U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended: MARCH 31, 2004
Commission File Number: 001-04026
LIFESTYLE INNOVATIONS, INC.
---------------------------
(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 April 30, 2004 was 20,989,659 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 - March 31, 2004 3
Condensed Consolidated Statements of Operations - 4
Three Months Ended March 31, 2004 and 2003
Condensed Consolidated Statements of Operations - 5
Nine Months Ended March 31, 2004 and 2003
Condensed Consolidated Statement of Stockholders' Deficit - 6
Nine Months Ended March 31, 2004
Condensed Consolidated Statements of Cash Flows - 7
Nine Months Ended March 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 8-23
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24-28
Item 3. Controls and Procedures 28
Part II. Other Information 28-32
2
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
(A Majority Owned Subsidiary of RCG Companies Incorporated)
Condensed Consolidated Balance Sheet
March 31, 2004
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,467
Accounts receivable, net of allowance of $176,093 22,817
Prepaid expenses and other assets 42,500
-------------
Total current assets 78,784
Property and equipment, net 88,758
Other assets 1,000
-------------
Total assets $ 168,542
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable and current installments of long-term debt $ 1,089,598
Notes payable - related parties 1,069,132
Accounts payable 220,597
Accrued expenses 912,701
Unearned income 5,876
Due to affiliates 1,953,422
Current liabilities of discontinued operations 1,538,524
-------------
Total current liabilities 6,789,850
Long-term debt less current installments 35,649
-------------
Total liabilities 6,825,499
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Commitments and contingencies
STOCKHOLDERS' DEFICIT
Series A convertible preferred stock: $.10 par value; 1,000,000 shares authorized;
852,778 shares issued and outstanding; liquidation preference $2,750,000;
convertible into from 852,778 to 1,876,112 shares of common stock 85,278
Common stock: $.001 par value; authorized 250,000,000 shares; issued - 21,096,054
shares; outstanding - 20,989,659 shares 21,096
Additional paid in capital 13,461,283
Common stock warrants 206,295
Deferred expenses (265,988)
Stock subscription receivable (4,000)
Accumulated deficit (20,160,921)
-------------
Total stockholders' deficit (6,656,957)
-------------
Total liabilities and stockholders' deficit $ 168,542
=============
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 MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
Sales and revenues
Products $ 10,996 $ 17,265
Services and other 24,964 183,372
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35,960 200,637
COST OF SALES 3,605 8,817
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GROSS PROFIT 32,355 191,820
OPERATING EXPENSES:
Selling, general and administrative expense 102,281 229,881
Stock option and warrant compensation -- 467,540
Bad debt expense 61,311 27,060
Depreciation and amortization 1,225 3,348
Management fee - parent -- 10,000
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Total operating expenses 164,817 737,829
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EARNINGS (LOSS) FROM OPERATIONS (132,462) (546,009)
OTHER INCOME (EXPENSE):
Rent and other income 2,144 --
Loss on disposal of equipment -- (9,015)
Interest expense (15,114) (12,663)
Interest expense - related parties (22,356) --
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(35,326) (21,678)
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EARNINGS (LOSS) FROM CONTINUING OPERATIONS (167,788) (567,687)
Discontinued operations:
Loss from discontinued operations (1,379,914) (514,727)
Income tax benefit -- --
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(1,379,914) (514,727)
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NET LOSS $ (1,547,702) $ (1,082,414)
============= =============
NET EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.01) $ (0.03)
DISCONTINUED OPERATIONS (0.06) (0.02)
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NET LOSS PER SHARE, BASIC AND DILUTED $ (0.07) $ (0.05)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 20,826,389 20,352,930
============= =============
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
NINE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
Sales and revenues
Products $ 74,150 $ 17,265
Services and other 144,791 429,130
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218,941 446,395
COST OF SALES 37,796 9,651
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GROSS PROFIT 181,145 436,744
OPERATING EXPENSES:
Selling, general and administrative expense 520,314 723,818
Stock option and warrant compensation (133,039) 481,790
Bad debt expense 61,311 27,060
Depreciation and amortization 33,492 23,491
Management fee - parent 25,000 30,000
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Total operating expenses 507,078 1,286,159
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LOSS FROM OPERATIONS (325,933) (849,415)
