UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 MARCH 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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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 (IRS 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 May 13, 2002, the registrant had 24,411,303 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 MARCH 31, 2002
PART I FINANCIAL INFORMATION
Page
----
Item 1 Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001 .1
Condensed Consolidated Statements of Loss for the three and nine months ended
March 31, 2002 and March 31, 2001 ..........................................3
Condensed Consolidated Statements of Cash Flows for the nine months ended
March 31, 2002 and March 31, 2001 ..........................................4
Notes to Interim Condensed Consolidated Financial Statements .................6
Item 2 Management's Discussion and Analysis .................................12
PART II OTHER INFORMATION
Item 1 Legal Proceedings ....................................................20
Item 2 Changes in Securities and Use of Proceeds ............................20
Item 3 Defaults Upon Senior Securities ......................................21
Item 4 Submission of Matters to a Vote of Security Holders ..................21
Item 5 Other Information ....................................................21
Item 6 Exhibits and Reports on Form 8-K .....................................21
i
LIFESTREAM TECHNOLOGIES, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, JUNE 30,
2002 2001
---------- ----------
Current assets:
Cash and cash equivalents ......................... $ 70,250 $1,649,979
Accounts receivable, net .......................... 517,895 466,853
Inventories, net (Note 2) ......................... 3,275,229 1,984,030
Prepaid expenses .................................. 268,368 55,399
---------- ----------
Total current assets ................................. 4,131,742 4,156,261
Patent and license rights, net ....................... 1,093,893 1,187,415
Purchased software technology and capitalized software
development costs, net ............................. 356,563 945,408
Property and equipment, net .......................... 1,090,322 945,530
Deferred financing costs, net (Note 6) ............... 514,082 320,000
Note receivable - officer (Note 3) ................... 97,116 100,349
Other ................................................ 15,439 14,403
---------- ----------
Total assets ......................................... $7,299,157 $7,669,366
========== ==========
The accompanying notes are an integral part of these financial statements
1
LIFESTREAM TECHNOLOGIES, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
MARCH 31, JUNE 30,
2002 2001
---------- ----------
Current liabilities:
Accounts payable .................................................. $ 1,767,479 $ 1,103,044
Accrued liabilities (Note 5) ...................................... 629,178 311,592
Commissions payable - related parties (Note 6) .................... -- 320,000
Current maturities of capital lease obligations ................... 113,921 108,084
Current maturities of convertible debt (Note 6) ................... 800,000 --
Current maturities of note payable ................................ 36,324 36,330
------------ ------------
Total current liabilities ............................................ 3,346,902 1,879,050
Capital lease obligations, less current maturities ................... 87,278 81,173
Note payable, less current maturities ................................ 6,061 33,302
Note payable - related party (Note 6) ................................ -- 140,000
Line of credit - related party (Note 6) .............................. -- 500,000
Convertible debt, face amount of $7,064,984 and $4,275,000 (Note 6) .. 2,157,417 2,109,936
------------ ------------
Total liabilities .................................................... 5,597,658 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;
24,411,303 and 20,345,331 issued and outstanding ................ 24,411 20,345
Additional paid-in capital ........................................ 32,295,903 22,384,031
Accumulated deficit ............................................... (30,618,815) (19,478,471)
------------ ------------
Total stockholders' equity ........................................... 1,701,499 2,925,905
------------ ------------
Total liabilities and stockholders' equity ........................... $ 7,299,157 $ 7,669,366
============ ============
The accompanying notes are an integral part of these financial statements
2
LIFESTREAM TECHNOLOGIES, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales ............................ $ 874,899 $ 518,702 $ 2,993,097 $ 597,809
Cost of sales ........................ 813,478 393,513 3,089,572 482,404
------------ ------------ ------------ ------------
Gross profit (loss) .................. 61,421 125,189 (96,475) 115,405
Operating expenses:
Sales and marketing ............ 745,334 229,048 2,085,280 766,148
General and administrative ..... 1,313,605 753,749 4,026,960 2,411,746
Product research and development 576,218 72,749 810,068 216,128
Depreciation and amortization .. 340,181 303,005 992,489 852,657
------------ ------------ ------------ ------------
Total operating expenses ............. 2,975,338 1,358,551 7,914,797 4,246,679
