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: SEPTEMBER 30, 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 October 31, 2004 was 24,303,691 shares.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
INDEX
Page
No.
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Part I. Financial Information (unaudited)
Item 1. Condensed Consolidated Balance Sheet - September 30, 2004 3
Condensed Consolidated Statements of Operations - 4
Three Months Ended September 30, 2004 and 2003
Condensed Consolidated Statement of Stockholders' Deficit - 5
Three Months Ended September 30, 2004
Condensed Consolidated Statements of Cash Flows - 6
Three Months Ended September 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 7-20
Item 2. Management's Discussion and Analysis or Plan of Operation 21-23
Item 3. Controls and Procedures 24
Part II. Other Information 25-27
2
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
September 30, 2004
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 309
Accounts receivable, net 39,371
Inventory 45,538
Loans and advances 62,000
-------------
Total current assets 147,218
Property and equipment, net 52,916
Goodwill, net 253,049
Other assets 52,785
-------------
Total assets $ 505,968
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable and current installments of long-term debt $ 923,280
Notes payable - related parties 1,124,267
Accounts payable 195,620
Accrued expenses 795,991
Due to affiliates 1,109,018
Current liabilities of discontinued operations 1,147,158
-------------
Total current liabilities 5,295,334
Long-term debt less current installments 177,806
-------------
Total liabilities 5,473,140
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Commitments and contingencies
STOCKHOLDERS' DEFICIT
Series A convertible preferred stock: $.10 par value; 1,000,000 shares authorized;
577,389 shares issued and outstanding; liquidation preference $1,587,820;
convertible into from 577,389 to 1,270,256 shares of common stock 57,739
Common stock: $.001 par value; authorized 250,000,000 shares; issued - 26,503,223
shares; outstanding - 24,303,691 shares 26,503
Additional paid in capital 13,847,569
Common stock warrants 206,295
Stock subscription receivable (4,000)
Treasury stock, 2,199,532 shares (76,984)
Accumulated deficit (19,024,294)
-------------
Total stockholders' deficit (4,967,172)
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Total liabilities and stockholders' deficit $ 505,968
=============
See accompanying notes to condensed consolidated financial statements.
3
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
Sales and revenues
Products $ 185,893 $ --
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185,893 --
COST OF SALES 95,368 --
------------- -------------
GROSS PROFIT 90,525 --
OPERATING EXPENSES:
Selling, general and administrative expense 140,880 70,040
Stock option and warrant compensation -- 108,334
Depreciation and amortization 1,193 422
Management fee - parent -- 15,000
------------- -------------
Total operating expenses 142,073 193,796
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EARNINGS (LOSS) FROM OPERATIONS (51,548) (193,796)
OTHER INCOME (EXPENSE):
Rent and other income 2,112 2,775
Loss on disposal of equipment -- --
Interest expense (36,951) (26,252)
Interest expense - related parties (25,041) (17,177)
------------- -------------
(59,880) (40,654)
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EARNINGS (LOSS) FROM CONTINUING OPERATIONS (111,428) (234,450)
Discontinued operations:
Loss from discontinued operations -- (778,729)
Income tax benefit -- --
------------- -------------
-- (778,729)
------------- -------------
NET LOSS $ (111,428) $ (1,013,179)
============= =============
NET EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.00) $ (0.01)
DISCONTINUED OPERATIONS -- (0.04)
------------- -------------
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.00) $ (0.05)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 24,232,292 20,707,205
============= =============
See accompanying notes to condensed consolidated financial statements.
4
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
THREE MONTHS ENDED SEPTEMBER 30, 2004
(UNAUDITED)
Additional
Preferred Stock Common Stock Paid-in
Shares Par Value Shares Par Value Capital
------ --------- ------ --------- -------
Balance, June 30, 2004 781,752 $ 78,175 26,053,625 $ 26,054 $13,827,582
Preferred stock converted
to common stock (204,363) (20,436) 449,598 449 19,987
Net loss -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, September 30, 2004 577,389 $ 57,739 26,503,223 $ 26,503 $13,847,569
=========== =========== =========== =========== ===========
Common Stock
Stock Subscription Accumulated Treasury
Warrants Receivable (Deficit) Stock Total
-------- ---------- --------- ----- -----
Balance, June 30, 2004 $ 206,295 $ (4,000) $(18,912,866) $ (76,984) $ (4,855,744)
Preferred stock converted
to common stock -- -- -- -- --
Net loss -- -- (111,428) -- (111,428)
------------- ------------- ------------- ------------- -------------
Balance, September 30, 2004 $ 206,295 $ (4,000) $(19,024,294) $ (76,984) $ (4,967,172)
============= ============= ============= ============= =============
See accompanying notes to condensed consoliated financial statements.
