U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For Quarter Ended: MARCH 31, 2005
Commission File Number: 001-04026
LIFESTYLE INNOVATIONS, INC.
---------------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 82-6008727
------ ----------
(State of Incorporation) (IRS Employer ID No)
4700 LAKESHORE CT, COLLEYVILLE, TX 76034
----------------------------------------
(Address of principal executive office)
817-291-4000
------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares outstanding of registrant's common stock, par value $.001
per share, as of April 30, 2005 was 27,892,093 shares.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
INDEX
Page
No.
---
Part I. Financial Information (unaudited)
Item 1. Condensed Consolidated Balance Sheet - March 31, 2005 3
Condensed Consolidated Statements of Operations - 4
Three Months Ended March 31, 2005 and 2004
Condensed Consolidated Statements of Operations - 5
Nine Months Ended March 31, 2005 and 2004
Condensed Consolidated Statement of Stockholders' Deficit - 6
Nine Months Ended March 31, 2005
Condensed Consolidated Statements of Cash Flows - 7
Nine Months Ended March 31, 2005 and 2004
Notes to Condensed Consolidated Financial Statements 8-20
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
March 31, 2005
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,992
Accounts receivable, net 52,895
Marketable equity securities 750
Inventory 17,684
------------
Total current assets 83,321
Property and equipment, net 10,884
Goodwill, net 253,049
Other assets 40,797
------------
Total assets $ 388,051
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable and current installments of long-term debt $ 917,234
Notes payable - related parties 1,124,267
Accounts payable 224,654
Accrued expenses 811,197
Due to affiliates 1,172,540
Current liabilities of discontinued operations 1,147,158
------------
Total current liabilities 5,397,050
Long-term debt less current installments 152,899
------------
Total liabilities 5,549,949
------------
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 - 27,892,093 shares 27,892
Additional paid in capital 13,804,970
Common stock warrants 206,295
Stock subscription receivable (4,000)
Accumulated deficit (19,254,794)
------------
Total stockholders' deficit (5,161,898)
------------
Total liabilities and stockholders' deficit $ 388,051
============
See accompanying notes to condensed consolidated financial statements.
3
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
Sales and revenues
Products $ 134,038 $ --
------------ ------------
134,038 --
COST OF SALES 106,237 --
------------ ------------
GROSS PROFIT 27,801 --
OPERATING EXPENSES:
Selling, general and administrative expense 119,799 72,829
------------ ------------
Total operating expenses 119,799 72,829
------------ ------------
EARNINGS (LOSS) FROM OPERATIONS (91,998) (72,829)
OTHER INCOME (EXPENSE):
Other income 328 2,144
Unrealized gain (loss) from marketable equity securities (8,250) --
Interest expense (36,775) (14,697)
Interest expense - related parties (33,728) (22,356)
------------ ------------
(78,425) (34,909)
------------ ------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (170,423) (107,738)
Discontinued operations:
Loss from discontinued operations (12,562) (1,439,964)
Income tax benefit -- --
------------ ------------
(12,562) (1,439,964)
------------ ------------
NET LOSS $ (182,985) $ (1,547,702)
============ ============
NET EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.01) $ --
DISCONTINUED OPERATIONS (0.00) (0.07)
------------ ------------
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.01) $ (0.07)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 27,735,455 20,826,389
============ ============
See accompanying notes to condensed consolidated financial statements.
4
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
Sales and revenues
Products $ 581,203 $ --
------------ ------------
581,203 --
COST OF SALES 336,015 --
------------ ------------
GROSS PROFIT 245,188 --
OPERATING EXPENSES:
Selling, general and administrative expense 360,112 272,092
Stock option and warrant compensation -- (135,414)
Management fee - parent -- 25,000
------------ ------------
Total operating expenses 360,112 161,678
------------ ------------
EARNINGS (LOSS) FROM OPERATIONS (114,924) (161,678)
OTHER INCOME (EXPENSE):
Other income 418 7,712
Unrealized gain from marketable equity securities 750 --
Interest expense (119,718) (84,027)
Interest expense - related parties (91,310) (61,494)
------------ ------------
(209,860) (137,809)
------------ ------------
EARNINGS (LOSS) FROM CONTINUING OPERATIONS (324,784) (299,487)
Discontinued operations:
Loss from discontinued operations (17,144) (7,943,065)
Income tax benefit -- --
------------ ------------
(17,144) (7,943,065)
------------ ------------
NET LOSS $ (341,928) $ (8,242,552)
============ ============
NET EARNINGS (LOSS) PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.01) $ (0.02)
DISCONTINUED OPERATIONS (0.00) (0.38)
------------ ------------
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.01) $ (0.40)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 25,874,048 20,712,875
============ ============
See accompanying notes to condensed consolidated financial statements.