OTHER INCOME (EXPENSE):
Rent and other income 10,094 --
Loss on sale of assets -- (9,015)
Interest expense (84,444) (13,840)
Interest expense - related parties (61,494) --
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(135,844) (22,855)
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LOSS FROM CONTINUING OPERATIONS (461,777) (872,270)
Discontinued operations:
Loss from discontinued operations (7,780,775) (1,258,806)
Income tax benefit -- --
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(7,780,775) (1,258,806)
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NET LOSS $ (8,242,552) $ (2,131,076)
============= =============
NET LOSS PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.02) $ (0.04)
DISCONTINUED OPERATIONS (0.38) (0.07)
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NET LOSS PER SHARE, BASIC AND DILUTED $ (0.40) $ (0.11)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 20,712,875 19,261,500
============= =============
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
NINE MONTHS ENDED MARCH 31, 2004
(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 - - - - - -
Preferred stock converted (147,222) (14,722) 276,729 277 14,445 -
to common stock
Net loss - - - - - -
------------ ------------ -------------- --------------- -------------- ------------
Balance, March 31, 2004 852,778 $ 85,278 21,096,054 $ 21,096 $ 13,461,283 $ 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
Preferred stock converted
to common stock - - - - -
Net loss - - - (8,242,552) (8,242,552)
------------ ------------ -------------- --------------- --------------
Balance, March 31, 2004 $ - $ (265,988) $ (4,000) $ (20,160,921) $ (6,656,957)
============ ============ ============== =============== ==============
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
NINE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
Cash flows from operating activities
Net loss $(8,242,552) $(2,131,076)
Loss from discontinued operations (7,780,775) (1,258,806)
------------ ------------
Loss from continuing operations (461,777) (872,270)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 33,492 23,491
Bad debts 61,311 27,060
Common stock option expense (133,039) 481,790
Amortize deferred expenses 37,500 --
Common stock issued for services 76,250 --
Sale of assets 1,367 9,015
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts and notes receivable 200,677 (469,606)
Inventories 7,275 (5,346)
Prepaid expenses and other assets 13,148 (43,376)
Accounts payable and accrued expenses (64,713) 667,262
Deposits and unearned income 5,876 --
------------ ------------
Net cash used by continuing operations (222,633) (181,980)
Net cash used by discontinued operations (366,156) (998,057)
------------ ------------
Net cash used by operations (588,789) (1,180,037)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of subsidiary 60,000 --
Acquisition of property and equipment (3,182) (61,461)
------------ ------------
Net cash provided (used) by continuing operations 56,818 (61,461)
Net cash used by discontinued operations (10,967) (374,816)
------------ ------------
Net cash provided (used) by investing activities 45,851 (436,277)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash -- 412,420
Subscribed unissued common stock -- 457,515
Cash received in excess of cash paid in acquisition -- 273,518
Loan proceeds 70,000 725,000
Repayment of notes payable (180,719) (114,219)
Loans from related parties 318,770 346,476
Loans made (62,500) --
Advances from parent 25,000 4,693
------------ ------------
Net cash provided by continuing operations 170,551 2,105,403
Net cash provided by discontinued operations 368,914 33,117
------------ ------------
Net cash provided by financing activities 539,465 2,138,520
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,473) 522,206
CASH AND CASH EQUIVALENTS, beginning of period 16,940 12,277
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 13,467 $ 534,483
============ ============
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
(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. and
subsidiaries ("Integrators"), LifeStyle Technologies Franchising
Corp. ("Franchising"), FutureSmart Systems, Inc. ("FutureSmart"),
SYSLYNC Colorado, Inc. ("Colorado"), SYSLYNC-GEORGIA, Inc.
("Georgia") 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.
(2) ORGANIZATION - LFSI was organized in September 1950, under the
laws of the State of Idaho under its original name, Princeton
Mining Company.
Georgia was incorporated on December 1, 2003, and commenced
operations on February 6, 2004. Georgia will provide builders,
homeowners and commercial customers with complete installation and
equipment for audio, video, home theater, security, computer
networking, central vacuum and accent lighting in the Georgia
market.
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.
8
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, Inc. ("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 March
31, 2004 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.
