UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Quarter Ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-29058
LIFESTREAM TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
NEVADA 82-0487965
------ ----------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
510 CLEARWATER LOOP, SUITE 101, POST FALLS, IDAHO 83854
(Address of principal executive offices)
(208) 457-9409
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 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
---- ----
As of November 10, 2000, the registrant had 19,681,156 shares of its $.001 par
value common stock outstanding.
Transitional Small Business Disclosure Format: YES NO X
---- -----------
LIFESTREAM TECHNOLOGIES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2000
PART I. FINANCIAL INFORMATION
Page
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 30, 2000 and June 30, 2000........................ 2
Condensed Consolidated Statements of Operations for the three month periods ended
September 30, 2000 and September 30, 1999.......................................................... 3
Condensed Consolidated Statements of Cash Flows for the three month periods ended
September 30, 2000 and September 30, 1999.......................................................... 4
Notes to Interim Condensed Consolidated Financial Statements......................................... 5
Item 2. Management's Discussion and Analysis........................................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 18
Item 2. Changes in Securities and Use of Proceeds.................................................. 18
Item 3. Defaults Upon Senior Securities............................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders........................................ 18
Item 5. Other Information.......................................................................... 18
Item 6. Exhibits and Reports on Form 8-K........................................................... 18
This report may contain forward-looking statements that involve certain risks
and uncertainties. When used in this discussion, the words "anticipate,"
"believe," "estimate," "expect," and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
factors set forth under "Management's Discussion and Analysis - Risk Factors"
and elsewhere in this report.
1
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, June 30,
2000 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 507,138 $ 1,059,637
Accounts receivable 13,267 13,786
Inventories 540,485 445,767
Prepaid expenses 96,241 8,419
------------ ------------
Total current assets 1,157,131 1,527,609
Equipment and leasehold improvements, net 511,798 480,308
Purchased software technology, net 1,407,494 1,591,083
Patent and license rights, net 1,280,939 1,312,113
Note receivable - Officer 93,519 18,836
Other assets 95,990 16,380
------------ ------------
Total assets $ 4,546,871 $ 4,946,329
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 387,569 $ 158,036
Accrued liabilities 106,591 90,037
Current maturities of capital lease obligations 29,548 30,186
Current maturities of note payable 36,330 36,330
------------ ------------
Total current liabilities 560,038 314,589
Capitalized lease obligations, less current maturities 10,536 20,216
Notes payable, less current maturities 57,522 69,632
Convertible debt 50,000 50,000
------------ ------------
Total liabilities 678,096 454,437
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $.001 par value, 50,000,000 shares authorized,
19,548,725 and 19,210,304 issued and outstanding, respectively 19,549 19,210
Additional paid-in capital 18,187,274 17,445,275
Accumulated deficit (14,338,048) (12,972,593)
------------ ------------
Total stockholders' equity 3,868,775 4,491,892
------------ ------------
Total liabilities and stockholders' equity $ 4,546,871 $ 4,946,329
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
2
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
------------------------------------
September 30, September 30,
2000 1999
------------ ----------
Net sales $ 26,974 $ 49,976
Cost of sales 44,949 41,472
------------ ----------
Gross (loss) profit (17,975) 8,504
Operating expenses:
Sales and marketing 259,979 111,646
General and administrative 476,294 240,515
Professional services 260,005 30,945
Product research and development 93,286 94,927
Depreciation and amortization 266,686 139,902
------------ ----------
Loss from operations (1,374,225) (609,431)
Interest, net, and other 8,770 (148,199)
------------ ----------
Net loss $ (1,365,455) $ (757,630)
============ ==========
Net loss per share - Basic $ (0.07) $ (0.06)
============ ==========
Net loss per share - Diluted $ (0.07) $ (0.06)
============ ==========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
--------------------------------------
September 30, September 30,
2000 1999
------------------ ------------------
OPERATING ACTIVITIES:
Net loss $ (1,365,455) $ (757,630)
------------ ----------
Non cash items:
Depreciation and amortization 266,686 139,902
Issuances of common stock and common stock options for services 301,834 168,488
Contingently issuable common stock -- (7,000)
Net change in current assets and liabilities, net of business acquired:
Accounts receivable 519 (4,451)
Inventories (94,718) 25,377
Prepaid expenses (87,822) (978)
Accounts payable 229,533 10,330
Accrued liabilities 16,554 2,500
Increase in other non-current assets (79,610) --
------------ ----------
Net cash used in operating activities $ (812,479) $ (423,462)
------------ ----------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements $ (83,413) $ (2,829)
Advances to officer (74,683) (386)
Cash in business acquired -- 78
------------ ----------
Net cash used in investing activities $ (158,096) $ (3,137)
------------ ----------
FINANCING ACTIVITIES:
Payments on capital lease obligations $ (10,318) $ (1,492)
Payments on notes payable (12,110) (3,125)
Proceeds from sales of common stock 210,000 450,000
Proceeds from exercises of stock options 230,504 --
Proceeds from issuance of convertible debt -- 20,000
------------ ----------
Net cash provided by financing activities $ 418,076 $ 465,383
------------ ----------
Net increase in cash and cash equivalents (552,499) 38,784
Cash and cash equivalents, beginning 1,059,637 81,656
------------ ----------
Cash and cash equivalents, ending $ 507,138 $ 120,440
============ ==========
SUPPLEMENTAL CASH FLOW DATA:
- -----------------------------
Cash paid for interest $ 2,066 $ 2,123
Issuances of common stock in exchange for:
Business acquired - 1,798,142
Financing costs 657 139,228
The accompanying notes are an integral part
of these condensed consolidated financial statements.