5
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
Cash flows from operating activities
Net loss $ (111,428) $(1,013,179)
Loss from discontinued operations -- (778,729)
------------ ------------
Loss from continuing operations (111,428) (234,450)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 1,193 422
Amortization 5,824 --
Common stock option expense -- 108,334
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts and notes receivable 13,392 --
Inventories (18,585) --
Prepaid expenses and other assets -- 34,377
Accounts payable and accrued expenses 58,305 35,030
------------ ------------
Net cash used by continuing operations (51,299) (56,287)
Net cash used by discontinued operations -- (166,700)
------------ ------------
Net cash used by operations (51,299) (222,987)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used by discontinued operations -- (10,967)
------------ ------------
Net cash used by investing activities -- (10,967)
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CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds -- 70,000
Repayment of notes payable (1,333) (80,000)
Loans and advances from related parties 25,494 67,027
Loans made (6,500) --
------------ ------------
Net cash provided by continuing operations 17,661 57,027
Net cash provided by discontinued operations -- 177,668
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Net cash provided by financing activities 17,661 234,695
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (33,638) 741
CASH AND CASH EQUIVALENTS, beginning of period 33,947 3,079
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 309 $ 3,820
============ ============
See accompanying notes to condensed consolidated financial statements.
6
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION AND ORGANIZATION
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION - The
consolidated financial statements include the accounts of
Lifestyle Innovations, Inc. ("LFSI") and its wholly owned
subsidiaries: LST of Baltimore, Inc. ("LBI"); Lifestyle
Technologies Franchising Corp. ("Franchising"); Brittany
Enterprises, Inc. ("Brittany"); SYSLYNC - COLORADO, Inc.
("Colorado") and FutureSmart Systems, Inc. ("FutureSmart")
(collectively the "Company"). Franchising, Colorado and
FutureSmart are included in discontinued operations. All material
intercompany accounts and transactions have been eliminated.
LST Integrators, Inc. ("Integrators") and its wholly owned
subsidiaries: LST, Inc., d/b/a Lifestyle Technologies ("LST");
Lifestyle Technologies Atlanta, Inc. ("LSTA"); Lifestyle
Technologies Charlotte, Inc. ("LS-Charlotte); and Lifestyle
Security, Inc. ("LS-Security") were all sold to Sports Management
& Recreation, Inc. ("Sports"), a Nevada corporation, on May 24,
2004, in exchange for 25,000 shares of Sports' common stock.
Integrators and its subsidiaries are included in discontinued
operations during the period owned by LFSI.
SYSLYNC-GEORGIA, Inc. ("Georgia") was also sold to Sports in
exchange for 50,000 shares of Sports' common stock on May 24,
2004, and is included in discontinued operations.
(2) ORGANIZATION - On May 5, 2004, the Company, LFSI Acquisition, Inc.
(a wholly-owned subsidiary), and LST of Baltimore, Inc. entered
into an Agreement and Plan of Merger (the "Merger Agreement"). The
merger contemplated by the Merger Agreement (the "Merger") was
also completed on May 5, 2004. As a result of the Merger, LBI
became a wholly-owned subsidiary of the Company and all
outstanding shares of LBI's capital stock were exchanged for
1,900,000 shares of the Company's common stock. The Company also
assumed an obligation to issue an additional 800,000 shares of its
common stock as a fee for facilitating the acquisition. LBI was a
private company which provided builders, homeowners and commercial
customers with complete installation and equipment for structured
wiring, security, personal computer networking, audio, video, home
theater, central vacuum and accent lighting. LBI was a franchisee
of Franchising until Franchising discontinued operations effective
April 1, 2004.
