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 December 31, 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
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(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 February 16, 2001, the registrant had 20,175,611 shares of its $.001 par
value common stock outstanding.
Transitional Small Business Disclosure Format: YES NO X
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LIFESTREAM TECHNOLOGIES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2000
PART I. FINANCIAL INFORMATION
Page
Item 1. Condensed Consolidated Financial Statements
(unaudited)
Condensed Consolidated Balance Sheets at December 31, 2000 and June 30, 2000............................ 2
Condensed Consolidated Statements of Operations for the three and six month periods ended
December 31, 2000 and December 31, 1999............................................................... 3
Condensed Consolidated Statements of Cash Flows for the three and six month periods ended
December 31, 2000 and December 31, 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.............................................................................. 19
Item 2. Changes in Securities and Use of Proceeds...................................................... 19
Item 3. Defaults Upon Senior Securities................................................................ 19
Item 4. Submission of Matters to a Vote of Security Holders............................................ 19
Item 5. Other Information.............................................................................. 20
Item 6. Exhibits and Reports on Form 8-K............................................................... 20
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.
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, June 30,
2000 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 177,372 $ 1,059,637
Accounts receivable 295,199 13,786
Inventories 1,482,805 445,767
Prepaid expenses 158,859 8,419
------------ ------------
Total current assets 2,114,235 1,527,609
Equipment and leasehold improvements, net 914,397 480,308
Purchased software technology, net 1,260,572 1,591,083
Patent and license rights, net 1,249,765 1,312,113
Note receivable - Officer 93,470 18,836
Other assets 12,499 16,380
------------ ------------
Total assets $ 5,644,938 $ 4,946,329
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,183,552 $ 158,036
Accrued liabilities 158,144 90,037
Deferred revenue 272,226 --
Current maturities of capital lease obligations 112,922 30,186
Current maturities of note payable 297,937 36,330
------------ ------------
Total current liabilities 2,024,781 314,589
Capitalized lease obligations, less current maturities 85,011 20,216
Notes payable, less current maturities 39,860 69,632
Convertible debt 50,000 50,000
------------ ------------
Total liabilities 2,199,652 454,437
------------ ------------
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,
20,175,611 and 19,210,304 issued and outstanding, respectively 20,175 19,210
Additional paid-in capital 19,385,111 17,445,275
Accumulated deficit (15,960,000) (12,972,593)
------------ ------------
Total stockholders' equity 3,445,286 4,491,892
------------ ------------
Total liabilities and stockholders' equity 5,644,938 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 Six Months Ended
------------------------------ ------------------------------
December 31, December 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net sales $ 52,133 $ 31,079 $ 79,106 9 $ 81,055 6
Cost of sales 43,942 30,452 88,891 71,924
----------- ----------- ----------- -----------
Gross profit (loss) 8,191 627 (9,785) 9,131
Operating expenses:
Sales and marketing 278,055 79,312 538,135 190,956
General and administrative 601,088 280,590 1,077,382 521,105
Professional services 224,521 104,373 484,526 135,318
Product research and development 145,148 77,400 238,433 172,327
Depreciation and amortization 282,966 255,924 549,652 395,827
----------- ----------- ----------- -----------
Loss from operations (1,523,587) (796,972) (2,897,913) (1,406,402)
Interest, net, and other (98,264) (184,854) (89,494) (333,053)
----------- ----------- ----------- -----------
Net loss $(1,621,851) $ (981,826) $(2,987,407) $(1,739,455)
=========== =========== =========== ===========
Net loss per share - Basic $ (0.08) $ (0.06) $ (0.15) $ (0.13)
=========== =========== =========== ===========
Net loss per share - Diluted $ (0.08) $ (0.06) $ (0.15) $ (0.13)
=========== =========== =========== ===========
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)
Six Months Ended
--------------------------------
December 31, December 31,
2000 1999
----------- -----------
OPERATING ACTIVITIES:
Net loss $(2,987,407) $(1,739,455)
----------- -----------
Non cash items:
Depreciation and amortization 549,652 395,827
