stock are: (i) entitled to receive dividends when and if declared;
(ii) liquidation value of $2.75 per share plus an amount equal to 5% per annum
on the original issue price; (iii) each holder of shares shall be entitled to
the number of votes equal to the number of shares of Common Stock into which
each share of Series A Preferred Stock could be converted; (iv) conversion is at
the option of the holder until 51% of the then outstanding shares elect to
convert, at which time all remaining outstanding Series A Preferred Stock shall
automatically be converted into Common Stock; (v) and the initial conversion
price of $2.75 per share is subject to adjustment in the event of certain
occurrences.
19
I. TRANSACTIONS WITH RELATED PARTIES
At December 31, 2003, advances due to affiliates consisted of the following (See
Note E for notes payable to affiliates of $979,866):
Due to RCG and its subsidiaries $ 1,881,812
Advance from and accrued interest payable to Mr. Pruitt 9,821
Advances from and accrued interest payable to G David Gordon,
a shareholder and creditor of LFSI and RCG 72,166
------------
$ 1,963,799
============
The amount due to RCG and its subsidiaries represents net advances to and from
RCG and its subsidiaries. RCG also provides various services to the Company,
including accounting and finance assistance, capital and debt raising, human
resources and other general and administrative services. For the three months
ended December 31, 2003 and 2002, RCG charged the Company $10,000 and $30,000
($17,500 to continuing operations), respectively. For the six months ended
December 31, 2003 and 2002, RCG charged the Company $25,000 and $60,000 ($35,000
to continuing operations), respectively. In August 2003 a lender converted the
Company's $300,000 obligation to the lender plus accrued interest of $42,500
into 200,000 shares of RCG common stock. The $342,500 is included in the amount
due RCG above.
Mr. Pruitt had pledged certain of his personal assets to secure a $100,000 bank
credit facility for LST. On August 8, 2003, the balance outstanding on this bank
facility of $100,000 was paid by Mr. Pruitt and the Company issued its $100,000
note payable to Mr. Pruitt. See Note E.
Mr. Pruitt is also a minority investor in a company that has purchased franchise
licenses and business operations of LST's home technology business in three
markets in South Carolina and in another company that has purchased franchise
licenses in three locations in Maryland. At December 31, 2003, the franchise
locations in South Carolina owed the Company and its subsidiaries $41,000 and
the franchise locations in Maryland owed the Company and its subsidiaries
$8,000.
Paul B. Johnson, President of the Company, is an investor in a company, which in
November 2001 became a franchisee of the Company's home technology business in
the Dallas, Texas market and purchased two additional locations in the Dallas,
Texas market during the year ended June 30, 2003. The Dallas franchise location
owed the Company and its subsidiaries $4,000 at December 31, 2003.
During fiscal 2002, Glenn Barrett resigned as President of Lifestyle and began
LVA Technologies LLC ("LVA"), a low voltage wiring business that operates as a
Lifestyle franchisee headquartered in Charlotte, NC to service the commercial
market. The Company waived LVA's initial franchise fee for the commercial
franchise. LVA also owns the Greenville and Columbia, SC franchises. LVA's low
voltage wiring business is charged royalties on products purchased from the
Company at the same rate as the Company's other franchisees, however, it does
not pay royalties on revenue generated from products purchased elsewhere as
required of the Company's other franchisees, including the Greenville and
Columbia, SC franchises. LVA and its subsidiaries owed the Company and its
subsidiaries $325,000 ($152,000 in discontinued operations) at December 31,
2003. Of this amount all but $51,000 has been reserved at December 31, 2003.
20
At December 31, 2003, total debt outstanding to G. David Gordon, his wife and a
company in which he is the president and a shareholder, was $861,157 which is
included in notes payable due related parties on the Condensed Consolidated
Balance Sheet. The loans bear interest at 6 to 12%. Mr. Gordon and this company
also loaned RCG an additional $1,144,000 ($750,000 balance at December 31, 2003)
during fiscal 2002 at interest rates of 8% to 12%. During the three months ended
September 30, 2003, Mr. Gordon converted $267,500 in debt owed to him into RCG
common stock. Mr. Gordon also acts as special legal counsel to RCG and the
Company from time to time.
Mr. Gordon has an ownership interest in ten of the Company's franchises,
including two locations that were purchased during fiscal 2002 from the Company
and for which the Company recorded a gain of $119,000. Mr. Gordon has an
ownership interest in the three markets in South Carolina along with Mr. Pruitt,
as discussed above; three locations in the Dallas market along with Mr. Johnson;
and four additional markets in Houston, Texas, Raleigh, North Carolina,
Wilmington, North Carolina and Greensboro, North Carolina. These four markets
owed the Company and its subsidiaries $14,000 at December 31, 2003.