5
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED MARCH 31, 2005
(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 - - 1,388,870 1,389 (42,599)
Net loss - - - - -
------------ ------------- ---------------- --------------- --------------
Balance, March 31, 2005 577,389 $ 57,739 27,892,093 $ 27,892 $ 13,804,970
============ ============= ================ =============== ==============
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 35,774
Net loss - - (341,928) - (341,928)
------------ ------------- ---------------- --------------- --------------
Balance, March 31, 2005 $ 206,295 $ (4,000) $ (19,254,794) $ - $ (5,161,898)
============ ============= ================ =============== ==============
See accompanying notes to condensed consoliated financial statements.
6
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
Cash flows from operating activities
Net loss $ (341,928) $(8,242,552)
Loss from discontinued operations (17,144) (7,943,065)
----------- -----------
Loss from continuing operations (324,784) (299,487)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 2,313 1,265
Amortization 21,022 --
Unrealized gain from marketable equity securities (750) --
Bad debt expense 62,000 --
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 4,593 --
Inventories 9,270 --
Prepaid expenses and other assets -- 14,148
Accounts payable and accrued expenses 109,359 93,594
----------- -----------
Net cash used by continuing operations (116,977) (212,144)
Net cash provided (used) by discontinued operations 26,330 (376,644)
----------- -----------
Net cash used by operations (90,647) (588,788)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets of subsidiary -- 60,000
----------- -----------
Net cash provided by continuing operations -- 60,000
Net cash used by discontinued operations -- (14,149)
----------- -----------
Net cash provided by investing activities -- 45,851
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Loan proceeds -- 70,000
Repayment of notes payable (20,324) (180,000)
Loans and advances from related parties 89,016 353,186
Loans made -- (62,500)
----------- -----------
Net cash provided by continuing operations 68,692 180,686
Net cash provided by discontinued operations -- 369,067
----------- -----------
Net cash provided by financing activities 68,692 549,753
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,955) 6,816
CASH AND CASH EQUIVALENTS, beginning of period 33,947 3,080
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 11,992 $ 9,896
=========== ===========
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.
(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"). 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 franchisee of Franchising until Franchising
discontinued operations effective April 1, 2004.
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, and until October 17, 2003, when it was sold, 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. The historical financial statements prior to September
5, 2002, are those of LST. At March 31, 2005, RCG owns 41.5% of
the outstanding common stock of LFSI.
8
(3) NATURE OF BUSINESS AND CURRENT OPERATIONS - LBI is the only
operating company in continuing 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.
(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 March 31, 2005, the Company has a significant
working capital deficit of $5,313,729. The major components of the
working capital deficit include: $1,172,540 due to affiliates,
$1,035,851 in accounts payable and accrued expenses, current
portion of long-term debt and notes payable in the amount of
$917,234, 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
9
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.
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, resulting in a negative stock option and
warrant compensation expense of $135,414 during the nine-month period
ended March 31, 2004.
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.
10
If the computed fair values of the stock-based awards had been
amortized to expense over the vesting period of the awards, net income
(loss) and net income (loss) per share, basic and diluted, would have
been as follows:
Three Months Ended March 31, 2005 and 2004
------------------------------------------
Fiscal 2005 Fiscal 2004
----------- -----------
Net loss, as reported $ (182,985) $(1,547,702)
Add: Stock-based employee compensation included
in reported net loss - -
Deduct: Total stock-based compensation expense
determined under fair value method for all awards - -
------------- ------------
Net loss, proforma $ (182,985) $(1,547,702)
============= ============
Net loss per share, basic and diluted $ (.01) $ (.07)
============= ============
Nine Months Ended March 31, 2005 and 2004
-----------------------------------------
Fiscal 2005 Fiscal 2004
----------- -----------
Net loss, as reported $ (341,928) $(8,242,552)
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 $ (341,928) $(8,377,966)
============= ============
Net loss per share, basic and diluted $ (.01) $ (.40)
============= ============
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
In December 2004, the FASB issued SFAS 123 (revised 2004), "Share-Based
Payment" (SFAS 123(R)). Among other things, SFAS 123(R) requires
expensing the fair value of stock options, previously optional
accounting. For transition, upon adoption on January 1, 2006, SFAS
123(R) would require expensing any unvested options and will also
require the Company to change the classification of certain tax
benefits from option deductions to financing rather than operating cash
flows. As of March 31, 2005, the Company did not have any unvested
options which would require adjustment upon adoption of SFAS 123(R).