Provision for inventory obsolescence 2,864 --
Issuances of common stock and common stock options for services 548,297 254,518
Issuance of common stock with convertible debt -- 270,000
Contingently issuable common stock -- (93,000)
Net change in current assets and liabilities, net of business acquired:
Accounts receivable (281,413) 12,811
Inventories (1,039,902) 49,848
Prepaid expenses (150,440) 28,734
Accounts payable 1,025,516 39,671
Accrued liabilities 68,107 (3,845)
Deferred revenue 272,226 --
Increase in other non-current assets 3,881 (16,418)
----------- -----------
Net cash used in operating activities $(1,988,619) $ (801,309)
----------- -----------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements $ (590,882) $ (2,829)
Advances to officer (74,634) --
Cash in business acquired -- 78
----------- -----------
Net cash used in investing activities $ (665,516) $ (2,751)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from capital lease obligations incurred $ 258,725 $ --
Principal payments on capital lease obligations (111,194) (9,004)
Proceeds from notes payable 250,000 540,000
Principal payments on notes payable (18,165) (520,000)
Proceeds from sales of common stock 1,157,000 735,000
Proceeds from exercises of stock options 235,504 --
----------- -----------
Net cash provided by financing activities $ 1,771,870 $ 745,996
----------- -----------
Net decrease in cash and cash equivalents (882,265) (58,064)
Cash and cash equivalents, beginning 1,059,637 81,656
----------- -----------
Cash and cash equivalents, ending $ 177,372 $ 23,592
=========== ===========
SUPPLEMENTAL CASH FLOW DATA:
- ----------------------------
Cash paid for interest $ 3,671 $ --
Issuances of common stock in exchange for:
Business acquired -- 1,798,142
Financing costs 97,427 139,248
Conversion of debt 270,000
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 an 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 periods have been reclassified to be consistent with the
current fiscal year's interim presentations.
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.
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.
5
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Financial Condition and Liquidity
The Company has incurred significant operating and net losses since its
inception and, as a result, has a substantial accumulated deficit at December
31, 2000. The Company recently began fulfilling initial purchase orders received
from a limited number of high-profile, national retailers for its
over-the-counter, consumer-use cholesterol monitor which management believes has
a significantly larger market and revenue potential than its professional-use
cholesterol monitor. However, the Company's ability to broadly market and
efficiently produce its cholesterol monitors has been and continues to be
severely constrained by its limited capital resources. As such, there can be no
assurance that the revenue-generating potential management perceives for its
cholesterol monitors will ever be realized.
The Company continues to actively pursue measures aimed at improving its current
liquidity and capital resource positions. These actions include seeking new
sources of capital or funding to allow the Company to continue marketing and
producing its cholesterol monitors. On September 13, 2000, the Company entered
into an agreement with a financial institution with which a member of its Board
of Directors ("Director") is affiliated. Under such agreement, the Company may
borrow up to $500,000 on an irrevocable and unsecured basis. Borrowings, which
must be made in $125,000 increments, accrue interest at the financial
institution's then prevailing prime rate plus two percent. There are no
associated covenants or restrictions. All principal and accrued interest is due
and payable on September 13, 2001. The Director, who provided a personal
guarantee, may elect at any time to repay all outstanding principal and accrued
interest on the Company's behalf and convert the assumed debt and interest
balance into common shares of the Company at mutually agreed upon conversion
terms. As of December 31, 2000, the Company had drawn two installments
aggregating $250,000. On February 12, 2001, the Company entered into an
agreement with one of its existing principal investors ("Investor") that
provided it with an unsecured $200,000 bridge loan. The loan accrues interest at
20% per annum and becomes due, if and when, the Company is successful in
obtaining a $1.5 million revolving credit facility from an unaffiliated bank to
which the Investor pledges personal assets as collateral. In this connection,
the Company is currently engaged in discussions with a major bank regarding
obtaining a revolving credit facility in the range of $3,000,000 to $6,000,000
to be secured by its accounts receivable and inventory as well as personal
assets of and/or guarantees from three of its investors. However, there can be