LST Integrators, Inc. and its wholly owned subsidiaries were all
sold to Sports on May 24, 2004, in exchange for 25,000 shares of
Sports' common stock. Integrators and its subsidiaries are
included in discontinued operations during the period owned by
LFSI.
7
SYSLYNC-GEORGIA, Inc. ("Georgia") was incorporated by the Company
on December 1, 2003, and commenced operations on February 6, 2004.
Georgia was formed to 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. Georgia was also sold
to Sports on May 24, 2004, in exchange for 50,000 shares of
Sports' common stock and is included in discontinued operations.
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.
On September 5, 2002, LFSI acquired LST, a Delaware corporation,
and its wholly owned subsidiaries, Franchising, LS-Security and
LSTA, all organized in July 2001. LFSI issued 16,000,000 shares of
its common stock to RCG Companies Incorporated, formerly eResource
Capital Group, Inc. ("RCG"), to acquire 100% interest in LST. On
February 20, 2003, LFSI reorganized its corporate structure.
Integrators 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 subsidiary of LFSI, while LST and LS-Security became
inactive. 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. At
September 30, 2004, RCG owns 47.6% of the outstanding common stock
of LFSI.
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.
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. Effective July 15, 2002, Princeton
Mining Company changed its name to Lifestyle Innovations, Inc.
(3) NATURE OF BUSINESS AND CURRENT OPERATIONS - LBI is a full service
home technology integration company providing builders,
homeowners, and commercial customers with complete installation
and equipment for structured wiring, security, personal computer
networking, audio, video, home theater, central vacuum and accent
lighting.
Brittany is the owner of two condominium units that are located in
Dallas, Texas which are currently under lease.
8
(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 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,
2004, which is included in the Company's Form 10-KSB filed on
October 14, 2004.
(5) FISCAL YEARS - As used herein, fiscal 2005 refers to the periods
included in the fiscal year ended June 30, 2005, and fiscal 2004
refers to the periods included in the fiscal year ended June 30,
2004.
(6) GOING CONCERN - At September 30, 2004, the Company has a
significant working capital deficit of $5,148,116. The major
components of the working capital deficit include: $1,109,018 due
to affiliates, $991,611 in accounts payable and accrued expenses,
current portion of long-term debt and notes payable in the amount
of $923,280, notes payable due related parties of $1,124,267 and
net current liabilities of discontinued operations in the amount
of $1,147,158. 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
negotiating a line of credit of up to $150,000 in addition to
exploring additional sources of liquidity, through debt and equity
financing alternatives and potential sales of its common stock in
private placement transactions. Additionally, the Company has
extended some of its notes payable and plans on negotiating with
its remaining 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 flows 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 consolidated financial statements do not include any
adjustments that may result from the outcome of these
uncertainties.
9
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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
10
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 September 30, 2004 and 2003
----------------------------------------------
Fiscal 2005 Fiscal 2004
----------- -----------
Net loss, as reported $ (111,428) $(1,013,179)
Add: Stock-based employee compensation included
in reported net loss -- 108,334
Deduct: Total stock-based compensation expense
determined under fair value method for all awards (--)
------------ ------------
(410,152)
Net loss, proforma $ (111,428) $(1,314,997)
============ ============
Net loss per share, basic and diluted $ (.00) $ (.06)
============ ============
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.
11
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
September 30, 2004, there were options granted under the plan for
680,461 shares (net of forfeitures), all of which are vested and
1,319,539 shares available for grant. There are non-qualified options
to purchase 166,666 shares (all vested) outstanding at September 30,
2004, which are note granted under the plan.
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 month periods ended September
30, 2004 and 2003, respectively. Accordingly, basic and diluted EPS are
the same for each period.
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.
C. ACQUISITIONS AND DISCONTINUED OPERATIONS
LST INTEGRATORS, INC. AND SYSLYNC-GEORGIA, INC.
- -----------------------------------------------
Integrators and its wholly owned subsidiaries: LST, LSTA, LS-Charlotte and
LS-Security were all sold to Sports on May 24, 2004, in exchange for 25,000
shares of Sports' common stock. Integrators and its subsidiaries are included in
discontinued operations during the period owned by LFSI.
