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, 2003
[ ] 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)
Check whether the issuer (1) 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, 2003, the registrant had 99,741,024 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, 2003
PAGE
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PART I. OUR FINANCIAL INFORMATION
Item 1. Our Interim Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of September 30, 2003 and June 30, 2003.......... 1
Condensed Consolidated Statements of Operations for the three months ended September 30,
2003, and September 30, 2002............................................................. 2
Condensed Consolidated Statements of Cash Flows for the three months ended
September 30, 2003 and September 30, 2002................................................ 3
Notes to Interim Condensed Consolidated Financial Statements.............................. 4
Item 2. Our Management's Discussion and Analysis.................................................. 12
Item 3. Our Controls and Procedures............................................................... 22
PART II. OUR OTHER INFORMATION
Item 1. Our Legal Proceedings..................................................................... 23
Item 2. Our Changes in Securities and Use of Proceeds............................................. 23
Item 3. Our Defaults Upon Senior Securities....................................................... 23
Item 4. Our Submission of Matters to a Vote of Security Holders................................... 23
Item 5. Our Other Information..................................................................... 24
Item 6. Our Exhibits and Reports on Form 8-K...................................................... 24
Signatures......................................................................................... 25
i
PART I. OUR FINANCIAL INFORMATION
ITEM 1. OUR INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, JUNE 30,
2003 2003
------------ ------------
ASSETS (NOTE 2)
Current assets:
Cash and cash equivalents .................................................. $ 956,801 $ 1,370,126
Accounts receivable, net ................................................... 386,193 269,398
Inventories, net (Note 4) .................................................. 1,328,731 1,612,590
Prepaid expenses ........................................................... 353,174 38,506
------------ ------------
Total current assets .................................................. 3,024,899 3,290,620
Deferred financing costs, net ................................................. 648,314 422,897
Patent rights, net ............................................................ 542,210 562,945
Property and equipment, net ................................................... 501,193 647,527
Note receivable - officer (Note 5) ............................................ 38,728 38,728
Contingent offering proceeds held in escrow (Note 8) .......................... 1,533,500 --
Other ......................................................................... 77,391 115,208
------------ ------------
Total assets .......................................................... $ 6,366,235 $ 5,077,925
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ........................................................... $ 1,380,942 $ 2,173,720
Accrued liabilities (Note 6) ............................................... 422,563 766,047
Capital lease obligations .................................................. 45,021 147,964
Notes payable (Note 7) ..................................................... 900,000 900,000
Deferred income (Note 10) .................................................. -- 250,000
------------ ------------
Total current liabilities ............................................. 2,748,526 4,237,731
Capital lease obligations ..................................................... 33,345 42,754
Note payable (Note 7) ......................................................... 879,392 1,069,932
Convertible notes, principal face amounts of $8,370,000 and $5,270,000,
respectively (Note 8) ...................................................... 2,523,754 2,386,082
------------ ------------
Total liabilities ..................................................... 6,185,017 7,736,499
------------ ------------
Commitments and contingencies (Notes 8 and 11)
Stockholders' equity (deficit) (Note 9):
Preferred stock, $.001 par value; 15,000,000 shares authorized; none issued
or outstanding ........................................................... -- --
Common stock, $.001 par value; 100,000,000 shares authorized; 99,741,024 and
92,894,590 issued and outstanding, respectively .......................... 99,741 92,895
Additional paid-in capital ................................................. 43,539,023 39,511,226
Accumulated deficit ........................................................ (43,457,546) (42,262,695)
------------ ------------
Total stockholders' equity (deficit) .................................. 181,218 (2,658,574)
------------ ------------
Total liabilities and stockholders' equity (deficit) .................. $ 6,366,235 $ 5,077,925
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
1
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
------------ ------------
Net sales ................................................................ $ 625,475 $ 1,132,437
Cost of sales ............................................................ 427,136 914,873
------------ ------------
Gross profit ................................................... 198,339 217,564
------------ ------------
Operating expenses:
Sales and marketing .................................................... 131,918 214,998
General and administrative ............................................. 697,851 936,061
Product research and development ....................................... 3,468 177,329
Depreciation and amortization .......................................... 79,313 120,457
Loss on disposal of equipment .......................................... 87,756 --
------------ ------------
Total operating expenses ........................................... 1,000,306 1,448,845
------------ ------------
Loss from operations ........................................... (801,967) (1,231,281)
------------ ------------
Non-operating income (expenses):
Interest income ........................................................ 2,007 1,018
Interest and financing expenses (Notes 7 and 8) ........................ (257,219) (379,378)
Amortization of discount on convertible notes (Note 8) ................. (387,672) (320,218)
Gain on unexercised option and purchase agreement (Note 10) ............ 250,000 --
Other .................................................................. -- (653)
------------ ------------
Total non-operating expenses, net .................................. (392,884) (699,231)
------------ ------------
Net loss ....................................................... $ (1,194,851) $ (1,930,512)
============ ============
Net loss per common share - basic and diluted (Note 3) ......... $ (0.01) $ (0.08)
============ ============
Weighted average shares outstanding - basic and diluted (Note 3) 95,989,741 24,980,497
============ ============
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,
2003 2002
----------- -----------
OPERATING ACTIVITIES:
Net loss ............................................................ $(1,194,851) $(1,930,512)
Non-cash items:
Depreciation/amortization of property, equipment and patent rights 79,313 120,457
Loss on disposal of equipment ..................................... 87,756 --
Amortization of deferred financing costs (Notes 7 and 8) .......... 57,583 90,100
Amortization of discount on convertible notes (Note 8) ............ 387,672 320,218
Provision for (recovery of) doubtful accounts ..................... 20,520 (42,572)
Reduction in inventory valuation allowance ........................ (22,719) --
Equity-based compensation for employee/non-employee services ...... -- 52,141
Beneficial conversion feature of convertible note to related party -- 13,154
Other ............................................................. (15,357) --
Net changes in assets and liabilities:
Accounts receivable ............................................... (137,315) (26)
Inventories ....................................................... 306,578 197,608
Prepaid expenses .................................................. (314,668) 1,331
Accounts payable .................................................. (792,778) 823,295
Accrued liabilities ............................................... 106,516 143,813
Deferred income ................................................... (250,000) --
Change in non-current assets ...................................... 57,817 (854)
----------- -----------
Net cash used in operating activities ........................ (1,623,933) (211,847)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures ................................................ -- (1,683)
----------- -----------
Net cash used in investing activities ........................ -- (1,683)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of convertible notes, net (Note 8) ........... 1,513,500 --
Proceeds from borrowings under credit facility ...................... -- 84,079
Principal payments of capital lease obligations ..................... (112,352) --
Principal payments of notes payable ................................. (190,540) --
Principal payments of convertible notes and other debt .............. -- (459,082)
----------- -----------
Net cash provided by (used in) financing activities .......... 1,210,608 (375,003)
----------- -----------
Net decrease in cash and cash equivalents .............................. (413,325) (588,533)
Cash and cash equivalents at beginning of period ....................... 1,370,126 589,854
----------- -----------
Cash and cash equivalents at end of period ............................. $ 956,801 $ 1,321
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH ACTIVITIES:
Interest paid in cash .............................................. $ -- $ 127,763
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Discount for beneficial conversion feature on convertible notes
and the fair value of accompanying detachable stock warrants (Note 8) $ 3,350,000 $ --
Contingent offering proceeds held in escrow (Note 8) ............... $ 1,553,500 $ --
Issuance of common stock in exchange for:
Conversion of convertible debt and accrued interest (Note 9) ..... $ 700,000 $ --
Financing costs .................................................. $ -- $ 13,154
Non-employee services ............................................ $ -- $ 52,141
The accompanying notes are an integral part of these
condensed consolidated financial statements
3
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANIZATIONAL STRUCTURE
Lifestream Technologies, Inc. (the "Company"), a Nevada corporation
headquartered in Post Falls, Idaho, is a marketer of a proprietary total
cholesterol measuring device for at-home use by health conscious consumers and
at-risk medical patients. Through regular monitoring of one's total cholesterol
level, an individual can continually assess their susceptibility to developing
cardiovascular disease. Once diagnosed with an elevated total cholesterol level,
regular at-home testing with one of our devices enables a patient to readily
ascertain the benefits derived from diet modification, an exercise regimen
and/or a drug therapy, thereby reinforcing their continuing compliance with an
effective cholesterol-lowering program.