4
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Condensed Consolidated Financial Statements
Nature of Operations and Basis of Presentation
Lifestream Technologies, Inc. ("Lifestream Technologies" or "the Company"), a
Nevada corporation, is a healthcare information technology company primarily
focused on developing and marketing secure, Internet-based medical solutions
through the use of proprietary smart card-enabled medical diagnostic devices.
The Company's current product line consists of a professional-use cholesterol
monitor, and a soon to be released, over-the-counter, consumer-use cholesterol
monitor. Both monitors measure total cholesterol levels in the blood and have
received market clearances from the United States Food and Drug Administration
("FDA").
These interim condensed consolidated financial statements include the operations
of the Company and its two wholly owned subsidiaries, Lifestream Diagnostics,
Inc. and Secured Interactive Technologies, Inc. All material intercompany
accounts and transactions have been eliminated in consolidation.
Preparation of Interim Condensed Consolidated Financial Statements
These interim condensed consolidated financial statements have been prepared by
the management of Lifestream Technologies, Inc., without audit, in accordance
with generally accepted accounting principles in the United States and, in the
opinion of management, contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the Company's consolidated
financial position, results of operations and cash flows for the periods
presented. Certain information and note disclosures normally included in
consolidated annual financial statements prepared in accordance with generally
accepted accounting principles in the United States have been condensed or
omitted in these consolidated interim financial statements, although the Company
believes that the disclosures are adequate to make the information presented not
misleading. The consolidated financial position, results of operations and cash
flows for the interim periods disclosed herein are not necessarily indicative of
future financial results. These interim condensed consolidated financial
statements should be read in conjunction with the annual consolidated financial
statements and the notes thereto included in the Company's latest Annual Report
on Form 10-KSB for the fiscal year ended June 30, 2000.
Certain amounts in the condensed consolidated financial statements for the prior
fiscal year's interim period have been reclassified to be consistent with the
current fiscal year's interim presentation.
Use of Estimates
The preparation of interim condensed consolidated financial statements in
conformity with generally accepted accounting principles in the United States
requires management to make certain estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities at the date of the interim condensed
consolidated financial statements. Actual results could differ from those
estimates.
5
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
1. Interim Condensed Consolidated Financial Statements (continued)
Fiscal Periods
References to a fiscal year refer to the calendar year in which such fiscal year
ends. The Company's fiscal year ends on June 30th.
2. Financial Condition and Liquidity
We have incurred significant operating and net losses since our inception and,
as a result, have a substantial accumulated deficit at September 30, 2000. Our
ability to effectively market our existing professional-use cholesterol monitor
has been constrained by continuing capital constraints and, as a consequence, we
have realized limited revenues to date. On July 25, 2000, we received FDA market
clearance for our new over-the-counter, consumer-use cholesterol monitor, which
we believe has a significantly larger market and revenue potential than our
existing professional-use cholesterol monitor. We currently anticipate that
initial shipments of our consumer-use cholesterol monitor will commence during
our second fiscal quarter ending December 31, 2000. However, it must be noted
that our ultimate ability to effectively introduce and broadly market our
consumer-use cholesterol monitor will likely also be constrained should we be
unsuccessful in our current capital raising efforts as described below. As such,
there can be no assurance that the revenue-generating potential we perceive for
our cholesterol monitors will ever be fully realized.
We have undertaken certain actions aimed at improving our current liquidity and
capital resource positions. These actions include seeking new sources of capital
or funding to allow us to continue production and marketing of our products.
Since June 30, 2000, we have raised approximately $725,000 from the sale of
common stock under an ongoing $3.0 million "best efforts" private placement and
approximately $230,000 from the exercising by certain individuals of previously
outstanding stock options. The private placement commenced on June 20, 2000 and
allows qualified investors to potentially purchase an aggregate one million
common shares at $3.00 per share. For every two shares of common stock
purchased, the investor will also receive a warrant, expiring on November 30,
2002, entitling them to purchase one additional common share for $5.00. We
recently received non-binding letters of intent from one of our existing
principal investors and two new investors indicating their current intent to
purchase in the aggregate approximately $1.6 million in common shares pursuant
to the private placement offering. It is our current intention to keep this
private placement open until the earlier of the full $3.0 million being
irrevocably subscribed to or November 30, 2000. We have also in our possession
an irrevocable letter of credit for $500,000 in contingency funding from an
existing principal investor. Additionally, we have recently employed certain
professionals with extensive backgrounds in the medical products industry that
we believe will assist us in executing our business plan. There can be no
assurances that we will be successful in our ongoing capital-raising efforts or
in the execution of our business plan. Any failure by us to raise sufficient
funds or to execute our business plan will have a material adverse impact on our
business, results of operations, liquidity and cash flows.
6
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
3. Inventories
Inventories consist of supplies, component parts, dry chemistry test strips and
assembled devices. Inventories are stated at lower of cost (first-in, first-out
method) or market. Inventories consist of the following:
September 30, June 30,
2000 2000
-------------- ------------
Raw materials $219,671 $421,397
Work in process 104,843 54,792
Finished goods 255,706 9,313
-------- --------
580,220 485,502
Less: Provision for inventory obsolescence 39,735 39,735
-------- --------
Total inventories $540,485 $445,767
======== ========
4. Loss Per Share
The following is a reconciliation of the number of common shares used in the
computations of net loss per basic and diluted share. Net loss per basic common
share is computed by dividing net loss by the weighted average number of common
shares outstanding for the period. Net loss per diluted common share is the same
as net loss per basic common share as the effects that could occur if securities
or other contracts to issue common stock (e.g., stock options, stock warrants
and convertible debt) were exercised or converted into common stock would be
anti-dilutive:
Three Months Ended
---------------------------------
September 30, September 30,
2000 1999
---------------------------------
Net loss $ 1,365,455 $ 757,630
=========== ===========
Average shares outstanding used to
determine net loss per basic common share 19,352,946 13,218,223
Net effect of dilutive stock options based
on the treasury stock method using average
market price (1) -- --
----------- -----------
Average shares used to determine net
loss per diluted common share 19,352,946 13,218,223
=========== ===========
(1) Excluded anti-dilutive shares issuable through stock options, stock warrants
and convertible debt were 2,670,362 and 1,097,540 for the three months ended
September 30, 2000 and September 30, 1999, respectively.
