UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
--------------------
LIFESTREAM TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
COMMISSION FILE NUMBER 000-29058
NEVADA 82-0487965
--------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
510 Clearwater Loop, Suite 101, Post Falls, ID 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 11, 2002, the registrant had 21,396,360 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 DECEMBER 31, 2001
PART I. FINANCIAL INFORMATION
Page
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2001 and June 30, 2001 1
Condensed Consolidated Statements of Loss for the three and six months ended
December 31, 2001 and December 31, 2000 ..................................... 3
Condensed Consolidated Statements of Cash Flows for the six months ended
December 31, 2001 and December 31, 2000 ..................................... 4
Notes to Interim Condensed Consolidated Financial Statements .................. 6
Item 2. Management's Discussion and Analysis ................................. 11
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 ...................................... 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
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
DECEMBER 31, JUNE 30,
2001 2001
---------- ----------
Current assets:
Cash and cash equivalents .............................................. $ 428,959 $1,649,979
Accounts receivable, net ............................................... 527,777 466,853
Inventories, net (Note 2) .............................................. 3,209,959 1,984,030
Prepaid expenses ....................................................... 237,121 55,399
---------- ----------
Total current assets ...................................................... 4,403,816 4,156,261
Patent and license rights, net ............................................ 1,125,067 1,187,415
Purchased software technology and capitalized software
development costs, net .................................................. 580,943 945,408
Property and equipment, net ............................................... 970,097 945,530
Deferred financing costs, net ............................................. 625,183 320,000
Note receivable - officer (Note 3) ........................................ 98,520 100,349
Other ..................................................................... 15,855 14,403
---------- ----------
Total assets............................................................... $7,819,481 $7,669,366
========== ==========
1
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
DECEMBER 31, JUNE 30,
2001 2001
------------ ------------
(unaudited)
Current liabilities:
Accounts payable .................................................. $ 1,811,438 $ 1,103,044
Accrued liabilities (Note 5) ...................................... 786,918 311,592
Commissions payable - related parties (Note 6) .................... -- 320,000
Current maturities of capital lease obligations ................... 150,605 108,084
Current maturities of note payable ................................ 36,330 36,330
------------ ------------
Total current liabilities ............................................ 2,785,291 1,879,050
Capital lease obligations, less current maturities ................... 83,537 81,173
Note payable, less current maturities ................................ 15,137 33,302
Note payable - related party (Note 6) ................................ -- 140,000
Line of credit - related party (Note 6) .............................. -- 500,000
Convertible debt, face amount of $8,917,484 and $3,225,000 (Note 6)... 3,026,897 2,109,936
------------ ------------
Total liabilities .................................................... 5,910,862 4,743,461
------------ ------------
Commitments and Contingencies (Note 8)
Stockholders' equity (Notes 6 and 7):
Preferred stock, $.001 par value; 5,000,000 shares authorized; none
issued or outstanding ........................................... -- --
Common stock, $.001 par value; 50,000,000 shares authorized;
20,603,027 and 20,345,331 issued and outstanding ................ 20,603 20,345
Additional paid-in capital ........................................ 28,074,650 22,384,031
Accumulated deficit ............................................... (26,186,634) (19,478,471)
------------ ------------
Total stockholders' equity ........................................... 1,908,619 2,925,905
------------ ------------
Total liabilities and stockholders' equity ........................... $ 7,819,481 $ 7,669,366
============ ============
2
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS ENDED SIX MONTHS ENDED
-----------------------------------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net sales ............................ $ 1,238,353 $ 52,133 $ 2,118,198 $ 79,106
Cost of sales ........................ 1,160,326 43,942 2,276,094 88,891
------------ ------------ ------------ ------------
Gross profit (loss) .................. 78,027 8,191 (157,896) (9,785)
Operating expenses:
Sales and marketing ............ 922,069 277,121 1,339,946 537,100
General and administrative ..... 1,646,202 904,612 2,713,355 1,657,997
Product research and development 102,877 67,079 233,850 143,379
Depreciation and amortization .. 348,329 282,966 652,308 549,652
------------ ------------ ------------ ------------
Total operating expenses ............. 3,019,477 1,531,778 4,939,459 2,888,128
------------ ------------ ------------ ------------
Loss from operations ................. (2,941,450) (1,523,587) (5,097,355) (2,897,913)
------------ ------------ ------------ ------------
Non-operating income (expenses):
Interest income ................ 3,040 3,413 17,803 17,226
Interest and financing expenses (649,163) (1,639) (1,613,374) (3,671)
Other, net ..................... (1,413) (100,038) (15,237) (103,049)
------------ ------------ ------------ ------------
Total non-operating (expense) income . (647,536) (98,264) (1,610,808) (89,494)
------------ ------------ ------------ ------------
Net loss ............................. $ (3,588,986) $ (1,621,851) $ (6,708,163) $ (2,987,407)
============ ============ ============ ============
Net loss per share (Note 1) .......... $ (0.18) $ (0.08) $ (0.33) $ (0.15)
============ ============ ============ ============
Weighted average shares -
Basic and diluted (Note 1) ......... 20,523,346 19,928,270 20,473,954 19,929,563
============ ============ ============ ============
3
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
DECEMBER 31, 2001 DECEMBER 31, 2000
----------------- -----------------
Cash flows from operating activities:
Net loss .......................................................... $(6,708,163) $(2,987,407)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 652,308 549,652
Amortization of convertible debt discount ...................... 696,977 --
Amortization of deferred financing costs ....................... 87,317 --
Provision for bad debts ......................................... 38,419 --
Provision for inventory obsolescence ............................ 14,277 2,864
Gain on sale of vehicle ........................................ (479) --
Issuance of common shares and warrants to related party as
inducement to convert line of credit into convertible term note
(Note 6) ...................................................... 349,200 --
Beneficial conversion feature of convertible debt issued
to related party (Note 6) ................................... 91,000 --
Issuances of common stock for debt offering commissions ......... (38,836) --
Issuances of common stock for other non-employee services ....... 740,114 548,297
Changes in assets and liabilities:
Accounts receivable ............................................. (99,343) (281,413)
Inventories ..................................................... (1,240,206) (1,039,902)
Prepaid expenses ................................................ (181,722) (150,440)
Accounts payable ................................................ 708,394 1,025,516
Accrued liabilities ............................................ 475,326 68,107
Commissions payable ............................................ (585,601) 272,226
Increase in other non-current assets ................................. (1,452) 3,881
----------- -----------
Net cash used in operating activities ................................ (5,002,470) (1,988,619)
----------- -----------
Cash flows from investing activities:
Capital expenditures .............................................. (72,106) (590,882)
Software development costs capitalized ............................ (43,504) --
