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: DECEMBER 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 January 31, 2004 was 27,892,093 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 - December 31, 2004 3
Condensed Consolidated Statements of Operations - 4
Three Months Ended December 31, 2004 and 2003
Condensed Consolidated Statements of Operations - 5
Six Months Ended December 31, 2004 and 2003
Condensed Consolidated Statement of Stockholders' Deficit - 6
Six Months Ended December 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows - 7
Six Months Ended December 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements 8-22
Item 2. Management's Discussion and Analysis or Plan of Operation 23-26
Item 3. Controls and Procedures 27
Part II. Other Information 28-30
2
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,802
Accounts receivable, net 83,969
Marketable equity securities 9,000
Inventory 59,526
Loans and advances 62,000
-------------
Total current assets 224,297
Property and equipment, net 11,655
Goodwill, net 253,049
Other assets 44,773
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Total assets $ 533,774
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable and current installments of long-term debt $ 923,024
Notes payable - related parties 1,124,267
Accounts payable 240,798
Accrued expenses 788,360
Due to affiliates 1,138,999
Current liabilities of discontinued operations 1,147,158
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Total current liabilities 5,362,606
Long-term debt less current installments 159,143
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Total liabilities 5,521,749
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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 1,270,256 shares of common stock 57,739
Common stock: $.001 par value; authorized 250,000,000 shares; issued and
outstanding - 26,885,134 shares 26,885
Additional paid in capital 13,796,915
Common stock warrants 206,295
Stock subscription receivable (4,000)
Accumulated deficit (19,071,809)
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Total stockholders' deficit (4,987,975)
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Total liabilities and stockholders' deficit $ 533,774
=============
See accompanying notes to condensed consolidated financial statements.
3
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
2004 2003
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SALES AND REVENUES
Products $ 261,272 $ --
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261,272 --
COST OF SALES 134,410 --
------------- -------------
GROSS PROFIT 126,862 --
OPERATING EXPENSES:
Selling, general and administrative expense 98,663 144,880
Stock option and warrant compensation -- (243,748)
Management fee - parent -- 10,000
------------- -------------
Total operating expenses 98,663 (88,868)
------------- -------------
EARNINGS (LOSS) FROM OPERATIONS 28,199 88,868
OTHER INCOME (EXPENSE):
Other income 89 --
Unrealized gain from marketable equity securities 9,000 --
Interest expense (45,992) (26,578)
Interest expense - related parties (32,541) (21,961)
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(69,444) (48,539)
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EARNINGS (LOSS) FROM CONTINUING OPERATIONS (41,245) 40,329
Discontinued operations:
Loss from discontinued operations (6,270) (5,722,000)
Income tax benefit -- --
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(6,270) (5,722,000)
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NET LOSS $ (47,515) $ (5,681,671)
============= =============
NET EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.00) $ 0.00
DISCONTINUED OPERATIONS (0.00) (0.27)
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NET LOSS PER SHARE, BASIC AND DILUTED $ (0.00) $ (0.27)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 24,974,541 20,819,053
============= =============
See accompanying notes to condensed consolidated financial statements.
4
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
2004 2003
------------- -------------
SALES AND REVENUES
Products $ 447,165 $ --
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447,165 --
COST OF SALES 229,779 --
------------- -------------
GROSS PROFIT 217,386 --
OPERATING EXPENSES:
Selling, general and administrative expense 240,311 198,419
Stock option and warrant compensation -- (135,414)
Management fee - parent -- 25,000
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Total operating expenses 240,311 88,005
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EARNINGS (LOSS) FROM OPERATIONS (22,925) (88,005)
OTHER INCOME (EXPENSE):
Other income 89 --
Unrealized gain from marketable equity securities 9,000 --
Interest expense (82,943) (69,330)
Interest expense - related parties (57,582) (39,139)
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(131,436) (108,469)
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EARNINGS (LOSS) FROM CONTINUING OPERATIONS (154,361) (196,474)
Discontinued operations:
Loss from discontinued operations (4,582) (6,498,376)
Income tax benefit -- --
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(4,582) (6,498,376)
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NET LOSS $ (158,943) $ (6,694,850)
============= =============
NET EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.01) $ (0.01)
DISCONTINUED OPERATIONS (0.00) (0.31)
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NET LOSS PER SHARE, BASIC AND DILUTED $ (0.01) $ (0.32)
============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 24,963,577 20,763,129
============= =============
See accompanying notes to condensed consolidated financial statements.