Georgia was incorporated by the Company on December 1, 2003, and commenced
operations on February 6, 2004. Georgia was also sold to Sports in exchange for
50,000 shares of Sports' common stock on May 24, 2004, and is included in
discontinued operations.
12
Sports' common stock is not currently trading, and the companies that were sold
had liabilities which exceeded their assets. Based on this information, the
Company's management believes the value of the Sports common stock owned had no
value on the date of the exchange and at September 30, 2004. Accordingly, the
Company has recorded a zero value for the stock received in the above
transactions.
LST OF BALTIMORE, INC.
- ----------------------
On May 5, 2004, the Company, LFSI Acquisition, Inc. (a wholly-owned subsidiary),
and LST of Baltimore, Inc. entered into a Merger Agreement. The merger
contemplated by the Merger Agreement was also completed on May 5, 2004. As a
result of the Merger, LBI became a wholly-owned subsidiary of the Company and
all outstanding shares of LBI's capital stock were exchanged for 1,900,000
shares of the Company's common stock. The Company also assumed an obligation to
issue an additional 800,000 shares of its common stock as a fee for facilitating
the acquisition. LBI was a private company which provided builders, homeowners
and commercial customers with complete installation and equipment for structured
wiring, security, personal computer networking, audio, video, home theater,
central vacuum and accent lighting. LBI was a franchisee of Franchising until
Franchising discontinued operations effective April 1, 2004.
The purchase price consisted of 1,900,000 shares of the Company's common stock
which was valued at $76,000, based upon the trading price of the stock on the
date of the transaction.
FUTURESMART SYSTEMS, INC.
- -------------------------
On March 7, 2003, LFSI completed its acquisition of FutureSmart Systems, Inc., a
manufacturer and distributor of structured wiring and home networking
distribution panels. 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 $876,910 consisted of the issuance of 1,000,000 shares of
LFSI's $.10 par value convertible preferred stock, a bridge loan by LFSI to
FutureSmart of $224,830 and $552,080 in direct transaction costs.
The acquisition of FutureSmart was accounted for as a purchase in accordance
with SFAS 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.
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
was scheduled to be disbursed by the escrow agent no later than one year and one
day after the closing date. The buyer has made claims against this amount which
have not been resolved. Accordingly, the amount the Company might receive and
when it will be available is not currently known.
13
DISCONTINUED OPERATIONS
- -----------------------
Discontinued operations include the results of operations for Georgia,
Franchising, FutureSmart, Colorado and Integrators and its wholly owned
subsidiaries during the periods owned by the Company and may be summarized for
the three months ended September 30, 2003 as follows:
Revenues $ 1,497,009
==============
Net loss from operations $ (778,729)
--------------
Net loss $ (778,729)
==============
Net loss per share $ (.04)
==============
Net non-current assets of discontinued operations includes fixed assets which
are fully depreciated.
Net current liabilities of discontinued operations includes: accounts receivable
(fully reserved); $130,681 in accounts payable; $232,023 due to RCG and
subsidiaries; $295,000 in notes payable; and $489,454 in accrued expenses as of
September 30, 2004.
D. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt and notes payable at September 30, 2004, consists of the
following:
Unsecured note payable - due in monthly installments of $1,450, commencing
November 1, 2004 with interest at 12% until the principal is paid in full;
convertible into the Company's common stock at $2.50 per share $ 145,000
Note payable - due June 30, 2005; with interest at 12%;
collateralized by real estate 34,919
Convertible debentures - due May 4, 2009; with interest at 1% (1) 168,774
Note payable - due upon demand; with interest at 4.5%;
Uncollateralized (2) 45,274
Note payable to bank - due July 31, 2004; with interest at 8.5%; collateralized
by a blanket lien on all business assets of LBI; guaranteed by the president
of LBI 43,750
Note payable - due in monthly installments of $361; with final payment duen
October 17, 2007; collateralized by a vehicle; non-interest bearing 13,369
Note payable - due in August 2003 with interest at 12% and collateralized by
certain home technology accounts receivable and inventory (3) 650,000
----------
Total notes payable and long-term debt 1,101,086
Less current portion of long-term debt 923,280
----------
Long-term debt less current portion $ 177,806
==========
14
(1) Immediately prior to the Merger, LBI entered into a Convertible Debenture
Purchase Agreement (the "Purchase Agreement"), dated as of May 5, 2004, with HEM
Mutual Assurance LLC (HEM), pursuant to which it sold and issued convertible
debentures to HEM in an aggregate principal amount of up to $1,000,000 in a
private placement pursuant to Rule 504 of Regulation D under the Securities Act
of 1933, as amended. Two debentures in the aggregate principal amount of
$999,200 were issued for gross proceeds of $249,200 in cash ( "First Debenture
A") and an additional debenture in the aggregate principal amount of $750,000
(the "Contingent Debenture" or "First Debenture B") was issued in exchange for a
promissory note from HEM in the principal amount of $750,000 (the "Note"). The
Contingent Debenture does not become an obligation until the Note is funded. In
addition, as a fee for facilitating the LBI acquisition, a debenture of $800
("Second Debenture") was issued for gross proceeds of $800 in cash and the right
to exchange the debenture for 800,000 shares of the Company's common stock. The
Second Debenture was issued as a finder's fee for the LBI acquisition. Each of
the debentures has a maturity date of May 4, 2009, subject to earlier conversion
or redemption pursuant to its terms, and bears interest at the rate of 1% per
year, payable in cash or shares of common stock at the option of the holder of
the debentures. As a result of the Merger, the Company has assumed the rights
and obligations of LBI in the private placement, including the gross proceeds
raised through the sale of the debentures, the Note issued by HEM to LBI, and
LBI's obligations under the debentures and the Purchase Agreement.
As a result of the Merger at May 5, 2004, $249,200 and $800 in principal amount
of the initial debentures are convertible into unrestricted shares of the
Company's common stock at a conversion price that is the lower of $0.42 or the
average of the three lowest closing per share bid prices for the common stock
during the 40 trading days prior to conversion and $0.001 per share,
respectively. The $750,000 Contingent Debenture will become convertible and
subject to repayment if and when the related Note from HEM is paid in full to
the Company in cash. The Contingent Debenture would be convertible into
unrestricted shares of the Company's common stock at a conversion price that is
based upon the trading prices of the Company's common stock at the time the Note
is funded.
Since the $250,000 in convertible debentures bear interest at 1%, the Company
discounted this amount by 6% to arrive at an effective cost of 7%. The discount
of $64,687 was recorded as additional paid-in capital. The additional 6%
interest will accrue monthly and be added to the convertible debenture balance.
The discount associated with any principal conversion is immediately recorded as
interest expense. During the three months ended September 30, 2004, $3,207 in
interest was accrued and added to the convertible debenture balance.
The First Debenture A conversion price of $0.42 per share was higher than the
per share price of the Company's common stock on the issuance date of May 5,
2004. The Second Debenture conversion price of $0.001 per share was lower than
the per share price of the Company's common stock on the issuance date of May 4,
2004. In accordance with the provisions of EITF 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios to Certain Convertible Instruments," and EITF
00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments," the
Company should record a beneficial conversion feature related to the debentures.
However, since the debenture was converted prior to June 30, 2004, no beneficial
conversion was recorded as it would have been fully amortized at June 30, 2004.
In connection with the convertible debt financing, the Company capitalized
$58,400 of debt issuance costs, which are included in other assets. These costs
are being amortized over the life of the convertible debentures. As of September
30, 2004, $47,703 of the debt financing costs remain and $2,617 was amortized
during the three months ended September 30, 2004.
15
On May 24, 2004, $800 in debenture principal and the related interest was
converted into 800,438 shares of the Company's common stock. On June 16, 2004,
$26,972 in debenture principal and the related interest was converted into
1,000,030 shares of the Company's common stock. The 1,800,468 shares were issued
from the 4,000,000 shares of treasury stock contributed by RCG.
The conversion price and number of shares of common stock issuable upon
conversion of the debentures is subject to adjustment for stock splits and
combinations and other dilutive events. To satisfy its conversion obligations
under the debentures, the Company placed 50,000,000 shares of its common stock
into escrow for potential issuance to HEM upon conversion of the debentures. As
of September 30, 2004, 48,199,532 shares of common stock remain in escrow.