------------ ------------ ------------ ------------
Loss from operations ................. (2,913,917) (1,233,362) (8,011,272) (4,131,274)
------------ ------------ ------------ ------------
Non-operating income (expenses):
Interest income ................ 2,440 2,764 20,243 19,990
Interest and financing expenses (1,509,899) (43,962) (3,122,973) (145,059)
Other, net ..................... (10,805) (6,224) (26,342) (11,847)
------------ ------------ ------------ ------------
Total non-operating expenses, net .... (1,518,264) (47,422) (3,129,072) (136,916)
------------ ------------ ------------ ------------
Net loss ............................. $ (4,432,181) $ (1,280,784) $(11,140,344) $ (4,268,190)
============ ============ ============ ============
Net loss per share (Note 1) .......... $ (0.20) $ (0.06) $ (0.53) $ (0.22)
============ ============ ============ ============
Weighted average shares -
Basic and diluted (Note 1) ......... 22,213,310 20,202,536 21,043,397 19,782,089
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements
3
LIFESTREAM TECHNOLOGIES, INC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss .......................................................... $(11,140,344) $ (4,268,190)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 992,489 852,657
Amortization of convertible debt discount ...................... 1,679,996 --
Amortization of deferred financing costs ....................... 198,418 --
Provision for bad debts ......................................... 11,510 --
Provision for inventory obsolescence ............................ 41,299 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) ...................................................... 310,364 --
Beneficial conversion feature of convertible debt issued
to related party (Note 6) ................................... 91,000 --
Issuances of common stock for other non-employee services ....... 1,356,428 619,482
Changes in assets and liabilities:
Accounts receivable ............................................. (62,552) (429,276)
Inventories ..................................................... (1,332,498) (1,924,136)
Prepaid expenses ................................................ (62,969) (28,717)
Accounts payable ................................................ 664,435 1,487,651
Accrued liabilities ............................................ 373,833 162,499
Deferred revenue ............................................... -- 422,982
Commissions payable ............................................ (585,601) --
Increase in other non-current assets ................................. (1,036) (17,805)
------------ ------------
Net cash used in operating activities ................................ (7,465,707) (3,119,989)
------------ ------------
Cash flows from investing activities:
Capital expenditures .............................................. (275,720) (756,625)
Software development costs capitalized ............................ (43,504) (69,098)
Advances to officer (Note 3) ...................................... -- (75,138)
Repayments from officer (Note 3) .................................. 3,233 --
------------ ------------
Net cash used in investing activities ................................ (315,991) (900,861)
------------ ------------
Cash flows from financing activities:
Proceeds from capital lease obligations incurred .................. -- 266,780
Principal payments on capital lease obligations ................... (123,268) (111,194)
Proceeds from issuances of notes payable .......................... -- 500,000
Principal payments on notes payable ............................... (27,247) (19,304)
Proceeds from issuances of convertible debt (Note 6) .............. 4,422,500 1,040,000
Principal payments on convertible debt ............................ (420,016) --
Proceeds from exercises of stock options .......................... -- 235,505
Proceeds from sales of common stock (Note 7) ...................... 2,350,000 1,157,000
------------ ------------
Net cash provided by financing activities ............................ 6,201,969 3,068,787
------------ ------------
Net decrease in cash and cash equivalents ............................ (1,579,729) (952,063)
Cash and cash equivalents at beginning of period ..................... 1,649,979 1,059,637
------------ ------------
Cash and cash equivalents at end of period ........................... $ 70,250 $ 107,574
============ ============
The accompanying notes are an integral part of these financial statements.
4
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001
---------- ----------
Supplemental schedule of cash activities:
Interest paid in cash ............................................ $ 14,505 $ 30,734
Supplemental schedule of non-cash investing and financing activities:
Equipment acquired through capital lease obligations ................ $ 142,449 $ --
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 (Note 6) ................... 640,000 --
Convertible debt converted to common stock (Note 6) ................. 1,108,747 --
Issuance of common stock in exchange for:
Financing costs .................................................. 126,899 98,435
Prepaid legal fees (Note 7) ...................................... 150,000 --
The accompanying notes are an integral part of these financial statements.