7
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion includes certain forward-looking statements within the
meaning of the federal securities laws. Such forward-looking statements include,
but are not limited to, statements regarding our current business strategies,
objectives and plans that involve risks and uncertainties. When used in this
discussion, the words "anticipate," "believe," "estimate," "expect," and similar
expressions are intended to identify such forward-looking statements. These
forward-looking statements are based on our current expectations and our actual
performance, results and achievements could differ materially from those
expressed in, or implied by, these forward-looking statements. Factors, within
and beyond our control, that could cause or contribute to such differences
include, among others, the following: those associated with developing and
marketing medical diagnostic devices, including technological advancements and
innovations, identifying, recruiting and retaining highly qualified personnel,
consumer receptivity and preferences, availability, affordability and coverage
terms of private and public medical insurance, political and regulatory
environments and general economic and business conditions; competition; success
of capital-raising, operating, marketing and growth initiatives; development and
operating costs; advertising and promotional efforts; brand awareness; the
existence or absence of adverse publicity; changes in business strategies or
development plans; quality and experience of management; availability, terms and
deployment of capital; business abilities and judgment of personnel; labor and
employee benefit costs; as well as those factors discussed elsewhere in this
Form 10-QSB and in our most recent Form 10-KSB for the fiscal year ended June
30, 2000 filed with the United States Securities and Exchange Commission.
References to a fiscal year refer to the calendar year in which such fiscal year
ends. Our fiscal year ends on June 30th.
Our Company Overview
We are a healthcare information technology company primarily focused on
developing and marketing secure, Internet-based medical solutions through the
use of proprietary smart card-enabled medical diagnostic devices. Our current
diagnostic product line consists of two easy-to-use, hand-held, smart
card-enabled cholesterol monitors, one specifically designed for facility-use by
professional medical service providers and one specifically designed for at home
use by at-risk cholesterol patients and health conscious consumers. Both
monitors share certain core technological capabilities, primarily being the
ability to measure total cholesterol levels in the blood with proven clinical
laboratory accuracy in approximately three minutes and the ability to
cumulatively store the resulting cholesterol test results on an integrated smart
card. Using a complimentary feature unique to our professional-use monitor, the
medical professional operator can additionally input via the monitor's keypad
eight other cardiac risk factors (e.g., gender, age, weight, tobacco use, etc.)
identified by the Framingham Heart Disease Epidemiological Study ("Framingham
Study") and determine the cardiac condition of the patient.
Both of our monitors have also been developed to ultimately take advantage of
our proprietary Internet technology, Privalink TM, which currently is in beta
testing. Once fully developed and available, our Privalink TM system will allow
for the cholesterol test results and any other patient medical data stored on
the smart card to be encryptically downloaded via the Internet to a secured
website we currently have under construction. This value-added capability will
allow both patients and their authorized medical providers to use the Internet
to conveniently retrieve this stored medical data, along with related scientific
literature, thereby promoting effective communication and coordination between
physician, pharmacist and patient. Although there can be no assurance of such,
we currently anticipate that our Privalink TM system will become available, on a
user fee or subscription basis, beginning in our fourth fiscal quarter ended
June 30, 2001.
In its recent "2000 Heart and Stroke Statistical Update", the American Heart
Association ("AHA") estimates that approximately 40 million American adults have
"high" total blood cholesterol levels (240 and higher milligrams per deciliter)
and approximately 60 million other Americans have "borderline-high" cholesterol
levels (200 - 239 milligrams per deciliter). The AHA, as well as the Framingham
Study, have identified elevated blood cholesterol as a primary contributor to
coronary heart disease ("CHD"), the single largest killer of American males and
females, as well as other forms of cardiovascular disease. Of the estimated
600,000 CHD-related deaths in the United States ("U.S.") during 1997, the AHA
estimates that about 225,000 died without ever being hospitalized and, in 50% of
the men and 63% of the women who died suddenly of CHD, there were no previous
symptoms of CHD. The AHA also sights CHD as the
8
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Company Overview (continued)
leading cause of premature, permanent disability in the U.S. labor force,
accounting for 19% of disability allowances by the Social Security
Administration. The AHA also estimates that CHD prevention and treatment costs
alone exceed $100 billion annually with more than 750,000 new patients entering
a cholesterol-lowering drug therapy programs each month.
Because of the recognized medical importance of managing cholesterol and
preventing CHD, the National Cholesterol Education Program ("NCEP") was formed
to educate consumers and professionals about the importance of knowing an
individual's cholesterol level and to establish guidelines for the detection,
evaluation and treatment of high cholesterol in adults. To detect cholesterol
risk and aid in therapy compliance, the NCEP recommends a whole blood total
cholesterol test at least once every five years, and if cholesterol levels are
categorized as high, every three months.
