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 SEPTEMBER 30, 2002
[ ] 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 November 11, 2002, the registrant had 24,986,747 shares of its $.001 par
value common stock outstanding.
Transitional Small Business Disclosure Format: YES [ ] NO [X]
LIFESTREAM TECHNOLOGIES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2002
PART I. FINANCIAL INFORMATION
Page
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2002 and June 30, 2002.................................1
Condensed Consolidated Statements of Loss for the three months ended
September 30, 2002 and September 30, 2001......................................................................2
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 2002 and September 30, 2001......................................................................3
Notes to Interim Condensed Consolidated Financial Statements ....................................................5
Item 2. Our Management's Discussion and Analysis...............................................................12
Item 3. Our Controls and Procedures............................................................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................21
Item 2. Changes in Securities and Use of Proceeds..............................................................21
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
Signatures......................................................................................................22
Certifications..................................................................................................23
i
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2002 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 1,321 $ 589,854
Restricted cash equivalents (Note 7) .............................. 600,000 600,000
Accounts receivable, net ........................................... 350,616 308,018
Inventories, net (Note 4) .......................................... 2,389,017 2,586,625
Prepaid expenses ................................................... 144,782 146,113
------------ ------------
Total current assets .................................................. 3,485,736 4,230,610
Patent and license rights, net ........................................ 625,151 645,886
Property and equipment, net ........................................... 905,541 1,003,580
Deferred financing costs, net ......................................... 582,632 672,732
Note receivable - officer (Note 5) .................................... 39,582 38,728
Other ................................................................. 14,785 14,785
------------ ------------
Total assets .......................................................... $ 5,653,427 $ 6,606,321
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ................................................... $ 2,228,154 $ 1,416,214
Accrued liabilities (Note 6) ....................................... 943,975 800,162
Revolving credit facility (Note 7) ................................. 2,305,097 2,221,018
Current maturities of capital lease obligations .................... 172,875 151,268
Current maturities of convertible debt, principal face amounts
of $325,000 and $775,000, respectively (Note 8) .................... 318,706 766,608
Current maturities of note payable ................................. 24,220 33,302
------------ ------------
Total current liabilities ............................................. 5,993,027 5,388,572
Capital lease obligations, less current maturities .................... 71,725 81,977
Convertible debt, principal face amounts of $7,039,984 and $7,039,984,
respectively (Note 8) ................................................. 2,779,147 2,461,027
------------ ------------
Total liabilities ..................................................... 8,843,899 7,931,576
------------ ------------
Commitments and contingencies (Note 9)
Stockholders' deficit:
Preferred stock, $.001 par value; 15,000,000 shares authorized; none
issued or outstanding ............................................ -- --
Common stock, $.001 par value; 100,000,000 shares authorized;
24,986,747 and 24,967,997 issued and outstanding, respectively ... 24,987 24,968
Additional paid-in capital ......................................... 32,870,803 32,805,527
Accumulated deficit ................................................ (36,086,262) (34,155,750)
------------ ------------
Total stockholders' deficit ........................................... (3,190,472) (1,325,255)
------------ ------------
Total liabilities and stockholders' deficit ........................... $ 5,653,427 $ 6,606,321
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
THREE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------ ------------
Net sales .................................................... $ 1,132,437 $ 879,845
Cost of sales ................................................ 914,873 1,115,768
------------ ------------
Gross profit (loss) .......................................... 217,564 (235,923
------------ ------------
Operating expenses:
Sales and marketing .................................... 214,998 417,878
General and administrative ............................. 936,061 1,067,153
Product research and development ....................... 177,329 130,972
Depreciation and amortization .......................... 120,457 303,980
------------ ------------
Total operating expenses ..................................... 1,448,845 1,919,983
------------ ------------
Loss from operations ......................................... (1,231,281) (2,155,906)
------------ ------------
Non-operating income (expenses):
Interest income ........................................ 1,018 14,763
Interest and financing expenses ........................ (379,378) (638,224)
Amortization of convertible debt discount .............. (320,218) (340,105)
Other, net ............................................. (653) 294
------------ ------------
Total non-operating expenses, net ............................ (699,231) (963,272)
------------ ------------
Net loss ..................................................... $ (1,930,512) $ (3,119,178)
============ ============
Net loss per share - Basic and diluted (Note 3) .............. $ (0.08) $ (0.15)
============ ============
Weighted average number of shares - Basic and diluted (Note 3) 24,980,497 20,418,431
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
2
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss ......................................................... $(1,930,512) $(3,119,178)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 120,457 303,980
Amortization of convertible debt discount ..................... 320,218 340,105
Amortization of deferred financing costs ...................... 90,100 44,937
Provision for (recovery of) bad debts .......................... (42,572) 9,181
Provision for inventory obsolescence ........................... -- 14,276
Gain on sale of vehicle ....................................... -- (479)
Issuance of common shares and warrants to related party as
inducement to convert line of credit into convertible note ... -- 349,200
Beneficial conversion feature of convertible debt issued
to related party (Note 8) .................................. 13,154 91,000
Issuances of common stock for debt offering commissions ........ -- (38,836)
Issuances of compensatory common stock, options and warrants for
employee and non-employee services ........................... 52,141 17,500
Net changes in assets and liabilities:
Accounts receivable ............................................ (26) 42,644
Inventories .................................................... 197,608 (765,079)
Prepaid expenses ............................................... 1,331 (86,202)
Accounts payable ............................................... 823,295 (25,974)
Accrued liabilities ........................................... 143,813 193,050
Commissions payable ........................................... -- (524,351)
Change in other non-current assets .................................. (854) (2,110)
----------- -----------
Net cash used in operating activities ............................... (211,847) (3,156,336)
----------- -----------
Cash flows from investing activities:
Capital expenditures ............................................. (1,683) (41,353)
Software development costs capitalized ........................... -- (22,882)
Repayments of note receivable from officer (Note 5) .............. -- 955
----------- -----------
Net cash used in investing activities ............................... (1,683) (63,280)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings under revolving line of credit .......... 84,079 --
Proceeds from issuances of convertible debt, net (Note 8) ........ -- 3,322,500
Proceeds from capital lease ...................................... -- 17,757
Payments on capital lease obligations ............................ -- (35,017)
Payments on convertible and other debt ........................... (459,082) (420,016)
----------- -----------
Net cash provided by financing activities ........................... (375,003) 2,885,224
----------- -----------
Net decrease in cash and cash equivalents ........................... (588,533) (334,392)
Cash and cash equivalents at beginning of period .................... 589,854 1,649,979
----------- -----------
Cash and cash equivalents at end of period .......................... $ 1,321 $ 1,315,587
=========== ===========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------ ------------
Supplemental schedule of cash activities:
Interest paid in cash ............................................ $ 127,763 $ 14,505
Supplemental schedule of non-cash investing and financing activities:
Discount on beneficial conversion feature and fair value of
detachable stock purchase warrants (Note 8) ...................... -- 3,322,500
Deferred financing costs (Note 8) ................................... -- 332,250
Lease assumed by officer ............................................ -- 7,239
Issuance of common stock in exchange for:
Financing costs .................................................. 13,154 126,899
Non-employee services ............................................ 52,141 --
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANIZATIONAL STRUCTURE
Lifestream Technologies, Inc., together with its wholly-owned subsidiaries (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 easy-to-use, hand-held, smart card-enabled cholesterol
monitors for consumers and medical professionals.