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 March 31, 2002 and 2001, the Company had stock options, stock
warrants and convertible debt outstanding that could potentially be exercised or
converted into 19,375,250 and 5,596,190 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.
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 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.
In November 2001, the EITF issued EITF 01-09, "Accounting for Consideration
Given by a Vendor to a Customer or a Reseller of the Vendor's Products." EITF
01-09 codifies and reconciles the consensuses on all or specific issues of EITF
00-14 and EITF 00-25.
The Company adopted each of the above EITFs, as required, in its consolidated
financial statements for the third quarter of fiscal 2002. As the Company's
historical recognition and classification of the subject costs conformed to
these EITFs, their adoption had no impact on the Company's consolidated
financial statements.
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
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 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 No. 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145"). SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements, by rescinding SFAS No. 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Accounting Principles Board Opinion No. 30 will now be
used to classify those gains and losses. Additionally, SFAS No. 145 amends SFAS
No. 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Finally, SFAS No. 145 also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The provisions of SFAS No. 145 that amend SFAS No. 13 are effective for
transactions occurring after May 15, 2002 with all other provisions of SFAS No.
145 being required to be adopted by the Company in its consolidated financial
statements for the first quarter of fiscal 2003. Management currently believes
that the adoption of SFAS No. 145 will not have a material impact on the
Company's consolidated financial statements.
8
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
Inventories consist of the following:
MARCH 31, JUNE 30,
2002 2001
----------- -----------
Raw materials ........................... $ 1,295,071 $ 1,332,519
Work in process ......................... 917,502 549,465
Finished goods .......................... 1,103,159 161,951
----------- -----------
3,315,732 2,043,935
Less allowance for inventory obsolescence (40,503) (59,905)
----------- -----------
Total inventories ....................... $ 3,275,229 $ 1,984,030
=========== ===========
The above finished goods inventories include $284,389 and $0 of inventory
consigned with a retailer at March 31, 2002 and June 30, 2001, respectively.
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 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 (3.40% at March 31, 2002), 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 March 31, 2002, 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 March 31, 2002.
9
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
MARCH 31, JUNE 30,
2002 2001
-------- --------
Accrued wages, benefits and related taxes $148,101 $152,869
Accrued royalties ....................... 37,500 112,490
Accrued sales returns ................... 54,278 26,000
Accrued interest payable ................ 388,686 16,560
Accrued other ........................... 613 3,673
-------- --------
Total accrued liabilities ............... $629,178 $311,592
======== ========
6. CONVERTIBLE DEBT
In March 2001, the Company obtained a $1.0 million short-term loan from a
principal shareholder. The loan was secured by all the unencumbered assets of
the Company, other than accounts receivable, accrued interest at the prime rate
plus two percent and had a 90-day maturity. In connection therewith, the Company
issued the shareholder warrants allowing him to purchase 100,000 shares of the
Company's common stock at $1.00 per share. At the end of the 90-day term, the
Company and the shareholder agreed to convert the above short-term loan into an
unsecured convertible note with a stated interest rate of prime plus two percent
(6.75% at March 31, 2002) and maturity date of March 5, 2003. The note is
immediately convertible at the option of the shareholder into common stock of
the Company at a rate of $1.00 per share. In connection therewith, the Company
issued the shareholder additional warrants allowing him to purchase another
100,000 shares of the Company's common stock at $1.00 per share. The Company
assigned these warrants an estimated fair value of $138,444 that was recognized
as a financing cost. The agreement also stipulates that for every subsequent
quarter the convertible debt remains outstanding that the Company will issue the
shareholder additional warrants for the purchase of 37,500 common shares at
$1.00 per share. The Company repaid $250,000 of the outstanding note balance
during its fiscal 2002 first quarter.
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 the offering's closing in the fiscal 2002 second
quarter. The notes are unsecured, accrue interest at the prime rate plus two
percent (6.75% at March 31, 2002), 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, which amounted to
$6,587,564, has been recorded as additional paid-in capital. The unamortized
debt discount amounted to $4,907,567 and $2,165,064 at March 31, 2002 and June
30, 2001, respectively. During the three months ended March 31, 2002, four
holders converted, in the aggregate, $1,108,747 of outstanding convertible debt,
and the accrued interest thereon, into common shares. In connection therewith,
the Company immediately recognized $606,840 in related debt discount as a
financing expense. In connection with the above offering, 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 outstanding
convertible debt.