Medical professionals have traditionally been the only source for cholesterol
testing and such testing has typically been performed with a bench top analyzer
requiring a considerable sample of whole blood and generally taking 24 to 48
hours to produce results. Although some bench top analyzers have more recently
evolved to utilize dry chemistry strip technology, such as that utilized in our
monitors, thereby eliminating the previously required and critical segregation
of red blood cells from serum/plasma for an accurate result, they continue to
require relatively large amounts of whole blood in precise measurements and
generally require a minimum of five minutes, excluding the time required for
blood drawing and centrifugation, to produce results. Additionally, as the cost
of a single bench top analyzer can approach $2,000, the resulting patient test
costs can also be a deterrent to routine cholesterol monitoring.
Accordingly, our efforts to date primarily have focused on meeting what we
perceive to be a continuing widespread need in the professional and consumer
markets for a more affordable, timely and convenient means of accurately testing
for blood cholesterol levels. We believe that our professional-use and
over-the-counter, consumer-use cholesterol monitors meet this widespread need,
providing easier to operate, more cost-effective and faster results-producing
alternatives to traditional bench top analyzers for use in routine cholesterol
testing, monitoring and treatment programs. We believe that the potential
societal benefits of our monitors will be earlier detection of high cholesterol
levels by at-risk individuals, more timely interventions by medical
professionals, more actively engaged and informed patients, and ultimately,
reductions in cholesterol-related disabilities and deaths.
Both our professional-use and over-the-counter, consumer use cholesterol
monitors have received market clearances from the U.S. Food and Drug
Administration ("FDA") and meet all NCEP guidelines for precision. Both monitors
operate on the power of a single nine-volt battery and are compact, lightweight
and portable. Either monitor can be easily and discreetly carried in a medical
bag, purse or briefcase. To perform a cholesterol test on either monitor, the
operator merely sticks the finger using a reusable lance device equipped with a
disposable lancet and deposits a single drop of blood on a dry chemistry strip.
The strip then initiates a chroma-graphic reaction with lipoprotein to produce a
color change in direct proportion to the quantity of total cholesterol in the
blood sample. The resulting color change is "read" by the monitor's integrated
photometry system and converted electronically to a quantitative digital
read-out that is displayed within three minutes on an integrated easy-to-read,
liquid crystal display ("LCD") screen. Ongoing test results may be stored on an
integrated, encryption-based smart card thereby maintaining a complete history
of test results. We believe that there are no other hand-held, quantitative
cholesterol monitoring systems that are easier to use, more accurate and quicker
in obtaining results. Our professional-use cholesterol monitor has been
available since March 1999 and currently has a suggested retail price of
$299.95. With our July 25, 2000 receipt of market clearance from the FDA, we
currently plan to introduce
9
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Company Overview (continued)
our over-the-counter, consumer-use cholesterol monitor with a suggested retail
price of $129.95 in our second fiscal quarter ending December 31, 2000.
Our overriding corporate objective is to ultimately establish our proprietary
cholesterol monitors and complimentary Privalink TM system as the consumer
standard of care for personal health and wellness and the medical industry
standard for virtual patient record storage and retrieval. We plan to achieve
our objective by:
0 Achieving and maintaining market leadership through innovative product
introductions and extensions
0 Leveraging what we believe to be our superior technological
capabilities
0 Accelerating our penetration of targeted markets through key strategic
marketing alliances
0 Aggressively targeting the consumer channel with the introduction of
our FDA-approved, Over-The-Counter, Consumer-Use Cholesterol Monitor
0 Obtaining and promoting independent third party endorsements by leading
healthcare authorities
0 Developing and introducing other proprietary, Internet-enabled medical
diagnostic devices to allow consumers to better manage their health
0 Positioning our products as the preferred tools for personal health
management of chronic diseases
Our Results of Operations
Our net sales for the three months ended September 30, 2000 ("fiscal 2001 first
quarter") were $26,974, as compared to $49,976 for the three months ended
September 30, 1999 ("fiscal 2000 first quarter"). On January 1, 1999, we
commenced revenue-generating operations related to our professional-use
cholesterol monitor and ceased being a development-stage company. In March 1999,
we recognized our first revenues from the professional-use cholesterol monitor
in connection with initial customer shipments. However, the revenue-generating
potential of our professional-use monitor has been severely constrained to date
by our continued lack of available capital to fund our initially planned sales
and marketing efforts for this monitor. Faced with a lack of sufficient capital
for the immediate future, we elected to forego the possibility of realizing
modestly increased sales in the shorter-term from further capital depleting
marketing efforts for our professional-use cholesterol monitor and instead
elected to deploy our limited capital resources into the development of our
over-the-counter, consumer-use cholesterol monitor for which we envisioned, and
continue to envision, significantly larger market and revenue potential. We
currently anticipate that initial shipments of our over-the-counter,
consumer-use cholesterol monitors, which recently received FDA market clearance
on July 25, 2000, will commence during the second fiscal quarter ending December
31, 2000. Recently, we have received in excess of $400,000 in purchase orders
from two major national retailers for our over-the-counter, consumer-use
cholesterol monitors and related dry chemistry strips and smart cards. Product
shipments fulfilling these purchase orders are scheduled for December 2000 and
January 2001. However, it must be noted that our ultimate ability to effectively
introduce and broadly market our over-the-counter, consumer-use cholesterol
monitor will also be constrained should we be unsuccessful in our current
raising additional funding - See Liquidity and Capital Resources below. As such,
there can be no assurance that the revenue-generating potential we perceive for
either of our cholesterol monitors will be fully realized.