Adoption should have the same impact as the pro forma disclosure
included under stock option plans above.
On May 7, 2002, the Board of Directors adopted and the shareholders
approved by majority consent the Princeton Mining Company 2002 Stock
Option Plan. The plan provides for the issuance of up to 2 million
shares of the Company's $.001 par value common stock in connection with
stock options and other awards under the plan. The plan authorizes the
grant of incentive stock options and non-statutory stock options. At
March 31, 2005, 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 March 31, 2005, 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 nine month periods ended
March 31, 2005 and 2004, 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.
12
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. 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.
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 on that date. At
March 31, 2005, LRCJ closed at $.01 per share. The Company recognized an
unrealized gain of $9,000 during the quarter ended December 31, 2004 and
recognized an unrealized loss of $8,250 during the quarter ended March 31, 2005.
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.
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 nine months ended March 31, 2005 and 2004 as follows:
13
Fiscal 2005 Fiscal 2004
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Revenues $ -- $ 42,993
============ ============
Net earnings (loss) from operations $ (12,562) $ (135,463)
Asset impairment -- (1,304,501)
Gain (loss) on sale of assets -- --
------------ ------------
Net loss $ (12,562) $(1,439,964)
============ ============
Net loss per share, basic and diluted $ (.00) $ (.07)
============ ============
NINE MONTHS ENDED MARCH 31, 2005 AND 2004
Revenues $ -- $ 2,288,247
============ ============
Net earnings (loss) from operations $ (10,220) $(1,673,521)
Asset impairment -- (6,899,054)
Gain (loss) on sale of assets (6,924) 629,510
------------ ------------
Net loss $ (17,144) $(7,943,065)
============ ============
Net loss per share, basic and diluted $ (.00) $ (.40)
============ ============
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
March 31, 2005.
14
D. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt and notes payable at March 31, 2005, 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) 146,034
Note payable - due on demand; with interest at 4.5%;
Uncollateralized (2) 39,484
Note payable to bank - due July 31, 2005; with interest at prime plus 2%;
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 11,201
Note payable - due in August 2003 with interest at 12% and collateralized by
certain home technology accounts receivable and inventory; past due (3) 650,000
----------
Total notes payable and long-term debt 1,070,133
Less current portion of long-term debt 917,234
----------
Long-term debt less current portion $ 152,899
==========
(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.
15
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 and nine months ended March 31, 2005, $2,139
and $7,692, respectively, in interest was accrued and added to the remaining
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 March 31,
2005, $35,714 of the debt financing costs remain and $2,150 and $6,546 was
amortized during the three and nine months ended March 31, 2005, respectively,
on the remaining balance. In addition, loan costs in the amount of $8,060 were
expensed when the related principal obligation of $35,596 (face value) was
converted during the nine months ended March 31, 2005.
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 nine
months ended March 31, 2005, debenture principal in the face amount of $35,596
and accrued interest of $178 was converted into 3,588,402 shares of the
Company's common stock. The shares included the Company's remaining treasury
stock of 2,199,532 shares and 1,388,870 newly issued shares.
16
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 March 31, 2005, 44,611,130 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.
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.
17
(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 has reduced the balance to $39,484 and is attempting to negotiate some
form of payout on the remainder.
(3) At the option of the note holder, this note can be converted into the common
stock of RCG (the former parent of the Company) at a ratio of one share of
common stock for each $4.55 of outstanding principal and interest. RCG's common
stock closed at $.77 on March 31, 2005.