2. SUBSTANTIAL DOUBT REGARDING THE COMPANY'S ABILITY TO CONTINUE AS A GOING
CONCERN
The Company has incurred substantial operating and net losses, as well as
negative operating cash flows, since its inception. As a result, the Company has
negative working capital and stockholders' equity, including a substantial
accumulated deficit, at September 30, 2002. Additionally, the Company has only
realized modest revenues to date which management primarily attributes to its
continued inability to fund the more extensive marketing activities believed
necessary to develop broad market awareness and acceptance of the Company's
products, particularly its over-the-counter consumer monitors. The
aforementioned factors raise substantial doubt as to the Company's ability to
continue as a going concern, which the Company's independent public accountants
expressed in their audit report on the Company's consolidated financial
statements for the most recently completed fiscal year ended June 30, 2002.
The Company's management continues to actively pursue a number of initiatives
intended to provide timely remedies to the above adverse conditions. In October
2002, the Company debuted its second-generation consumer monitors from which
management expects substantially increased retail market penetration and gross
margins. In recent months, management has also recently undertaken certain
measures to prospectively reduce the Company's less variable operating expenses
and related cash needs. These measures included, among others, the elimination
of certain non-critical personnel and consultants. Management also expects that
the Company's product research and development expenditures will be
substantially lower for fiscal 2003 as a whole as the re-engineering activities
associated with the second-generation consumer monitors were substantially
complete at September 30, 2002. With respect to funding, management remains
actively engaged in discussions with a number of interested parties regarding
various potential forms of financing and investment as well as possible
transactions to monetize certain of the Company's non-critical intellectual
property assets. Management has retained the services of an investment banking
firm to assist the Company in these funding pursuits. However, there can be no
assurance that management will ultimately be sufficiently successful in its
efforts. Any failure by management to procure financing or investment adequate
to fund the Company's ongoing operations, including planned marketing
initiatives designed to accelerate sales, or to service its significant accounts
payable and debt obligations, will likely have material adverse consequences on
the Company's business operations, and as a result, on its consolidated
financial condition, results of operations and cash flows.
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
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.
5
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Periods
The Company's fiscal year-end is June 30th. References to a fiscal year refer to
the calendar year in which such fiscal year ends.
Use of Estimates
The preparation of condensed 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 and timing of revenue and expenses, the reported amounts and
classification of assets and liabilities, and the disclosure of contingent
assets and liabilities. These estimates and assumptions are based on the
Company's historical results as well as management's future expectations. The
Company's actual results could vary materially from management's estimates and
assumptions.
Reclassifications
Certain amounts in the condensed consolidated financial statements for the
comparative prior fiscal periods have been reclassified to be consistent with
the current fiscal period'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, 2002.
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 September 30, 2002 and 2001, the Company had stock options, stock
warrants and convertible debt outstanding that could potentially be exercised or
converted into 21,214,107 and 19,216,234 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.
6
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Segment Reporting
The Company's chief operating decision makers consist of members of senior
management that work together to allocate resources to, and assess the
performance of, the Company's business. Senior management currently manages the
Company's business, assesses its performance, and allocates its resources as a
single operating segment.
Recently Adopted Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard 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.
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.
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.
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 Company adopted the provisions of SFAS No. 145 that amended SFAS No. 13, as
required, on May 15, 2002 for transactions occurring after such date with no
material impact on its consolidated financial statements. The Company adopted
SFAS Nos. 142, 143 and 144, as well as the remaining provisions of SFAS No. 145,
as required, on July 1, 2002, with no material impact on its consolidated
financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 was issued to
address the financial accounting and reporting for costs associated with exit or
disposal activities, unless specifically excluded. SFAS No. 146 requires that a
liability for a cost
7
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Recently Issued Accounting Standards Not Yet Adopted (continued)
associated with a covered exit or disposal activity be recognized and measured
initially at its fair value in the period in which the liability is incurred,
except for a liability for one-time termination benefits that is incurred over
time. If employees are not required to render service until they are terminated
in order to receive the one-time termination benefits or if employees will not
be retained to render service beyond the minimum retention period (as dictated
by existing law, statute or contract, or in the absence thereof, 60 days), a
liability for the termination benefits shall be recognized and measured at its
fair value at the communication date. If employees are required to render
service until they are terminated in order to receive the one-time termination
benefits and will be retained to render service beyond the minimum retention
period, a liability for the termination benefits shall be measured initially at
the communication date based on the fair value of the liability as of the
termination date. The liability shall be recognized ratably over the future
service period. SFAS No. 146 also dictates that a liability for costs to
terminate an operating lease or other contract before the end of its term shall
be recognized and measured at its fair value when the entity terminates the
contract in accordance with the contract terms. A liability for costs that will
continue to be incurred under a contract for its remaining term without economic
benefit to the entity is to be recognized and measured at its fair value when
the entity ceases using the right conveyed by the contract. SFAS No. 146 further
dictates that a liability for other covered costs associated with an exit or
disposal activity be recognized and measured at its fair value in the period in
which the liability is incurred. The Company will adopt SFAS No. 146, as
required, on January 1, 2003 for its consolidated financial statements for the
third quarter of fiscal 2003. Management does not currently anticipate that such
adoption will have a material impact.
4. INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, JUNE 30,
2002 2002
----------- -----------
Raw materials ........................... $ 1,561,126 $ 1,524,618
Work in process ......................... 485,478 493,381
Finished goods .......................... 401,375 627,588
----------- -----------
2,447,979 2,645,587
Less allowance for inventory obsolescence (58,962) (58,962)
----------- -----------
Total inventories ....................... $ 2,389,017 $ 2,586,625
=========== ===========
5. NOTE RECEIVABLE - OFFICER
Through fiscal 2001, the Company's Board of Directors 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% per annum and
requires bi-weekly repayments of principal and interest through May 23, 2014. On
May 1, 2002, the Board of Directors indefinitely suspended the bi-weekly
servicing requirement. The Board of Directors subsequently awarded the Company's
Chief Executive Officer a $60,000 bonus for his fiscal 2002 performance with
such bonus applied in its entirety against the outstanding note receivable
balance.
8
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
SEPTEMBER 30 JUNE 30,
2002 2002
-------- --------
Accrued interest payable ................ $636,934 $511,462
Accrued wages, benefits and related taxes 167,344 188,793
Accrued sales returns ................... 54,278 54,278
Accrued royalties payable ............... 79,960 39,960
Accrued other ........................... 5,459 5,669
-------- --------
Total accrued liabilities ............... $943,975 $800,162
======== ========
7. CREDIT FACILITIES
The Company executed an agreement with a financial institution effective June
18, 2002 that provides it with a revolving credit facility. Borrowings under the
facility are limited to the lesser of (i) $3.0 million or (ii) $1.0 million plus
75% of approved accounts receivable, as defined, and 65% of non-obsolete
finished inventory. Outstanding borrowings accrue interest at a fixed rate of
18.0% per annum and are secured by the Company's accounts receivable, inventory,
property and equipment and intellectual property. The Company is required to
service all accrued interest monthly as well as to assign to the financial
institution all principal collections on all accounts receivable. The financial
institution retains ten percent of all collected accounts receivable, subject to
a limitation of ten percent of the outstanding borrowings balance, with the
aggregate retentions to be returned to the Company upon its repayment of all
outstanding borrowings. The facility matures, with all outstanding borrowings
due, on the earlier of (i) April 15, 2003 or (ii) the date on which the Company
were to complete a specified financing transaction. The Company had no
additional borrowings available to it at September 30, 2002 based on then
existing collateral levels.
The Company executed an agreement with a bank effective June 24, 2002 that
provides it with a $600,000 irrevocable standby letter of credit facility for
the exclusive benefit of a principal vendor. Any draws against the facility will
accrue interest at a rate equal to the bank's variable index rate plus one
percent (5.75% at September 30, 2002) and be secured by all of the Company's
assets, including an assigned $600,000 certificate of deposit. All principal and
interest are payable on demand and the facility expires on June 30, 2003. There
were no outstanding draws at September 30, 2002.
8. CONVERTIBLE DEBT
The Company has an outstanding $0.3 million convertible note with a principal
shareholder ("Shareholder") that accrues interest at the prime rate plus two
percent (6.75% at September 30, 2002), is secured by all the Company's assets
other than its accounts receivable, and becomes due on March 5, 2003. The note
is convertible at the option of the Shareholder into common stock of the Company
at a rate of $1.00 per share. The note provides that for every quarter an unpaid
principal balance remains outstanding that the Shareholder is entitled to
warrants allowing for the purchase of common shares of the Company at $1.00 per
share. Based on the current unpaid principal balance, the Shareholder is
entitled to 15,000 warrants per quarter. The Company recognizes the aggregate
fair value of such warrants as a financing cost.
9
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONVERTIBLE DEBT (CONTINUED)
The Company has an outstanding $0.5 million unsecured convertible note with a
principal shareholder and member of its Board of Directors ("Director") that
accrues interest at the prime rate plus two percent (6.75% at September 30,
2002) and becomes due on August 1, 2003. The note is convertible at the option
of the Director into common stock of the Company at a rate of $1.00 per share.
The note provides that for every quarter an unpaid principal balance remains
outstanding that the Director is entitled to warrants allowing for the purchase
of common shares of the Company at $1.00 per share. Based on the current unpaid
principal balance, the Director is entitled to 23,500 warrants per quarter. The
Company recognizes the aggregate fair value of such warrants as a financing
cost.