5
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED DECEMBER 31, 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
Debentures converted to
common stock -- -- 381,911 382 (50,654)
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 577,389 $ 57,739 26,885,134 $ 26,885 $ 13,796,915
============= ============= ============= ============= =============
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 -- -- -- -- --
Debentures converted to
common stock -- -- -- 76,984 26,712
Net loss -- -- (158,943) -- (158,943)
------------- ------------- ------------- ------------- -------------
Balance, December 31, 2004 $ 206,295 $ (4,000) $(19,071,809) $ -- $ (4,987,975)
============= ============= ============= ============= =============
See accompanying notes to condensed consoliated financial statements.
6
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
(UNAUDITED)
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (158,943) $(6,694,850)
Loss from discontinued operations (4,582) (6,498,376)
------------ ------------
Loss from continuing operations (154,361) (196,474)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 1,542 --
Amortization 22,608 --
Unrealized gain from marketable equity securities (9,000)
Common stock issued for services -- 113,750
Common stock option expense -- (135,414)
Changes in operating assets and liabilities, net of effects of
acquisitions and divestitures:
Accounts and notes receivable (31,207) --
Inventories (32,573) --
Prepaid expenses and other assets -- 13,315
Accounts payable and accrued expenses 95,853 42,757
------------ ------------
Net cash used by continuing operations (107,138) (162,066)
Net cash provided (used) by discontinued operations 36,329 (282,743)
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Net cash used by operations (70,809) (444,809)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets of subsidiary -- 60,000
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Net cash provided by continuing operations -- 60,000
Net cash used by discontinued operations -- (10,967)
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Net cash provided by investing activities -- 49,033
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CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds -- 365,000
Repayment of notes payable (2,311) (180,000)
Loans and advances from related parties 55,475 281,332
Loans made (6,500) (15,000)
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Net cash provided by continuing operations 46,664 451,332
Net cash used by discontinued operations -- (51,006)
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Net cash provided by financing activities 46,664 400,326
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (24,145) 4,550
CASH AND CASH EQUIVALENTS, beginning of period 33,947 27,757
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CASH AND CASH EQUIVALENTS, end of period $ 9,802 $ 32,307
============ ============
See accompanying notes to condensed consolidated financial statements.
7
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, Brittany, 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 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.
(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.
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.
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 was 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 December 31, 2004, RCG
owns 43% of the outstanding common stock of LFSI.
(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 owned two condominium units in Dallas, Texas until
October 2004, when they were sold. Brittany has been included
in discontinued operations for all periods presented.
(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
9
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 December 31, 2004, the Company has a
significant working capital deficit of $5,138,309. The major
components of the working capital deficit include: $1,138,999
due to affiliates, $1,029,158 in accounts payable and accrued
expenses, current portion of long-term debt and notes payable
in the amount of $923,024, 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 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.
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.
10
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
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.