Advances to officer (Note 3) ...................................... -- (74,634)
Repayments from officer (Note 3) .................................. 1,829 --
----------- -----------
Net cash used in investing activities ................................ (113,781) (665,516)
----------- -----------
Cash flows from financing activities:
Proceeds from capital lease obligations incurred .................. -- 258,725
Principal payments on capital lease obligations ................... (107,253) (111,194)
Proceeds from issuances of notes payable .......................... -- 250,000
Principal payments on notes payable ............................... -- (18,165)
Proceeds from issuances of convertible debt (Note 6) .............. 4,422,500 --
Principal payments on convertible debt ............................ (420,016) --
Proceeds from exercises of stock options .......................... -- 235,504
Proceeds from sales of common stock ............................... -- 1,157,000
----------- -----------
Net cash provided by financing activities ............................ 3,895,231 1,771,870
----------- -----------
Net decrease in cash and cash equivalents ............................ (1,221,020) (882,265)
Cash and cash equivalents at beginning of period ..................... 1,649,979 1,059,637
----------- -----------
Cash and cash equivalents at end of period ........................... $ 428,959 $ 177,372
=========== ===========
4
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
---------- ---------
Supplemental schedule of cash activities:
Interest paid in cash............................................... $ 14,505 $ 3,671
Supplemental schedule of non-cash investing and financing activities:
Equipment acquired through capital lease obligations .................. 141,213 --
Discount on beneficial conversion feature and fair value of
detachable stock purchase warrants (Note 6) ........................ 4,422,500 --
Deferred financing costs (Note 6) ..................................... 392,500 --
Other debt converted to convertible debt .............................. 640,000 --
Issuance of common stock in exchange for:
Financing costs .................................................... 126,899 97,427
5
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nature of Business and Organizational Structure
Lifestream Technologies, Inc. (the "Company"), a Nevada corporation
headquartered in Post Falls, Idaho, is a healthcare information technology
company primarily focused on developing, manufacturing and marketing proprietary
smart card-enabled medical diagnostic devices to aid in the prevention,
detection, monitoring and control of certain widespread chronic diseases. The
Company's current diagnostic product line principally consists of three
easy-to-use, hand-held, smart card-enabled cholesterol monitors, one
specifically designed for personal-use by adult at-risk cholesterol patients and
health conscious consumers, one specifically designed for adult point-of-care
facility-use by various medical professionals, and one specifically designed for
children and adolescent point-of-care facility-use by pediatricians.
These 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 transactions
and balances have been eliminated in consolidation.
Fiscal Periods
References to a fiscal year refer to the calendar year in which such fiscal year
ends. The Company's fiscal year end is June 30th.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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 consolidated financial
statements. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the condensed consolidated financial statements for the prior
fiscal period have been reclassified to be consistent with the current fiscal
year's presentation.
Preparation of Interim Condensed Consolidated Financial Statements
These interim condensed consolidated financial statements have been prepared by
the Company's management, without audit, in accordance with accounting
principles generally accepted in the United States of America 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 accounting
principles generally accepted in the United States of America 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 most recent Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2001.
6
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net Loss Per Share
Basic and diluted net loss per share has been computed by dividing net loss by
the weighted average number of common shares outstanding during the fiscal
period. At December 31, 2001 and 2000, the Company had stock options, stock
warrants and convertible debt outstanding that could potentially be exercised or
converted into 20,244,750 and 5,631,190 common shares, respectively. Should the
Company report net income in a future period, diluted net income per share will
be separately disclosed giving effect to the potential dilution that could occur
under the treasury stock method if these stock options, stock warrants and
convertible debt were exercised or converted into common shares.
Recently Adopted Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 141, "Business Combinations" ("SFAS No.
141"). SFAS No. 141 mandates the purchase method of accounting for all business
combinations initiated after June 30, 2001. In addition, SFAS No. 141 addresses
the accounting for intangible assets and goodwill acquired in business
combinations completed after June 30, 2001. The Company adopted SFAS No. 141, as
required, on July 1, 2001 without any impact on the interim condensed
consolidated financial statements presented herein. The ultimate impact of the
adoption of SFAS No. 141 on the future financial statements of the Company will
be determined by the particulars of future business combinations, if any.
Recently Issued Accounting Standards Not Yet Adopted
In May 2000, the Emerging Issues Task Force ("EITF") of the FASB issued EITF
00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14"). Under the
provisions of EITF 00-14, for sales incentives that will not result in a loss on
the sale of product or service, a vendor should recognize the cost of the sales
incentive at the latter of the date the related revenue is recorded by the
vendor or the date the sales incentive is offered. The reduction to or refund of
the selling price of the product or service resulting from any cash sales
incentive should be classified as a reduction of revenue. In April 2001, the
EITF delayed the effective date of EITF 00-14. The Company will adopt EITF
00-14, as required, in its consolidated financial statements for the third
quarter of fiscal 2002 with restatement of all comparative prior period
financial statements. Management currently believes that the adoption of EITF
00-14 will not have a material impact on the Company's consolidated financial
statements.
In April 2001, the EITF issued EITF 00-25, "Accounting for Consideration from a
Vendor to a Retailer in Connection with the Purchase or Promotion of the
Vendor's Products" ("EITF 00-25"). Under the provisions of EITF 00-25, it is
presumed, in the absence of persuasive evidence to the contrary, that
consideration from a vendor to a purchaser of the vendor's products should be
characterized as a reduction of revenue when recognized in the vendor's income
statement. This presumption is overcome and the consideration should be
characterized as a cost incurred if, the vendor receives, or will receive, an
identifiable benefit (i.e., goods or services) in return for the consideration
and the vendor can reasonably estimate the fair value of the benefit. The
Company will adopt EITF 00-25, as required, in its consolidated financial
statements for the third quarter of fiscal 2002 with restatement of all
comparative prior period financial statements. Management currently believes
that the adoption of EITF 00-25 will not have a material impact on the Company's
consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), which revises the accounting for purchased goodwill
and other intangible assets. Under SFAS No. 142, goodwill and other intangible
assets with indefinite lives will no longer be systematically amortized into
operating results. Instead, each of these assets will be tested, in the absence
of an indicator of possible impairment, at least annually, and upon an indicator
of possible impairment, immediately. The Company will adopt SFAS No. 142, as
required, in its
7
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recently Issued Accounting Standards Not Yet Adopted (continued)
consolidated financial statements for the first quarter of fiscal 2003.