10
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Results of Operations (continued)
Cost of sales includes direct labor, direct material, and overhead. Our cost of
sales for the fiscal 2001 first quarter were $44,949 as compared to $41,472 for
the fiscal 2000 first quarter. We realized a negative gross margin of 66.6% for
the fiscal 2001 first quarter as compared to a positive gross margin of 17.0%
for the fiscal 2000 first quarter. The limited unit sales to date of our
professional-use cholesterol monitor and incentive introductory discounting
granted to initial customers has resulted in reductions to our gross revenues
and negative gross profits and margins. We expect to continue discounting the
prices of our cholesterol monitors until these products receive more widespread
market exposure and acceptance. With our recent receipt of purchase orders
exceeding $400,000, we anticipate realizing modest positive gross margins over
the next ninety days, as we begin to benefit from increased economies of scale.
Total operating expenses were $1,356,250 for the fiscal 2001 first quarter, an
increase of $738,315, or 119.5%, from the $617,935 incurred during the fiscal
2000 first quarter. This increase, as further detailed below, primarily is
attributable to costs incurred in preparation for the pending launch of our
over-the-counter, consumer-use cholesterol monitor.
Sales and marketing expenses were $259,979 for the fiscal 2001 first quarter, an
increase of $148,333, or 132.9%, from the $111,646 incurred during the fiscal
2000 first quarter. This increase primarily is attributable to increased trade
show attendance, market research, advertising and headcount.
General and administrative expenses were $476,294 (inclusive of $83,760 in
non-cash charges) for the fiscal 2001 first quarter, an increase of $235,779, or
98.0%, from the $240,515 (inclusive of $24,240 in non-cash charges) incurred
during the fiscal 2000 first quarter. This increase primarily is attributable to
increased headcount, director fees and communications costs.
Professional service expenses were $260,005 (inclusive of $122,174 in non-cash
charges) for the fiscal 2001 first quarter, as compared to $30,945 (inclusive of
$5,000 in non-cash charges) during the fiscal 2000 first quarter. This increase
primarily is attributable to increased headhunter, legal, consulting and public
relations fees.
Product research and development expenses were $93,286 for the fiscal 2001 first
quarter (inclusive of $9,633 in non-cash charges), relatively constant with the
$94,927 (inclusive of $0 in non-cash charges) incurred during the fiscal 2000
first quarter.
Non-cash depreciation and amortization expenses were $266,686 for the fiscal
2001 first quarter, as compared to $139,902 for the fiscal 2000 first quarter.
This increase primarily is attributable to the amortization of software
technology acquired in our September 3, 1999 acquisition of Secured Interactive
Technologies, Inc.
Primarily as a result of the foregoing, our loss from operations for the fiscal
2001 first quarter was $1,374,225, an increase of $764,794, or 125.5%, from the
$609,431 incurred during the fiscal 2000 first quarter.
Non-operating expenses and income primarily consist of interest income, interest
expense and other miscellaneous income and expense items. Net non-operating
income was $8,770 (inclusive of $0 in non-cash charges) for the fiscal 2001
first quarter as compared to net non-operating expenses of $148,199 (inclusive
of $139,248 in non-cash charges) for the fiscal 2000 first quarter. The fiscal
2001 first quarter primarily reflects interest income whereas the fiscal 2000
first quarter primarily reflects inducement costs associated with incremental
common shares issued in connection with the conversion of $270,000 in
convertible debt.
11
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Results of Operations (continued)
We incurred a net loss of $1,365,455 ($0.07 per basic and diluted share) for the
fiscal 2001 first quarter as compared to a net loss of $757,630 ($0.06 per basic
and diluted share) for the fiscal 2000 first quarter.
Our Liquidity and Capital Resources
We have incurred significant operating and net losses since our inception and,
as a result, have a substantial accumulated deficit at September 30, 2000. Our
ability to effectively market our existing professional-use cholesterol monitor
has been constrained by continuing capital constraints and, as a consequence, we
have realized limited revenues to date. On July 25, 2000, we received FDA market
clearance for our new over-the-counter, consumer-use cholesterol monitor, which
we believe has a significantly larger market and revenue potential than our
existing professional-use cholesterol monitor. We currently anticipate that
initial shipments of our consumer-use cholesterol monitor will commence during
our second fiscal quarter ending December 31, 2000. However, it must be noted
that our ultimate ability to effectively introduce and broadly market our
consumer-use cholesterol monitor will likely also be constrained should we be
unsuccessful in our current capital raising efforts as described below. As such,
there can be no assurance that the revenue-generating potential we perceive for
our cholesterol monitors will ever be fully realized.
We have undertaken certain actions aimed at improving our current liquidity and
capital resource positions. These actions include seeking new sources of capital
or funding to allow us to continue production and marketing of our products.
Since June 30, 2000, we have raised approximately $725,000 from the sale of
common stock under an ongoing $3.0 million "best efforts" private placement and
approximately $230,000 from the exercising by certain individuals of previously
outstanding stock options. The private placement commenced on June 20, 2000 and
allows qualified investors to potentially purchase an aggregate one million
common shares at $3.00 per share. For every two shares of common stock
purchased, the investor will also receive a warrant, expiring on November 30,
2002, entitling them to purchase one additional common share for $5.00. We
recently received non-binding letters of intent from one of our existing
principal investors and two new investors indicating their current intent to
purchase in the aggregate approximately $1.6 million in common shares pursuant
to the private placement offering. It is our current intention to keep this
private placement open until the earlier of the full $3.0 million being
irrevocably subscribed to or November 30, 2000. We have also in our possession
an irrevocable letter of credit for $500,000 in contingency funding from an
existing principal investor. Additionally, we have recently employed certain
professionals with extensive backgrounds in the medical products industry that
we believe will assist us in executing our business plan. There can be no
assurances that we will be successful in our ongoing capital-raising efforts or
in the execution of our business plan. Any failure by us to raise sufficient
funds or to execute our business plan will have a material adverse impact on our
business, results of operations, liquidity and cash flows.