10
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONVERTIBLE DEBT (CONTINUED)
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 March 31, 2002) 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, with accompanying stock purchase warrants,
at a fixed price of $1.50 per common share. Subsequently, on April 15, 2002, the
Company's Board of Directors elected to (i) revise the offering, on a fully
retroactive basis, to 6,000,000 common shares, without any accompanying stock
purchase warrants, at a fixed price of $1.00 per common share and (ii) extend
the offering's closing date to May 31, 2002, if needed. As of March 31, 2002,
the Company had received $2,350,000 in net cash proceeds and $150,000 in prepaid
intellectual property legal fees in exchange for 2,500,000 common shares. The
Company subsequently received additional net cash proceeds of $450,000 through
May 13, 2002.
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.
11
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS REGARDING
OUR CURRENT BUSINESS PLANS, STRATEGIES AND OBJECTIVES AND REGARDING OUR BELIEF
THAT WE CAN ACQUIRE ADDITIONAL FINANCING NECESSARY TO MAINTAIN OUR INTENDED
OPERATIONS. THESE STATEMENTS CONSTITUTE FORWARD-LOOKING STATEMENTS FOR PURPOSES
OF THE SAFE HARBOR PROVISIONS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. ALTHOUGH THESE FORWARD-LOOKING STATEMENTS ARE BASED UPON OUR CURRENT
EXPECTATIONS AND UPON REASONABLE ASSUMPTIONS WITHIN THE BOUNDS OF OUR KNOWLEDGE
OF OUR BUSINESS, OPERATIONS AND PROSPECTS, FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO NUMEROUS RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE
CONTROL OF THE COMPANY, AND ACTUAL RESULTS AND DEVELOPMENTS WILL ULTIMATELY
DIFFER FROM THE PROJECTIONS AND MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, AMONG OTHERS: THOSE ASSOCIATED WITH
DEVELOPING AND MARKETING MEDICAL DIAGNOSTIC DEVICES, INCLUDING TECHNOLOGICAL
ADVANCEMENTS AND INNOVATIONS; OUR ABILITY TO OBTAIN ADDITIONAL FINANCING AND
CAPITAL; OUR COMPETITION; OUR ABILITY TO CONTROL OUR COSTS AND EXPENSES; THE
LEGISLATIVE AND REGULATORY CHANGES AFFECTING THE HEALTH CARE INDUSTRY;
AVAILABILITY AND TERMS AND DEPLOYMENT OF CAPITAL; 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. THESE RISKS AND UNCERTAINTIES SHOULD BE CONSIDERED IN
EVALUATING THE FORWARD-LOOKING STATEMENTS AND UNDUE RELIANCE SHOULD NOT BE
PLACED ON SUCH STATEMENTS. THE COMPANY ASSUMES NO RESPONSIBILITY TO UPDATE THESE
FORWARD-LOOKING STATEMENTS.
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 adult point-of-care cholesterol monitor ("our
professional-use cholesterol monitor") and ceased being a development-stage
company. In March 1999, we recognized our first revenues from sales of our
professional-use cholesterol monitor. However, shortly thereafter, we elected to
curtail further active marketing of our professional-use cholesterol monitor and
instead deploy our then severely limited capital resources into the development
of an over-the-counter, adult personal-use cholesterol monitor ("our
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
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 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 more 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-use cholesterol monitor as well as our recently debuted
professional pediatric point-of-care cholesterol monitor ("our professional-use
pediatric cholesterol monitor").