no assurances that the Company will ultimately be successful in its ongoing
capital-raising efforts, including procuring the aforementioned revolving credit
facility in the desired dollar range or timeframe, or in the execution of its
overall business plan. Any failure by the Company to raise sufficient funds in a
timely manner or to effectively execute its business plan will have a material
adverse impact on its 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:
December 31, June 30,
2000 2000
----------- -----------
Raw materials $ 902,676 $ 421,397
Work in process 101,419 54,792
Finished goods 478,710 9,313
----------- -----------
1,482,805 485,502
Less: Provision for inventory
obsolescence 0 39,735
----------- -----------
Total inventories $1,482,805 $ 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 Six Months Ended
------------------------------- -------------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
Net loss $ 1,621,851 $ 981,826 $ 2,987,407 $ 1,739,455
=========== =========== =========== ===========
Average shares outstanding used to
determine net loss per basic common
share 19,928,270 15,147,651 19,929,563 13,486,616
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 19,928,270 15,147,651 19,929,563 13,486,616
=========== =========== =========== ===========
(1) Excluded anti-dilutive shares issuable through stock options, stock
warrants and convertible debt were 2,839,612 and 185,747 for the three
months ended December 31, 2000 and December 31, 1999, respectively, and
3,236,278 and 185,747 for the six months ended December 31, 2000 and
December 31, 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 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
8
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Company Overview (continued)
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 was introduced
into the marketplace in March 1999 and currently has a suggested retail price of
$299.95. We recently introduced our over-the-counter, consumer-use cholesterol
monitor into the marketplace in November 2000 with a suggested retail price of
$129.95.
9
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Company Overview (continued)
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:
>> Achieving and maintaining market leadership through innovative product
introductions and extensions
>> Leveraging what we believe to be our superior technological
capabilities
>> Accelerating our penetration of targeted markets through key strategic
marketing alliances
>> Aggressively targeting the consumer channel with the continued
introduction of our FDA-approved, Over-The-Counter, Consumer-Use
Cholesterol Monitor
>> Obtaining and promoting independent third party endorsements by leading
healthcare authorities
>> Developing and introducing other proprietary, Internet-enabled medical
diagnostic devices to allow consumers to better manage their health
>> Positioning our products as the preferred tools for personal health
management of chronic diseases
We have recently employed a number of professionals with extensive backgrounds
in the medical products industry that we believe will assist us in executing our
business plan. In addition, we recently renegotiated our existing license and
supply agreement with Roche. The new agreement became effective January 1, 2001
and has a four-year term with an additional one-year option to renew. Provided
that we meet certain minimum purchase requirements, Roche will continue to
supply us with dry chemistry test strips for our cholesterol monitors but with
more favorable licensing fees, strip pricing and payment terms. In the absence
of a material breach of contract, the agreement also provides that Roche will
not market any competing cholesterol monitors in the United States.
10
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Results of Operations
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 sales of the
professional-use cholesterol monitor. However, due to ongoing capital
constraints, we subsequently elected to forego the possibility of realizing
modestly increased sales in the shorter-term from 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. On July 25, 2000, we received FDA market clearance for
our over-the-counter, consumer-use cholesterol monitor thereby allowing us to
proceed with production and marketing. In November 2000, we began shipping our
consumer-use cholesterol monitor in fulfillment of initial purchase orders
received from a limited number of high-profile, national retailers (e.g., QVC,
Sharper Image, etc.). However, it must be noted that our ability to broadly
market and efficiently produce our cholesterol monitors will continue to be
severely constrained should we be unsuccessful in our current capital raising
efforts - 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 realized.