Revenues from the franchises discussed above for the three months ended December
31, 2003 and 2002 were as follows:
Fiscal 2004 Fiscal 2003
Houston and the three North Carolina markets $ 20,000 $ 47,000
Three South Carolina markets 1,000 61,000
Three Maryland markets 4,000 12,000
LVA and subsidiaries 4,000 42,000
Dallas 3,000 22,000
------------- ------------
Total $ 32,000 $ 184,000
============= ============
Revenues from the franchises discussed above for the six months ended December
31, 2003 and 2002 were as follows:
Fiscal 2004 Fiscal 2003
Houston and the three North Carolina markets $ 79,000 $ 100,000
Three South Carolina markets 26,000 95,000
Three Maryland markets 10,000 14,000
LVA and subsidiaries 30,000 48,000
Dallas 21,000 40,000
------------- ------------
Total $ 166,000 $ 297,000
============= ============
21
J. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (amounts in thousands of
dollars):
Company
Owned
Locations Franchise Corporate Total
--------- --------- --------- ---------
SIX MONTHS ENDED DECEMBER 31, 2003
- ----------------------------------
Revenue
External customers $ 338 $ 183 $ -- $ 521
Intersegment $ -- $ 60 $ -- $ 60
Loss from continuing operations $ 31 $ 81 $ 193 $ 305
SIX MONTHS ENDED DECEMBER 31, 2002
- ----------------------------------
Revenue
External customers $ 302 $ 100 $ 3 $ 405
Intersegment $ -- $ 188 $ -- $ 188
Loss from continuing operations $ 261 $ 172 $ 138 $ 571
Corporate includes the real estate investment and the costs associated with the
requirements of a public company.
K. COMMITMENTS AND CONTINGENCIES
As a part of the issuance of 16,000,000 shares of its Common Stock to RCG, LFSI
was obligated to file a registration statement within 90 days of the September
5, 2002 closing date of the transaction. If LFSI did not meet this deadline, it
was obligated to issue an option to RCG for 1,000,000 shares of LFSI common
stock at 20% of the last bid price for the LFSI common stock on the triggering
date. As a result of the acquisition of FutureSmart Systems, Inc.
("FutureSmart") by LFSI (See Note C), RCG and LFSI have agreed to extend the
deadline for filing the registration statement until a later date consistent
with any registration rights associated with the acquisition of FutureSmart.
During 2001, FutureSmart approved a plan to exit, and subsequently vacated
certain facilities in San Jose, California and Murray, Utah. As of December 31,
2003, FutureSmart has accrued $210,921 for payment of minimum lease payments
under non-cancelable operating leases. The landlord of the San Jose lease has
demanded full payment of amounts due on the lease.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. All statements other than statements of historical fact included in
this section or elsewhere in this report are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Important
factors that could cause actual results to differ materially from those
discussed in such forward-looking statements include, but are not limited to,
the following: changes in the economy or in specific customer industry sectors;
changes in customer procurement policies and practices; changes in product
manufacturer sales policies and practices; the availability of product and
labor; changes in operating expenses; the effect of price increases or
decreases; the variability and timing of business opportunities including
acquisitions, alliances, customer agreements and supplier authorizations; the
Company's ability to realize the anticipated benefits of acquisitions and other
business strategies; the incurrence of debt and contingent liabilities in
connection with acquisitions; changes in accounting policies and practices; the
effect of organizational changes within the Company; the emergence of new
competitors, including firms with greater financial resources than the Company;
adverse state and federal regulation and legislation; and the occurrence of
extraordinary events, including natural events and acts of God, fires, floods
and accidents.
Effective December 1, 2003, the operations of Charlotte were discontinued.
Effective November 15, 2003, pursuant to an Asset Purchase Agreement, LFSI,
through its wholly owned subsidiary, Colorado, completed the acquisition of the
majority of the assets of HomeSync Corporation ("HomeSync") by assuming certain
liabilities of HomeSync. The purchase price was recorded in an amount equal to
the assumed liabilities of approximately $750,000. Shortly after completing the
acquisition and prior to December 31, 2003, a significant portion of the assets
of HomeSync, which were supposedly acquired by Colorado, were seized by the
Colorado Department of Revenue to satisfy certain unpaid tax obligations. Upon
notifying HomeSync of the seizure, the Company was informed that HomeSync would
be filing for Chapter 7 Bankruptcy. Based upon that information, the Company was
informed by counsel that, due to the U.S. Bankruptcy rules regarding
preferential transfer, the Company was instructed to deliver control of the
HomeSync assets acquired back to HomeSync. The Company had only nominal costs
associated with the acquisition, which have been expensed. Accordingly, the
Company has treated the transaction as if it were rescinded with the only
financial impact being the acquisition costs discussed above.