12
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 March 31, 2002. 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 currently
anticipate substantial operating and net losses, and negative cash flow from
operating activities, through our fiscal 2003 first quarter, and possibly
beyond. As such, it must be noted that, despite our positive working capital
position at March 31, 2002, our ability to efficiently produce and sell our
cholesterol monitors, and thereby achieve net profitability and positive
operating cash flow, 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
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 March 31, 2002 ("fiscal
2002 third quarter") were $874,899 as compared to $1,238,353 and $879,845 for
the preceding fiscal 2002 second and first quarters, respectively, and $518,702
for the comparative three months ended March 31, 2001 ("fiscal 2001 third
quarter"). For the nine months ended March 31, 2002 ("first nine months of
fiscal 2002"), our consolidated net sales were $2,993,097 as compared to
$597,809 for the nine months ended March 31, 2001 ("first nine months of fiscal
2001"). The increases in our consolidated net sales for both the fiscal 2002
third quarter and first nine months primarily were attributable to the
fulfillment of purchase orders received from new retail distributors, primarily
drug store chains, and, to a lesser extent, the fulfillment of increased
purchase orders received from several continuing retail distributors, primarily
specialty retailers and department stores. The sequential decrease in our
consolidated net sales for the fiscal 2002 third quarter, as compared to the
immediately preceding fiscal 2002 second quarter, primarily was attributable to
seasonality and, to a lesser extent, fewer purchase orders from new retail
distributors. Our personal-use cholesterol monitor, and related test strips,
accounted for 96% of our consolidated net sales for the fiscal 2002 third
quarter and first nine months as compared to 89% and 80% of our consolidated net
sales for the fiscal 2001 third quarter and first nine months, respectively. Our
professional-use cholesterol monitors, and related test strips, accounted for
the respective balances.
Our cost of sales, being direct labor, material and overhead, including related
product shipping and handling costs, were $813,478 for the fiscal 2002 third
quarter as compared to $393,513 for the fiscal 2001 third quarter. For the first
nine months of fiscal 2002, our cost of sales were $3,089,572 as compared to
$482,404 for the first nine months of fiscal 2001. Our resulting gross margins
were 7.0% and (3.2%) for the fiscal 2002 third quarter and first nine months,
respectively, as compared to 24.1% and 19.3% for the fiscal 2001 third quarter
and first nine months, respectively. Limited unit sales to date of our
cholesterol monitors and introductory wholesale pricing discounts and incentives
granted during fiscal 2002 to achieve greater market penetration of our
personal-use cholesterol monitor with retail distributors have resulted in
significant reductions to our targeted gross revenues and margins. For instance,
during our 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 test strips.
Although all of the associated product costs are included in our consolidated
cost of sales, the aggregate retail value of these free products, which
approximated $270,000, is excluded from our consolidated net sales, as required
by generally accepted accounting principles in the United States. 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
13
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR RESULTS OF OPERATIONS (CONTINUED)
and various economies of scale in our procurement and production processes. We
have outsourced the final assembly of our cholesterol devices to a large-scale
contract manufacturer and are currently in final discussions with an overseas
manufacturer to further facilitate reduction in production costs. We are also
continuing to actively pursue a number of product re-engineering initiatives
directed at gaining access to certain large mass merchandisers and achieving
certain cost reductions. There can be no assurance that we will ultimately be
successful in achieving such cost reductions.
Our total operating expenses were $2,975,338 for the fiscal 2002 third quarter,
an increase of $1,616,787 or 119.0%, from the $1,358,551 incurred during the
fiscal 2001 third quarter. For the first nine months of fiscal 2002, our total
operating expenses were $7,914,797, an increase of $3,668,118, or 86.4%, from
the $4,246,679 incurred during the first nine months of fiscal 2001. As further
detailed below, the increases realized for both the fiscal 2002 third quarter
and first nine months primarily were attributable to various costs incurred by
us in connection with our continuing introduction and national roll-out of our
personal-use cholesterol monitor and in connection with the product
re-engineering initiatives.
Our sales and marketing expenses were $745,334 for the fiscal 2002 third
quarter, an increase of $516,286, or 225.4%, from the $229,048 incurred during
the fiscal 2001 third quarter. For the first nine months of fiscal 2002, our
sales and marketing expenses were $2,085,280, an increase of $1,319,132, or
172.2%, from the $766,148 incurred during the first nine months of fiscal 2001.
The increases incurred for both the fiscal 2002 third quarter and first nine
months primarily were attributable to our incurring of incremental costs for
advertising and, to a significantly lesser extent, additional sales and
marketing personnel, both in support of our continuing introduction and national
roll-out of our personal-use cholesterol monitor. These increases were slightly
offset primarily by lower expenses associated with national trade shows and a
local product promotional event.