E. NOTES PAYABLE - RELATED PARTIES
Notes payable to related parties at March 31, 2005, 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 March 31, 2005, consist primarily of net operating loss
carryforwards, which amount to approximately $19,780,000 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.
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During the three months ended September 30, 2004, 204,363 shares of preferred
stock were converted into 449,598 shares of common stock. At March 31, 2005,
577,389 shares of preferred stock are outstanding.
H. TRANSACTIONS WITH RELATED PARTIES
At March 31, 2005, 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 14,250
Advances from and accrued interest payable to G. David Gordon, a shareholder
and creditor of LFSI and RCG 197,554
Advances from Steven Zink, President of LBI 15,364
------------
$ 1,172,540
============
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 nine months ended March 31, 2004, RCG charged the Company $25,000, (none
was charged in fiscal 2005 or during the three months ended March 31, 2004).
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 March 31, 2005, 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 March 31, 2005, which is included in
accrued expenses.
19
I. BUSINESS SEGMENT INFORMATION
As of March 31, 2005, the Company's continuing operations consisted of one
location. Accordingly, the Company only operates in one business segment.
J. COMMITMENTS AND CONTINGENCIES
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 made a subsequent payment which reduced the balance to $39,484. LBI
is negotiating a pay-out schedule for the remaining 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, the only current operating company, 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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2005, the Company has a significant working capital deficit of
$5,313,729. The major components of the working capital deficit include:
$1,172,540 due to affiliates, $1,035,851 in accounts payable and accrued
expenses, current portion of long-term debt and notes payable in the amount of
$917,234, 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
21
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 nine months ended March 31, 2005, debentures with a face value of
$35,596 and accrued interest of $178 were converted into 3,588,402 shares
(including 2,199,532 shares of treasury stock) of the common stock of the
Company.
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
SALES AND REVENUES
During the three months ended March 31, 2005, 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 increased $46,970
(64%) during the three month period ended March 31, 2005, as compared to the
year earlier period. The fiscal 2005 amount includes $62,832 in SG&A for LBI and
$56,967 for corporate SG&A. The fiscal 2004 amount includes only corporate SG&A.
Fiscal 2005 corporate SG&A includes bad debt expense of $62,000.
INTEREST EXPENSE
Interest expense amounted to $70,503 ($33,728 for related parties) during the
three month period ended March 31, 2005, as compared to the year earlier period
amount of $37,053 ($22,356 for related parties). The increase in interest
expense of $33,450 ($11,372 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 $55,135 as of the
end of the periods.
DISCONTINUED OPERATIONS
The loss from discontinued operations amounted to $12,562 and $1,439,964 during
the three month period ended March 31, 2005 and 2004, respectively.
22
NINE MONTHS ENDED MARCH 31, 2005 AND 2004
SALES AND REVENUES
During the nine months ended March 31, 2005, 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 $88,020 (32%) during the nine month period ended
March 31, 2005, as compared to the year earlier period. The fiscal 2005 amount
includes $203,681 in SG&A for LBI and $156,431 for corporate SG&A. The fiscal
2004 amount includes only corporate SG&A. Corporate SG&A in fiscal 2005 includes
bad debt expense in the amount of $62,000.
STOCK OPTION AND WARRANT COMPENSATION
Stock option and warrant compensation amounted to ($135,414) during the
nine-month period ended March 31, 2004, 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 $211,028 ($91,310 for related parties) during the
nine-month period ended March 31, 2005, as compared to the year earlier period
amount of $145,521 ($61,494 for related parties). The increase in interest
expense of $65,507 ($29,816 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 $55,135 as of the
end of the period.
DISCONTINUED OPERATIONS
The loss from discontinued operations amounted to $17,144 and $7,943,065 during
the nine month period ended March 31, 2005 and 2004, respectively.
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 March 31,
2005, 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 month period ended March 31, 2005, the Company issued 1,006,959
shares of its common stock in exchange for convertible debentures with a face
value of $9,000. 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 26
32 Certifications pursuant to 18 U.S.C. Section 1350,
Section 906 of the Sarbanes-Oxley Act of 2002 Page 27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFESTYLE INNOVATIONS, INC.
Date: May 18, 2005 By: /s/ Paul Johnson
----------------------------
Paul Johnson, President
Acting CEO and Principal
Accounting Officer
25