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, 2005
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)
817-291-4000
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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 December 31, 2005 was 29,162,349 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 - December 31, 2005 3
Condensed Consolidated Statements of Operations - Three Months Ended December
31, 2005 and 2004 4
Condensed Consolidated Statements of Operations - Six Months Ended December
31, 2005 and 2004 5
Condensed Consolidated Statements of Cash Flows - Six Months Ended December
31, 2005 and 2004 6
Notes to Condensed Consolidated Financial Statements 7-16
Item 2. Management's Discussion and Analysis or Plan of Operation 17-19
Item 3. Controls and Procedures 20
Part II. Other information 21-23
2
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
December 31, 2005
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 513
Accounts receivable 3,218
Marketable equity securities --
------------
Total current assets 3,731
Other assets 29,144
------------
Total assets $ 32,875
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Notes payable and current installments of long-term debt $ 829,919
Notes payable - related parties 1,124,267
Accounts payable 289,456
Accrued expenses 869,550
Due to affiliates 1,255,986
Current liabilities of discontinued operations 1,647,158
------------
Total current liabilities 6,016,336
Long-term debt and accrued interest less current installments 155,856
------------
Total liabilities 6,172,192
------------
Commitments and contingencies
STOCKHOLDERS' DEFICIT
Common stock: $.001 par value; authorized 250,000,000 shares; issued and
outstanding - 29,162,349 shares 29,162
Additional paid in capital 14,067,734
Accumulated deficit (20,236,213)
------------
Total stockholders' deficit (6,139,317)
------------
Total liabilities and stockholders' deficit $ 32,875
============
See accompanying notes to condensed consolidated financial statements.
3
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
Sales and revenues
Royalty $ 1,632 $ --
------------ ------------
1,632 --
COST OF SALES -- --
------------ ------------
GROSS PROFIT 1,632 --
OPERATING EXPENSES:
Selling, general and administrative expense 11,444 36,956
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Total operating expenses 11,444 36,956
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EARNINGS (LOSS) FROM OPERATIONS (9,812) (36,956)
OTHER INCOME (EXPENSE):
Unrealized gain (loss) from marketable equity securities (2,250) 9,000
Interest expense (29,849) (26,498)
Interest expense - related parties (32,541) (32,541)
------------ ------------
(64,640) (50,039)
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LOSS FROM CONTINUING OPERATIONS (74,452) (86,995)
Discontinued operations:
Earnings from discontinued operations -- 39,480
Income taxes -- --
------------ ------------
-- 39,480
------------ ------------
NET LOSS $ (74,452) $ (47,515)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.00) $ (0.00)
DISCONTINUED OPERATIONS -- 0.00
------------ ------------
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.00) $ (0.00)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 29,162,349 24,974,541
============ ============
See accompanying notes to condensed consolidated financial statements.
4
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
Sales and revenues
Royalty $ 3,218 $ --
------------ ------------
3,218 --
COST OF SALES -- --
------------ ------------
GROSS PROFIT 3,218 --
OPERATING EXPENSES:
Selling, general and administrative expense 12,829 99,465
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Total operating expenses 12,829 99,465
------------ ------------
EARNINGS (LOSS) FROM OPERATIONS (9,611) (99,465)
OTHER INCOME (EXPENSE):
Unrealized gain (loss) from marketable equity securities (4,500) 9,000
Interest expense (59,788) (51,786)
Interest expense - related parties (65,082) (57,582)
------------ ------------
(129,370) (100,368)
------------ ------------
LOSS FROM CONTINUING OPERATIONS (138,981) (199,833)
Discontinued operations:
Earnings from discontinued operations -- 40,890
Income taxes -- --
------------ ------------
-- 40,890
------------ ------------
NET LOSS $ (138,981) $ (158,943)
============ ============
NET LOSS PER SHARE, BASIC AND DILUTED:
CONTINUING OPERATIONS $ (0.00) $ (0.01)
DISCONTINUED OPERATIONS -- 0.00
------------ ------------
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.00) $ (0.01)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 29,162,349 24,963,577
============ ============
See accompanying notes to condensed consolidated financial statements.