LFSI completed its acquisition of FutureSmart effective March 7, 2003. On May
28, 2003 the Board of Directors approved a plan to dispose of FutureSmart.
Accordingly, its operations since March 7, 2003 have been included in
discontinued operations.
The purchase price of $801,910 consisted of the issuance of 1,000,000 shares of
LFSI's $.10 par value preferred stock, a bridge loan by LFSI to FutureSmart of
$224,830 and $477,080 in direct transaction costs.
23
Pursuant to the acquisition agreements, the shareholders of FutureSmart could
have received "Earn out Consideration" of up to 1,200,000 LFSI common shares if
FutureSmart achieved certain "Performance Milestones."
On October 17, 2003 the Company completed its sale of all of the assets of
FutureSmart for an "Initial Purchase Price" of $1,500,000, which is subject to
adjustment as provided in the Asset Purchase Agreement to the "Final Purchase
Price." The Initial Purchase Price is allocated to the secured creditors of
FutureSmart; $200,000 to the Company, and $1,300,000 to the other secured
creditors. Thirty percent ($450,000) of the Initial Purchase Price was paid at
Closing pro rata to the secured creditors ($60,000 to the Company) and the
remainder of $1,050,000 was placed in escrow. The escrowed amount is subject to
various adjustments, including determination of the final net assets as of the
Closing Date and settlement of certain other obligations. The remaining balance
will be disbursed by the Escrow Agent no later than one year and one day after
the Closing Date. Due to the uncertainty of the amount, the Company has not
recorded the escrowed amount ($140,000) in earnings.
On September 5, 2002, LFSI acquired LST, a Delaware corporation, and its wholly
owned subsidiaries, Lifestyle Technologies Franchising Corp., Lifestyle
Security, Inc. and Lifestyle Technologies Atlanta. LFSI issued 16,000,000 shares
of its common stock to eResource Capital Group, Inc. ("RCG"), to acquire 100%
interest in LST. At December 31, 2003 RCG owns 75% of the outstanding common
stock of LFSI. LFSI had only nominal operations prior to the merger, leasing two
condominium units, accordingly for accounting purposes the transaction has been
treated as the issuance of stock by LST for the net monetary assets of LFSI,
accompanied by a recapitalization of LST. The accounting treatment is identical
to accounting for a reverse acquisition, except that no goodwill or other
intangible asset is recorded. The historical financial statements prior to
September 5, 2002 are those of LST.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003 LFSI had a working capital deficit of $6,346,196 as
compared to a working capital deficit of $6,281,183 at June 30, 2003, when
restated for discontinued operations, an increase of $65,013. Current assets
decreased $303,086 and current liabilities decreased $238,073. The current asset
decrease is primarily due to a decline in accounts and notes receivable of
$251,930. The decrease in current liabilities includes an increase in notes
payable and notes payable due related parties of $1,167,785; a decrease in
accounts payable and accrued expenses of $258,133; an increase in amounts due
affiliates of $276,812 and a decrease in the current liabilities of discontinued
operations of $1,400,770.
During the six months ended December 31, 2003 the Company had $365,000 in new
borrowings and reduced other loans by $180,000. In addition, in August 2003 a
lender converted the Company's $300,000 obligation to the lender plus accrued
interest of $42,500 into 200,000 shares of RCG common stock. The $342,500 is now
included in the amount due to RCG. During the six months ended December 31,
2003, the Company also received $257,690 in loans and advances from related
parties.
24
As discussed above, at December 31, 2003 the Company has a significant working
capital deficit. The Company does not have sufficient cash flows to meet its
obligations currently due within the next 12 months. The Company is currently
exploring additional sources of liquidity, including debt and equity financing
alternatives and potential sales of its Common Stock in private placement
transactions. Additionally, the Company plans on negotiating with its debt
holders to continue to extend or convert some or all of the debt. If the Company
is (i) unable to grow its business or improve its operating cash flows as
expected, (ii) unsuccessful in extending a substantial portion of the scheduled
debt repayments, or (iii) unable to raise additional funds through private
placement sales of its Common Stock, then the Company may be unable to continue
as a going concern. There can be no assurance that additional financing will be
available when needed or, if available, that it will be on terms favorable to
the Company and its stockholders. If the Company is not successful in generating
sufficient cash flow from operations, or in raising additional capital when
required in sufficient amounts and on terms acceptable to the Company, these
failures would have a material adverse effect on the Company's business, results
of operations and financial condition. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the Company's
current shareholders would be diluted.