Our net sales for the three months ended December 31, 2000 ("the fiscal 2001
second quarter") were $52,133, as compared to $31,079 for the three months ended
December 31, 1999 ("the fiscal 2000 second quarter"). For the six months ended
December 31, 2000 ("the first half of fiscal 2001"), our net sales were $79,106
as compared to $81,055 for the six months ended December 31, 1999 ("the first
half of fiscal 2000"). At December 31, 2000, our balance sheet reflects deferred
revenue of $272,226 that represents certain additional shipments of our
consumer-use cholesterol monitor to retail distributors for which we have
deferred revenue recognition pursuant to Statement of Financial Accounting
Standards No. 48 "Revenue Recognition When Right of Returns Exist". These
revenues will be recognized at such time as we accumulate historical product
returns experience sufficient to enable us to reasonably estimate and
correspondingly record an accrual for related product returns.
Cost of sales includes direct labor, direct material, and overhead. Our cost of
sales for the fiscal 2001 second quarter and first half were $43,942 and
$88,891, respectively, as compared to $30,452 and $71,924 for the fiscal 2000
second quarter and first half, respectively. Our resulting gross margins were
15.7% and (12.4)% for the fiscal 2001 second quarter and first half,
respectively, as compared to gross margins of 2.0% and 11.3% for the fiscal 2000
second quarter and first half, respectively. Limited unit sales to date and
introductory pricing discounts granted to achieve market penetration have
resulted in reductions to our gross revenues and modestly positive or negative
gross profits and margins. Our ability to realize significantly improved gross
profits and margins in the future remains contingent upon our cholesterol
monitors receiving broader market exposure and acceptance which, in turn, will
enable us to maintain our suggested retail prices and realize various economies
of scale.
Total operating expenses were $1,531,778 for the fiscal 2001 second quarter, an
increase of $734,179, or 92.0%, from the $797,599 incurred during the fiscal
2000 second quarter. Total operating expenses were $2,888,128 for the first half
of fiscal 2001, an increase of $1,472,595, or 104.0%, from the $1,415,533
incurred during the first half of fiscal 2000. These increases, as further
detailed below, primarily are attributable to various costs incurred in
connection with developing and marketing of our recently debuted
over-the-counter, consumer-use cholesterol monitor.
Sales and marketing expenses were $278,055 for the fiscal 2001 second quarter,
an increase of $198,743, or 250.6%, from the $79,312 incurred during the fiscal
2000 second quarter. For the first half of fiscal 2001, sales and marketing
expenses were $538,135, an increase of $347,179, or 181.8%, from the $190,956
incurred during the first half of fiscal 2000. These increases primarily are
attributable to increased
11
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Results of Operations (continued)
marketing and customer service headcount, trade show attendence and market
research related to the roll-out of our recently debuted over-the-counter,
consumer-use cholesterol montor.
General and administrative expenses were $601,088 (inclusive of $67,920 in
non-cash charges) for the fiscal 2001 second quarter, an increase of $320,498,
or 114.2%, from the $280,590 (inclusive of $36,030 in non-cash charges) incurred
during the fiscal 2000 second quarter. For the first half of fiscal 2001,
general and administrative expenses were $1,077,382 (inclusive of $151,680 in
non-cash charges), an increase of $556,277, or 106.8%, from the $521,105
(inclusive of $60,270 in non-cash charges) incurred during the first half of
fiscal 2000. These increases primarily are attributable to increased support
personnel headcount, telecommunications, investor relations activities
(including incremental costs incurred in connection with the listing of our
common stock on the American Stock Exchange beginning in February 2000 - Ticker
Symbol "KFL"), and director fees.