Management currently believes that the adoption of SFAS No. 142 will not have a
material impact on the Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is a cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related obligation
for its recorded amount or incurs a gain or loss upon settlement. The Company
will adopt SFAS No. 143, as required, in its consolidated financial statements
for the first quarter of fiscal 2003. Management currently believes that the
adoption of SFAS No. 143 will not have a material impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS N. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" ("SFAS No. 144"). SFAS No. 144 was issued to
resolve certain implementation issues that had arisen under SFAS No. 121. Under
SFAS No. 144, a single uniform accounting model is required to be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and certain additional disclosures are required. The Company
will adopt SFAS No. 144, as required, in its consolidated financial statements
for the first quarter of fiscal 2003. Management currently believes that the
adoption of SFAS No. 144 will not have a material impact on the Company's
consolidated financial statements.
2. INVENTORIES
Inventories consist of the following:
DECEMBER 31, JUNE 30,
2001 2000
----------- -----------
Raw materials ........................... $ 1,682,788 $ 1,332,519
Work in process ......................... 935,982 549,465
Finished goods .......................... 620,493 161,951
----------- -----------
3,239,263 2,043,935
Less allowance for inventory obsolescence (29,304) (59,905)
----------- -----------
Total inventories ....................... $ 3,209,959 $ 1,984,030
=========== ===========
3. NOTE RECEIVABLE - OFFICER
The Board of Directors has periodically approved the advancement of funds to the
Company's Chief Executive Officer. The underlying promissory note is unsecured,
has a stated interest rate of 8.75% and requires bi-weekly repayments of
principal and interest through May 23, 2014.
4. REVOLVING CREDIT FACILITY
The Company executed an agreement with a bank effective September 25, 2001 that
provides the Company with a $1.5 million secured revolving credit facility (with
a sub-limit of $0.5 million for letters of credit). Initial
8
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REVOLVING CREDIT FACILITY (CONTINUED)
borrowings of up to $500,000 are to be secured with a corresponding bank
deposit, with all borrowings being additionally secured by the Company's
accounts receivable. The agreement requires monthly payments of interest, at a
rate equal to the premium commercial market fund rate plus three percent (3.75%
at December 31, 2001), plus principal payments from collections of the Company's
securing accounts receivable. Letters of credit have terms and interest payable
as specified in the underlying letters of credit. The agreement contains certain
covenants that require the Company to maintain $2.5 million in minimum working
capital and $3.5 million in minimum net worth, both as defined by the agreement.
The Company is also required to periodically submit certain financial
information to the bank. The credit facility has a maturity date of September
10, 2002.
At December 31, 2001, the Company was not in compliance with the aforementioned
minimum working capital requirement. Until such compliance is restored or a
written notice of waiver is obtained from the bank, the Company's future
borrowings, if any, under this credit facility will be limited to those secured
by a corresponding bank deposit. The Company had no outstanding borrowings
against this credit facility at December 31, 2001.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31, JUNE 30,
2001 2001
-------- --------
Accrued wages, benefits and related taxes $180,264 $152,869
Accrued royalties ....................... 265,040 112,490
Accrued sales returns ................... 54,278 26,000
Accrued interest payable ................ 276,637 16,560
Accrued other ........................... 10,699 3,673
-------- --------
Total accrued liabilities ............... $786,918 $311,592
======== ========
6. CONVERTIBLE DEBT
During June 2001, the Company commenced a private offering of convertible notes
with detachable stock purchase warrants from which it had received proceeds of
$3,225,000 as of June 30, 2001. The Company subsequently received additional
proceeds of $4,422,500 through December 31, 2001. The notes are unsecured,
accrue interest at the prime rate plus two percent (6.75% at December 31, 2001),
and mature on either July 1, 2003 or July 1, 2006, as specified. The notes are
immediately convertible at the option of the holders into common stock of the
Company at a rate of $1.00 per share. The Company has the right to force
conversion of the notes if the market price of its common stock exceeds $3.00
per share for 20 consecutive trading days. Each note holder received one
detachable stock purchase warrant for every two dollars of note principal. Each
warrant allows the holder to purchase a share of the Company's common stock at
$2.50 per share. As the accompanying detachable warrants, in effect, created a
beneficial conversion feature, the Company was required by U.S. generally
accepted accounting principles to reduce the carrying value of the notes by an
amount equal to the estimated fair value of the beneficial conversion feature.
This fair value discount, amounting to $6,587,564 at December 31, 2001, has been
recorded as additional paid-in capital. The unamortized debt discount amounted
to $5,890,587 and $2,165,064 at December 31, 2001 and June 30, 2001,
respectively.
9
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE DEBT (CONTINUED)
In connection with the immediately preceding offering of convertible notes, the
Company agreed to pay two principal shareholders each a commission equal to five
percent of the related offering proceeds. Total commissions of $712,250 were
incurred which are being amortized as deferred financing fees over the term of
the convertible debt.
During the fiscal 2002 first quarter, the Company executed an agreement with a
principal shareholder and member of the Board of Directors ("Director") whereby
the Company repaid $184,200 in outstanding principal and interest against
unsecured loans and a line of credit provided by the Director during fiscal 2001
and consolidated the remaining $469,984 aggregate principal balance into a
two-year convertible note due August 1, 2003. The note accrues interest at the
prime rate plus two percent (6.75% at December 31, 2001) and is immediately
convertible at the Director's option into common stock of the Company at a
stated rate of $1.00 per share. In connection with this agreement, the Company
issued the Director 40,000 common shares with an aggregate fair value of $54,000
and a warrant allowing the Director to purchase 134,000 additional common shares
at $1.00 per share. The agreement also stipulates that for every subsequent
quarter the note remains outstanding that the Company will issue the Director an
additional warrant for the purchase of 23,500 common shares at $1.00 per share.