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 and LifeStyle Security, Inc. ("Security") were transferred to
Integrators. Simultaneously Franchising became a wholly owned
subsidiary of LFSI and LST and Security became inactive. Effective
December 1, 2003, the operations of Lifestyle Technologies
Charlotte, Inc. ("Charlotte") were discontinued. Effective March
1, 2004, the operations of Integrators and Atlanta were
discontinued.
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 AND CURRENT OPERATIONS - LFSI through Georgia
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.
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.
9
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting
principles generally accepted in the United States of America 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.
(6) GOING CONCERN - At March 31, 2004, the Company has a significant
working capital deficit of $6,711,066. The major components of the
working capital deficit include: $1,953,422 due to affiliates,
$1,133,298 in accounts payable and accrued expenses, notes payable
in the amount of $1,089,598, notes payable due related parties of
$1,069,132 and current liabilities of discontinued operations in
the amount of $1,538,524. The Company does not have sufficient
cash flows to meet its obligations currently due within the next
12 months. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. 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. These condensed consolidated
financial statements do not include any adjustments that may
result from the outcome of these uncertainties.
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.
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, which is
depreciated over 3 years and real estate which is depreciated over 27.5
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.
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.
11
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 operations of its location in
Charlotte, NC effective December 1, 2003, and wrote off the associated
goodwill in the amount of $5,691,604. The Company also discontinued
operations of its location in Atlanta, GA effective March 1, 2004, and
wrote off the associated goodwill in the amount of $1,207,849.
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 condensed 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.
On February 13, 2004, the Company granted an option to the general
manager of Georgia for 113,795 shares of common stock with an exercise
price of $1.45, which was the trading price of the common stock on that
date. 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. 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, one
year from the date of grants in fiscal 2004; stock price volatility,
126%; risk free interest rate, 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 March 31, 2004 and 2003
------------------------------------------
Fiscal 2004 Fiscal 2003
----------- -----------
Net loss, as reported $(1,547,702) $(1,082,414)
Add: Stock-based employee compensation included
in reported net loss -- 467,540
Deduct: Total stock-based compensation expense
determined under fair value method for all awards (79,667) (1,743,152)
------------ ------------
Net loss, proforma $(1,627,369) $(2,358,026)
============ ============
Net loss per share, basic and diluted $ (.08) $ (.12)
============ ============
13
Nine Months Ended March 31, 2004 and 2003
- -----------------------------------------
Fiscal 2004 Fiscal 2003
----------- -----------
Net loss, as reported $(8,242,552) $(2,131,076)
Add: Stock-based employee compensation included
in reported net loss (133,039) 481,790
Deduct: Total stock-based compensation expense
determined under fair value method for all awards (79,667) (2,319,152)
------------ ------------
Net loss, proforma $(8,455,258) $(3,968,438)
============ ============
Net loss per share, basic and diluted $ (.41) $ (.21)
============ ============
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
March 31, 2004, there were options granted under the plan for 830,461
shares (net of forfeitures), all of which are vested and 1,169,539
shares available for grant.
REVENUE RECOGNITION
Georgia's home technology services work is completed in three phases -
pre-wiring, trim-out and hardware installation. Georgia invoices its
customers and records revenue as work is completed on each project. For
alarm monitoring service contracts sold by Georgia, revenue is
recognized only when the contracts are sold to third party finance
companies or as earned if Georgia 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 nine month periods ended
March 31, 2004 and 2003, respectively. Accordingly, basic and diluted
EPS are the same for each period.
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.
LST INTEGRATORS, INC. AND LIFESTYLE TECHNOLOGIES ATLANTA, INC.
- --------------------------------------------------------------
Effective March 1, 2004, the Board of Directors of Integrators and Atlanta voted
unanimously to discontinue the operations of the companies. Accordingly, their
operations are included in discontinued operations for all periods presented.