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
continued to have significant working capital and stockholders' deficits at June
30, 2003. In recognition of such, the Company's independent certified public
accountants included an explanatory paragraph in their report on the Company's
consolidated financial statements for the fiscal year ended June 30, 2003 that
expressed substantial doubt as to the Company's ability to continue as a going
concern.
As more extensively discussed in Note 8, the Company subsequently completed on
September 13, 2003 a private placement offering of $3,350,000 in unsecured
convertible notes from which it received $3,067,000 in net cash proceeds.
However, the Company was required to immediately place 50%, or $1,533,500, of
the net cash proceeds into escrow. The future release of these escrowed proceeds
remains contingent upon the Company obtaining the approval by a majority of its
shareholders of a proposed increase in its authorized common shares from 100
million to 250 million, which is to be voted upon at a special meeting of
shareholders to be held on December 1, 2003. Any failure by the Company to
obtain such approval will constitute a default event, thereby allowing the note
holders to immediately demand "repayment," as defined below. Furthermore, as the
Company had only 105,410 authorized common shares remaining available for
issuance at September 30, 2003, any failure by the Company to obtain such
approval will limit its future financing options to the issuance of higher
interest-bearing, non-convertible debt instruments.
As a result of the $1,533,500 in offering proceeds retained, the Company
reported $276,373 in working capital at September 30, 2003. However, absent a
significant increase in its fiscal 2004 second quarter net sales and the receipt
of the $1,533,500 balance of offering proceeds held in escrow, the Company
anticipates that it will have a working capital deficiency at December 31, 2003.
Even if the Company is successful in obtaining the required shareholder approval
for an increase in its authorized common shares, and thus, receives the escrowed
offering proceeds, the Company currently estimates that it will need
approximately $5.0 million in additional financing. This additional funding will
be necessary to fund the Company's longer-term operating needs, including its
continued conducting of those marketing activities it deems critical to building
broad public awareness of, and demand for, its current consumer device. Within
the restrictions set forth above, the Company is continuing, with the assistance
of an investment banking firm, to pursue this additional financing. Although
there can be no assurance of such, the Company currently believes that its
receipt of the escrowed offering proceeds and the additional financing it seeks,
followed by the sales increases it expects to realize from the additional
marketing activities they will collectively fund, will be sufficient to support
it until that point in time at which it forecasts that its business will become
self-sustaining from internally generated cash flow.
4
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUBSTANTIAL DOUBT REGARDING THE COMPANY'S ABILITY TO CONTINUE AS A GOING
CONCERN (CONTINUED)
With respect to its sales and gross margins, the Company introduced its current
consumer device to the retail marketplace in October 2002, from which it has
realized, and expects to continue to realize, a substantially improved gross
margin. Despite such, the Company's consolidated gross margin for the next few
fiscal quarters will continue to reflect a blended rate as it attempts to
deplete its remaining inventory of its predecessor device, primarily through
smaller, less prominent, direct marketers. During such time, the Company may
periodically offer related incentives that would adversely impact its
consolidated gross margin, the timing and degree to which is not currently
determinable. However, once its inventory of these predecessor devices is fully
depleted, the Company anticipates a consolidated gross margin of approximately
50% from sales of its current consumer device. Additionally, to the extent that
it is able to continue to conduct the meaningful marketing activities it began
in October 2003, primarily targeted radio advertising, the Company believes that
the economic and psychological attractiveness of its current consumer device's
lower retail price point will substantially increase the likelihood of it
realizing the significant sales increases and operating cost leverage it seeks
over the longer term.
With respect to its operating cost structure, the Company implemented a series
of difficult, yet necessary, cost-cutting measures during its preceding fiscal
year. The most significant of which was the elimination of substantially all
non-critical personnel, consultants and infrastructure. The Company currently
operates with a core staff of 19 full-time employees, as compared to 38
employees at June 30, 2002. Additionally, concurrent with the completion of all
re-engineering activities associated with the development and refinement of its
current consumer device, the Company eliminated substantially all of its product
research and development expenditures as of December 31, 2002. The Company
expects that its product research and development needs and expenditures for the
foreseeable future will remain nominal.
It must be noted that, should the Company be unsuccessful in any of the
initiatives or matters discussed above, its business, and, as a result, its
consolidated financial position, results of operations and cash flows will
likely be materially adversely impacted, the effects from which it may not
recover. As such, substantial doubt as to the Company's ability to continue as a
going concern remains as of the date of this report.
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.
Fiscal Periods
The Company's fiscal year-end is June 30. 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.
5
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted in these interim condensed consolidated 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, 2003.
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 year.