7. EQUITY
In late November 2001, the Company commenced a "best efforts" private placement
offering of 4,000,000 common shares at a fixed price of $1.50 per common share
from which it had not yet received any proceeds as of December 31, 2001. The
Company has subsequently received gross proceeds of $1,100,000 through February
14, 2002. This offering will continue, unless extended by the Company's Board of
Directors, until the earlier of February 28, 2002 or such date that all of the
common shares have been sold. Each common share purchased in the offering will
be accompanied by two callable stock purchase warrants, consisting of: (i) one
warrant allowing for the subsequent purchase of one-half share of common stock
at a price of $2.50 per share (the "$2.50 Warrants") and (ii) one warrant
allowing for the subsequent purchase of one-half share of common stock at a
price of $3.50 per share ("$3.50 Warrants"). The Company may subsequently
redeem, at its option and upon providing a 30-day written notice of redemption,
any outstanding unexercised warrants at a price of $.001 per warrant. However,
such redemption notice may only be issued by the Company if, following the close
of the offering, the average closing price of the common shares, as reported on
the American Stock Exchange or other market on which the common shares are
traded, equals or exceeds the following market prices for a period of ten
consecutive trading days: (i) $3.50 for the $2.50 Warrants or (ii) $4.50 for the
$3.50 Warrants. Any warrants not exercised or submitted for redemption within
the 30-day redemption notice period will be cancelled.
8. CONTINGENCIES
The Company is periodically involved in litigation and administrative
proceedings primarily arising in the normal course of its business. In the
opinion of management, the Company's gross liability, if any, and without any
consideration given to the availability of indemnification or insurance
coverage, under any pending or existing litigation or administrative proceedings
would not materially affect its financial position, results of operations or
cash flows.
10
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion includes certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements involve risks and uncertainties that could cause actual results to
differ from anticipated results. Such forward-looking statements include, but
are not limited to, statements regarding our current business plans, strategies
and objectives that involve risks and uncertainties. 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;
product development and improvement; 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; product sales and material inventory; development and
operating costs; advertising and promotional efforts; brand awareness; the
existence 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, 2001 filed
with the United States Securities and Exchange Commission. Readers are urged to
carefully review and consider the various disclosures made by us in this report
and those detailed from time to time in our reports and filings with the United
States Securities and Exchange Commission that attempt to advise interested
parties of the risks and factors that are likely to affect our business.
References to a fiscal year refer to the calendar year in which such fiscal year
ends. Our fiscal year ends on June 30th.
INTRODUCTION
On January 1, 1999, we commenced limited revenue-generating operations related
to our professional point-of-care cholesterol monitor and ceased being a
development-stage company. In March 1999, we recognized our first revenues from
sales of our professional point-of-care cholesterol monitor. However, shortly
thereafter, we elected to curtail further active marketing of our professional
point-of-care cholesterol monitor and instead deploy our then severely limited
capital resources into the development of an over-the-counter, personal-use
cholesterol monitor for which we envisioned, and continue to envision,
significantly larger market and revenue potential over the longer term.
On July 25, 2000, we received the prerequisite FDA market clearance for our
over-the-counter, personal-use cholesterol monitor thereby allowing us to
proceed with production and marketing. In November 2000, we began fulfilling an
initial purchase order received from a high-profile, national speciality
retailer for our personal-use cholesterol monitor. In January 2001, our
over-the-counter, personal-use cholesterol monitor made its formal debut with a
prominent national television-based retailer as well as with two additional
high-profile, national specialty retailers. Shortly thereafter, our personal-use
cholesterol monitor also began to be offered by thirteen other prominent
national and regional retailers, including major department store chains and
additional speciality retailers. The majority of the aforementioned specialty
retailers have multiple sales channels, including retail stores, direct mail
catalogs and e-commerce web sites. Currently, our personal-use cholesterol
monitor is being offered by over forty national and regional retailers,
including the recent addition of ten major national and regional drug store
chains. To date, we have been successful in obtaining follow-up purchase orders
for escalating quantities from the vast majority of these retailers. With the
national roll-out of our personal-use cholesterol monitor well underway, we are
also beginning to once again actively market our professional adult
point-of-care cholesterol monitor as well as our recently debuted professional
pediatric point-of-care cholesterol monitor.
11
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
INTRODUCTION (CONTINUED)
Despite the aforementioned progress, it must be noted that we have continued to
experience substantial operating and net losses as evidenced by our substantial
accumulated deficit at December 31, 2001. Additionally, our operating activities
have continued to utilize substantial amounts of cash and cash equivalents
thereby necessitating ongoing procurements of equity and debt financing to
sustain our operations and to fund our growth. Looking forward, we anticipate
substantial operating and net losses, and negative cash flow from operating
activities, for the remainder of fiscal 2002, and possibly beyond. As such, it
must be noted that, despite our positive working capital position at December
31, 2001, our ability to efficiently produce and sell our cholesterol monitors,
and thereby achieve net profitability and positive operating cash flow, over the
longer term remains highly contingent upon us continuing to meet our ongoing
capital needs, which are anticipated to be significant, and obtaining broad
market acceptance of our cholesterol monitors, particularly for our
over-the-counter, personal-use cholesterol monitor. There can be no assurances
that we will be successful in achieving such. Any failure by us to raise
necessary funding in a timely manner or to effectively execute our business plan
will likely have a material adverse impact on our business, results of
operations, liquidity and cash flows.
OUR RESULTS OF OPERATIONS
Our consolidated net sales for the three months ended December 31, 2001 ("fiscal
2002 second quarter") were $1,238,353 as compared to $879,845 for the preceding
three months ended September 30, 2001 ("fiscal 2002 first quarter") and $52,133
for the three months ended December 31, 2000 ("fiscal 2001 second quarter"). For
the six months ended December 31, 2001 ("first half of fiscal 2002"), our
consolidated net sales were $2,118,198 as compared to $79,106 for the six months
ended December 31, 2000 ("first half of fiscal 2001"). Substantially all of our
consolidated net sales for the first half of fiscal 2002 were derived from
solicited sales of our recently debuted over-the-counter, personal-use
cholesterol monitor whereas substantially all of our consolidated net sales for
the first half of fiscal 2001 were derived from passive sales of our then
de-emphasized professional point-of-care cholesterol monitor. The increase in
our consolidated net sales for the fiscal 2002 second quarter as compared to the
preceding fiscal 2002 first quarter primarily was attributable to the
fulfillment of initial purchase orders received from several new retail
distributors and, to a lesser extent, the fulfillment of increased purchase
orders received from several continuing retail distributors. We additionally
benefited from increased direct consumer sales realized through our
www.lifestreamtech.com and www.KnowItForLife.com web sites.