16
DISCONTINUED OPERATIONS
- -----------------------
Discontinued operations include the result of operations for Integrators and its
two wholly owned subsidiaries, Charlotte and Atlanta, for both the three and
nine 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 March 31, 2004 and 2003:
Fiscal 2004 Fiscal 2003
----------- -----------
Revenues $ 18,029 $ 803,331
============ ============
Net loss from operations $ (172,065) $ (514,727)
Asset impairment (1,207,849) --
------------ ------------
Net loss $(1,379,914) $ (514,727)
============ ============
Net loss per share $ (.06) $ (.02)
============ ============
The results of discontinued operations may be summarized as follows for the nine
months ended March 31, 2004 and 2003:
Fiscal 2004 Fiscal 2003
----------- -----------
Revenues $ 2,018,420 $ 1,658,708
============ ============
Net loss from operations $(1,510,832) $(1,258,806)
Asset impairment (6,899,453) --
Gain on sale of assets 629,510 --
------------ ------------
Net loss $(7,780,775) $(1,258,806)
============ ============
Net loss per share $ (.38) $ (.07)
============ ============
Current liabilities of discontinued operations include $295,000 in notes
payable, $345,635 in accounts payable and $897,889 in accrued expenses.
17
D. NOTES PAYABLE
Notes payable at March 31, 2004, consist of the following:
Unsecured note payable - due January 1, 2004; 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
Notes payable - due in monthly installments totaling $789 until February 2009;
with interest of 0% and 3.9%; collateralized by
transportation equipment; guaranteed by G. David Gordon 44,328
Note payable - due December 18, 2003; with interest at 36%; past due (2) 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 (3) 181,000
----------------
1,125,247
Less current maturities, including demand notes 1,089,598
----------------
Long-term portion $ 35,649
================
(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 $1.82 on
March 31, 2004.
(2) Convertible into the Company's common stock at a ratio of one share of
common stock for each $2.50 of outstanding principal.
(3) On February 13, 2004, the Company and the note holder executed a settlement
agreement which required cash payments aggregating $27,827 and an option to
purchase the Company's common stock with the remaining principal balance.
As of March 31, 2004, $5,000 of the cash payment had been made.
18
E. NOTES PAYABLE - RELATED PARTIES
Notes payable due related parties at March 31, 2004, 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% 450,423
----------------
Notes payable due related parties $ 1,069,132
================
F. INCOME TAXES
Deferred income taxes at March 31, 2004 consist primarily of net operating loss
carryforwards, which amount to approximately $12,400,000 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.
19
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.
During the three months ended March 31, 2004, 147,222 shares of preferred stock
were converted into 276,729 shares of common stock.
I. TRANSACTIONS WITH RELATED PARTIES
At March 31, 2004, advances due to affiliates consisted of the following (See
Note E for notes payable to affiliates of $1,069,132):
Due to RCG and its subsidiaries $ 1,863,932
Advance from and accrued interest payable to Mr. Pruitt 3,378
Advances from and accrued interest payable to G. David Gordon
and his wife, shareholders and creditors of LFSI and RCG 106,112
Advances to LST Baltimore (20,000)
------------
$ 1,953,422
============
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 March 31, 2003, RCG charged the Company $30,000 ($10,000 to continuing
operations) and none in fiscal 2004. For the nine months ended March 31, 2004
and 2003, RCG charged the Company $25,000 and $90,000 ($30,000 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 a company
that has purchased franchise licenses in three locations in Maryland. At March
31, 2004, the franchise locations in Maryland owed the Company and its
subsidiaries $14,000 plus the $20,000 advance included above.
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
has paid the Company and its subsidiaries all amounts owed at March 31, 2004.
20
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. Mr. Barrett took over operation of three South Carolina
markets in October 2003. LVA and its subsidiaries owed the Company and its
subsidiaries $328,000 ($152,000 in discontinued operations) at March 31, 2004.
This entire amount has been reserved at March 31, 2004.
At March 31, 2004, total debt outstanding to G. David Gordon and his wife, was
$950,423 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
a company in which he is the president and a shareholder also loaned RCG an
additional $1,144,000 ($750,000 balance at March 31, 2004) 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 seven 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 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
had paid the Company and its subsidiaries all amounts owed at March 31, 2004.