The Company has outstanding unsecured convertible notes with an aggregate
principal face amount of $6.6 million that accrue interest at the prime rate
plus two percent (6.75% at September 30, 2002) and become due on various dates
during calendar years 2003 and 2006, as specified. The notes are convertible at
the option of the holders into common stock of the Company at a rate of $1.00
per share. Certain of these notes, having an aggregate principal face amount of
$5.5 million at September 30, 2002, contain an anti-dilution provision providing
for a formula-driven, currently indeterminable downward adjustment of their
conversion rate should the Company subsequently issue common shares at a price
below the then stated conversion rate. 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. For every two dollars of note
principal, the holder received a detachable stock purchase warrant allowing for
the purchase of a share of the Company's common stock at $2.50 per share. At the
respective dates of issuance, the Company was required under accounting
principles generally accepted in the United States of America to ascertain the
fair value of the detachable stock warrants and resulting beneficial conversion
feature. The aggregate fair value of the detachable warrants and beneficial
conversion feature was equal to the aggregate principal face amount of the debt
proceeds received, and as such, this amount was recorded as a debt discount by
increasing additional paid-in capital. This debt discount is being amortized to
interest expense over the life of the underlying notes. The unamortized debt
discount amounted to $4,260,837 and $4,578,957 at September 30, 2002 and June
30, 2002, respectively.
In summary, the contractual maturities of the Company's outstanding convertible
debt obligations at September 30, 2002 are as follows:
PRINCIPAL DISCOUNTED
YEARS ENDING JUNE 30, AMOUNTS AMOUNTS
-----------------------------------------------------------------
2003 (remaining three fiscal quarters) $ 325,000 $ 318,706
2004 .................................. 1,069,984 918,926
2005 .................................. -- --
2006 .................................. -- --
2007 .................................. 5,970,000 1,860,221
---------- ----------
Total convertible debt maturities ..... 7,364,984 3,097,853
Less current maturities ............... 325,000 318,706
---------- ----------
Total long-term maturities ........... $7,039,984 $2,779,147
========== ==========
9. 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
10
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CONTINGENCIES (CONTINUED)
litigation or administrative proceedings would not materially affect its
financial position, results of operations or cash flows.
Certain contracts with the Company's principal vendors contain put provisions
that could potentially require us to make certain compensating payments in the
event we were to not fulfill certain minimum purchase requirements. The dollar
amount of such future amounts, if any, is currently indeterminable.
11
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion includes certain forward-looking statements within the
meaning of the safe harbor protections of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Statements that include words such as "anticipates," "expects,"
"believes," "estimates," "intentions," " efforts," "prospectively," "possible,"
"no assurances," or other future-oriented statements, are forward-looking
statements. Such forward-looking statements include, but are not limited to,
statements regarding our current business plans, strategies and objectives that
involve risks and uncertainties, and in particular statements referring to our
expectations for increased market penetration and improved gross margins from
our recently introduced second generation consumer monitors and statements
regarding our expectations that we can obtain necessary additional financing and
investment. These forward-looking statements involve risks and uncertainties
that could cause actual results to differ from anticipated results. The
forward-looking statements are based on our current expectations and what we
believe are reasonable assumptions given our knowledge of the markets, however
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 relatively new medical diagnostic devices, including
technological advancements and innovations; 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; the effects of our competition; the success of
our capital-raising efforts and our operating, marketing and growth initiatives;
development and operating costs; the amount and effectiveness of our advertising
and promotional efforts; brand awareness; the existence of adverse publicity;
changes in business strategies or development plans; quality and experience of
our management; availability, terms and deployment of capital; labor and
employee benefit costs; as well as those factors discussed elsewhere in this
Form 10-QSB and in "Item 1 - Our Business," "Item 6 - Our Management's
Discussion and Analysis," particularly the discussion under "Risk Factors",
"Substantial Doubt as to our Ability to Continue as a Going Concern" and
elsewhere in our most recent Form 10-KSB for our fiscal year ended June 30, 2002
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, in the aforementioned Form 10-KSB 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.
Our fiscal year ends on June 30th. References to a fiscal year refer to the
calendar year in which such fiscal year ends.
INTRODUCTION
We are 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. During our fiscal 2003 first quarter
ended September 30, 2002, our diagnostic product line principally consisted of
three easy-to-use, hand-held, smart card-enabled cholesterol monitors as
follows:
o Our adult, over-the-counter total cholesterol monitor for use by at-risk
patients and health-conscious consumers ("our first-generation consumer
monitor"),
o Our adult, point-of-care total cholesterol monitor for use by qualified
medical professionals ("our professional adult-care monitor"), and
o Our pediatric, point-of-care total cholesterol monitor for use by
pediatricians ("our professional pediatric-care monitor").
For additional details regarding the above cholesterol monitors, please refer to
the discussion entitled "Our Business - Our Current Product Offerings" in our
Annual Report on Form 10-KSB for the fiscal year ended June 30, 2002.
12
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
INTRODUCTION (CONTINUED)
On January 1, 1999, we commenced limited revenue-generating operations related
to our professional adult-care monitor and ceased being a development-stage
company. In March 1999, we recognized our first revenues from sales of this
monitor. However, shortly thereafter, we elected to suspend our marketing of our
professional adult-care monitor and instead redeploy our limited financial and
human resources into the development of an over-the-counter consumer monitor for
which we envisioned, and continue to envision, substantially greater revenue
potential over the longer term.
On July 25, 2000, we received the prerequisite FDA market clearance for our
consumer monitor thereby allowing us to proceed with production and marketing.
In January 2001, we formally debuted our first-generation consumer monitor to
the retail marketplace. Currently, our first-generation consumer monitor is
being offered by national and regional retailers throughout the U.S. and we have
been successful in obtaining continuing orders from the vast majority of these
retailers.