Our cost of sales, being direct labor, material and overhead, including related
product shipping and handling costs, were $1,160,326 for the fiscal 2002 second
quarter as compared to $43,942 for the fiscal 2001 second quarter. For the first
half of fiscal 2002, our cost of sales were $2,276,094 as compared to $88,891
for the first half of fiscal 2001. Our resulting gross margins were 6.3% and
(7.5%) for the fiscal 2002 second quarter and first half, respectively, as
compared to 15.7% and (12.4%) for the fiscal 2001 second quarter and first half,
respectively. Limited unit sales to date of our cholesterol monitors and
introductory wholesale pricing discounts and incentives granted during fiscal
2002 to achieve market penetration of our recently debuted over-the-counter,
personal-use cholesterol monitor with retail distributors have resulted in
significant reductions to our targeted gross revenues and margins. For instance,
during the fiscal 2002 first quarter, we gained access to a major national drug
store chain by agreeing to initially provide them at no charge with a
significant number of personal-use cholesterol monitors and dry chemistry test
strips. Although all associated product costs are included in our consolidated
cost of sales, the aggregate retail value of these free products, approximately
$270,000, is excluded from our consolidated net sales consistent with generally
accepted accounting principles in the United States of America. Our ability to
realize significantly improved gross margins in the future remains contingent
upon our cholesterol monitors, particularly our personal-use cholesterol
monitor, receiving broad market acceptance, which, in turn, will enable us to
realize improved wholesale prices and various economies of scale in our
procurement and production processes. Although we recently outsourced the final
assembly of our cholesterol devices to a large-scale contract manufacturer and
are continuing to pursue a number of product re-engineering initiatives, there
can be no assurance that we will be successful in achieving the cost reductions
we seek.
12
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR RESULTS OF OPERATIONS (CONTINUED)
Our total operating expenses were $3,019,477 for the fiscal 2002 second quarter,
an increase of $1,487,699 or 97.1%, from the $1,531,778 incurred during the
fiscal 2001 second quarter. For the first half of fiscal 2002, our total
operating expenses were $4,939,459, an increase of $2,051,331, or 71.0%, from
the $2,888,128 incurred during the first half of fiscal 2001. As further
detailed below, the increases realized for the fiscal 2002 second quarter and
first half primarily were attributable to various costs incurred in connection
with the continuing introduction and national roll-out of our over-the-counter,
personal-use cholesterol monitor.
Our sales and marketing expenses were $922,069 for the fiscal 2002 second
quarter, an increase of $644,948, or 232.7%, from the $277,121 incurred during
the fiscal 2001 second quarter. For the first half of fiscal 2002, our sales and
marketing expenses were $1,339,946, an increase of $802,846, or 149.5%, from the
$537,100 incurred during the first six months of fiscal 2001. The increases
incurred for both the fiscal 2002 second quarter and first half primarily were
attributable to our incurring of incremental costs for advertising and, to a
significantly lesser extent, additional sales and marketing personnel, in
support of our continuing introduction and national roll-out of our personal-use
cholesterol monitor. The aggregate increase incurred for the fiscal 2002 first
half was slightly offset primarily by lower expenses associated with national
trade shows and a local product promotional event.
Our general and administrative expenses were $1,646,202 (inclusive of $631,511
in non-cash charges) for the fiscal 2002 second quarter, an increase of
$741,590, or 82.0%, from the $904,612 (inclusive of $139,722 in non-cash
charges) incurred during the fiscal 2001 second quarter. For the first half of
fiscal 2001, our general and administrative expenses were $2,713,355 (inclusive
of $649,011 in non-cash charges), an increase of $1,055,358, or 63.7%, from the
$1,657,997 (inclusive of $255,952 in non-cash charges) incurred during the first
half of fiscal 2001. The increases incurred for both the fiscal 2002 second
quarter and first half primarily were attributable to increased professional
service fees incurred in connection with various investor relations activities,
including the identification of potential future funding sources. To a lesser
extent, the increases were also attributable to various incremental costs
incurred for additional administrative and technical personnel, and associated
facilities, in connection with the introduction and national roll-out of our
personal-use cholesterol monitor. The aggregate increases incurred for the
fiscal 2002 second quarter and first half were slightly offset by lower board
member fees, travel and meeting costs and stock exchange registration fees.
Our product research and development expenses were $102,877 for the fiscal 2002
second quarter, an increase of $35,798, or 53.4%, from the $67,079 incurred
during the fiscal 2001 second quarter. For the first half of fiscal 2002, our
research and development expenses were $233,850, an increase of $90,471, or
63.1%, from the $143,379 incurred during the first half of fiscal 2001. The
increases incurred for both the fiscal 2002 second quarter and first half
primarily were attributable to certain incremental technical, personnel,
regulatory and travel costs incurred in connection with the aforementioned
product re-engineering initiatives directed at achieving certain cost
reductions.
Our non-cash depreciation and amortization expenses were $348,329 for the fiscal
2002 second quarter, an increase of $65,363, or 23.1%, as compared to $282,966
for the fiscal 2001 second quarter. For the first half of fiscal 2002, our
non-cash depreciation and amortization expenses were $652,308, an increase of
$102,656, or 18.7 %, from the $549,652 incurred during the first half of fiscal
2001. The increases incurred for both the fiscal 2002 second quarter and first
half primarily were attributable to the addition of equipment and leasehold
improvements necessary to the continuing introduction and national roll-out of
our personal-use cholesterol monitor.
Primarily as a result of the foregoing, our loss from operations for the fiscal
2002 second quarter was $2,941,450, an increase of $1,417,863, or 93.1%, from
the $1,523,587 incurred during the fiscal 2001 first quarter. For the first half
of fiscal 2002, our loss from operations was $5,097,355, an increase of
$2,199,442, or 75.9%, from the $2,897,913 incurred during the first half of
fiscal 2001.
Our non-operating expenses and income primarily consist of interest income,
interest and financing expenses, and other miscellaneous income and expense
items. Our net non-operating expense was $647,536 (inclusive of $447,975
13
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR RESULTS OF OPERATIONS (CONTINUED)
in non-cash charges) for the fiscal 2002 second quarter as compared to $98,264
(inclusive of $10,182 in non-cash charges) for the fiscal 2001 second quarter.
For the first half of fiscal 2002, our net non-operating expense was $1,610,808
(inclusive of $1,228,312 in non-cash charges) as compared to $89,494 (inclusive
of $10,182 in non-cash charges) for the first half of fiscal 2001. As set forth
in the accompanying condensed consolidated statement of cash flows, the
increased non-operating expenses incurred for both the fiscal 2002 and first
half primarily were attributable to various non-cash amortization and inducement
expenses associated with our issuances of convertible debt during the fiscal
2001 fourth quarter and fiscal 2002 first quarter. The fiscal 2002 second
quarter and, to a lesser extent, first half also reflects the interest expense
subsequently incurred in connection with this outstanding convertible debt. It
should be noted that the amortization and interest expenses associated with this
outstanding convertible debt will continue to have a material adverse impact on
our results of operations for the foreseeable future.