Professional service expenses were $224,521 (inclusive of $86,202 in non-cash
charges) for the fiscal 2001 second quarter, an increase of $120,148, or 115.1%,
from the $104,373 (inclusive of $10,000 in non-cash charges) incurred during the
fiscal 2000 second quarter. For the first half of fiscal 2001, professional
service expenses were $484,526 (inclusive of $208,376 in non-cash charges), an
increase of $349,208, or 258.1%, from the $135,318 (inclusive of $15,000 in
non-cash charges) incurred during the first half of fiscal 2000. These increases
primarily are attributable to legal fees associated with new patent filings and
patent enforcement litigation initiated against a competitor, the retention of a
new investor relations group and incremental headhunter, accounting, consulting
and public relations fees.
Product research and development expenses were $145,148 for the fiscal 2001
second quarter, an increase of $67,748, or 87.5%, from the $77,400 incurred
during the fiscal 2000 second quarter. For the first half of fiscal 2001,
product research and development expenses were $238,433 (inclusive of $9,633 in
non-cash charges), an increase of $66,106, or 38.4%, from the $172,327 incurred
during the first half of fiscal 2000. These increases primarily are attributable
to product development efforts related to the completion of our recently debuted
over-the-counter, consumer-use cholesterol monitor.
Non-cash depreciation and amortization expenses were $282,966 for the fiscal
2001 second quarter, an increase of $27,042, or 10.6%, from the $255,924
incurred during the fiscal 2000 second quarter. For the first half of fiscal
2001, non-cash depreciation and amortization expenses were $549,652, an increase
of $153,825, or 38.9%, from the $395,827 incurred during the first half of
fiscal 2000. These increases primarily are attributable to the amortization of
software technology acquired in our September 3, 1999 acquisition of Secured
Interactive Technologies, Inc. and, to a lesser extent, incremental amortization
and depreciation of infrastructure added to accommodate our increased overall
headcount.
Primarily as a result of the foregoing, our losses from operations for the
fiscal 2001 second quarter and first half were $1,523,587 and $2,897,913,
respectively. This compares to our losses from operations for the fiscal 2000
second quarter and first half of $796,972 and $1,406,402, respectively.
Non-operating expenses and income primarily consist of interest income, interest
expense and other miscellaneous income and expense items. Net non-operating
expense was $98,264 (inclusive of $92,341 in non-cash charges) for the fiscal
2001 second quarter as compared to $184,854 (inclusive of $40,000 in non-cash
charges) for the fiscal 2000 second quarter. For the first half of fiscal 2001,
net non-operating expense was $89,494 (inclusive of $92,341 in non-cash charges)
as compared to $333,053 (inclusive of $179,248 in non-cash charges) for the
first half of fiscal 2000. All periods primarily reflect interest expense with
the first half of fiscal 2000 additionally reflecting certain equity inducement
costs associated with the conversion of $270,000 in convertible debt. Our
interest expense for the first half of fiscal 2001 was slightly offset by
interest income earned on cash balances maintained during the fiscal 2001 first
quarter.
12
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Results of Operations (continued)
We incurred a net loss of $1,621,851 ($0.08 per basic and diluted share) for the
fiscal 2001 second quarter as compared to a net loss of $981,826 ($0.06 per
basic and diluted share) for the fiscal 2000 second quarter. For the first half
of fiscal 2001, we incurred a net loss of $2,987,407 ($0.15 per basic and
diluted share) as compared to a net loss of $1,739,455 ($0.13 per basic and
diluted share).
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 December 31, 2000. We
recently began fulfilling initial purchase orders received from a limited number
of high-profile, national retailers for our over-the-counter, consumer-use
cholesterol monitor which we believe has a significantly larger market and
revenue potential than our professional-use cholesterol monitor. However, our
ability to broadly market and efficiently produce our cholesterol monitors has
been and continues to be severely constrained by our limited capital resources.
As such, there can be no assurance that the revenue-generating potential we
perceive for our cholesterol monitors will ever be realized.