Gross billings to the franchises discussed above for the three months ended
March 31, 2004 and 2003, were as follows:
Fiscal 2004 Fiscal 2003
----------- -----------
Houston and the three North Carolina markets $ 14,000 $ 108,000
Three South Carolina markets - 111,000
Three Maryland markets 6,000 17,000
LVA and subsidiaries - 97,000
Dallas 4,000 57,000
---------- ----------
Total $ 24,000 $ 390,000
========== ==========
21
Gross billings to the franchises discussed above for the nine months ended March
31, 2004 and 2003, were as follows:
Fiscal 2004 Fiscal 2003
----------- -----------
Houston and the three North Carolina markets $ 93,000 $ 208,000
Three South Carolina markets 29,000 206,000
Three Maryland markets 17,000 30,000
LVA and subsidiaries 30,000 145,000
Dallas 25,000 97,000
----------- -----------
Total $ 194,000 $ 686,000
=========== ===========
J. BUSINESS SEGMENT INFORMATION
Information related to business segments is as follows (amounts in thousands of
dollars):
Company
Owned
Locations Franchise Corporate Total
--------- --------- --------- -----
NINE MONTHS ENDED MARCH 31, 2004
- --------------------------------
Revenue
External customers $ 11 $ 208 $ - $ 219
Intersegment $ - $ 60 $ - $ 60
Loss from continuing operations $ 12 $ 150 $ 300 $ 462
NINE MONTHS ENDED MARCH 31, 2003
- --------------------------------
Revenue
External customers $ - $ 440 $ 6 $ 446
Intersegment $ - $ 53 $ - $ 53
Loss from continuing operations $ - $ 203 $ 669 $ 872
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 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.
22
During 2001, FutureSmart approved a plan to exit, and subsequently vacated
certain facilities in San Jose, California and Murray, Utah. As of March 31,
2004, 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.
L. PURCHASE OF LST BALTIMORE, INC.
On May 17, 2004, LFSI completed its acquisition of LST Baltimore, Inc. ("LBI")
by issuing 1,900,000 shares of its common stock for all the issued and
outstanding common shares of LBI. LBI had previously been a Lifestyle franchisee
prior to its acquisition.
23
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.
LFSI through Georgia 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.
Brittany is the owner of two condominium units that are located in Dallas, Texas
which are currently under lease.
On February 6, 2004, Georgia commenced operations.
Effective December 1, 2003, the operations of Charlotte were discontinued, and
the operations of Integrators and Atlanta were discontinued effective March 1,
2004.
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
24
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.
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 of $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 March 31, 2004, LFSI had a working capital deficit of $6,711,066 as compared
to a working capital deficit of $6,583,974 at June 30, 2003, when restated for
discontinued operations, an increase in the deficit of $127,092. Current assets
decreased $323,908 and current liabilities decreased $196,817. The current asset
decrease is primarily due to a decline in accounts and notes receivable of
$313,555. The decrease in current liabilities includes an increase in accounts
payable and accrued expenses of $806,680; an increase in amounts due affiliates
of $188,655 and a decrease in the current liabilities of discontinued operations
of $1,253,974.
25
During the nine months ended March 31, 2004, continuing operations of the
Company had $115,047 in new borrowings and reduced other loans by $180,719. 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 nine
months ended March 31, 2004, the Company also received $318,770 in loans and
advances from related parties.
As discussed above, at March 31, 2004, 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 MARCH 31, 2004 AND 2003
SALES AND REVENUES
During the three months ended March 31, 2004, sales decreased $164,677 (82%)
from the year earlier amount. During fiscal 2004, the Company temporarily
shut-down its product sales to its franchisees and also discontinued accruing
royalty revenue from the Glenn Barrett companies. In addition the royalty
revenue is calculated at 3.5% in fiscal 2004 and 6% in fiscal 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses have decreased $127,600
(56%) during the three month period ended March 31, 2004, 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 $467,540 during the
three-month period ended March 31, 2003, and none in fiscal 2004. The Company
hired a new Chief Executive Officer in March 2003, as a part of the purchase of
FutureSmart, and one-third of the options she received vested upon receipt. The
compensation expense is the difference between the exercise price and the market
price on the date of the grant.
26
INTEREST EXPENSE
Interest expense amounted to $37,470 ($22,356 for related parties) during the
three month period ended March 31, 2004, as compared to the year earlier period
amount of $12,663. The increase in interest expense of $24,807 is primarily due
to debt associated with discontinued operations in the prior year period.
DISCONTINUED OPERATIONS
The loss from discontinued operations increased $865,187 to $1,379,914 during
the three month period ended March 31, 2004, as compared to the year earlier
period amount of $514,727 . The fiscal 2004 amount included an impairment of
goodwill in the amount of $1,207,849.