Unless and until the debentures are converted, HEM has no voting or other
ownership rights in any of the shares of the Company's common stock held in
escrow and the shares in escrow are not treated by the Company as being issued
and outstanding.
The debentures may never be converted into an aggregate of more than 50,000,000
shares of the Company's common stock unless the Company elects to increase the
number of shares held in escrow in accordance with and subject to any applicable
rules or regulations of the exchange, market or system on which the Company's
common stock is then listed requiring stockholder approval prior to such
additional issuance. In the event that the conversion rate of the debentures
would require the Company to issue more than an aggregate of 50,000,000 shares
of the Company's common stock upon conversion of the debentures and the Company
elects not to increase the number of shares held in escrow (or the Company fails
to obtain any required stockholder approval for such proposed increase), the
Company will be required to redeem the unconverted amount of the debentures for
125% of the principal amount thereof, plus accrued and unpaid interest.
In addition to the foregoing, the debentures may not be converted if and to the
extent that after such conversion the holder would beneficially own more than 5%
of the Company's then outstanding common stock, unless the holder waives this
limitation by providing the Company 75 days prior notice of the waiver.
The Company has the right to redeem the debentures, in whole or in part, at any
time on 30 days advance notice for 125% of the principal amount of the
outstanding debentures being redeemed, plus accrued and unpaid interest. In
addition, if at any time any of the debentures are outstanding, the Company
receives debt or equity financing in an amount equal to or exceeding five
million dollars ($5,000,000) in a single transaction or series of related
transactions (excluding any portion of such financing consisting of forgiveness
of debt or other obligations), the Company is required to redeem the debentures
for 125% of the amount of the then outstanding debentures. If trading in the
Company's common stock is suspended (other than suspensions of trading on such
market or exchange generally or temporary suspensions pending the release of
material information) for more than 10 trading days, or if the Company's common
stock is delisted from the exchange, market or system on which it is then traded
and not relisted on another exchange, market or the Over the Counter Bulletin
Board within 10 trading days, HEM may elect to require us to redeem all then
outstanding debentures in the manner set forth in the Purchase Agreement.
16
Until such time as it no longer holds any debentures, neither HEM nor its
affiliates may engage in any short sales of the Company's common stock if there
is no offsetting long position in the Company's common stock then held by HEM or
such affiliates.
(2) This note payable was originally payable to a bank. The individual guarantor
of the note paid the note in June 2004 and has obtained a judgment against LBI
in the amount of $51,179, plus interest and costs from August 23, 2004. The
Company is attempting to negotiate some form of payout.
(3) 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 $.90 on
September 30, 2004.
E. NOTES PAYABLE - RELATED PARTIES
Notes payable to related parties at September 30, 2004, consist of the
following:
Note payable to the wife of G. David Gordon - due April 1, 2005; interest
payable monthly from November 1, 2004 at 12%; convertible into the Company's
common stock at $2.50 per share after January 1, 2005; collateralized by a
security interest in the Company's investment in LBI $ 500,000
Unsecured note payable to G. David Gordon - due in monthly installments of
$5,056 with interest at 12% until paid in full; convertible into the
Company's common stock at $2.50 per share 505,558
Unsecured note payable to Mike Pruitt - due in monthly payments of $791 with
interest at 8% until the principal is paid in full; convertible into the
Company's common stock at $2.50 per share 118,709
----------
Total $1,124,267
==========
F. INCOME TAXES
Deferred income taxes at September 30, 2004 consist primarily of net operating
loss carryforwards, which amount to approximately $19,600,000 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.
17
G. 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 September 30, 2004, 204,363 shares of preferred
stock were converted into 449,598 shares of common stock.
H. TRANSACTIONS WITH RELATED PARTIES
At September 30, 2004, notes and advances due to affiliates from continuing
operations consisted of the following:
Due to RCG and its subsidiaries $ 945,372
Advance from and accrued interest payable to Michael Pruitt, CEO
of RCG 8,314
Advances from and accrued interest payable to G. David Gordon, a
shareholder and creditor of LFSI and RCG 137,221
Advances from Steven Zink, President of LBI 18,111
----------
$1,109,018
==========
The amount due to RCG and its subsidiaries represents net advances to and from
RCG and its subsidiaries. RCG also has provided various services to the Company,
including accounting and finance assistance, capital and debt raising, human
resources and other general and administrative services, until November 2003.