5
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
Cash flows from operating activities
Net loss $(138,981) $(158,943)
Loss from discontinued operations -- 40,890
--------- ---------
Loss from continuing operations (138,981) (199,833)
Adjustments to reconcile net loss to net
cash used by operating activities:
Amortization 5,473 --
Unrealized (gain) loss from marketable equity securities 4,500 (9,000)
Changes in operating assets and liabilities:
Accounts receivable (3,218) --
Prepaid expenses and other assets 4,396 --
Accounts payable and accrued expenses 62,666 99,335
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Net cash used by continuing operations (65,164) (109,498)
Net cash provided by discontinued operations -- 38,689
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Net cash used by operations (65,164) (70,809)
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CASH FLOWS FROM FINANCING ACTIVITIES
Loans and advances from related parties 65,082 57,582
Loans made -- (6,500)
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Net cash provided by continuing operations 65,082 51,082
Net cash used by discontinued operations -- (4,418)
--------- ---------
Net cash provided by financing activities 65,082 46,664
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NET DECREASE IN CASH AND CASH EQUIVALENTS (82) (24,145)
CASH AND CASH EQUIVALENTS, beginning of period 595 33,947
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 513 $ 9,802
========= =========
See accompanying notes to condensed consolidated financial statements.
6
LIFESTYLE INNOVATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION AND ORGANIZATION
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION - The
consolidated financial statements include the accounts of
Lifestyle Innovations, Inc. ("LFSI") and its wholly owned
subsidiaries: 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. OneTravel Holdings, Inc. ("OTV") owns 39.7%
of the Company's common stock.
(2) NATURE OF BUSINESS AND CURRENT OPERATIONS - The Company has a
royalty agreement which calls for monthly payment of royalties
equal to 1% of LST of Baltimore, Inc.'s ("LBI") sales after June
30, 2005.
(3) 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,
2005, which is included in the Company's Form 10-KSB.
(4) FISCAL YEARS - As used herein, fiscal 2006 refers to the periods
included in the fiscal year ended June 30, 2006, and fiscal 2005
refers to the periods included in the fiscal year ended June 30,
2005.
(5) GOING CONCERN - At December 31, 2005, the Company has a
significant working capital deficit of $6,012,605. The major
components of the working capital deficit include: $1,255,986 due
to affiliates, $1,159,006 in accounts payable and accrued
expenses, current portion of long-term debt and notes payable in
the amount of $829,919, notes payable due related parties of
7
$1,124,267 and net current liabilities of discontinued operations
in the amount of $1,647,158. 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 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 or acquire a business to improve its
operating cash flows, (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.
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.
8
During the six months ended December 31, 2005, and 2004, the Company
did not have any employee awards. Accordingly, there is no fair
value/intrinsic value difference to disclose.
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.
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 December 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 which
would be included above, if applicable.
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, 2005, there were options granted under the plan for
280,461 shares (net of forfeitures), all of which are vested and
1,719,539 shares available for grant. There are non-qualified options
to purchase 166,666 shares (all vested) outstanding at December 31,
2005, which are not granted under the plan. An incentive stock option
for 400,000 shares expired in September 2005.
NET LOSS PER COMMON SHARE
The Company has adopted SFAS No. 128 "Earnings Per Share," 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
9
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, 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.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current year presentation.
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, which was valued at $76,000, based upon the trading
price of the stock on the date of the transaction. 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 sold effective June 30, 2005. Accordingly, the operations of LBI are
included in discontinued operations for the periods owned by LFSI.
DISCONTINUED OPERATIONS
- -----------------------
Discontinued operations include the results of operations for LBI and Brittany
during the periods owned by the Company and may be summarized for the six months
ended December 31, 2004 as follows (none in fiscal 2006):
10
Revenues $ 261,272
===============
Net earnings from operations $ 40,890
Gain (loss) on sale of assets --
---------------
Net earnings $ 40,890
===============
Net earnings per share, basic and diluted $ (.00)
============
Net current liabilities of discontinued operations includes: accounts receivable
(fully reserved); $130,681 in accounts payable; $232,023 due to OTV and
subsidiaries; $295,000 in notes payable; and $989,454 in accrued expenses as of
December 31, 2005.