NINE MONTHS ENDED MARCH 31, 2004 AND 2003
SALES AND REVENUES
During the nine months ended March 31, 2004, sales decreased $227,454 (51%) from
the year earlier amount. During fiscal 2004, the Company temporarily shut-down
its product sales to its franchisees and also discontinued accruing royalty
revenue from the Glenn Barrett companies. In addition the royalty revenue is
calculated at 3.5% in fiscal 2004 and 6% in fiscal 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses have decreased $203,504
(28%) during the nine-month period ended March 31, 2004, 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 $481,790 during
the nine-month periods ended March 31, 2004 and 2003, 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. The Company hired a new Chief Executive
Officer in March 2003, as a part of the purchase of FutureSmart, and one-third
of the options she received vested upon receipt. The majority of the
compensation expense in fiscal 2003 is the difference between the exercise price
and the market price on the date of the grant of these options.
INTEREST EXPENSE
Interest expense amounted to $145,938 ($61,494 for related parties) during the
nine-month period ended March 31, 2004, as compared to the year earlier period
amount of $13,840. The increase in interest expense of $132,098 is primarily due
to debt associated with discontinued operations in the prior year period.
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DISCONTINUED OPERATIONS
The loss from discontinued operations increased $6,521,969 to $7,780,775 during
the nine-month period ended March 31, 2004, as compared to the year earlier
period amount of $1,258,806. The fiscal 2004 amount included an impairment of
goodwill in the amount of $6,899,453.
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 March 31,
2004, and based on its evaluation, our principal executive officer and principal
accounting officer have concluded that these controls and procedures are
effective.
(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
During the three months ended March 31, 2004, the Company issued
276,729 shares of its common stock in exchange for 147,222 shares of
its preferred stock. 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.
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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 31
32 Certifications pursuant to 18 U.S.C. Section 1350,
Section 906 of the Sarbanes-Oxley Act of 2002 Page 32
(b) Reports on Form 8-K -
(a) Previous Independent Accountant - On January 23, 2004, Crisp Hughes Evans
LLP ("CHE") informed the Registrant and the Audit Committee of the Registrant in
writing of its decision to resign as the Registrant's independent auditors
effective as of that date. CHE had served as the registrant's principal
independent accountant to audit the Company's financial statements for the
fiscal year ended June 30, 2003.
The independent audit report of CHE on the consolidated financial statements of
the Company as of and for the fiscal years ended June 30, 2003 and 2002, did not
contain any adverse or disclaimer of opinion and was not qualified or modified
as to uncertainty, audit scope, or accounting principles. In connection with the
audit of the June 30, 2003 and 2002, financial statements, the review of the
September 30, 2003 quarterly financial statement and through the date of their
resignation, there were no disagreements with CHE on matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of CHE, would have caused
CHE to make reference to the matter in its reports.
In the Report to the Audit Committee as of June 30, 2003, CHE recommended the
Company hire a Chief Financial Officer. The Company agreed with the
recommendation and has retained a consultant to serve this function. No other
reportable event described under Item 304 (a)(1)(v) of Regulation S-K occurred
within the two most recent fiscal years ended June 30, 2003 and 2002, or within
the quarter ended September 30, 2003.
(b) New Independent Accountant - As of February 4, 2004, the Company engaged
Guest & Company, P.C. ("Guest") of Tulsa, Oklahoma as its new independent
accountant. The engagement of Guest was approved by the Board of Directors of
the Company on February 4, 2004.
During the period that CHE was independent accountant for the registrant neither
the Company nor anyone acting on the Company's behalf consulted Guest regarding
either:
(i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion
that might be rendered on the Company's financial statement, and
neither a written report nor oral advise was provided by Guest to the
Company that Guest concluded was an important factor considered by the
Company in reaching a decision as to any such accounting, auditing or
financial reporting issue; or (ii) any matter that was either the
subject of a "disagreement," as that term is defined in Item
304(a)(1)(v) of Regulation S-K and the related instructions to Item 304
of Regulation S-K, or a "reportable event," as that term is defined in
Item 304(a)(1)(v) of Regulation S-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: May 17, 2004 By: /s/ Paul Johnson
--------------------------
Paul Johnson, President
Acting CEO and Principal
Accounting Officer
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