Operating activities used $812,479 in cash and cash equivalents during the
fiscal 2001 first quarter as compared to $423,462 during the fiscal 2000 first
quarter. This increased consumption rate primarily is attributable to the
increased net loss coupled with the negative cash flow effects of increased
inventories and prepaid expenses. Partially offsetting these negative cash flow
effects were the positive cash flow effects of increased accounts payable and
accrued liabilities as well as the adding back of increased non-cash
depreciation and amortization and non-cash compensatory charges. We have
historically financed our operations through the issuance of common stock and
debt securities.
Investing activities used $158,096 in cash and cash equivalents during the
fiscal 2001 first quarter as compared to $3,137 during the fiscal 2000 first
quarter. The increase in cash and cash equivalents used in investing activities
primarily is attributable to increased capital expenditures and advances to an
officer.
12
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Liquidity and Capital Resources (continued)
Financing activities provided $418,076 in cash and cash equivalents during the
fiscal 2001 first quarter as compared to $465,383 during the fiscal 2000 first
quarter. The decrease in cash and cash equivalents provided by financing
activities primarily is attributable to increased proceeds from exercises of
stock options being more than offset by decreased proceeds from sales of common
stock and issuances of convertible debt.
As a result of the foregoing, we had cash and cash equivalents of $507,138 and
$1,059,637 at September 30, 2000 and June 30, 2000, respectively. We had working
capital of $597,093 and $1,213,020 at September 30, 2000 and June 30, 2000,
respectively.
We currently have no material commitments for capital equipment. We do
anticipate the need over the next twelve months for certain assembly tooling and
equipment, a dry room and computer hardware, all of which we believe will be
obtainable as needed through conventional leases.
Our Other Matters
Seasonal and Inflationary Influences
We currently are not materially impacted by seasonal or inflationary influences.
Quantitative and Qualitative Disclosures About Market Risk
We currently are not exposed to financial market risks from changes in foreign
currency exchange rates and are only minimally impacted by changes in interest
rates. However, in the future, we may enter into transactions denominated in
non-U.S. currencies or increase the level of our borrowings, which could
increase our exposure to these market risks. We have not used, and currently do
not contemplate using, any derivative financial instruments.
Risk Factors
History of Operating Losses and Need For Additional Capital/Funding To Fully
Execute Our Business Plan.
We have incurred significant operating and net losses since our inception and,
as a result, have a substantial accumulated deficit at September 30, 2000. Our
ability to effectively market our existing professional-use cholesterol monitor
has been constrained by continuing capital constraints and, as a consequence, we
have realized limited revenues to date. On July 25, 2000, we received FDA market
clearance for our new over-the-counter, consumer-use cholesterol monitor, which
we believe has a significantly larger market and revenue potential than our
existing professional-use cholesterol monitor. We currently anticipate that
initial shipments of our consumer-use cholesterol monitor will commence during
our second fiscal quarter ending December 31, 2000. However, it must be noted
that our ultimate ability to effectively introduce and broadly market our
consumer-use cholesterol monitor will likely also be constrained should we be
unsuccessful in our current capital raising efforts as described below. As such,
there can be no assurance that the revenue-generating potential we perceive for
our cholesterol monitors will ever be fully realized.
We have undertaken certain actions aimed at improving our current liquidity and
capital resource positions. These actions include seeking new sources of capital
or funding to allow us to continue production and marketing of our products.
Since June 30, 2000, we have raised approximately $725,000 from the sale of
13
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
History (continued) common stock under an ongoing $3.0 million "best efforts"
private placement and approximately $230,000 from the exercising by certain
individuals of previously outstanding stock options. The private placement
commenced on June 20, 2000 and allows qualified investors to potentially
purchase an aggregate one million common shares at $3.00 per share. For every
two shares of common stock purchased, the investor will also receive a warrant,
expiring on November 30, 2002, entitling them to purchase one additional common
share for $5.00. We recently received non-binding letters of intent from one of
our existing principal investors and two new investors indicating their current
intent to purchase in the aggregate approximately $1.6 million in common shares
pursuant to the private placement offering. It is our current intention to keep
this private placement open until the earlier of the full $3.0 million being
irrevocably subscribed to or November 30, 2000. We have also in our possession
an irrevocable letter of credit for $500,000 in contingency funding from an
existing principal investor. Additionally, we have recently employed certain
professionals with extensive backgrounds in the medical products industry that
we believe will assist us in executing our business plan. There can be no
assurances that we will be successful in our ongoing capital-raising efforts or
in the execution of our business plan. Any failure by us to raise sufficient
funds or to execute our business plan will have a material adverse impact on our
business, results of operations, liquidity and cash flows.
Limited Marketing Experience and Uncertain Market Acceptance of Products. While
certain members of our management team have significant and relevant marketing
experience in healthcare diagnostics, as a company we have limited experience
marketing our professional-use or consumer-use cholesterol monitors. In the
professional market, we are currently working with third party representatives
to engage medical product distributors to market our cholesterol monitors. While
we have engaged one distributor directly, our third party representatives have
only held preliminary discussions with a limited number of distributors to date.
It is possible that we will be unsuccessful in retaining suitable distributors
for our professional-use product. Additionally, there can be no assurance that
these distributors will be successful in introducing and marketing our monitors
in the professional marketplace. In the consumer market, we are approaching the
traditional consumer retail channel directly, via internal personnel. While we
have had initial success in achieving agreements with a major catalogue showroom
retailer and a major television-shopping network, we have no assurance that the
balance of our distribution efforts will match our early success. Specifically,
we may find resistance from department store, chain drug and mass merchandiser
classes of trade to accepting our product for distribution. And, achieving
adequate distribution does not necessarily guarantee consumer purchase of our
consumer cholesterol monitor. Finally, although our initial marketing plan does
not focus on such, it should be noted that we have no experience as a company in
marketing our products in foreign countries.