11
If the computed fair values of the stock-based awards had been
amortized to expense over the vesting period of the awards, net income
(loss) and net income (loss) per share, basic and diluted, would have
been as follows:
Three Months Ended December 31, 2004 and 2003
---------------------------------------------
Fiscal 2005 Fiscal 2004
------------ ------------
Net loss, as reported $ (47,515) $(5,681,671)
Add: Stock-based employee compensation included
in reported net loss -- (243,748)
Deduct: Total stock-based compensation expense
determined under fair value method for all awards (--) (--)
------------ ------------
Net loss, proforma $ (47,515) $(5,925,419)
============ ============
Net loss per share, basic and diluted $ (.00) $ (.28)
============ ============
Six Months Ended December 31, 2004 and 2003
-------------------------------------------
Fiscal 2005 Fiscal 2004
------------ ------------
Net loss, as reported $ (158,943) $(6,694,850)
Add: Stock-based employee compensation included
in reported net loss -- (135,414)
Deduct: Total stock-based compensation expense
determined under fair value method for all awards (--) (--)
------------ ------------
Net loss, proforma $ (158,943) $(6,830,264)
============ ============
Net loss per share, basic and diluted $ (.01) $ (.33)
============ ============
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.
12
On May 7, 2002, the Board of Directors adopted and the shareholders
approved by majority consent the Princeton Mining Company 2002 Stock
Option Plan. The plan provides for the issuance of up to 2 million
shares of the Company's $.001 par value common stock in connection with
stock options and other awards under the plan. The plan authorizes the
grant of incentive stock options and non-statutory stock options. At
December 31, 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 December 31,
2004, which are not 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 and six month periods ended
December 31, 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 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.
13
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.
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.
Sports' common stock was not trading at the time of the exchange, 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. Accordingly, the Company has recorded a zero value for
the stock received in the above transactions. At December 31, 2004,
Sports had changed its name to Lauraan Corp. ("LRCJ") and with limited
trading closed at $.12 per share at the end of the quarter. The Company
recognized an unrealized gain of $9,000 during the quarter ended
December 31, 2004.
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
14
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.
DISCONTINUED OPERATIONS
-----------------------
Discontinued operations include the results of operations for Georgia,
Franchising, Brittany, FutureSmart, Colorado and Integrators and its
wholly owned subsidiaries during the periods owned by the Company and
may be summarized for the three and six months ended December 31, 2004
and 2003 as follows:
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
Revenues $ -- $ 367,392
============ ============
Net earnings (loss) from operations $ 654 $ (261,970)
Asset impairment -- (6,089,540)
Gain (loss) on sale of assets (6,924) 629,510
------------ ------------
Net loss $ (6,270) $(5,722,000)
============ ============
Net loss per share, basic and diluted $ (.00) $ (.27)
============ ============
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
Revenues $ -- $ 1,662,267
============ ============
Net earnings (loss) from operations $ 2,342 $(1,038,346)
Asset impairment -- (6,089,540)
Gain (loss) on sale of assets (6,924) 629,510
------------ ------------
Net loss $ (4,582) $(6,498,376)
============ ============
Net loss per share, basic and diluted $ (.00) $ (.31)
============ ============
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 December 31, 2004.
15
D. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt and notes payable at December 31, 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; past due $ 145,000
Note payable - due June 30, 2005; with interest at 12% 34,919
Convertible debentures - due May 4, 2009; with interest at 1% (1) 150,833
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 43,495
Note payable - due in monthly installments of $361; with final payment due on
October 17, 2007; collateralized by a vehicle; non-interest bearing 12,646
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 1,082,167
Less current portion of long-term debt 923,024
-----------
Long-term debt less current portion $ 159,143
===========
(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
16
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 and six months ended December 31, 2004, $2,566 and
$5,773, respectively, 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 December 31, 2004,
$39,690 of the debt financing costs remain and $2,617 and $5,234 was
amortized during the three and six months ended December 31, 2004,
respectively. In addition, loan costs in the amount of $5,396 were
expensed when the related principal obligation of $26,596 (face value)
was converted during the quarter ended December 31, 2004.
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. During the quarter ended December 31, 2004,
debenture principal in the face amount of $26,596 was converted into
2,581,443 shares of the Company's common stock. The shares included the
Company's remaining treasury stock of 2,199,532 shares and 381,911
newly issued shares.
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 December 31, 2004, 45,618,089
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.
17
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.