We continue to actively pursue measures 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 marketing and producing our
cholesterol monitors. On September 13, 2000, we entered into an agreement with a
financial institution with which a member of our Board of Directors ("Director")
is affiliated. Under such agreement, we may borrow up to $500,000 on an
irrevocable and unsecured basis. Borrowings, which must be made in $125,000
increments, accrue interest at the financial institution's then prevailing prime
rate plus two percent. There are no associated covenants or restrictions. All
principal and accrued interest is due and payable on September 13, 2001. The
Director, who provided a personal guarantee, may elect at any time to repay all
outstanding principal and accrued interest on our behalf and convert the assumed
debt and interest balance into our common shares at mutually agreed upon
conversion terms. As of December 31, 2000, we had drawn two installments
aggregating $250,000. On February 12, 2001, we entered into an agreement with
one of our existing principal investors ("Investor") that provided us with an
unsecured $200,000 bridge loan. The loan accrues interest at 20% per annum and
becomes due, if and when, we are successful in obtaining a $1.5 million
revolving credit facility from an unaffiliated bank to which the Investor
pledges personal assets as collateral. In this connection, we are currently
engaged in discussions with a major bank regarding obtaining a revolving credit
facility in the range of $3,000,000 to $6,000,000 to be secured by our accounts
receivable and inventory as well as personal assets of and/or guarantees from
three of our investors. However, there can be no assurances that we will
ultimately be successful in our ongoing capital-raising efforts, including
procuring the aforementioned revolving credit facility in the desired dollar
range or timeframe, or in the execution of our overall business plan. Any
failure by us to raise sufficient funds in a timely manner or to effectively
execute our business plan will have a material adverse impact on our business,
results of operations, liquidity and cash flows.
Our operating activities consumed $1,988,619 in cash and cash equivalents during
the first half of fiscal 2001, an increase of $1,187,310, or 148.2%, from the
$801,309 in cash and cash equivalents consumed during the first half of fiscal
2000. The increased consumption rate for the first half of fiscal 2001 primarily
is attributable to our increased net loss coupled with the negative cash flow
effects of increased inventories, accounts receivable and prepaid expenses.
Partially offsetting these negative cash flow effects were the positive cash
flow effects of increased accounts payable, deferred revenue and accrued
liabilities as well as the adding back of increased non-cash depreciation and
amortization and non-cash equity compensation charges. We have historically
financed our operations through the issuance of common stock and debt
securities.
13
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Our Liquidity and Capital Resources (continued)
Our investing activities utilized $665,516 in cash and cash equivalents during
the first half of fiscal 2001, compared to the nominal utilization of $2,751 in
cash and cash equivalents during the first half of fiscal 2000. The first half
of fiscal 2001 primarily reflects investments in equipment, leasehold
improvements and software technology necessary to the production and marketing
of our recently introduced consumer-use cholesterol monitor and, to a
significantly lesser extent, advances to an officer.
Our financing activities provided $1,771,870 in cash and cash equivalents during
the first half of fiscal 2001, an increase of $1,025,874, or 137.5%, from the
$745,996 in cash and cash equivalents provided by financing activities during
the first half of fiscal 2000. The increase in cash and cash equivalents
provided by financing activities during the first half of fiscal 2001 primarily
is attributable to the positive cash flow effects of increased proceeds from
capital leases, private equity placements and stock option exercises as well as
decreased principal payments on notes payable. Partially offsetting these
positive cash flow effects were the negative cash flow effects of decreased
proceeds from issuances of notes payable and increased capital lease servicing.
As a result of the foregoing, we had cash and cash equivalents of $177,372 and
$1,059,637 at December 31, 2000 and June 30, 2000, respectively. Our working
capital was $89,454 and $1,213,020 at December 31, 2000 and June 30, 2000,
respectively.
We currently have no material commitments for capital equipment.
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.
14
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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
December 31, 2000. We recently began fulfilling initial purchase orders received
from a limited number of high-profile, national retailers for our
over-the-counter, consumer-use cholesterol monitor which we believe has a
significantly larger market and revenue potential than our professional-use
cholesterol monitor. However, our ability to broadly market and efficiently
produce our cholesterol monitors has been and continues to be severely
constrained by our limited capital resources. As such, there can be no assurance
that the revenue-generating potential we perceive for our cholesterol monitors
will ever be realized.