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
SALES AND REVENUES
During the three months ended December 31, 2003, sales increased $19,807 (8%)
from the year earlier amount. During fiscal 2004, the majority of the security
contracts held by its location in Atlanta were sold for $134,302. Excluding the
sale of security contracts, all other sales declined $114,495 during the
quarter, primarily due to a lack of funding which also resulted in lower sales
from continuing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses have decreased $105,240
(29%) during the three month period ended December 31, 2003 as compared to the
year earlier period. Virtually all costs were proportionately lower in fiscal
2004 as compared to fiscal 2003 due to the scaled down operations. The most
significant decrease was salaries and wages due to the substantially lower
number of personnel.
STOCK OPTION AND WARRANT COMPENSATION
Stock option and warrant compensation amounted to $(243,748) and $7,125 during
the three-month periods ended December 31, 2003 and 2002, respectively. The
negative amount in fiscal 2004 is due to the resignation of the Company's Chief
Executive Officer in October 2003 upon the sale of FutureSmart causing the
reversal of the accrual of unvested option expense.
INTEREST EXPENSE
Interest expense amounted to $74,264 ($21,961 for related parties) in fiscal
2004 and $12,451 in fiscal 2003. The increase in interest expense of $61,813 is
primarily due to debt associated with discontinued operations in the prior year
period.
DISCONTINUED OPERATIONS
The loss from discontinued operations increased $5,468,123 to $5,745,624 in
fiscal 2004 as compared to $277,501 in fiscal 2003. The fiscal 2004 amount
included an impairment of goodwill in the amount of $5,691,604.
25
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
SALES AND REVENUES
During the six months ended December 31, 2003, sales increased $115,859 (29%)
from the year earlier amount. During fiscal 2004, the majority of the security
contracts held by its location in Atlanta were sold for $134,302, which accounts
for the sales increase. Excluding the sales of the security contracts, all other
sales declined $18,443 (5%).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses have decreased $242,564
(30%) during the six-month period ended December 31, 2003 as compared to the
year earlier period. Virtually all costs were proportionately lower in fiscal
2004 as compared to fiscal 2003 due to the scaled down operations. The most
significant decrease was salaries and wages due to the substantially lower
number of personnel.
STOCK OPTION AND WARRANT COMPENSATION
Stock option and warrant compensation amounted to $(133,039) and $14,250 during
the six-month periods ended December 31, 2003 and 2002, respectively. The
negative amount in fiscal 2004 is due to the resignation of the Company's Chief
Executive Officer in October 2003 upon the sale of FutureSmart causing the
reversal of the accrual of unvested option expense.
INTEREST EXPENSE
Interest expense amounted to $117,693 ($39,139 for related parties) in fiscal
2004 and $24,637 in fiscal 2003. The increase in interest expense of $93,056 is
primarily due to debt associated with discontinued operations in the prior year
period.
DISCONTINUED OPERATIONS
The loss from discontinued operations increased $5,912,243 to $6,390,081 in
fiscal 2004 as compared to $477,838 in fiscal 2003. The fiscal 2004 amount
included an impairment of goodwill in the amount of $5,691,604.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the principal executive
officer and principal accounting officer, as appropriate to allow timely
decisions regarding required disclosure. Under the supervision of and with the
participation of management, including the principal executive officer and
principal accounting officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as of December
31, 2003, and, based on its evaluation, our principal executive officer and
principal accounting officer have concluded that these controls and procedures
are effective.
26
(b) Changes in Internal Controls
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation described above, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company issued 25,000 shares of its Common Stock for advertising
and marketing services rendered during the year ended December 31,
2003. The transaction was valued at $76,250, based upon the closing
price of the Common Stock on the day the stock was issued. The small
business issuer claimed exemption from registration based upon Section
4(2) of the Securities and Exchange Act of 1933.
ITEM 5. OTHER INFORMATION
Although the Company does not currently employ a Chief Financial
Officer, Paul Johnson, President and Acting CEO, is also the principal
accounting officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
31 Certifications pursuant to 18 U.S.C. Section 1350,
Section 302 of the Sarbanes-Oxley Act of 2002 Page 29
32 Certifications pursuant to 18 U.S.C. Section 1350,
Section 906 of the Sarbanes-Oxley Act of 2002 Page 30
(b) Reports on Form 8-K -
On December 8, 2003 the Company filed its report on Form 8-K reporting
the acquisition of HomeSync Corporation through its wholly owned
subsidiary, SYSLYNC Colorado, Inc. on November 20, 2003. A copy of the
Asset Purchase Agreement was filed as an exhibit to the Form 8-K.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFESTYLE INNOVATIONS, INC.
Date: March 19, 2004 By: /s/ Paul Johnson
-----------------------------
Paul Johnson, President
Acting CEO and Principal
Accounting Officer
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