Our general and administrative expenses were $1,313,605 (inclusive of $251,377
in non-cash charges) for the fiscal 2002 third quarter, an increase of $559,856,
or 74.3%, from the $753,749 (inclusive of $153,386 in non-cash charges) incurred
during the fiscal 2001 third quarter. For the first nine months of fiscal 2002,
our general and administrative expenses were $4,026,960 (inclusive of $900,388
in non-cash charges), an increase of $1,615,214, or 67.0%, from the $2,411,746
(inclusive of $609,300 in non-cash charges) incurred during the first nine
months of fiscal 2001. The increases incurred for both the fiscal 2002 third
quarter and first nine months primarily were attributable to increased
professional service fees incurred in connection with various investor relations
activities, primarily related to the identification of potential future funding
sources. To a lesser extent, these increases were also attributable to various
incremental costs incurred for additional administrative and technical support
personnel, and associated facilities, in connection with the introduction and
national roll-out of our personal-use cholesterol monitor. The increase incurred
for the fiscal 2002 first nine months was slightly offset by lower board member
fees and stock exchange registration fees.
Our product research and development expenses were $576,218 for the fiscal 2002
third quarter (inclusive of $258,000 in non-cash charges), an increase of
$503,469, or 692.1%, from the $72,749 incurred during the fiscal 2001 third
quarter (inclusive of $0 in non-cash charges). For the first nine months of
fiscal 2002, our product research and development expenses were $810,068
(inclusive of $258,000 in non-cash charges), an increase of $593,940, or 274.8%,
from the $216,128 (inclusive of $0 in non-cash charges) incurred during the
first nine months of fiscal 2001. The increases incurred for both the fiscal
2002 third quarter and first nine months primarily were attributable to certain
incremental technical, personnel, regulatory and travel costs incurred in
connection with the aforementioned product re-engineering initiatives.
Our non-cash depreciation and amortization expenses were $340,181 for the fiscal
2002 third quarter, an increase of $37,176, or 12.3%, as compared to $303,005
for the fiscal 2001 third quarter. For the first nine months of fiscal 2002, our
non-cash depreciation and amortization expenses were $992,489, an increase of
$139,832, or 16.4%, from
14
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR RESULTS OF OPERATIONS (CONTINUED)
the $852,657 incurred during the first nine months of fiscal 2001. The increases
incurred for both the fiscal 2002 third quarter and first nine months 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 third quarter was $2,913,917, an
increase of $1,680,555, or 136.3%, from the $1,233,362 incurred during the
fiscal 2001 third quarter. For the first nine months of fiscal 2002, our loss
from operations was $8,011,272, an increase of $3,879,998, or 93.9%, from the
$4,131,274 incurred during the first nine months 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 $1,518,264 (inclusive of $1,201,059 in
non-cash charges) for the fiscal 2002 third quarter as compared to $47,422
(inclusive of $0 in non-cash charges) for the fiscal 2001 third quarter. For the
first nine months of fiscal 2002, our net non-operating expense was $3,129,072
(inclusive of $2,477,819 in non-cash charges) as compared to $136,916 (inclusive
of $10,182 in non-cash charges) for the first nine months 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 third quarter
and first nine months 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, including our fiscal 2002 third quarter recognition of $606,840 in debt
discount related to convertible debt that was converted by four holders into
common shares during the fiscal quarter. The fiscal 2002 third quarter and, to a
slightly lesser extent, first nine months also reflect 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 $4,432,181 ($0.20 per basic and diluted share) for the
fiscal 2002 third quarter as compared to a net loss of $1,280,784 ($0.06 per
basic and diluted share) for the fiscal 2001 third quarter. For the first nine
months of fiscal 2002, we incurred a net loss of $11,140,344 ($0.53 per basic
and diluted share) as compared to a net loss of $4,268,190 ($0.22 per basic and
diluted share) for the first nine months 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 (3.40% at March 31, 2002), 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.
15
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At March 31, 2002, 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 March
31, 2002.
Our operating activities consumed $7,465,707 in cash and cash equivalents during
the first nine months of fiscal 2002, an increase of $4,345,718, or 139.3%, from
the $3,119,989 in cash and cash equivalents consumed during the first nine
months of fiscal 2001. On a comparative period-to-period basis, this increase
primarily reflects our significantly increased net loss and, to a substantially
lesser extent, the negative cash flow effects of increased prepaid expenses and
decreased accounts payable, deferred revenues and 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 decreased
accounts receivable, inventories and other non-current assets and increased
accrued liabilities.