Lack of Assembly Experience and Dependence on Certain Sources of Supply. We have
limited experience to date in assembling our professional-use cholesterol
monitor and minimal experience in assembling our over-the-counter, consumer-use
cholesterol monitor. Prior to any significant increase in the current production
of our cholesterol monitors, we will have to select and qualify various sources
of supply and remain able to manufacture in compliance with regulatory
requirements, in sufficient quantity, with appropriate quality and at acceptable
costs. There also can be no assurance that we would be able to pass through any
incremental costs incurred to our customers. We are also highly dependent upon
Roche and LRE as the sole supplier of the diagnostic modules, dry chemistry test
strips and calibration keys required for our cholesterol monitors. Should any
party be unable to meet its respective continuing obligations under the contract
or should we be unable to obtain a renewal of such contract at the end of its
five-year term in November 2002, we will be forced to either find another
suitable supplier for these critical items or make substantial capital and
personnel investments to allow us to internally produce these critical items.
Although we have recently entered into discussions with Roche and LRE aimed at
revising certain provisions of the above contract and extending its term, there
can be no assurance that a revised and extended contract will be obtained.
Although we believe that suitable alternative sources are available for our
other components, any interruptions in our supply of components or raw materials
would likely have at
14
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
Lack of Assembly Experience and Dependence on Certain Sources of Supply
(continued) least a short-term material adverse effect on our business,
financial position, results of operations and cash flows.
Dependence on Key Personnel. We believe that our future success is highly
dependent upon the continued services of Christopher Maus, our Chairman, Chief
Executive Officer and President. We believe that the loss of Mr. Maus' services
would likely have a material adverse effect on our business, results of
operations, liquidity and cash flows. We currently maintain a key man life
insurance policy on the life of Mr. Maus in the amount of $5,000,000. There can
be no assurances that we would be able to replace Mr. Maus in the event his
services become unavailable or that the proceeds from the above insurance policy
would sufficiently compensate us for the loss of Mr. Maus' services.
We are also highly dependent upon the principal members of our current
management team. Furthermore, our successful recruiting and retaining of certain
additional key personnel will be critical to our future success. Although we
believe that we have successful to date in recruiting and retaining skilled and
experienced management, marketing and scientific personnel, there can be no
assurance that we continue to be successful in recruiting and retaining key
personnel on acceptable terms, particularly given the current intensely
competitive environment for highly-qualified and experienced individuals.
Competition. The development and marketing of medical products is intensely
competitive. There are other companies that are currently marketing, or are
seeking to market, diagnostic products that compete with our professional-use
and over-the-counter, consumer-use cholesterol monitors. Some of these competing
products have received the prerequisite FDA marketing clearances for competing
with our monitors. Furthermore, several companies offering products similar to
ours have substantially greater financial, marketing and technological resources
than we do. As such, there can be no assurance that our products will be able to
successfully compete with these existing or future products. Our cholesterol
monitors compete, and will continue to compete, with established medical
laboratories that have traditionally performed most blood analysis. Certain of
our laboratory competitors currently offer services that may be perceived by
some individuals as being priced lower than the costs of utilizing our
cholesterol monitors. We also can not currently provide the same range of tests
provided by these laboratories. In addition, certain health care providers may
choose not to change their established means for such tests or make the
necessary capital investment to purchase our products. We also face competition
in the alternate-site market from makers of bench top multi-test blood analyzers
and other point-of-care blood analyzers.
While we believe that our products will be able to successfully compete with
clinical laboratories, bench top multi-test analyzers and other point-of-care
blood analyzers on the basis of ease of use, portability, the ability to conduct
tests without a skilled technician, cost effectiveness and quality of results,
there can be no assurance that we will be able to compete successfully. Blood
analysis is a well-established field in which there are a number of competitors
that have substantially greater financial resources and larger, more established
marketing, sales and service organizations than we are. As such, there can be no
assurance that our products will be competitive with the existing or future
products or services of our competitors.
Other companies having a significant presence in the professional market for
diagnostic screening and therapeutic monitoring, such as Abbott Laboratories,
Clinical Diagnostic Systems (a division of Johnson & Johnson) and Boehringer
Mannheim GmbH (a subsidiary of Roche Holdings Ltd.), have developed or are
developing analyzers designed for preventive care testing. These competitors
have substantially greater financial, technical, research and other resources
and larger, more established marketing, sales, distribution and service
organizations than we do. However, we believe that we currently have a
competitive advantage due to the design and cardiac risk factor analysis
capabilities of our professional-use cholesterol monitor as a hand-held,
quantitative, affordable and regulatory approved instrument. However, there can
be no assurance that our professional-use cholesterol monitor will be able to
compete with these other analyzers and testing devices or that our competitors
will not succeed in obtaining further government approvals or in
15
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
Competition (continued) developing or marketing technologies or products that
are more commercially attractive than our current or future products.
Government Regulation. In the past, we have been successful in obtaining all
required U.S. regulatory approvals, however, the process of obtaining marketing
clearances or approvals can be costly and time-consuming and there can be no
assurance that further clearances or approvals will be granted to us with
respect to any future products or that FDA review will not involve delays
adversely affecting the marketing and sale of any new products developed by us.