We incurred a net loss of $3,588,986 ($0.18 per basic and diluted share) for the
fiscal 2002 second quarter as compared to a net loss of $1,621,851 ($0.08 per
basic and diluted share) for the fiscal 2001 second quarter. For the first half
of fiscal 2002, we incurred a net loss of $6,708,163 ($0.33 per basic and
diluted share) as compared to a net loss of $2,987,407 ($0.15 per basic and
diluted share) for the first half of fiscal 2001.
OUR LIQUIDITY AND CAPITAL RESOURCES
We have historically sustained our operations and funded our growth through an
ongoing combination of short-term financings, equity and debt issuances, and
trade credit arrangements. As our working capital requirements have generally
preceded the realization of sales and related accounts receivable, we have
routinely drawn upon our existing cash balances and sought short-term financing,
primarily from existing principal shareholders, to fund the procurement of
component parts and assembly of our cholesterol monitors.
We executed an agreement with a bank effective September 25, 2001 that provides
us with a $1.5 million secured revolving credit facility (with a sub-limit of
$0.5 million for letters of credit). Initial borrowings of up to $500,000 are to
be secured with a corresponding bank deposit, with all borrowings being
additionally secured by our accounts receivable. The agreement requires monthly
payments of interest, at a rate equal to the premium commercial market fund rate
plus three percent (3.75% at December 31, 2001), plus principal payments from
collections of our securing accounts receivable. Letters of credit have terms
and interest payable as specified in the underlying letters of credit. The
agreement contains certain covenants that require us to maintain $2.5 million in
minimum working capital and $3.5 million in minimum net worth, both as defined
by the agreement. We are also required to periodically submit certain financial
information to the bank. The credit facility has a maturity date of September
10, 2002.
At December 31, 2001, we were not in compliance with the aforementioned minimum
working capital requirement. Until such compliance is restored or a written
notice of waiver is obtained from the bank, our future borrowings, if any, under
this credit facility will be limited to those secured by a corresponding bank
deposit. We had no outstanding borrowings against this credit facility at
December 31, 2001.
Our operating activities consumed $5,002,470 in cash and cash equivalents during
the first half of fiscal 2002, an increase of $3,013,851, or 151.6%, from the
$1,988,619 in cash and cash equivalents consumed during the first half of fiscal
2001. The increase for the first half of fiscal 2002 primarily reflects our
substantially increased net loss and, to a significantly lesser extent, the
negative cash flow effects of increased inventories, prepaid expenses, accounts
receivable and other non-current assets and decreased commissions payable. These
negative cash flows were partially offset primarily by the adding back of
various non-cash amortization, depreciation, inducement, compensation and other
charges and, to a lesser extent, the positive cash flow effects of increased
accounts payable and accrued liabilities.
14
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Our investing activities utilized $113,781 in cash and cash equivalents during
the first half of fiscal 2002, a decrease of $551,735, or 82.9%, from the
$665,516 in cash and cash equivalents utilized during the first half of fiscal
2001. The decrease for the first half of fiscal 2002 primarily is attributable
to the comparative fiscal 2001 first half reflecting the negative cash flow
effects of substantially higher capital expenditures and, to a significantly
lesser extent, advances to officer. The first half of fiscal 2002 reflects the
negative cash flow effect of increased software development costs capitalized,
being minimally offset by the positive cash flow effect of repayments from
officer.
Our financing activities provided $3,895,231 in cash and cash equivalents during
the first half of fiscal 2002, an increase of $2,123,361, or 119.8%, from the
$1,771,870 in cash and cash equivalents provided by financing activities during
the first half of fiscal 2001. The increase for the first half of fiscal 2002
primarily is attributable to proceeds from issuances of convertible debt as
described below, slightly offset by certain principal repayments of convertible
debt. In contrast, the comparative first half of fiscal 2001 reflects a smaller
aggregate amount of net financing proceeds from sales of common stock and, to a
lesser extent, exercises of common stock, issuances of notes payable and the
incurring of capital lease obligations.
As a result of the foregoing, we had cash and cash equivalents of $428,959 and
$1,649,979 at December 31, 2001 and June 30, 2001, respectively. Our working
capital was $1,618,525 and $2,277,211 at December 31, 2001 and June 30, 2001,
respectively. The reduction in our cash and cash equivalents balance and
increase in our accounts payable balance during the first half of fiscal 2002,
and particularly during the fiscal 2002 second quarter, primarily reflects our
building of inventory in anticipation of our achieving greater market
penetration in the near future through both new and existing retail
distributors, although there can be no assurance of that we will in fact be
successful in achieving such. Any significant failure on our part to achieve
this increased market penetration in a timely manner may result in inventory
write-downs and further working capital constraints which, if realized, would
likely have material adverse effects on our business, results of operations,
liquidity and cash flows.
Just prior to our fiscal 2001 year-end, we commenced a private offering of
convertible notes with detachable stock purchase warrants from which we had
received proceeds of $3,225,000 as of June 30, 2001. We subsequently received
additional proceeds of $4,422,500 through December 31, 2001. The notes are
unsecured, accrue interest at the prime rate plus two percent (6.75% at December
31, 2001), and mature on either July 1, 2003 or July 1, 2006, as specified. The
notes are immediately convertible at the option of the holders into our common
stock at a rate of $1.00 per share. We have the right to force conversion of the
notes if the market price of our common stock exceeds $3.00 per share for 20
consecutive trading days. Each note holder received one detachable stock
purchase warrant for every two dollars of note principal. Each warrant allows
the holder to purchase a share of our common stock at $2.50 per share. As the
accompanying detachable warrants, in effect, created a beneficial conversion
feature, we were required by U.S. generally accepted accounting principles to
reduce the carrying value of the notes by an amount equal to the estimated fair
value of the beneficial conversion feature. This fair value discount, amounting
to $6,587,564 at December 31, 2001, has been recorded as additional paid-in
capital.