In October 2002, we debuted the following second-generation, over-the-counter,
consumer monitors:
o Our Basic-Edition Consumer Monitor. Our adult, basic-edition,
over-the-counter total cholesterol monitor ("our basic-edition consumer
monitor"), which has all the same clinically-accurate, total
cholesterol-measuring capabilities as our current consumer monitor, will
feature a lower suggested retail price of $119.95. However, we expect it
to be promoted by many of our retailers for $99.95, thereby breaking the
psychologically important $100.00 price point for consumers. We believe
that this lower price-point will substantially increase the likelihood of
our achieving our goal of broad market acceptance, including our initial
entry into several high-volume, mass-merchandisers that have indicated an
interest in carrying a lower-priced monitor. Most importantly, this new
monitor has been designed and engineered to provide us with a
substantially improved gross profit margin despite its lower wholesale
price. As with our existing first-generation consumer monitor, this new
monitor will allow each individual user, with the separate purchase of
one of our personal health smart cards, to securely store via encryption
up to 200 chronologically dated test results for subsequent retrieval and
trend analysis, including the ability to readily compute an average total
cholesterol level using the six most recent test results. This new
monitor is compact, portable and lightweight with dimensions of
approximately 5.50" x 4.00" x 1.75" and a weight of approximately one
pound. The monitor will be warranted for one year from defects in
materials or workmanship.
o Our Plus-Edition Consumer Monitor. Our adult, plus-edition,
over-the-counter total cholesterol monitor ("our plus-edition consumer
monitor") will have the same $129.95 suggested retail price as our
current consumer monitor but will utilize the same lower-cost
technological platform as the above basic-edition consumer monitor,
thereby providing us with a substantially improved gross profit margin.
This new monitor will be accompanied with a CD-ROM and a serial cable
allowing the user to connect the monitor to their personal computer and
to utilize the software to better track their cardiovascular health over
time. Specifically, the software will provide detailed,
easy-to-understand charts of a user's historical total cholesterol
readings, including a rolling average of those results. We believe that
these value-added analytical features will provide a user with critical
behavioral feedback, thereby assisting them in their adherence to a
cholesterol-lowering regiment. We also believe that these value-added
features will be attractive to certain premium retailers. This new
monitor is compact, portable and lightweight with dimensions of
approximately 5.50" x 4.00" x 1.75" and a weight of approximately one
pound. The monitor will be warranted for three years from defects in
materials or workmanship.
13
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN
We as a company have incurred substantial operating and net losses, as well as
negative operating cash flows, since our inception. As a result, we have
negative working capital and stockholders' equity, including a substantial
accumulated deficit, at September 30, 2002. Additionally, we have only realized
modest revenues to date which we primarily attribute to our continued inability
to fund the more extensive marketing activities believed necessary to develop
broad market awareness and acceptance of our products, particularly our
over-the-counter consumer monitors. Primarily as a result of the aforementioned
factors, our independent certified public accountants included an explanatory
paragraph in their report on our consolidated financial statements for the
fiscal year ended June 30, 2002 that expressed substantial doubt as to our
ability as a company to continue as a going concern.
We continue to actively pursue a number of initiatives intended to provide
timely remedies to the above adverse conditions. In October 2002, we debuted our
second-generation consumer monitors from which we expect substantially increased
retail market penetration and gross margins. In recent months, we have also
undertaken certain measures to prospectively reduce our less variable operating
expenses and related cash needs. These measures included, among others, the
elimination of certain non-critical personnel and consultants. We also expect
that our product research and development expenditures will be substantially
lower for fiscal 2003 as a whole as the re-engineering activities associated
with the second-generation consumer monitors were substantially complete at
September 30, 2002. With respect to funding, we remain actively engaged in
discussions with a number of interested parties regarding various potential
forms of financing and investment as well as possible transactions to monetize
certain of our non-critical intellectual property assets. We have retained the
services of an investment banking firm to assist in these funding pursuits.
However, there can be no assurance that we will ultimately be sufficiently
successful in our efforts. Any failure by us to procure financing or investment
adequate to fund our ongoing operations, including planned marketing initiatives
designed to escalate sales, or to service our significant accounts payable and
debt obligations, will likely have material adverse consequences on our business
operations, and as a result, on our consolidated financial condition, results of
operations and cash flows.
OUR RESULTS OF OPERATIONS
Our consolidated net sales for the fiscal quarter ended September 30, 2002
("fiscal 2003 first quarter") were $1,132,437, an increase of $252,592, or
28.7%, as compared to $879,845 for the fiscal quarter ended September 30, 2001
("fiscal 2002 first quarter"). Our first-generation consumer monitor, and
related test strips, accounted for 96% of our consolidated net sales for the
fiscal 2003 first quarter as compared to 97% of our consolidated net sales for
the fiscal 2002 first quarter. Our professional monitors, and related test
strips, accounted for the respective balances. Our comparative sales increase
substantially was attributable to increased unit sales volume, primarily from
the fulfillment of follow-up orders received from national and regional drug and
pharmacy-featuring grocery store chains.
We realized a consolidated gross profit of $217,564 for the fiscal 2003 first
quarter, as compared to a consolidated gross loss of $(235,923) for the fiscal
2002 first quarter. This equated to a positive consolidated gross margin of
19.2% for the fiscal 2003 first quarter, as compared to a negative consolidated
gross margin of (26.8)% for the fiscal 2002 first quarter. This comparative
improvement primarily was attributable to the comparative fiscal 2002 first
quarter reflecting introductory pricing discounts and incentives granted to
achieve initial market penetration for our first-generation consumer monitor. We
granted these discounts and incentives, despite the known adverse consequences
to our gross profits and margins, with the expectation of subsequently
transitioning such retailers to a substantially more profitable
second-generation, basic-edition consumer monitor as soon as it became
available.
Despite the substantially greater gross margin expected to be realized from our
new second-generation, basic-edition consumer monitor beginning in our fiscal
2003 second quarter, our ability to realize consolidated gross profits
14
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR RESULTS OF OPERATIONS (CONTINUED)
sufficient to leverage our ongoing operating expenses, and thus, achieve
sustained operating profitability, is dependent upon our achieving broad
awareness and acceptance of this monitor among both retailers and consumers.