We continue to actively pursue measures 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 marketing and producing our
cholesterol monitors. On September 13, 2000, we entered into an agreement with a
financial institution with which a member of our Board of Directors ("Director")
is affiliated. Under such agreement, we may borrow up to $500,000 on an
irrevocable and unsecured basis. Borrowings, which must be made in $125,000
increments, accrue interest at the financial institution's then prevailing prime
rate plus two percent. There are no associated covenants or restrictions. All
principal and accrued interest is due and payable on September 13, 2001. The
Director, who provided a personal guarantee, may elect at any time to repay all
outstanding principal and accrued interest on our behalf and convert the assumed
debt and interest balance into our common shares at mutually agreed upon
conversion terms. As of December 31, 2000, we had drawn two installments
aggregating $250,000. On February 12, 2001, we entered into an agreement with
one of our existing principal investors ("Investor") that provided us with an
unsecured $200,000 bridge loan. The loan accrues interest at 20% per annum and
becomes due, if and when, we are successful in obtaining a $1.5 million
revolving credit facility from an unaffiliated bank to which the Investor
pledges personal assets as collateral. In this connection, we are currently
engaged in discussions with a major bank regarding obtaining a revolving credit
facility in the range of $3,000,000 to $6,000,000 to be secured by our accounts
receivable and inventory as well as personal assets of and/or guarantees from
three of our investors. However, there can be no assurances that we will
ultimately be successful in our ongoing capital-raising efforts, including
procuring the aforementioned revolving credit facility in the desired dollar
range or timeframe, or in the execution of our overall business plan. Any
failure by us to raise sufficient funds in a timely manner or to effectively
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.
15
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
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, 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 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 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 been successful to date in recruiting and retaining skilled
and experienced management, marketing and scientific personnel, there can be no
assurance that we will 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 cannot 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
16
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
Competition (continued). 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 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
17
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Risk Factors (continued)
Potential Impact of Medicare Reimbursement Regulations (continued). 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 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.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Other than patent enforcement litigation initiated by the Company against a
competitor, 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.
Effective April 1998, we began compensating each member of our Board of
Directors with 2,000 common shares for each month of service. Pursuant to this
agreement, an aggregate 24,000 common shares will be issued to Board members for
the three month period ended December 31, 2000.
In October 2000, we issued (i) 923 common shares to a public relations
consultant in exchange for services valued at $3,000 and (ii) 4,431 common
shares to a marketing consultant in exchange for services valued at $14,400.
From October 1, 2000 through December 31, 2000, we issued 582,623 common shares
pursuant to a "best efforts" private placement offering that commenced June 20,
2000.
In November 2000, we issued 4,000 common shares in connection with the exercise
of outstanding stock options by one individual at a per share price of $1.25.
In December 2000, we issued 10,909 common shares to a consultant in exchange for
services valued at $22,500.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Below are the proxy tabulation results for matters voted upon at the Company's
Annual Meeting of Stockholders held on December 15, 2000:
1. Election of Directors to the Company's Board of Directors:
Christopher Maus For: 11,297,251 Against: 0 Abstain: 8,741
Michael Crane For: 11,302,151 Against: 0 Abstain: 3,841
David Hurley For: 11,302,151 Against: 0 Abstain: 3,841
2. Ratify the appointment of the Company's Independent Accountants:
BDO Seidman LLP For: 11,285,186 Against: 10,725 Abstain: 10,081
19
PART II. OTHER INFORMATION (continued)
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 December
31, 2000.
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 20th day of February
2001.
LIFESTREAM TECHNOLOGIES, INC.
By: /s/ Brett Sweezy
-------------------------------------
Brett Sweezy
Chief Financial and Accounting Officer
20