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 $1.25 on December 31, 2004.
18
E. NOTES PAYABLE - RELATED PARTIES
Notes payable to related parties at December 31, 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; past due $ 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; past due 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; past due 118,709
-----------
Total $1,124,267
===========
F. INCOME TAXES
Deferred income taxes at December 31, 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.
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. At
December 31, 2004, 577,389 shares of preferred stock are outstanding.
19
H. TRANSACTIONS WITH RELATED PARTIES
At December 31, 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 10,688
Advances from and accrued interest payable to G. David Gordon, a shareholder
and creditor of LFSI and RCG 167,388
Advances from Steven Zink, President of LBI 15,551
-----------
$1,138,999
===========
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 and six
months ended December 30, 2003, RCG charged the Company $15,000 and
$25,000, respectively, (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 December 31, 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 $28,544 in accrued compensation at December 31, 2004,
which is included in accrued expenses.
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.
20
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 during fiscal 2004.
Revenues from these franchisees for the three and six months ended
December 31, 2003, are as follows (there were no sales during the
current fiscal year):
Houston and three North Carolina markets $ 20,000 $ 79,000
Three South Carolina markets 1,000 26,000
Three Maryland markets 4,000 10,000
LVA and subsidiaries 4,000 30,000
Dallas 3,000 21,000
--------- ---------
$ 32,000 $166,000
========= =========
I. BUSINESS SEGMENT INFORMATION
As of December 31, 2004, the Company's continuing operations consisted
of one location. Accordingly, the Company only operates in one business
segment.
21
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) $24,850
2006 49,700
2007 4,200
--------
$78,750
========
Rent expense from continuing operations for the three and six months
ended December 31, 2004, amounted to $12,483 and $28,942, respectively.
There was no rent expense in continuing operations during fiscal 2004.
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.
22
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 was the owner of two condominium units in Dallas, Texas which were sold
in October 2004. The operations of Brittany are included in discontinued
operations for all periods presented.
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.
23
Effective November 15, 2003, pursuant to an Asset Purchase Agreement, LFSI,
through its wholly owned subsidiary, Colorado, completed the acquisition of the
majority of the assets of HomeSync Corporation ("HomeSync") by assuming certain
liabilities of HomeSync. The purchase price was recorded in an amount equal to
the assumed liabilities of approximately $750,000. Shortly after completing the
acquisition and prior to December 31, 2003, a significant portion of the assets
of HomeSync, which were supposedly acquired by Colorado, were seized by the
Colorado Department of Revenue to satisfy certain unpaid tax obligations. Upon
notifying HomeSync of the seizure, the Company was informed that HomeSync would
be filing for Chapter 7 Bankruptcy. Based upon that information, the Company was
informed by counsel that, due to the U.S. Bankruptcy rules regarding
preferential transfer, the Company was instructed to deliver control of the
HomeSync assets acquired back to HomeSync. The Company had only nominal costs
associated with the acquisition, which have been expensed. Accordingly, the
Company has treated the transaction as if it were rescinded with the only
financial impact being the acquisition costs discussed above.
LFSI completed its acquisition of FutureSmart effective March 7, 2003. On May
28, 2003, the Board of Directors approved a plan to dispose of FutureSmart.
Accordingly, its operations since March 7, 2003 have been included in
discontinued operations.
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 December 31, 2004, the Company has a significant working capital deficit of
$5,138,309. The major components of the working capital deficit include:
$1,138,999 due to affiliates, $1,029,158 in accounts payable and accrued
expenses, current portion of long-term debt and notes payable in the amount of
$923,024, 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 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
24
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.
During the six months ended December 31, 2004, debentures with a face value of
$26,596 were converted into 2,581,443 shares (including 2,199,532 shares of
treasury stock) of the common stock of the Company.
THREE MONTHS ENDED DECEMBER 31, 2004 AND 2003
SALES AND REVENUES
During the three months ended December 31, 2004, the Company's only continuing
operation consisted of the operations of LBI, which was acquired on May 5, 2004.