Our investing activities utilized $315,991 in cash and cash equivalents during
the first nine months of fiscal 2002, a decrease of $584,870, or 64.9%, from the
$900,861 in cash and cash equivalents utilized during the first nine months of
fiscal 2001. This decrease primarily is attributable to the comparative fiscal
2001 period reflecting the negative cash flow effects of substantially higher
capital expenditures and, to a significantly lesser extent, increased software
development costs capitalized and net advances to an officer. Our capital
equipment purchases for the first nine months of fiscal 2002 primarily consisted
of automated test strip packaging equipment and, to a lesser extent, various
computer hardware and software, leasehold improvements and office furnishings
necessary to accommodate incremental personnel.
Our financing activities provided $6,201,969 in cash and cash equivalents during
the first nine months of fiscal 2002, an increase of $3,133,182, or 102.1%, from
the $3,068,787 in cash and cash equivalents provided by financing activities
during the first nine months of fiscal 2001. This increase primarily is
attributable to increased proceeds from issuances of convertible debt and sales
of common stock, as described below, slightly offset by certain principal
repayments of convertible debt and increased principal payments on capital lease
obligations. In contrast, the comparative fiscal 2001 period reflects proceeds
from issuances of notes payable, the incurring of capital lease obligations and
the exercises of stock options.
As a result of the foregoing, we had cash and cash equivalents of $70,250 and
$1,649,979 at March 31, 2002 and June 30, 2001, respectively. Our working
capital was $784,840 and $2,277,211 at March 31, 2002 and June 30, 2001,
respectively. The reduction in our cash and cash equivalents balance and
increase in our accounts payable balance during the first nine months of fiscal
2002 primarily reflects our building of inventory and funding of increased
administrative and technical support infrastructure in anticipation of our
achieving greater market penetration for our personal-use cholesterol monitor,
although there can be no assurance 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 our fiscal 2002 second quarter. The
notes are unsecured, accrue interest at the prime rate plus two percent (6.75%
at March 31, 2002), 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
16
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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, which amounted to $6,587,564, 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
March 31, 2002) 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, with accompanying stock purchase warrants, at a
fixed price of $1.50 per common share. Subsequently, on April 15, 2002, our
Board of Directors elected to (i) revise the offering, on a fully retroactive
basis, to 6,000,000 common shares, without any accompanying stock purchase
warrants, at a fixed price of $1.00 per common share and (ii) extend the
offering's closing date to May 31, 2002, if needed. As of March 31, 2002, we had
received $2,350,000 in net cash proceeds and $150,000 in prepaid intellectual
property legal fees in exchange for 2,500,000 common shares. We subsequently
received additional net cash proceeds of $450,000 through May 13, 2002. We are
continuing to actively market this offering. In addition, on April 30, 2002, we
engaged RP&C International Inc. to assist us on a best efforts basis with the
placement of up to $20 million by way of an offering of convertible debt
securities.
Although we currently have no material commitments for the purchase of capital
equipment, we do currently envision the need primarily for certain packaging
equipment and technology hardware and software with an estimated aggregate cost
of approximately $275,000 and $375,000 during our fiscal 2002 fourth quarter and
fiscal 2003 first quarter, respectively. 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
Although we remain in the early stages of our national introduction and roll-out
of our personal-use cholesterol monitor to retailers, we have begun to note
certain seasonal sales influences consistent with our initial expectations. In
particular, we currently expect our fiscal second quarter ending December 31 to
continue to disproportionately benefit from increased personal and gift sales
associated with the holiday shopping season. However, we remain unable at this
time to reasonably estimate the future magnitude of this expected seasonal sales
concentration. To date, we have not been materially impacted by inflationary
influences.
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 substantially negative results of operations
and operating cash flows through our fiscal 2003 first quarter, and possibly
beyond. We currently are not exposed to
17
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR OTHER MATTERS (CONTINUED)
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
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.