D. MARKETABLE EQUITY SECURITIES
Lauraan Corp.'s ("Lauraan") common stock was not trading at the time it was
acquired in exchange for two former subsidiaries of the Company, 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 Lauraan
common stock owned had no value on the date of the exchange. The Company
recorded a zero value for the stock received in the above transactions.
Lauraan's common stock no longer has a market and the Company included an
unrealized loss of $2,250 and $4,500 in operations during the three and six
months ended December 31, 2005, respectively, and reduced the carrying value of
the investment to zero.
E. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt and notes payable at December 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%; past due 34,919
Convertible debentures - due May 4, 2009; with interest at 1% (1) 152,769
Note payable - due in August 2003 with interest at 12%; collateralized by
certain home technology accounts receivable and inventory; past due (2) 650,000
-----------
Total notes payable and long-term debt 982,688
Less current portion of long-term debt 829,919
-----------
Long-term debt less current portion 152,769
Non-current accrued interest 3,087
-----------
Long-term debt and accrued interest $ 155,856
===========
11
(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. Each
of the debentures has a maturity date of May 4, 2009, subject to earlier
conversion or redemption pursuant to its terms, and bears interest at the rate
of 1% per year, payable in cash or shares of common stock at the option of the
holder of the debentures. As a result of the Merger, the Company has assumed the
rights and obligations of LBI in the private placement, including the gross
proceeds raised through the sale of the debentures, the Note issued by HEM to
LBI, and LBI's obligations under the debentures and the Purchase Agreement.
As a result of the Merger at May 5, 2004, $249,200 and $800 in principal amount
of the initial debentures are convertible into unrestricted shares of the
Company's common stock at a conversion price that is the lower of $0.42 or the
average of the three lowest closing per share bid prices for the common stock
during the 40 trading days prior to conversion and $0.001 per share,
respectively. The $750,000 Contingent Debenture will become convertible and
subject to repayment if and when the related Note from HEM is paid in full to
the Company in cash. The Contingent Debenture would be convertible into
unrestricted shares of the Company's common stock at a conversion price that is
based upon the trading prices of the Company's common stock at the time the Note
is funded.
Since the $250,000 in convertible debentures bear interest at 1%, the Company
discounted this amount by 6% to arrive at an effective cost of 7%. The discount
of $64,687 was recorded as additional paid-in capital. The additional 6%
interest will accrue monthly and be added to the convertible debenture balance.
The discount associated with any principal conversion is immediately recorded as
interest expense. During the six months ended December 31, 2005, $4,540, 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
12
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, 2005, $29,144 of the debt financing cost remains and $4,396 was amortized
during the six months ended December 31, 2005.
As of June 30, 2005, $63,368 in debenture principal plus the related accrued
interest had been converted into 5,388,870 shares of the Company's common stock.
There were no additional conversions during the six months ended December 31,
2005.
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, 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
13
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) At the option of the note holder, this note can be converted into OTV's
common stock at a ratio of one post-split share of common stock for each $45.50
($4.55 pre-split) of outstanding principal and interest. OTV changed its name to
OneTravel Holdings, Inc. and on July 7, 2005 had a 1:10 stock split. OTV's
common stock closed at $2.03 on December 31, 2005.
F. NOTES PAYABLE - RELATED PARTIES
Notes payable to related parties at December 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; 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
=============
14
G. INCOME TAXES
Deferred income taxes at December 31, 2005, consist primarily of net operating
loss carryforwards, which amount to approximately $20,290,000 and expire between
2020 and 2025. 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 net operating losses could be limited.
H. TRANSACTIONS WITH RELATED PARTIES
At December 31, 2005, notes and advances due to affiliates from continuing
operations consisted of the following:
Due to OTV and its subsidiaries $ 945,372
Advance from and accrued interest payable to Michael Pruitt,
former CEO of OTV 22,559
Advances from and accrued interest payable to G. David
Gordon, a shareholder and creditor of LFSI and OTV 288,055
-----------
$ 1,255,986
===========
The amount due to OTV and its subsidiaries represents net advances to and from
OTV and its subsidiaries. OTV 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.