At September 30, 2003 and 2002, the Company had stock options, stock warrants
and convertible notes outstanding that could potentially be exercised or
converted into 55,986,279 and 21,214,107 additional common shares, respectively.
Should the Company report net income in a future period, net income per share -
diluted 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 notes were exercised or converted into common shares.
Stock-Based Compensation
As allowed by Statement of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), the Company has elected to
retain the compensation measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"), and
its related interpretations for stock options issued to employees. Under APB No.
25, compensation cost is recognized at the measurement date for the amount, if
any, that the quoted market price of the Company's common stock exceeds the
option exercise price. The measurement date is the date at which both the number
of options and the exercise price for each option are known.
No stock-based employee compensation cost is reflected in the Company's reported
net losses, as all options granted had an exercise price equal to or in excess
of the market value of the underlying common stock on the respective dates of
grant. If the Company had accounted for its stock-based employee compensation
under the fair value recognition and measurement principles of SFAS No. 123, the
Company's reported net losses would have been adjusted to the pro forma net loss
amounts presented below:
THREE MONTHS ENDED
----------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Net loss, as reported ...................... $(1,194,851) $(1,930,512)
Add: SFAS No. 123 compensation expense ..... (145,870) (220,712)
----------- -----------
Pro forma net loss ......................... $(1,340,721) $(2,151,224)
=========== ===========
Net loss per share:
Basic and diluted - as reported ....... $ (0.01) $ (0.08)
=========== ===========
Basic and diluted - pro forma .......... $ (0.01) $ (0.09)
=========== ===========
6
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO 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 April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149
requires that contracts with comparable characteristics be accounted for
similarly and clarifies when a derivative contains a financing component that
warrants special reporting in the statement of cash flows. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, except in
certain circumstances, and for hedging relationships designated after June 30,
2003. The Company adopted SFAS No. 149, as required, on July 1, 2003 with no
impact on the condensed consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
established standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. The Company adopted SFAS No. 150, as required, on May
31, 2003 for financial instruments entered into or modified after such date,
with no impact on its accompanying consolidated financial statements. The
remaining provisions of SFAS No. 150 are effective beginning with the Company's
fiscal 2004 first quarter ending September 30, 2003 and must be applied
prospectively by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of SFAS No.
150 and still existing at July 1, 2003. The Company adopted these remaining
provisions of SFAS No. 150, as required, on July 1, 2003, with no impact on the
condensed consolidated financial statements.
4. INVENTORIES, NET
Inventories, net, consist of the following:
SEPTEMBER 30, 2003 JUNE 30, 2003
------------------ -------------
Raw materials ........................ $ 1,028,344 $ 1,203,877
Work in process ...................... 125,152 63,861
Finished goods ....................... 527,212 719,548
----------- -----------
1,680,708 1,987,286
Less valuation allowance ............. (351,977) (374,696)
----------- -----------
Inventories, net ..................... $ 1,328,731 $ 1,612,590
=========== ===========
7
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, accrues interest at a stated interest rate of
8.75% per annum and requires bi-weekly repayments of principal and interest
through May 23, 2014. Effective May 1, 2002, the Board of Directors indefinitely
suspended the bi-weekly servicing requirement. On October 15, 2003, the
Company's Board of Directors resolved that all related interest accruals during
fiscal 2004 are to be concurrently offset by equivalent bonus awards to the
Company's Chief Executive Officer.
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
SEPTEMBER 30, 2003 JUNE 30, 2003
------------------ -------------
Accrued royalties payable ............................ $118,020 $104,104
Accrued sales returns, including warranty obligations 116,333 103,947
Accrued interest payable ............................. 115,195 472,413
Accrued wages, benefits and related taxes ............ 58,423 79,672
Accrued other ........................................ 14,592 5,911
-------- --------
Total accrued liabilities ............................ $422,563 $766,047
======== ========
7. NOTE PAYABLE
Effective May 1, 2003, the Company renegotiated its existing revolving credit
facility agreement with a financial institution. Under the new agreement, the
Company's then outstanding balance of $2,197,800 was bifurcated into a
$2,000,000 twenty-four month term loan ("term loan") and a $197,800 advance loan
("advance loan"). The term loan accrues interest at a fixed rate of 15% per
annum and is to be repaid through the financial institution's retention of the
first $75,000 of each month's assigned accounts receivable collections. The
advance loan accrues interest at 15% and is to be repaid through the financial
institution's additional retention of 25% of each month's assigned accounts
receivable collections over and beyond the initial $75,000 in collections
retained to service the term loan. This incremental 25% retention is limited to
$50,000 in any month, with a sub-limit of $25,000 should any month's aggregate
accounts receivable collections be less than $200,000. Any principal and accrued
interest balances remaining on the respective loans will be due and payable as
lump sums on April 1, 2005. Beginning with the date on which the advance loan is
repaid in full, the financial institution will become entitled to retain ten
percent of all subsequently collected accounts receivable, subject to a
limitation of ten percent of the term loan's then outstanding balance, with the
aggregate retentions to be returned to the Company upon its full repayment of
the term loan. Either loan may be prepaid at any time, without penalty, at the
Company's option. As with the original revolving credit facility, both loans are
secured and collateralized by the Company's accounts receivable, inventory,
property and equipment and intellectual property. Should any category of
collateral fall below specified percentages and margins, the financial
institution will be entitled to retain additional accounts receivable
collections sufficient to restore such percentages and margins. In consideration
for extending the above loans, the Company will pay the financial institution an
annual fee of $100,000, beginning on May 1, 2003 and upon each annual
anniversary thereafter on which the term loan remains unpaid. The initial annual
fee was satisfied through the issuance of 1,000,000 shares of the Company's
common stock.
8
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONVERTIBLE NOTES
On September 13, 2003, the Company issued $3,350,000 in unsecured convertible
notes from which it received $3,067,000 in net cash proceeds. The Company was
required to immediately place 50%, or $1,533,500, of the net cash proceeds into
escrow. The future release of these escrowed proceeds remains contingent upon
the Company obtaining the approval by a majority of its shareholders of a
proposed increase in its authorized common shares from 100 million to 250
million, which is to be voted upon at a special meeting of shareholders to be
held on December 1, 2003. Any failure by the Company to obtain such approval
will constitute a default event, thereby allowing the note holders to demand
"repayment," as defined below. These notes, which have an aggregate principal
face amount of $3,350,000 at September 30, 2003, (i) accrue interest at a fixed
rate of 8.0% per annum, which is payable at the Company's option in either cash
or authorized and unissued shares of its common stock, (ii) are currently
convertible at the option of the holders, provided that the Company has
sufficient authorized and unissued common shares, into shares of its common
stock at a stated rate of $0.13 per share, and (iii) become due and payable on
September 12, 2006. For every two dollars of original note principal, the holder
received a detachable stock purchase warrant allowing for the purchase over the
subsequent two-year period of a share of the Company's common stock at $0.2144
per share. Any related subsequent issuances of the Company's common stock are
limited to any individual note holder beneficially owning no more than 4.99% of
the Company's then outstanding common shares.