During the fiscal 2002 first quarter, we repaid $184,200 in outstanding
principal and interest against outstanding short-term notes and a line of
credit, which had been previously provided by a principal shareholder and member
of the Board of Directors during fiscal 2001, and consolidated the remaining
$469,984 aggregate principal balance into a two-year convertible note due August
1, 2003. The note accrues interest at the prime rate plus two percent (6.75% at
December 31, 2001) and is immediately convertible at the Director's option into
our common stock at a stated rate of $1.00 per share.
In late November 2001, we commenced a "best efforts" private placement offering
of 4,000,000 common shares at a fixed price of $1.50 per common share from which
we had not yet received any proceeds as of December 31, 2001. We have
subsequently received gross proceeds of $1,100,000 through February 14, 2002.
This offering will continue, unless extended by the Company's Board of
Directors, until the earlier of February 28, 2002 or such date that all of the
common shares have been sold. Each common share purchased in the offering will
be accompanied by
15
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
two callable stock purchase warrants, consisting of: (i) one warrant allowing
for the subsequent purchase of one-half share of common stock at a price of
$2.50 per share (the "$2.50 Warrants") and (ii) one warrant allowing for the
subsequent purchase of one-half share of common stock at a price of $3.50 per
share ("$3.50 Warrants"). We may subsequently redeem, at our option and upon
providing a 30-day written notice of redemption, any outstanding unexercised
warrants at a price of $.001 per warrant. However, such redemption notice may
only be issued by us if, following the close of the offering, the average
closing price of our common shares, as reported on the American Stock Exchange
or other market on which our common shares are traded, equals or exceeds the
following market prices for a period of ten consecutive trading days: (i) $3.50
for the $2.50 Warrants or (ii) $4.50 for the $3.50 Warrants. Any warrants not
exercised or submitted for redemption within the 30-day redemption notice period
will be cancelled.
Although we currently have no material commitments for the purchase of capital
equipment, we do currently envision the need for additional equipment,
technology hardware and software, and office furnishings, with an estimated
aggregate cost of approximately $125,000 to $500,000 during the remainder of
fiscal 2002. We anticipate that the majority of these items will be procured and
financed through a combination of conventional operating and capital leases,
including under certain existing lease lines of credit available to us with
previously utilized vendors.
OUR OTHER MATTERS
Seasonal and Inflationary Influences
To date, we have not been materially impacted by seasonal or inflationary
influences. However, as we continue the national introduction and roll-out of
our over-the-counter, personal-use cholesterol monitor to retailers, we may
increasingly begin to realize certain seasonal sales concentrations particularly
around major certain gift-giving holidays. We are unable at this time to
estimate the probability, timing or magnitude of any future seasonal sales
concentrations.
Quantitative and Qualitative Disclosures About Market Risk
We currently are exposed to financial market risks from changes in short-term
interest rates as the majority of our outstanding debt is variable in nature
with interest rates that fluctuate with the prime rate. Based on our current
aggregate variable debt level, we believe that the prime rate would have to
increase significantly for the resulting adverse impact on our interest expense
to be material to our anticipated results of operations and operating cash flows
for the remainder of fiscal 2002, and possibly beyond. We currently are not
exposed to financial market risks from changes in foreign currency exchange
rates. However, in the future, we may increase the level of our variable rate
debt or enter into transactions denominated in non-U.S. currencies which could
increase our exposure to these market risks. We have not used, and currently do
not contemplate using, any derivative financial instruments.
Recently Issued Accounting Standards Not Yet Adopted
In May 2000, the EITF issued EITF 00-14, "Accounting for Certain Sales
Incentives" ("EITF 00-14"). Under the provisions of EITF 00-14, for sales
incentives that will not result in a loss on the sale of product or service, a
vendor should recognize the cost of the sales incentive at the latter of the
date the related revenue is recorded by the vendor or the date the sales
incentive is offered. The reduction to or refund of the selling price of the
product or service resulting from any cash sales incentive should be classified
as a reduction of revenue. In April 2001, the EITF delayed the effective date of
EITF 00-14. We will adopt EITF 00-14, as required, in our consolidated financial
statements for the third quarter of fiscal 2002 with restatement of all
comparative prior period financial statements. We currently believe that the
adoption of EITF 00-14 will not have a material impact on our consolidated
financial statements.
16
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR OTHER MATTERS (CONTINUED)
Recently Issued Accounting Standards Not Yet Adopted (continued)
In April 2001, the EITF issued EITF 00-25, "Accounting for Consideration from a
Vendor to a Retailer in Connection with the Purchase or Promotion of the
Vendor's Products" ("EITF 00-25"). Under the provisions of EITF 00-25, it is
presumed, in the absence of persuasive evidence to the contrary, that
consideration from a vendor to a purchaser of the vendor's products should be
characterized as a reduction of revenue when recognized in the vendor's income
statement. This presumption is overcome and the consideration should be
characterized as a cost incurred if, the vendor receives, or will receive, an
identifiable benefit (i.e., goods or services) in return for the consideration
and the vendor can reasonably estimate the fair value of the benefit. We will
adopt EITF 00-25, as required, in our consolidated financial statements for the
third quarter of fiscal 2002 with restatement of all comparative prior period
financial statements. We currently believe that the adoption of EITF 00-25 will
not have a material impact on our consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), which revises the accounting for purchased goodwill
and other intangible assets. Under SFAS No. 142, goodwill and other intangible
assets with indefinite lives will no longer be systematically amortized into
operating results. Instead, each of these assets will be tested, in the absence
of an indicator of possible impairment, at least annually, and upon an indicator
of possible impairment, immediately. We will adopt SFAS No. 142, as required, in
our consolidated financial statements for the first quarter of fiscal 2003. We
currently believe that the adoption of SFAS No. 142 will not have a material
impact on our consolidated financial statements.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in which
it is a cost by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related obligation
for its recorded amount or incurs a gain or loss upon settlement. We will adopt
SFAS No. 143, as required, in our consolidated financial statements for the
first quarter of fiscal 2003. We currently believe that the adoption of SFAS No.
143 will not have a material impact on our consolidated financial statements.
In August 2001, the FASB issued SFAS N. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets" ("SFAS No. 144"). SFAS No. 144 was issued to
resolve certain implementation issues that had arisen under SFAS No. 121. Under
SFAS No. 144, a single uniform accounting model is required to be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and certain additional disclosures are required. We will adopt
SFAS No. 144, as required, in our consolidated financial statements for the
first quarter of fiscal 2003. We currently believe that the adoption of SFAS No.
144 will not have a material impact on our consolidated financial statements.