For the three months ended September 30, 2003, RCG charged the Company $15,000
(none was charged in fiscal 2005).
During fiscal 2004, RCG returned 4,000,000 shares of the Company's common stock,
which has been recorded as treasury stock. This transaction was related to an
indemnification agreement between RCG and the Company, where RCG is indemnified
against potential liabilities as a shareholder of the Company.
At September 30, 2004, total debt outstanding to G. David Gordon, his wife and a
company in which he is the principal shareholder, was $1,005,558 which is
included in notes payable to related parties. Mr. Gordon acts as special legal
counsel to RCG and the Company from time to time and is a shareholder of both.
Paul B. Johnson, President and acting Chief Executive Officer of the Company, is
owed $64,594 in accrued compensation at September 30, 2004, which is included in
accrued expenses.
18
TRANSACTIONS WITH RELATED PARTIES IN DISCONTINUED OPERATIONS
Mr. Pruitt, Mr. Gordon, Mr. Johnson, and Glenn Barrett, former President of LST,
had transactions with the discontinued operations of the Company.
Net current liabilities of discontinued operations include $232,023 due to RCG
and its subsidiaries.
Mr. Pruitt is also a minority investor in a company that had purchased franchise
licenses and business operations of LST's home technology business in three
markets in South Carolina and in another company that had purchased franchise
licenses in three locations in Maryland. The franchise locations in South
Carolina were closed in fiscal 2004. The amounts due to the Company and its
subsidiaries were paid by the shareholders of these franchisees. The franchise
location in Maryland, LBI, was purchased by the Company in May 2004.
Mr. Johnson was 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 that market during the quarter ended
March 31, 2003. The Dallas franchise locations were closed during fiscal 2004
and all amounts due the Company and its subsidiaries were paid by the
shareholders.
During fiscal 2002, Mr. 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 was 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. All amounts due by LVA and its subsidiaries to the
Company and its subsidiaries have been fully reserved.
Mr. Gordon had 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 had paid the Company and its subsidiaries all amounts owed by
June 30, 2004.
Revenues from these franchisees for the three months September 30, 2003, are as
follows (there were no sales during the current fiscal year):
Houston and three North Carolina markets $ 59,000
Three South Carolina markets 24,000
Three Maryland markets 6,000
LVA and subsidiaries 25,000
Dallas 17,000
---------------
$ 131,000
===============
19
I. BUSINESS SEGMENT INFORMATION
As of September 30, 2004, the Company's continuing operations consisted of one
location. Accordingly, the Company only operates in one business segment.
J. COMMITMENTS AND CONTINGENCIES
Future minimum operating lease commitments under non-cancelable leases for
office space is summarized as follows:
Fiscal year Total
- ----------- -----
2005 (balance of fiscal year) $ 37,275
2006 49,700
2007 4,200
-------------
$ 91,175
=============
Rent expense from continuing operations for the three months ended September 30,
2004 and 2003, amounted to $16,459 and $0, respectively.
On April 6, 2004, Mercator Momentum Fund LP ("Mercator") filed a complaint (case
number BC313358, Superior Court of California, County of Los Angeles, Stanley
Mosk Central District) against Lifestyle Innovations, Inc. as an alter ego and
RichMark Capital Corp. relating to a past due loan obligation of Lifestyle
Integrators, Inc., a wholly owned subsidiary of Lifestyle, in the amount of
$295,000. The loan amount is included in current liabilities of discontinued
operations. Integrators was sold in May 2004. On September 3, 2004, Mercator
filed a request for entry of default against Integrators and RichMark.
On September 29, 2004, LBI received notice that the guarantor of a $50,000 note
payable to a bank had obtained a judgment against LBI on August 23, 2004, in the
amount of $51,179 plus costs and post-judgment interest at 6.5%. (Case number
03-C-04-008855CJ, Circuit Court for Baltimore County). LBI had made an initial
payment on the judgment of approximately $10,000 as partial settlement of the
judgment and is negotiating a pay-out schedule for the balance.