The Company is required to file a registration statement with the United States
Securities and Exchange Commission ("SEC") registering the preceding notes and
warrants on or before December 1, 2003. Depending upon the occurrence and
duration of certain intervening events to which it has little or no control
over, the Company may be required to obtain the SEC's declaration of
effectiveness for this registration statement as early as January 11, 2004, to
which there can be no assurance. Any failure by the Company to meet the mandated
deadlines will constitute a default event, and, as a result, the note holders
may demand "repayment." Within the context of any default, "repayment" is
defined as being the greater of (i) 130% of the aggregate outstanding principal
balance and accrued interest or (ii) a currently indeterminable amount based
upon the aggregate outstanding principal and accrued interest adjusted upwards
in accordance with a formula dependent upon any increase in the market price of
the Company's common stock subsequent to September 13, 2003. An underlying
agreement also requires that the Company obtain the unanimous approval of the
note holders prior to (i) selling any common shares or convertible notes from
September 13, 2003 until 120 days after the date on which the SEC declares the
registration statement effective or (ii) selling any common shares or common
share equivalents with anti-dilution guarantees or declaring a reverse stock
split during the period in which any of these notes remain outstanding. The
agreement further stipulates that no note may be prepaid without the consent of
the holder and that each note holder has a right of first refusal to participate
in any new financing transaction consented to through the 120 day period ending
after effectiveness of the registration statement. The Company will also be
prohibited under the Securities Act of 1933, as amended, from conducting any
other offering activities subsequent to filing the registration statement with
the SEC and through the date on which either the SEC declares it effective or
the Company withdraws it.
From June 2001 through November 2001, the Company issued unsecured convertible
notes that remain outstanding. These notes, which have an aggregate principal
face amount of $5,020,000 at September 30, 2003, (i) accrue interest at the
prime rate plus two percent (6.00% at September 30, 2003), (ii) are currently
convertible at the option of the holders into common stock of the Company at a
stated rate of $0.10 per share, and (iii) become due and payable on various
dates between July 1, 2006 and November 20, 2006. 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
original 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.
9
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. CONVERTIBLE NOTES (CONTINUED)
At the respective dates of issuance, the Company was required under accounting
principles generally accepted in the United States of America to ascertain for
each of the above note issuances the fair value of the detachable stock warrants
and resulting beneficial conversion feature. For each note issuance, the
aggregate fair value of the detachable warrants and beneficial conversion
features was determined to be equal to the aggregate principal face amount of
the debt proceeds received, and as such, these amounts were recorded as debt
discounts by increasing additional paid-in capital. These debt discounts are
being amortized over the respective lives of the underlying notes. The aggregate
unamortized debt discount amounted to $5,846,246 and $2,883,918 at September 30,
2003 and June 30, 2003, respectively. The remaining principal and discounted
amounts of the Company's outstanding convertible notes at September 30, 2003 of
$8,370,000 and $2,523,754, respectively, mature during the Company's fiscal year
ending June 30, 2007.
9. STOCKHOLDERS' EQUITY (DEFICIT)
General
The Company has submitted a proposal to its shareholders requesting an increase
in its authorized common shares from 100 million to 250 million. In this
connection, a special meeting of the Company's shareholders has been scheduled
for December 1, 2003.
Common Shares Issued In Payment of Accrued Interest and Upon Conversion of
Convertible Note
In August 2003, the Company issued 4,500,000 shares of its common stock to an
institutional investor in payment of $450,000 in accrued interest on outstanding
convertible notes.
In August 2003, the Company additionally issued 2,500,000 shares of its common
stock to an institutional investor upon its conversion of a convertible note
with a principal face amount of $250,000.
Common Shares Returned and Retired
In August 2003, two vendors returned 100,000 shares and 53,566 shares of the
Company's common stock as refunds of $10,000 and $5,357, respectively, in
prepaid services not ultimately rendered. The Company retired these returned
shares upon receipt.
10. OPTION AND PURCHASE AGREEMENT
Pursuant to an option and purchase agreement dated November 20, 2002, the
Company received $250,000 from an unrelated party in exchange for granting them
an option to purchase for an additional $500,000 a non-critical and currently
unutilized technology patent to which the Company claims ownership. The Company
reflected the $250,000 received as deferred income at June 30, 2003. Concurrent
with the July 10, 2003 expiration of this option and purchase agreement, the
Company recognized $250,000 in non-operating income.
11. CONTINGENCIES
General
The Company is periodically involved in litigation and administrative
proceedings primarily arising in the normal course of its business. In the
opinion of management, the Company's gross liability, if any, and without any
consideration given to the availability of indemnification or insurance
coverage, under any pending or existing litigation or administrative proceedings
would not materially affect its financial position, results of operations or
cash flows.
10
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CONTINGENCIES (CONTINUED)
Compensating Payment Provision with Principal Vendor
The Company's contract with the supplier of its dry-chemistry total cholesterol
test strips contains a provision that could potentially require the Company to
make certain compensating payments in the event the Company fails to meet
minimum annual sales requirements. The dollar amount of such future amounts, if
any, is currently indeterminable.
11
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS
Certain disclosures in this Quarterly Report on Form 10-QSB, including the
information incorporated by reference herein, include 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
"believe," "expect," "should," intend," "may," "anticipate," "likely,"
"contingent," "could," "may," "estimate," or other future-oriented statements,
are forward-looking statements. Such forward-looking statements include, but are
not limited to, statements regarding our business plans, strategies and
objectives, and, in particular, statements referring to our expectations
regarding our ability to continue as a going concern, generate increased market
awareness of, and demand for, our current consumer device, realize improved
gross margins, and timely obtain required financing. 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 our marketing of a relatively new total
cholesterol monitoring device for consumers in a yet to be established product
marketplace, consumer preferences, perceptions and receptiveness with respect to
our device, our critical capital raising efforts in an uncertain and volatile
economical environment, our pending submission of critical proposals to our
shareholders, our ability to maintain an existing relationships with critical
vendors and customers, our cash-preservation and cost-containment efforts, our
ability to retain key management personnel, our inexperience with advertising,
our competition and the potential impact of technological advancements thereon,
the impact of changing economic, political, geo-political and regulatory
environments on our business, the impact on demand for devices such as ours due
to the availability, affordability and coverage terms of private and public
medical insurance, our exposure to product liability claims, as well as those
factors discussed in "Item 1 - Our Business," "Item 6 - Our Management's
Discussion and Analysis," particularly the discussions under "Substantial Doubt
as to our Ability to Continue as a Going Concern" and "Our Risks and
Uncertainties," and elsewhere in our most recent Annual Report on Form 10-KSB
for the fiscal year ended June 30, 2003 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 Annual
Report on 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 30. References to a fiscal year refer to the
calendar year in which such fiscal year ends.