OFF-BALANCE SHEET LIABILITIES
Our off-balance sheet liabilities substantially consist of lease payment
obligations incurred under operating leases, which are required to be excluded
from our consolidated balance sheet by generally accepted accounting principles
in the United States. Our most significant operating leases pertain to our
corporate facilities. All of our other operating leases pertain to various
equipment and technology. Our aggregate minimum annual lease payment
requirements under operating leases as of March 31, 2002 are as follows: $46,102
in fiscal 2002 (remainder), $162,621 in fiscal 2003, $6,988 in fiscal 2004 and
$4,299 in fiscal 2005, with none thereafter.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us 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. Our actual results have differed, and will likely continue to
differ, to some extent from our initial estimates and assumptions. However,
despite such, we do not currently believe that any of our significant accounting
policies entail making particularly difficult, subjective or complex judgments
of inherently uncertain matters that, given any reasonably possible variance
therein, would make such policy particularly critical to a materially accurate
portrayal of our historical or reasonably foreseeable financial condition or
results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
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 No. 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
18
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR OTHER MATTERS (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED (CONTINUED)
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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145"). SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements, by rescinding SFAS No. 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in Accounting Principles Board Opinion No. 30 will now be
used to classify those gains and losses. Additionally, SFAS No. 145 amends SFAS
No. 13 to require that certain lease modifications that have economic effects
similar to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. Finally, SFAS No. 145 also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
The provisions of SFAS No. 145 that amend SFAS No. 13 are effective for
transactions occurring after May 15, 2002 with all other provisions of SFAS No.
145 being required to be adopted by us in our consolidated financial statements
for the first quarter of fiscal 2003. We currently believe that the adoption of
SFAS No. 145 will not have a material impact on our consolidated financial
statements.
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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
continues and we have answered all discovery requests to date. The Court most
recently 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. These two motions were subsequently denied by the Court on
jurisdictional grounds. This ruling did not dismiss any of the claims or
counter-claims pending in action, which is continuing toward trial in accordance
with the court's ruling. We have also engaged two expert witnesses who have
recently submitted their finding to the Court. 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 continue as we wait the Court's setting of a trial date.
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 third quarter ended March 31, 2002:
In late November 2001, we commenced a "best efforts" private placement offering
of 4,000,000 common shares, with accompanying stock purchase warrants, at a
fixed price of $1.50 per common share. Subsequently, on April 15, 2002, our
Board of Directors elected to (i) revise the offering, on a fully retroactive
basis, to 6,000,000 common shares, without any accompanying stock purchase
warrants, at a fixed price of $1.00 per common share and (ii) extend the
offering's closing date to May 31, 2002, if needed. As of March 31, 2002, we had
received $2,350,000 in net cash proceeds and $150,000 in prepaid intellectual
property legal fees in exchange for 2,500,000 common shares. We subsequently
received additional net cash proceeds of $450,000 through May 13, 2002. We are
continuing to actively market this offering. In addition, on April 30, 2002, we
engaged RP&C International Inc. to assist us on a best efforts basis with the
placement of up to $20 million by way of an offering of convertible debt
securities.
In January 2002, we issued 18,006 common shares to a public relations firm in
exchange for services provided over a four-month contract period beginning
September 2001 with an estimated aggregate fair market value of $32,000.
In January 2002, we issued 60,000 common shares to an investment relations
consultant in exchange for services to be subsequently provided over a six-month
contract period beginning January 2002 with an estimated aggregate fair market
value of $105,000.
20
PART II. OTHER INFORMATION (CONTINUED)
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (CONTINUED)
In February 2002, we issued 100,000 common shares to an engineering firm in
exchange for product re-engineering services provided over a three-month period
beginning November 2001 with an estimated aggregate fair market value of
$258,000.
In February and March 2002, we issued 1,108,747 common shares to four investors
upon the conversion of outstanding convertible term notes and accrued interest
thereon aggregating $1,108,747.
In March 2002, we issued 8,750 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 March 2002, we issued 12,773 common shares to a public relations firm in
exchange for services provided over a three-month contract period beginning
January 2002 with an estimated aggregate fair market value of $27,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three months ended March 31,
2002.
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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 May 2002.
LIFESTREAM TECHNOLOGIES, INC.
By: /s/ Brett Sweezy
---------------------
Brett Sweezy
Chief Financial and Accounting Officer
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