All other operations were discontinued in fiscal 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses have decreased $46,217
(32%) during the three month period ended December 31, 2004, as compared to the
year earlier period. The fiscal 2005 amount includes $61,707 in SG&A for LBI and
$36,956 for corporate SG&A. The fiscal 2004 amount includes only corporate SG&A.
During fiscal 2004, the Company issued common stock valued at $113,750 in
exchange for marketing and consulting services.
STOCK OPTION AND WARRANT COMPENSATION
Stock option and warrant compensation amounted to ($243,745) during the
three-month period ended December 31, 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. Compensation expense was accrued on a monthly basis in
fiscal 2004 for the difference between the exercise price and the market price
on the date of the grant, until the resignation of the Chief Executive Officer
in October 2003. The accrual since March 2003 for all un-vested options was
reversed in October 2003.
INTEREST EXPENSE
Interest expense amounted to $78,533 ($32,541 for related parties) during the
three month period ended December 31, 2004, as compared to the year earlier
period amount of $48,539 ($21,961 for related parties). The increase in interest
expense of $29,994 ($10,580 for related parties) is primarily due to expensing
the unamortized loan cost associated with converted debentures, the interest
accruing on the debentures, a transfer of debt from discontinued operations to
continuing operations and an increase in related party debt of $144,401.
25
DISCONTINUED OPERATIONS
The loss from discontinued operations amounted to $6,270 and $5,722,000 during
the three month period ended December 31, 2004 and 2003, respectively.
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003
SALES AND REVENUES
During the six months ended December 31, 2004, the Company's only continuing
operation consisted of the operations of LBI, which was acquired on May 5, 2004.
All other operations were discontinued in fiscal 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
SG&A expenses have increased $41,892 (21%) during the three month period ended
December 31, 2004, as compared to the year earlier period. The fiscal 2005
amount includes $140,846 in SG&A for LBI and $99,465 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 ($135,414) during the
six-month period ended December 31, 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. Compensation expense was accrued on a monthly basis in
fiscal 2004 for the difference between the exercise price and the market price
on the date of the grant, until the resignation of the Chief Executive Officer
in October 2003. The accrual since March 2003 for all un-vested options was
reversed in October 2003.
INTEREST EXPENSE
Interest expense amounted to $140,525 ($57,582 for related parties) during the
six month period ended December 31, 2004, as compared to the year earlier period
amount of $108,469 ($39,139 for related parties). The increase in interest
expense of $32,056 ($18,443 for related parties) is primarily due to expensing
the unamortized loan cost associated with converted debentures, the interest
accruing on the debentures, a transfer of debt from discontinued operations to
continuing operations and an increase in related party debt of $144,401.
DISCONTINUED OPERATIONS
The loss from discontinued operations amounted to $4,582 and $6,498,376 during
the six month period ended December 31, 2004 and 2003, respectively.
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ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
are filed or submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in the reports that are filed under the Exchange Act is
accumulated and communicated to management, including the principal executive
officer and principal accounting officer, as appropriate to allow timely
decisions regarding required disclosure. Under the supervision of and with the
participation of management, including the principal executive officer and
principal accounting officer, the Company has evaluated the effectiveness of the
design and operation of its disclosure controls and procedures as of December
31, 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.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the six month period ended December 31, 2004, the Company issued
2,581,443 shares of its common stock (including 2,199,532 from treasury stock)
in exchange for convertible debentures with a face value of $26,596. The shares
were sold pursuant to an exemption from registration under Section 4(2)
promulgated under the Securities Act of 1933, as amended.
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 29
32 Certifications pursuant to 18 U.S.C. Section 1350,
Section 906 of the Sarbanes-Oxley Act of 2002 Page 30
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: February 10, 2005 By: /s/ Paul Johnson
---------------------------
Paul Johnson, President
Acting CEO and Principal
Accounting Officer
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