INTRODUCTION
We market a proprietary over-the-counter, total cholesterol monitoring device
for at-home use by both health-conscious and at-risk consumers ("our consumer
device"). Our consumer device enables an individual, through regular at-home
monitoring of their total cholesterol level, to continually assess their
susceptibility to developing cardiovascular disease, the single largest cause of
premature death and permanent disability among adult men and women in the United
States of America ("U.S.").
Once an individual is diagnosed with an elevated total cholesterol level, our
consumer device enables an individual to readily ascertain and track certain
collective benefits being derived from diet modification, an exercise regimen
and drug therapy. By doing so, we believe that an individual's long-term
adherence to an effective cholesterol-lowering program is reinforced.
We introduced our current consumer device to the retail marketplace in October
2002. It is the successor to a consumer device that we first introduced in
January 2001. Our consumer device sales has accounted for substantially all of
our consolidated net sales since fiscal 2001.
12
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
INTRODUCTION (CONTINUED)
Our current base of customers primarily consists of national and regional drug
store chains, and, to a lesser extent, pharmacy-featuring grocery store chains,
specialty catalog and Internet-based direct marketers and independent
pharmacies. To date, our ability to conduct those significant marketing
activities that we deem critical to building broad market awareness of, and
demand for, our consumer device has been severely limited due to financial
constraints. However, subsequent to our most recent fiscal year ended June 30,
2003, we have been successful in obtaining a portion of the long-term financing
we have sought to enable us to begin to move forward with such marketing, as
discussed immediately below.
SUBSTANTIAL DOUBT REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN
We have incurred substantial operating and net losses, as well as negative
operating cash flows, since our inception. As a result, we continued to have
significant working capital and stockholders' deficits at June 30, 2003. In
recognition of such, our independent certified public accountants included an
explanatory paragraph in their report on our consolidated financial statements
for the fiscal year ended June 30, 2003 that expressed substantial doubt as to
our ability to continue as a going concern.
Subsequently, on September 13, 2003, we completed a private placement offering
of $3,350,000 in unsecured convertible notes from which we received $3,067,000
in net cash proceeds. However, we were required to immediately place 50%, or
$1,533,500, of the net cash proceeds into escrow. The future release of these
escrowed proceeds remains contingent upon us obtaining the approval by a
majority of our shareholders of a proposed increase in our authorized common
shares from 100 million to 250 million, which is to be voted upon at a special
meeting of shareholders to be held on December 1, 2003. Any failure by us to
obtain such approval will constitute a default event, thereby allowing the note
holders to immediately demand "repayment," as defined below. Furthermore, as we
had only 105,410 authorized common shares remaining available for issuance at
September 30, 2003, any failure by us to obtain such approval will limit our
future financing options to the issuance of higher interest-bearing,
non-convertible debt instruments.
As a result of the $1,533,500 in offering proceeds retained by us, we reported
$276,373 in working capital at September 30, 2003. However, absent a significant
increase in our fiscal 2004 second quarter net sales and the receipt of the
$1,533,500 balance of offering proceeds held in escrow, we anticipate that we
will have a working capital deficiency at December 31, 2003.
Even if we are successful in obtaining the required shareholder approval for an
increase in our authorized common shares, and thus, receive the escrowed
offering proceeds, we currently estimate that we will need approximately $5.0
million in additional financing. This additional funding will be necessary to
fund our longer-term operating needs, including our continued conducting of
those marketing activities we deem critical to building broad public awareness
of, and demand for, our current consumer device. Within the restrictions set
forth above, we are continuing, with the assistance of an investment banking
firm, to pursue this additional financing. Although there can be no assurance of
such, we currently believe that our receipt of the escrowed offering proceeds
and the additional financing we seek, followed by the sales increases we expect
to realize from the additional marketing activities they will collectively fund,
will be sufficient to support us until that point in time at which we forecast
that our business will become self-sustaining from internally generated cash
flow.
With respect to our sales and gross margins, we introduced our current consumer
device to the retail marketplace in October 2002, from which we have realized,
and expect to continue to realize, a substantially improved gross margin.
Despite such, our consolidated gross margin for the next few fiscal quarters
will continue to reflect a blended rate as we attempt to deplete our remaining
inventory of our predecessor device, primarily through smaller, less prominent,
direct marketers. During such time, we may periodically offer related incentives
that would adversely impact our consolidated gross margin, the timing and degree
to which currently is not determinable. However, once our inventory of these
predecessor devices is fully depleted, we anticipate a consolidated gross margin
of approximately 50% from sales of our current consumer device. Additionally, to
the extent that we are able to continue to conduct the meaningful marketing
activities we began in October 2003, primarily targeted radio advertising, we
believe that the economic and psychological
13
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
SUBSTANTIAL DOUBT REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN
(CONTINUED)
attractiveness of our current consumer device's lower retail price point will
substantially increase the likelihood of us realizing the significant sales
increases and operating cost leverage we seek over the longer term.
With respect to our operating cost structure, we implemented a series of
difficult, yet necessary, cost-cutting measures during our preceding fiscal
year. The most significant of which was the elimination of substantially all
non-critical personnel, consultants and infrastructure. We currently operate
with a core staff of 19 full-time employees, as compared to 38 employees at June
30, 2002. Additionally, concurrent with the completion of all re-engineering
activities associated with the development and refinement of our current
consumer device, we eliminated substantially all of our product research and
development expenditures as of December 31, 2002. We expect that our product
research and development needs and expenditures for the foreseeable future will
remain nominal.
It must be noted that, should we be unsuccessful in any of the initiatives or
matters discussed above, our business, and, as a result, our consolidated
financial position, results of operations and cash flows will likely be
materially adversely impacted, the effects from which we may not recover. As
such, substantial doubt as to our ability to continue as a going concern remains
as of the date of this report.