On April 23, 2004, Meyer Saltzman etal ("Saltzman") filed a complaint (Case No.
2004-CV-2440, State District Court of Denver, Colorado) against
SYSLYNC-COLORADO, Inc. and Lifestyle Innovations, Inc. for their part in the
acquisition of the assets of Homesync. Saltzman's claim against LFSI is for
fraud and breach of contract under an alter-ego theory. Both sides have agreed
to transfer the dispute to arbitration. The Company has not recorded an accrual
for this dispute.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
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 LBI 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.
Brittany is the owner of two condominium units that are located in Dallas, Texas
which are currently under lease.
Effective December 1, 2003, the operations of Charlotte were discontinued, and
the operations of Integrators and Atlanta were discontinued effective March 1,
2004.
LST Integrators, Inc. and its wholly owned subsidiaries were all sold to Sports
Management & Recreation, Inc. ("Sports") on May 24, 2004, in exchange for 25,000
shares of Sports' common stock. Integrators and its subsidiaries are included in
discontinued operations during the period owned by LFSI.
SYSLYNC-GEORGIA, Inc. ("Georgia") was incorporated by the Company on December 1,
2003, and commenced operations on February 6, 2004. Georgia was also sold to
Sports on May 24, 2004, in exchange for 50,000 shares of Sports' common stock
and is included in discontinued operations.
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
21
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.
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
was scheduled to be disbursed by the escrow agent no later than one year and one
day after the closing date. The buyer has made claims against this amount which
have not been resolved. Accordingly, the amount the Company might receive and
when it will be available is not currently known.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, the Company has a significant working capital deficit of
$5,148,116. The major components of the working capital deficit include:
$1,109,018 due to affiliates, $991,611 in accounts payable and accrued expenses,
current portion of long-term debt and notes payable in the amount of $923,280,
notes payable due related parties of $1,124,267 and net current liabilities of
discontinued operations in the amount of $1,147,158. 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 negotiating a line of
credit of up to $150,000 in addition to exploring additional sources of
liquidity, through debt and equity financing alternatives and potential sales of
its common stock in private placement transactions. Additionally, the Company
has extended some of its notes payable and plans on negotiating with its
remaining 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 flows 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
consolidated financial statements do not include any adjustments that may result
from the outcome of these uncertainties.
22
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
SALES AND REVENUES
During the three months ended September 30, 2004, the Company's only continuing
operation consisted of the operations of LBI, which was acquired on May 5, 2004.
All operations in fiscal 2004 were discontinued.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses have increased $70,840
(101%) during the three month period ended September 30, 2004, as compared to
the year earlier period. The fiscal 2005 amount includes $78,370 in SG&A for LBI
and $62,510 for corporate SG&A. The fiscal 2004 amount includes only corporate
SG&A.
STOCK OPTION AND WARRANT COMPENSATION
Stock option and warrant compensation amounted to $108,334 during the
three-month period ended September 30, 2003, and none in fiscal 2005. The
Company hired a new Chief Executive Officer in March 2003, as a part of the
purchase of FutureSmart. One-third of the options she received vested upon
receipt and the remaining two-thirds were to vest one-third at the end of year
one and one-third at the end of year two. The compensation expense in fiscal
2004 is the difference between the exercise price and the market price on the
date of the grant.
INTEREST EXPENSE
Interest expense amounted to $61,992 ($25,041 for related parties) during the
three month period ended September 30, 2004, as compared to the year earlier
period amount of $43,429 ($17,177 for related parties). The increase in interest
expense of $18,563 ($7,864 for related parties) is primarily due to the interest
accruing on the debentures, a transfer of debt from discontinued operations to
continuing operations and an increase in related party debt of $166,827.
DISCONTINUED OPERATIONS
The loss from discontinued operations amounted to $778,729 during the three
month period ended September 30, 2003.
23
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 September
30, 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.
24
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2004, the Company issued
449,598 shares of its common stock in exchange for 204,363 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.
ITEM 6. 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
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: November 15, 2004 By: /s/ Paul Johnson
--------------------------
Paul Johnson, President
Acting CEO and Principal
Accounting Officer
25