Moreover, our current approvals as well as any future approvals remain subject
to continual review and the subsequent discovery of previously unknown problems
may result in certain marketing restrictions or a complete withdrawal of the
product from the market. We also remain subject to FDA regulations with respect
to various other matters, including our manufacturing practices, record-keeping
and reporting. For instance, the FDA requires the integration of their quality
system into any facility it registers as a "medical device facility". The
quality system requirement ("QSR") encompasses product development ("GDP") and
manufacturing, customer service, incident reporting and labeling control
("GMP"). Our assembly facility in Post Falls, Idaho is registered with the FDA
and operates under the quality provisions of the FDA as well as under those of
the ISO-9001 quality system. Our assembly facility as well as our production
processes will remain subject to periodic audits on an ongoing basis by the FDA.
In addition, the use of our products may be regulated by various state agencies.
Although we believe that we will be able to comply with all applicable
regulations of the FDA, including QSR, GMP and GDP guidelines, current FDA
regulations and state regulations depend heavily on administrative
interpretations. As such, there can be no assurance that future interpretations
made by the FDA or other regulatory bodies, with possible retroactive effect,
will not adversely affect our business, results of operations, liquidity and
cash flows.
Although our primary marketing focus for the foreseeable future will be the
domestic U.S. market, we anticipate eventually attempting to market our products
overseas. Regulatory requirements pertaining to cholesterol monitors, as well as
other medical diagnostic devices, vary widely from country to country and can
range from simple product registrations to detailed submissions such as those
required by the U.S. FDA. There can be no assurance that we will be successful
in obtaining the requisite regulatory clearances in any foreign market.
Potential Impact of Medicare Reimbursement Regulations. Third party payers can
affect the pricing and the relative attractiveness of our products by regulating
the maximum amount of reimbursement they will provide for blood testing
services. For example, the reimbursement of fees for blood testing services for
Medicare patients in the hospital is included under Medicare's prospective
payment system diagnosis- related group regulations. If the reimbursement
amounts for blood testing services are decreased in the future, it may decrease
the amount which physicians and hospitals are able to charge Medicare patients
for such services and consequently the price we can charge for our products.
Dependence on and Protection of Patents and Proprietary Technology. Our
commercial success is dependent, in part, upon our trade secrets, know-how,
patents and other proprietary rights. There can be no assurance that our current
and pending patents will not be challenged by third parties, invalidated or
designed around, or that they will provide protection that has commercial
significance. There can also be no assurance that any current or future patent
applications will result in the actual issuance of a patent. Litigation, which
would likely be costly and time-consuming, may be necessary to protect our
intellectual property. The invalidation of any of our current or future patents
could permit increased competition, with potential material adverse effects on
our business, results of operations, liquidity and cash flows. In addition,
there can be no assurance that our technological applications will not infringe
upon the patents or proprietary rights of others or that licenses that might be
required for our processes or products will be
16
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
Dependence on and Protection of Patents and Proprietary Technology (continued)
available to us on commercially reasonable terms, if at all. Furthermore, there
can be no assurance that others may not develop or acquire trade secrets or
know-how similar to ours.
Product Liability and Insurance; Possible Exposure to Claims. The clinical
testing, marketing and manufacturing of our products necessarily involves the
risk of product liability. Although we maintain product liability insurance, the
amount and scope of any current and future insurance coverage may not be
adequate to protect us in the event of a product liability claim.
Continuing Research and Development Expenditures. We anticipate that we will
continue to expend significant funds on our research and product development
efforts. There can be no assurance that these costs will ultimately be recovered
through the successful development, introduction and marketing of resulting
products.
Limited Market for Our Common Shares. Our common stock is currently traded on
the American Stock Exchange and currently experiences limited trading volume on
any given day. This limited liquidity may adversely affect the ability of a
shareholder to sell their shares in the secondary market.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings presently pending to which Lifestream
Technologies, Inc. or either of its two subsidiaries are party or of which any
of their properties are the subject.
Item 2. Changes in Securities and Use of Proceeds
The Company relied on Section 4(2) of the 1933 Act as the basis for an exemption
from the registration requirements of the 1933 Act for the issuance of the
following restricted shares.
In April 1998, the Company agreed to issue 2,000 shares of Common Stock to each
of the directors elected to the Company's Board of Directors as compensation for
each month each serves as a director of the Company. Pursuant to this agreement,
24,000 shares will be issued, in the aggregate, to the directors with respect to
the three month period ended September 30, 2000.
In July 2000, we issued 582 shares of common stock to a public relations
consultant in exchange for services in the amount of $2,000.
In August 2000, we issued 70,000 shares of common stock to two investors
pursuant to our $3,000,000 private placement offering that commenced June 20,
2000.
In August 2000, we issued 2,500 shares of common stock to a public relations
consultant pursuant to a consulting agreement valued at $8,000, and 25,000
shares of common stock to our patent attorneys in pre-payment of legal services
amounting to $75,000.
In September 2000, we issued 6,207 shares of common stock to a consultant in
exchange for services valued at $25,000, and 7,765 shares of common stock to a
personnel recruitment firm in exchange for services valued at $33,000.
In September 2000, we issued 16,667 shares of common stock pursuant to our
$3,000,000 private placement offering that commenced June 20, 2000, to our
corporate attorney in exchange for past and pre-paid invoices for legal services
valued at $50,000.
From July 1, 2000 through September 30, 2000, 185,700 shares of common stock
were issued in connection with the exercise of outstanding stock options by
three individuals at prices ranging from $.98 to $1.25 per share for a total
exercise price of $230,504.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
There were no reports filed on Form 8-K during the three months ended September
30, 2000.
18
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Post Falls,
State of Idaho, on this 14th day of November 2000.
LIFESTREAM TECHNOLOGIES, INC.
By: /s/ Brett Sweezy
-----------------------------------
Brett Sweezy
Chief Financial and Accounting Officer