OUR CONSOLIDATED RESULTS OF OPERATIONS
Our consolidated net sales for the three months ended September 30, 2003
("fiscal 2004 first quarter") were $625,475, a decrease of $506,962, or 44.8%,
as compared to $1,132,437 for the three months ended September 30, 2002 ("fiscal
2003 first quarter"). This decrease in net sales is primarily attributed to a
significant order from a national drug store chain during the fiscal 2003 first
quarter, as well as, decreased sales volume from reorders. The decrease in net
sales from the above is offset by an increase in sales from additional
distribution channels added throughout fiscal 2003.
We realized a consolidated gross profit of $198,339 for our fiscal 2004 first
quarter, a decrease of $19,225, or 8.8%, as compared to a consolidated gross
profit of $217,564 for our fiscal 2003 first quarter. Our resulting consolidated
gross margin was 31.7% for our fiscal 2004 first quarter, as compared to 19.2%
for our fiscal 2003 first quarter. Our consolidated gross margin for the fiscal
2004 first quarter represents a blended rate from sales of both our current and
predecessor consumer devices whereas our consolidated gross margin for the
fiscal 2003 first quarter was exclusively from sales of our predecessor consumer
device. As previously discussed, the technological platform of our current
consumer device was designed and engineered to provide us with a substantially
improved gross margin as compared to our predecessor consumer device, which we
had previously released in January 2001, despite its known poor economics, in
order to capture critical retail store shelf space given the substantial absence
of any competitive presence.
It should be noted that we expect to continue to realize a blended gross margin
for the next few fiscal quarters as we attempt to deplete our remaining
inventory of our predecessor device, primarily through smaller, less prominent,
direct marketers. During such time, we may periodically offer related incentives
that will adversely impact our consolidated gross margin, the timing and degree
to which currently is not determinable.
Despite the substantially improved consolidated gross margin we are realizing
from sales of our current consumer device, it must be noted that our ability to
realize a consolidated gross profit sufficient to leverage our ongoing operating
expenses, and thus, achieve sustained operating profitability at an acceptable
level, remains highly contingent upon us achieving broad awareness of, and
demand for, our current device among both retailers and consumers. Should we be
unsuccessful in our ongoing efforts at obtaining the aggregate long-term
financing we currently seek, the majority of which would be used by us to fund
critical marketing activities, it is highly unlikely that we will be able to
realize significant future sales growth.
14
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
Our consolidated total operating expenses were $1,000,306 for the fiscal 2004
first quarter, a decrease of $448,539, or 31.0%, from the $1,448,845 incurred
during our fiscal 2003 first quarter. As further detailed below, this overall
decrease primarily was attributable to various cash preservation and cost
containment measures we undertook during our fiscal 2003 third quarter ended
March 31, 2003 as our then financial condition further deteriorated.
Our consolidated sales and marketing expenses were $131,918 for the fiscal 2004
first quarter, a decrease of $83,080, or 38.6%, from the $214,998 incurred
during our fiscal 2003 first quarter. This decrease primarily was attributable
to the elimination of dedicated internal sales and marketing personnel,
decreased commissions paid to independent sales representatives, and curtailed
travel. Slightly offsetting the preceding were increased advertising and
promotional activities. Our selling and marketing expenses will significantly
increase for our fiscal 2004 second quarter, and possibly beyond, as we deploy a
significant portion of the proceeds received from our recent debt financing, as
well as from any future financings, into advertising campaigns.
Our consolidated general and administrative ("G&A") expenses were $697,851 for
the fiscal 2004 first quarter, a decrease of $238,210, or 25.4%, from the
$936,061 incurred during our fiscal 2003 first quarter. This decrease primarily
was attributable to various cost savings realized as a result of administrative
and technical support headcount reductions, including related salaries and
benefits, rent, utilities, telecommunications and travel. To a lesser extent, we
incurred lower professional service costs due to the previous completion,
contraction or discontinuance of non-critical consulting engagements. Slightly
offsetting the preceding were increased costs for investor relations and a
special proxy related to a proposed increase in our authorized common shares, a
provision for doubtful accounts, as compared to a recovery, and increased
royalty fee accruals as a result of ongoing negotiations with a principal vendor
from whom we license the proprietary optics technology utilized in our
predecessor consumer device. Discussions are ongoing with this principal vendor
regarding whether our current consumer device is subject to royalty fees under
our licensing agreement. Although there can be no assurance of such, we believe
this vendor, given our long-standing relationship, will be inclined to
ultimately agree to mutually acceptable royalty terms.
Our product research and development expenses were $3,468 for the fiscal 2004
first quarter, a decrease of $173,861, or 98.0%, from the $177,329 incurred
during our fiscal 2003 first quarter. This decrease primarily was attributable
to reductions in salaries, benefits, travel and meeting expenses as the
development of our current consumer device was substantially completed by the
end of our fiscal 2003 first quarter and certain continuing engineering
activities directed at achieving further cost refinements were substantially
completed during our preceding fiscal 2003 second quarter. We currently expect
that our product research and development needs and expenditures will be nominal
for the foreseeable future.
Our non-cash depreciation and amortization expenses were $79,313 for the fiscal
2004 first quarter, a decrease of $41,144, or 34.2%, from the $120,457 incurred
during our fiscal 2003 first quarter. This decrease primarily was attributable
to certain equipment which became fully depreciated during fiscal 2003. As our
planned capital expenditures are relatively modest in amount, we currently
anticipate that our depreciation and amortization expense for each of the
remaining quarters of fiscal 2004 will approximate that incurred during the
fiscal 2004 first quarter.
We incurred an $87,756 loss on the disposal of tooling equipment associated with
our predecessor consumer device during the fiscal 2004 first quarter. We
currently do not foresee any similar losses for the balance of fiscal 2004.
Our resulting loss from operations for the fiscal 2004 first quarter was
$801,967, a decrease of $429,314, or 34.9%, from the $1,231,281 incurred during
our fiscal 2003 first quarter.
15
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED)
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 for
the fiscal 2004 first quarter were $392,884 (inclusive of $508,086 in non-cash
charges), a decrease of $306,347, or 43.8%, from net non-operating expenses of
$699,231 (inclusive of $410,318 in non-cash charges) in our fiscal 2003 first
quarter. The net decrease primarily reflects a $250,000 gain on an unexercised
option and purchase agreement, and, to a lesser extent, decreased interest
expense incurred on convertible notes, notes payable and overdue accounts
payable due to a lower average outstanding principal balances, and decreased
amortization of deferred financing costs due certain debt-to-equity conversions.