Should we be unsuccessful in our current efforts to procure equity or debt
financing sufficient to fund our planned marketing initiatives designed to
escalate sales, the likelihood of us achieving the prerequisite broad market
awareness and acceptance of this monitor will be remote.
Our consolidated total operating expenses were $1,448,845 for the fiscal 2003
first quarter, a decrease of $471,138, or 24.5%, from the $1,919,983 incurred
during the fiscal 2002 first quarter. As further detailed below, this decrease
primarily was attributable to various cost containment and cash preservation
measures recently enacted by us.
Our consolidated sales and marketing expenses were $214,998 for the fiscal 2003
first quarter, a decrease of $202,880, or 48.6%, from the $417,878 incurred
during the fiscal 2002 first quarter. The decrease primarily was attributable to
substantially decreased advertising costs and, to a significantly lesser extent,
decreased travel and trade show costs. The preceding expense reductions were
necessitated by our ongoing need to conserve cash. To the extent that we are
successful in our current efforts to procure additional funding, it is our
intention to significantly increase our sales and merketing expenditures,
particularly for advertising, with the goal of realizing rapidly escalating
sales for our new second-generation, basic-edition consumer montitor.
Our consolidated general and administrative ("G&A") expenses were $936,061
(inclusive of $65,295 in non-cash charges) for the fiscal 2003 first quarter, a
decrease of $131,092, or 12.3%, from the $1,067,153 (inclusive of $17,500 in
non-cash charges) incurred during the fiscal 2002 first quarter. The decrease
primarily was attributable to reductions in a number of G&A expense categories
made by us in order to preserve cash. Most prominent among such expense
reductions were decreased royalty fees as result of our recent product
re-engineering efforts and decreased salaries, taxes and benefits as a result of
certain recent staff reductions. To a lesser extent, we realized expense
reductions for travel, meetings, supplies and other miscellaneous items.
Significantly offsetting the preceding expense reductions primarily were
increased non-recurring expenses for professional fees incurred in connection
with our product re-engineering activities and increased rent and utility
expenses incurred in connection with our expanded operations.
Our product research and development expenses were $177,329 for the fiscal 2003
first quarter, an increase of $46,357, or 35.4%, from the $130,972 incurred
during the fiscal 2002 first quarter. The increase primarily was attributable to
incremental engineering and staffing costs incurred in connection with the
development of our second-generation consumer monitors. As the development
efforts associated with our second-generation consumer monitors were
substantially complete at September 30, 2002, we anticipate that our research
and development expenses will significantly contract to more normalized cost
levels for the foreseeable future.
Our non-cash depreciation and amortization expenses were $120,457 for the fiscal
2003 first quarter, a decrease of $183,523, or 60.4%, from the $303,980 incurred
during the fiscal 2002 first quarter. The decrease primarily was attributable to
significant decreases at June 30, 2002 in the amount of our amortizable
intangible assets. We anticipate that our results of operations for the
foreseeable future will continue to benefit from these significantly reduced
amortization expenses.
Primarily as a result of the foregoing, our loss from operations for the fiscal
2003 first quarter was $1,231,281, a decrease of $924,625, or 42.9%, from the
$2,155,906 incurred during the fiscal 2002 first quarter.
Our non-operating income and expenses primarily consist of interest income,
interest and financing expenses, amortization of convertible debt discount and
other miscellaneous income and expense items. Our net non-operating expenses
were $699,231 (inclusive of $410,318 in non-cash charges) in the fiscal 2003
first quarter, as compared to net non-operating expenses of $963,272 (inclusive
of $786,157 in non-cash charges) in the fiscal 2002 first quarter.
15
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR RESULTS OF OPERATIONS (CONTINUED)
The comparative decrease primarily was attributable to the fiscal 2002 first
quarter reflecting certain non-recurring financing costs incurred in connection
with our then issuances of convertible debt. Partially offsetting this
comparative decrease was interest expense incurred in connection with borrowings
under our revolving line of credit, and to a substantially lesser extent,
incremental amortization expense as a result of increased deferred financing
costs. Our decreased interest income was attributable to our lower average cash
and cash equivalent balances.
Primarily as a result of the foregoing, we incurred a net loss of $1,930,512
($0.08 per basic and diluted share) in the fiscal 2003 first quarter as compared
to a net loss of $3,119,178 ($0.15 per basic and diluted share) in the fiscal
2002 first quarter.
OUR LIQUIDITY AND CAPITAL RESOURCES
We have historically sustained our operations and funded our growth through an
ongoing combination of short-term financings, debt and equity 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 and cash equivalent balances and sought
short-term financing to fund our procurement of inventory.
Our Credit Facilities
We executed an agreement with a financial institution effective June 18, 2002
that provides us with a revolving credit facility. Borrowings under the facility
are limited to the lesser of (i) $3.0 million or (ii) $1.0 million plus 75% of
approved accounts receivable, as defined, and 65% of non-obsolete finished
inventory. Outstanding borrowings accrue interest at a fixed rate of 18.0% per
annum and are secured by our accounts receivable, inventory, property and
equipment and intellectual property. We are required to service all accrued
interest monthly as well as to assign to the financial institution all principal
collections on all accounts receivable. The financial institution retains ten
percent of all collected accounts receivable, subject to a limitation of ten
percent of the outstanding borrowings balance, with the aggregate retentions to
be returned to us upon our repayment of all outstanding borrowings. The facility
matures, with all outstanding borrowings due, on the earlier of (i) April 15,
2003 or (ii) the date on which we were to complete a specified financing
transaction. At September 30, 2002, we had outstanding borrowings of $2,305,097
with no additional borrowings available to us based on then existing collateral
levels.