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are periodically involved in incidental
litigation and administrative proceedings primarily arising in the normal course
of its business. In the opinion of management, the Company's gross liability, if
any, and without any consideration given to the availability of indemnification
or insurance coverage, under any pending or existing incidental litigation or
administrative proceedings would not materially affect its financial position,
results of operations or cash flows.
Our wholly-owned subsidiary, Lifestream Diagnostics, Inc., is the plaintiff in
patent infringement litigation, Civil Action No. CV00-300-N-MHW, against Polymer
Technology Systems, Inc., et al, currently pending in the United States District
Court for the District of Idaho. The patent-in-suit is Thakore, U.S. Patent No.
3,135,716 (see "Item 1. Business - Our Intellectual Property Rights" in our
Fiscal 2001 Annual Report on Form 10-KSB for further details). We allege willful
patent infringement and seek Polymer's immediate discontinuance of the HDL test
strip technology currently utilized in their diagnostic device to which we claim
ownership. The defendants have brought a number of counterclaims, including
antitrust, unfair competition, tortious interference with business relations,
and patent misuse, and have only asserted unspecified general damages. Discovery
is underway and we have answered all discovery requests. The Court had a hearing
on October 10, 2001 to address two motions filed by us, including a motion for
partial summary judgment and a motion for leave to amend the complaint. We
continue to await the Court's rulings. We have engaged two expert witnesses, who
are in the process of completing their expert reports for use in the litigation.
To date, the defendants have not identified any expert witnesses or presented
any evidence to support their defenses or counterclaims. However, such evidence
may be presented at a later time. Although we believe that our claims are well
founded in law and fact, and believe that the counterclaims and defenses alleged
by the defendants are baseless, the outcome of this litigation cannot be
predicted with certainty. Settlement discussions have recently resumed and are
ongoing.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We relied upon certain registration exemptions provided by Section 4(2) of the
Securities Act of 1933, as amended, for the following securities transactions
which transpired during our fiscal 2002 second quarter ended December 31, 2001:
In June 2001, we commenced a "best efforts" private placement offering of
convertible notes with detachable stock purchase warrants from which we had
received gross proceeds of $3,225,000 as of June 30, 2001. We subsequently
received additional gross proceeds of $3,322,500 and $1,100,000 during our
fiscal 2002 first and second quarters, respectively. The notes are unsecured,
accrue interest at the prime rate plus two percent (6.75% at December 31, 2001),
and mature on either July 1, 2003 or July 1, 2006, as specified. The notes are
immediately convertible at the option of the holders into our common stock at a
rate of $1.00 per share. We have the right to force conversion of the notes if
the market price of our common stock exceeds $3.00 per share for 20 consecutive
trading days. Each note holder received one detachable stock purchase warrant
for every two dollars of note principal. Each warrant allows the holder to
purchase a share of our common stock at $2.50 per share. As the accompanying
detachable warrants, in effect, created a beneficial conversion feature, we were
required by U.S. generally accepted accounting principles to reduce the carrying
value of the notes by an amount equal to the estimated fair value of the
beneficial conversion feature. This fair value discount, amounting to $6,587,564
at December 31, 2001, was recorded as additional paid-in capital. In connection
with the immediately preceding offering of convertible notes, the Company agreed
to pay two principal shareholders each a commission equal to five percent of the
related offering proceeds. Total commissions of $712,250 were incurred which are
being amortized as deferred financing fees over the term of the convertible
debt.
18
PART II. OTHER INFORMATION (CONTINUED)
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (CONTINUED)
In late November 2001, we commenced a "best efforts" private placement offering
of 4,000,000 common shares at a fixed price of $1.50 per common share from which
we had not yet received any proceeds as of December 31, 2001. We have
subsequently received gross proceeds of $1,100,000 through February 14, 2002.
This offering will continue, unless extended by the Company's Board of
Directors, until the earlier of February 28, 2002 or such date that all of the
common shares have been sold. Each common share purchased in the offering will
be accompanied by two callable stock purchase warrants, consisting of: (i) one
warrant allowing for the subsequent purchase of one-half share of common stock
at a price of $2.50 per share (the "$2.50 Warrants") and (ii) one warrant
allowing for the subsequent purchase of one-half share of common stock at a
price of $3.50 per share ("$3.50 Warrants"). We may subsequently redeem, at our
option and upon providing a 30-day written notice of redemption, any outstanding
unexercised warrants at a price of $.001 per warrant. However, such redemption
notice may only be issued by us if, following the close of the offering, the
average closing price of our common shares, as reported on the American Stock
Exchange or other market on which our common shares are traded, equals or
exceeds the following market prices for a period of ten consecutive trading
days: (i) $3.50 for the $2.50 Warrants or (ii) $4.50 for the $3.50 Warrants. Any
warrants not exercised or submitted for redemption within the 30-day redemption
notice period will be cancelled.
In December 2001, we issued 10,174 common shares to a product development
consultant in exchange for services to be subsequently provided over a
twelve-month contract period beginning September 2001 with an estimated
aggregate fair market value of $17,500.
In December 2001, we issued 100,000 common shares to an investment relations
consulting firm in exchange for services to be subsequently provided over a
twelve-month contract period beginning December 2001 with an estimated aggregate
fair market value of $172,000.
In December 2001, we issued 10,000 common shares to an investment relations
consultant in exchange for services to be subsequently provided over a six-month
contract period beginning December 2001 with an estimated aggregate fair market
value of $17,200.
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 the matters voted upon at the
Company's Annual Meeting of Stockholders held on December 21, 2001:
1. Election of Class I Directors to the Company's Board of Directors:
Robert Boyle For: 15,864,054 Withhold: 7,381
William Gridley For: 15,859,554 Withhold: 11,881
Boyd D. Lyles, Jr., M.D. For: 15,864,054 Withhold: 7,381
19
PART II. OTHER INFORMATION (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
2. Approval of the Issuance of Common Shares Upon Possible Conversion of
Term Notes and Possible Exercise of Detachable Stock Purchase Warrants:
For: 11,366,104 Against: 68,397 Abstain: 33,433
3. Ratify the appointment of BDO Seidman LLP as the Company's Independent
Certified Public Accountants for the Fiscal Year Ending June 30, 2002:
For: 11,801,974 Against: 38,341 Abstain: 31,120
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, 2001.
20
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 February 2002.
LIFESTREAM TECHNOLOGIES, INC.
By: /s/ Brett Sweezy
--------------------------------------
Brett Sweezy
Chief Financial and Accounting Officer