Partially offsetting the preceding was increased amortization of convertible
debt discount due to the addition of $3.35 million in discount during the fiscal
2004 first quarter.
Primarily as a result of the foregoing, we incurred a net loss of $1,194,851
($0.01 per basic and diluted share) in the fiscal 2004 first quarter as compared
to a net loss of $1,930,512 ($0.08 per basic and diluted share) in our fiscal
2003 first quarter.
OUR CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
General
We have historically sustained our operations and funded our growth through an
ongoing combination of trade credit arrangements, short-term financings, and
debt and equity issuances. As our working capital requirements generally precede
the realization of sales and related accounts receivable, we routinely draw upon
our existing cash and cash equivalent balances and seek short and long-term
financing to fund our procurement of inventory.
As more extensively discussed in the preceding disclosures entitled "Substantial
Doubt as to Our Ability to Continue as a Going Concern," we have incurred
substantial operating and net losses, as well as negative operating cash flows,
since our inception. As a result, we had significant working capital and
stockholders' deficits as of our most recently completed fiscal year ended June
30, 2003. In recognition of such, our independent certified public accountants
included an explanatory paragraph in their report on our consolidated financial
statements for our most recently completed fiscal year ended June 30, 2003 that
expressed substantial doubt as to our ability to continue as a going concern.
It must be noted that, should we be unsuccessful in any of the initiatives or
matters discussed in the preceding disclosures entitled "Substantial Doubt as to
Our Ability to Continue as a Going Concern," our business, and, as a result, our
consolidated financial position, results of operations and cash flows will
likely be materially adversely impacted, the effects from which we may not
recover. As such, substantial doubt as to our ability to continue as a going
concern remains as of the date of this report.
Structured Settlement Agreement with Roche, a Principal Vendor to Which We Are
Materially Dependent
On May 22, 2003, we entered into a structured settlement agreement with Roche to
prospectively service and ultimately satisfy $996,921 in overdue accounts
payable to them. Our payment obligations under this agreement are as follows:
$250,000 on or before June 30, 2003 (which was timely paid), $250,000 on or
before September 30, 2003 (which was timely paid), and $496,921 on or before
December 31, 2003. Our ability to make the December 31, 2003 payment remains
contingent upon us previously obtaining a significant portion of the longer-term
financing we currently seek, inclusive of the previously discussed offering
proceeds in escrow. Any disruption in our relationship with Roche would likely
have material and long-lasting adverse impacts on our business, financial
condition, results of operations and cash flows, from which we would not likely
recover. See "Our Business - Our Principal Vendors" in our Annual Report on Form
10-KSB for the fiscal year ended June 30, 2003 for further details regarding our
material dependency on Roche.
16
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Our Capital Lease Obligations
We lease certain equipment under capital leases. The aggregate net carrying
values of the underlying collateralizing assets were approximately $254,000 and
$285,000 at September 30, 2003 and June 30, 2003, respectively.
Our aggregate future obligations under capital lease agreements in existence at
September 30, 2003 are as follows:
FISCAL YEARS ENDING JUNE 30,
------------------------------------------------------------
2004 (balance thereof) ........................ $44,354
2005 .......................................... 29,648
2006 .......................................... 11,512
2007 .......................................... 5,340
2008 .......................................... 5,340
-------
Total lease payments .......................... 96,194
Less imputed interest ......................... 17,828
-------
Present value of net minimum lease payments ... 78,366
Less current maturities ....................... 45,021
-------
Total long-term capital lease obligation ...... $33,345
=======
Our Outstanding Notes Payable
Effective May 1, 2003, we converted our then expiring revolving credit facility
agreement with a financial institution. Under the new agreement, our then
outstanding balance of $2,197,800 was bifurcated into a $2,000,000 twenty-four
month term loan ("term loan") and a $197,800 advance loan ("advance loan"). The
term loan accrues interest at a fixed rate of 15% per annum and is to be repaid
through the financial institution's retention of the first $75,000 of each
month's assigned accounts receivable collections. The advance loan accrues
interest at 15% and is to be repaid through the financial institution's
additional retention of 25% of each month's assigned accounts receivable
collections over and beyond the initial $75,000 in collections retained to
service the term loan. This incremental 25% retention is limited to $50,000 in
any month, with a sub-limit of $25,000 should any month's aggregate accounts
receivable collections be less than $200,000. Any principal and accrued interest
balances remaining on the respective loans will be due and payable as lump sums
on April 1, 2005. Beginning with the date on which the advance loan is repaid in
full, the financial institution will become entitled to retain ten percent of
all subsequently collected accounts receivable, subject to a limitation of ten
percent of the term loan's then outstanding balance, with the aggregate
retentions to be returned to us upon our full repayment of the term loan. Either
loan may be prepaid at any time, without penalty, at our option. As with the
original revolving credit facility, both loans are secured and collateralized by
our accounts receivable, inventory, property and equipment and intellectual
property. Should any category of collateral fall below specified percentages and
margins, the financial institution will be entitled to retain additional
accounts receivable collections sufficient to restore such percentages and
margins. In consideration for extending the above loans, we will pay the
financial institution an annual fee of $100,000, beginning on May 1, 2003 and
upon each annual anniversary thereafter on which the term loan remains unpaid.
The initial annual fee was satisfied through the issuance of 1,000,000 shares of
our common stock.
As a result of the preceding conversion, we no longer have any established
credit facilities in place for future borrowings.
17
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
Our Outstanding Convertible Notes
On September 13, 2003, we issued $3,350,000 in unsecured convertible notes from
which we received $3,067,000 in net cash proceeds. We were required to
immediately place 50%, or $1,533,500, of the net cash proceeds into escrow. The
future release of these escrowed proceeds remains contingent upon our obtaining
the approval by a majority of our shareholders of a proposed increase in our
authorized common shares from 100 million to 250 million, which is to be voted
upon at a special meeting of shareholders to be held on December 1, 2003. Any
failure by us to obtain such approval will constitute a default event, thereby
allowing the note holders to demand "repayment," as defined below. These notes,
which have an aggregate principal face amount of $3,350,000 at September 30,
2003, (i) accrue interest at a fixed rate of 8.0% per annum, which is payable at
our option in either cash or authorized and unissued shares of our common stock,
(ii) are currently convertible at the option of the holders, provided that we
have sufficient authorized and unissued common shares, into shares of our common
stock at a stated rate of $0.13 per share, and (iii) become due and payable on
September 12, 2006. For every two dollars of original note principal, the holder
received a detachable stock purchase warrant allowing for the purchase over the
subsequent two-year period of a share of our common stock at $0.2144 per share.