We also executed an agreement with a bank effective June 24, 2002 that provides
us with a $600,000 irrevocable standby letter of credit facility for the
exclusive benefit of a principal vendor. Any draws against the facility will
accrue interest at a rate equal to the bank's variable index rate plus one
percent (5.75% at September 30, 2002) and be secured by all of our assets,
including an assigned $600,000 certificate of deposit which is reflected in our
consolidated balance sheet as a restricted cash equivalent at September 30,
2002. All principal and interest are payable on demand and the facility expires
on June 30, 2003. There were no outstanding draws at September 30, 2002.
Our Cash Flows
Our operating activities consumed $211,847 in cash and cash equivalents during
the fiscal 2003 first quarter, a decrease of $2,944,489, or 93.3%, from the
$3,156,336 consumed during the fiscal 2002 first quarter. On a comparative
fiscal quarter-to-quarter basis, this decrease primarily reflects our
significantly decreased net loss and, to a significantly lesser extent, the
positive cash flow impacts of decreased inventories and prepaid expenses and
increased accounts payable. The favorable comparison also results from the
fiscal 2002 first quarter reflecting the negative cash flow impact of
significantly decreased commissions payable. Slightly offsetting the favorable
comparison primarily was the fiscal 2002 first quarter reflecting substantially
higher add-backs for various non-cash charges related to amortization,
depreciation, inducement, compensation, and other expenses, and to a
significantly
16
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Our Cash Flows (continued)
lesser extent, the positive cash flow impact of decreased accounts receivable.
Our fiscal 2003 first quarter also reflects the negative cash flow impact of
decreased accrued liabilities.
Our investing activities utilized $1,683 in cash and cash equivalents during the
fiscal 2003 first quarter, a decrease of $61,597, or 97.3%, from the $63,280 in
cash and cash equivalents utilized during the fiscal 2002 first quarter. This
comparative decrease primarily was attributable to the fiscal 2002 first quarter
reflecting higher capital expenditures and, to a lesser extent, net advances to
an officer.
Our financing activities utilized $375,003 in cash and cash equivalents during
the fiscal 2003 first quarter, as compared to providing $2,885,224 in cash and
cash equivalents during the fiscal 2002 first quarter. Our fiscal 2003 first
quarter utilization of cash and cash equivalents was attributable to principal
repayments of convertible and other debt, being slightly offset by increased
borrowings under our aforementioned revolving credit facility. Our comparative
fiscal 2002 first quarter providing of cash and cash equivalents reflects net
proceeds received from our issuances of convertible debt, being slightly offset
by principal repayments of convertible and other debt, and to a substantially
lesser extent, net repayments on capital lease obligations.
As a result of the foregoing, our unrestricted cash and cash equivalents
decreased by $588,533 to $1,321 at September 30, 2002 from $589,854 at June 30,
2002. Our working capital deficiency increased by $1,349,329 to $2,507,291 at
September 30, 2002 from $1,157,962 at June 30, 2002. The decrease in our
unrestricted cash and cash equivalents balance and the increase in our accounts
payable balance during the fiscal 2003 first quarter primarily reflect our
funding of ongoing, yet curtailed, operations, minimal servicing of obligations
to certain critical vendors, and our postponed servicing of obligations to less
or non-critical vendors. We are actively engaged in discussions with those
vendors with which we are significantly past due in our payment obligations in
an effort to obtain forbearances either in the amounts owed or in the timing and
amounts of repayments. Although we have been successful to date in obtaining
forbearances from certain vendors, there can be no assurance that we will
continue to be successful in obtaining other necessary forbearances. Any failure
by us to either obtain timely and adequate forbearances or to obtain and
maintain minimally satisfactory relationships with critical vendors will likely
have a material adverse impact on our business, and as a result, on our
consolidated financial condition, results of operations and cash flows.
Our Debt Obligations
The contractual maturities of our outstanding convertible debt obligations at
September 30, 2002 are as follows:
PRINCIPAL DISCOUNTED
FISCAL YEARS ENDING JUNE 30, AMOUNTS AMOUNTS
------------------------------------------------------------------
2003 (remaining three fiscal quarters) $ 325,000 $ 318,706
2004 .................................. 1,069,984 918,926
2005 .................................. -- --
2006 .................................. -- --
2007 .................................. 5,970,000 1,860,221
---------- ----------
Total convertible debt maturities ..... 7,364,984 3,097,853
Less current maturities ............... 325,000 318,706
---------- ----------
Total long-term maturities ........... $7,039,984 $2,779,147
========== ==========
17
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Our Off-Balance Sheet Liabilities
Our off-balance sheet liabilities principally 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 of America. 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 September 30, 2002 are as follows:
$112,814 in fiscal 2003, $32,918 in fiscal 2004 and $4,299 in fiscal 2005, with
none thereafter.
Additionally, certain contracts with our principal vendors contain put
provisions that could potentially require us to make certain compensating
payments in the event we were to not fulfill certain minimum purchase
requirements. The dollar amount of such future amounts, if any, is currently
indeterminable.
Our Planned Capital Expenditures
The only significant capital expenditure we have currently planned for the
balance of fiscal 2003 is for the purchase or lease of an additional automated
packing machine with an estimated price of $325,000.
OUR OTHER MATTERS
Our Seasonal and Inflationary Influences
Although we remain in the relatively early stages of the national introduction
and roll-out of our consumer monitors to retailers, we have begun to experience
certain seasonal sales influences consistent with our initial expectations. In
particular, we expect, absent materially adverse economic or counter-acting
events, that our fiscal second quarter ending December 31 will benefit from
increased orders by retailers for the holiday shopping season. To date, we have
not been materially impacted by inflationary influences.
Our Quantitative and Qualitative Disclosures About Market Risk
We currently are exposed to financial market risks from changes in short-term
interest rates as our outstanding convertible 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 expected results of operations for fiscal 2003, and
possibly beyond. However, in the future, we may increase the level of our
variable rate debt which could increase our exposure to these market risks.