During fiscal 2004, OTV returned 4,000,000 shares of the Company's common stock,
which was recorded as treasury stock. This transaction was related to an
indemnification agreement between OTV and the Company, where OTV is indemnified
against potential liabilities as a shareholder of the Company.
At December 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 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, 2005, which is included in
accrued expenses. Mr. Johnson currently serves without compensation.
I. COMMITMENTS AND CONTINGENCIES
The Company had no rent expense from continuing operations for the periods ended
December 31, 2005 and 2004. The office space occupied by LFSI is provided at no
cost by the President of the Company. It is expected that this arrangement will
continue until operations improve.
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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. ("Integrators") 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 at the time,
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 received a default judgment against Integrators and RichMark in the
amount of $295,000. In addition, Mercator has pursued its alter ego claim
against LFSI and due to LFSI's inability to pay for legal counsel LFSI will most
likely not prevail.
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. Prior to a decision by the arbitrator,
SYSLYNC-COLORADO filed for bankruptcy protection. LFSI believes the bankruptcy
filing stayed all of the proceedings; however, Saltzman is attempting to enforce
a $500,000 judgment against LFSI. The $500,000 judgment is included in current
liabilities of discontinued operations.
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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.
The Company has a royalty agreement with LBI, which calls for monthly payment of
royalties equal to 1% of LBI's sales after June 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2005, the Company has a significant working capital deficit of
$6,012,605. The major components of the working capital deficit include:
$1,255,986 due to affiliates, $1159,006 in accounts payable and accrued
expenses, current portion of long-term debt and notes payable in the amount of
$829,919, notes payable due related parties of $1,124,267 and net current
liabilities of discontinued operations in the amount of $1,647,158. 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 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 develop or acquire a business and improve its operating cash flows,
(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
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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.
THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004
SALES AND REVENUES
During the three months ended December 31, 2005, the Company's only continuing
operation consisted of the 1% royalty agreement on LBI's sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses have decreased $25,512
(69%) during the three month period ended December 31, 2005, as compared to the
year earlier period. The majority of the decline is the result of lower
accounting and professional fees. The remainder of the earlier year costs
includes travel and other SG&A expenses, which have been substantially
discontinued or minimized in the current fiscal period.
INTEREST EXPENSE
Interest expense amounted to $62,390 ($32,541 for related parties) during the
three month period ended December 31, 2005, as compared to the year earlier
period amount of $59,039 ($32,541 for related parties). The increase in interest
expense is primarily due to amortizing the loan cost associated with debentures
and the interest accruing on the debentures.
DISCONTINUED OPERATIONS
Earnings from operations discontinued at the end of fiscal 2005 amounted to
$39,480 during the three month period ended December 31, 2004.
SIX MONTHS ENDED DECEMBER 31, 2005 AND 2004
SALES AND REVENUES
During the six months ended December 31, 2005, the Company's only continuing
operation consisted of the 1% royalty agreement on LBI's sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative ("SG&A") expenses have decreased $86,636
(87%) during the six month period ended December 31, 2005, as compared to the
year earlier period. The decline includes lower legal and accounting costs of
$44,530 and discontinued officer compensation of $13,456. The remainder of the
earlier year costs includes travel and other SG&A expenses, which have been
substantially discontinued or minimized in the current fiscal period.
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INTEREST EXPENSE
Interest expense amounted to $124,870 ($65,082 for related parties) during the
six month period ended December 31, 2005, as compared to the year earlier period
amount of $109,368 ($57,582 for related parties). The increase in interest
expense is primarily due to amortizing the loan cost associated with debentures,
the interest accruing on the debentures and an increase from 6% to 12% on
related party debt with a principal balance of $500,000.
DISCONTINUED OPERATIONS
Earnings from operations discontinued at the end of fiscal 2005 amounted to
$40,890 during the six month period ended December 31, 2004.
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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, 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.
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PART II - OTHER INFORMATION
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 21
32 Certifications pursuant to 18 U.S.C. Section 1350,
Section 906 of the Sarbanes-Oxley Act of 2002 Page 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIFESTYLE INNOVATIONS, INC.
Date: March 22, 2006 By: /s/ Paul Johnson
--------------------------
Paul Johnson, President
Acting CEO and Principal
Accounting Officer
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