We are exposed to currency market risks as a result of our manufacturing
services contract with Samina-SCI Corporation which became effective on April 1,
2002. This contract, which has a stated term of one year, provides that
Samina-SCI may periodically adjust the previously agreed-upon, fixed U.S.
dollar-based prices for any material increases realized by them in the cost of
components procured by them which are denominated in non-U.S. dollar-based
currencies. We believe that any likely underlying non-U.S. dollar-based
currencies would have to increase significantly for the resulting adverse impact
on our consolidated cost of sales and gross profit to be material to our
expected results of operations for fiscal 2003, and possibly beyond. However, in
the future, we may enter into other agreements subject to underlying foreign
currency adjustments, or contracts directly denominated in non-U.S. dollar
currencies, that could increase our exposure to these market risks.
We have not used, and currently do not contemplate using, any derivative
financial instruments.
18
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR OTHER MATTERS (CONTINUED)
Our 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 and timing of revenue and expenses, the reported amounts and
classification of assets and liabilities, and disclosure of contingent assets
and liabilities. Our actual results have differed, and will likely continue to
differ, to some extent from our initial estimates and assumptions. However,
despite such, we currently do not 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. See Note 3 to the consolidated financial statements
included in our Form 10-KSB for the fiscal year ended June 30, 2002 for a
summary of our significant accounting policies.
Recently Issued Accounting Standards Not Yet Adopted
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 was issued to
address the financial accounting and reporting for costs associated with exit or
disposal activities, unless specifically excluded. SFAS No. 146 requires that a
liability for a cost associated with a covered exit or disposal activity be
recognized and measured initially at its fair value in the period in which the
liability is incurred, except for a liability for one-time termination benefits
that is incurred over time. If employees are not required to render service
until they are terminated in order to receive the one-time termination benefits
or if employees will not be retained to render service beyond the minimum
retention period (as dictated by existing law, statute or contract, or in the
absence thereof, 60 days), a liability for the termination benefits shall be
recognized and measured at its fair value at the communication date. If
employees are required to render service until they are terminated in order to
receive the one-time termination benefits and will be retained to render service
beyond the minimum retention period, a liability for the termination benefits
shall be measured initially at the communication date based on the fair value of
the liability as of the termination date. The liability shall be recognized
ratably over the future service period. SFAS No. 146 also dictates that a
liability for costs to terminate an operating lease or other contract before the
end of its term shall be recognized and measured at its fair value when the
entity terminates the contract in accordance with the contract terms. A
liability for costs that will continue to be incurred under a contract for its
remaining term without economic benefit to the entity is to be recognized and
measured at its fair value when the entity ceases using the right conveyed by
the contract. SFAS No. 146 further dictates that a liability for other covered
costs associated with an exit or disposal activity be recognized and measured at
its fair value in the period in which the liability is incurred. We will adopt
SFAS No. 146, as required, on January 1, 2003 for our consolidated financial
statements for the third quarter of fiscal 2003. We do not currently anticipate
that such adoption will have a material impact.
Legal Proceedings
We as a company, including our subsidiaries, are periodically involved in
incidental litigation and administrative proceedings primarily arising in the
normal course of our business. In our opinion, our 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 our 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"). We allege
willful patent infringement and seek Polymer's immediate
19
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR OTHER MATTERS (CONTINUED)
Legal Proceedings (continued)
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. We have engaged two expert witnesses, who are in the process
of completing their expert reports for use in the litigation. The defendants
have also identified two expert witnesses, who have presented expert reports to
support the alleged defense of non-infringment. Polymer's other alleged defenses
and counterclaims have been bifurcated for consideration after the infringement
phase of the proceedings. The Court has scheduled a "claim interpretation"
hearing (also called a "Markman" hearing) for January 29-31, 2003. 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
are at a standstill but may resume at any time.
ITEM 3. OUR CONTROLS AND PROCEDURES
Under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, we performed an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures within 90
days before the filing date of this Quarterly Report of Form 10-QSB. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, although there are inherent limitations in all control systems
and although we apply certain reasonable cost/benefit considerations to the
design of our disclosure controls and procedures, as of September 30, 2002 our
disclosure controls and procedures were effective. There have been no
significant changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
While we believe that our existing disclosure controls and procedures have been
effective to accomplish their objectives, we intend to continue to examine,
refine and formalize our disclosure controls and procedures and to monitor
ongoing developments in this area.
20
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"). 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. We
have engaged two expert witnesses, who are in the process of completing their
expert reports for use in the litigation. The defendants have also identified
two expert witnesses, who have presented expert reports to support the alleged
defense of non-infringment. Polymer's other alleged defenses and counterclaims
have been bifurcated for consideration after the infringement phase of the
proceedings. The Court has scheduled a "claim interpretation" hearing (also
called a "Markman" hearing) for January 29-31, 2003. 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 are at a
standstill but may resume at any time.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In reliance upon the registration exemption provisions of Section 4(2) of the
Securites Act of 1933, as amended, we issued 18,750 common shares to an
investment banking firm in exchange for consulting services with an estimated
aggregate fair market value of $13,126 during our fiscal 2003 first quarter
ended September 30, 2003.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K during the three months ended September
30, 2001.
Exhibits
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
21
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has Duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Post Falls,
State of Idaho, on this 14th day of November 2002.
LIFESTREAM TECHNOLOGIES, INC.
By: /s/ Brett Sweezy
-----------------------------------------
Brett Sweezy
Chief Financial and Accounting Officer
22
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Christopher Maus, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Lifestream
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared; b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions): a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls' and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Christopher Maus
------------------------
Christopher Maus
Chief Executive Officer
23
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Brett Sweezy, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Lifestream
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed
such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in
which this quarterly report is being prepared; b) evaluated the effectiveness of
the registrant's disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions): a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and b) any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls' and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Brett Sweezy
---------------------
Brett Sweezy
Chief Financial Officer
24