Any related subsequent issuances of our common stock is limited to any
individual note holder beneficially owning no more than 4.99% of our then
outstanding common shares.
We are required to file a registration statement with the United States
Securities and Exchange Commission ("SEC") registering the preceding notes and
warrants on or before December 1, 2003. Depending upon the occurrence and
duration of certain intervening events to which we have little or no control
over, we may be required to obtain the SEC's declaration of effectiveness for
this registration statement as early as January 11, 2004, to which there can be
no assurance. Any failure by us to meet the mandated deadlines will constitute a
default event, and, as a result, the note holders may demand "repayment." Within
the context of any default, "repayment" is defined as being the greater of (i)
130% of the aggregate outstanding principal balance and accrued interest or (ii)
a currently indeterminable amount based upon the aggregate outstanding principal
and accrued interest adjusted upwards in accordance with a formula dependent
upon any increase in the market price of our common stock subsequent to
September 13, 2003. An underlying agreement also requires that we obtain the
unanimous approval of the note holders prior to (i) selling any common shares or
convertible notes from September 13, 2003 until 120 days after the date on which
the SEC declares the registration statement effective or (ii) selling any common
shares or common share equivalents with anti-dilution guarantees or declaring a
reverse stock split during the period in which any of these notes remain
outstanding. The agreement further stipulates that no note may be be prepaid
without the consent of the holder and that each note holder has a right of first
refusal to participate in any new financing transaction consented to through the
120 day period ending after effectiveness of the registration statement. We will
also be prohibited under the Securities Act of 1933, as amended, from conducting
any other offering activities subsequent to filing the registration statement
with the SEC and through the date on which either the SEC declares it effective
or we withdraw it.
From June 2001 through November 2001, we issued unsecured convertible notes that
remain outstanding. These notes, which have an aggregate principal face amount
of $5,020,000 at September 30, 2003, (i) accrue interest at the prime rate plus
two percent (6.00% at September 30, 2003), (ii) are currently convertible at the
option of the holders into our common stock at a stated rate of $0.10 per share,
and (iii) become due and payable on various dates between July 1, 2006 and
November 20, 2006. 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. For every two dollars of original note principal, the holder
received a detachable stock purchase warrant allowing for the purchase of a
share of our common stock at $2.50 per share.
18
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Our Outstanding Convertible Notes (continued)
At the respective dates of issuance, we were required under accounting
principles generally accepted in the United States of America to ascertain for
each of the above note issuances the fair value of the detachable stock warrants
and resulting beneficial conversion feature. For each note issuance, the
aggregate fair value of the detachable warrants and beneficial conversion
features was determined to be equal to the aggregate principal face amount of
the debt proceeds received, and as such, these amounts were recorded as debt
discounts by increasing additional paid-in capital. These debt discounts are
being amortized over the respective lives of the underlying notes. The aggregate
unamortized debt discount amounted to $5,846,246 and $2,883,918 at September 30,
2003 and June 30, 2003, respectively. The remaining principal and discounted
amounts of our outstanding convertible notes at September 30, 2003 of $8,370,000
and $2,523,754, respectively, mature during our fiscal year ending June 30,
2007.
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. Certain of these operating leases are
noncancellable and contain rent escalation clauses.
The future aggregate minimum lease payments under operating lease agreements in
existence at September 30, 2003 are as follows:
FISCAL YEARS ENDING JUNE 30,
------------------------------------------------------------
2004 (balance thereof) ...................... $ 83,385
2005 ........................................ 25,445
--------
Total minimum operating lease payments ...... $108,830
========
Our Consolidated Cash Flows
Our operating activities utilized $1,623,933 in cash and cash equivalents during
the fiscal 2004 first quarter, an increase of $1,412,086, or 666.6%, from the
$211,847 in cash and cash equivalents utilized during our fiscal 2003 first
quarter. On a comparative quarter-to-quarter basis, our higher utilization
substantially reflects the negative cash flow effects of decreased accounts
payable, accrued liabilities and deferred income, and increased accounts
receivable and prepaid expenses. Partially offsetting the preceding was our
decreased net loss, the positive cash effects of decreased inventories and
deferred financing costs, and the adding back of increased aggregate non-cash
charges.
Our investing activities utilized $0 and $1,683 in cash and cash equivalents
during the fiscal 2004 and 2003 first quarters, respectively. Our decreased
utilization is attributable to the comparative fiscal 2003 first quarter
reflecting capital expenditures.
Our financing activities provided $1,210,608 in cash and cash equivalents during
the fiscal 2004 first quarter, as compared to the utilization of $375,003 in
cash and cash equivalents during our fiscal 2003 first quarter. Our fiscal 2004
first quarter reflects the receipt of the non-escrowed portion of the net cash
proceeds received from our issuance of convertible notes, as previously
discussed, being slightly offset by principal payments on our outstanding
capital lease obligations and notes payable. In contrast, our fiscal 2003 first
quarter reflected principal payments on outstanding convertible notes and other
debt, being slightly offset by borrowings under our then existing revolving line
of credit.
As a result of the foregoing, our cash and cash equivalents decreased by
$413,325 to $956,801 at September 30, 2003 as compared with $1,370,126 at June
30, 2003.
19
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Our Planned Capital Expenditures
Our only significant planned capital expenditure for fiscal 2004 is the purchase
or lease of an additional automated test strip packaging machine with an
estimated cost of $350,000. However, our ultimate need for this machine is
dependent upon us meeting our fiscal 2004 sales target, which correspondingly is
dependent upon us procuring the significant additional equity or debt financing
we currently seek, as previously discussed. To a significantly lesser extent, we
currently anticipate the need to perform certain telecommunications and computer
technology upgrades during fiscal 2004 with an estimated aggregate cost of
$100,000.
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 continue to
benefit from increased orders by retailers for the holiday shopping season.
Conversely, we expect that our subsequent fiscal third quarter ending March 31
will continue to experience decreased orders as retailers seek to sell-through
any surplus holiday stock and return to more normal inventory levels.
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 certain of our outstanding convertible notes, as discussed
above, have an interest rate that fluctuates with the prime rate. Based on the
aggregate outstanding balance of these convertible notes at September 30, 2003,
we believe that the prime rate would have to significantly increase, in excess
of a few hundred basis points, for the resulting adverse impact on our interest
expense to be material to our expected results of operations for fiscal 2004,
and possibly beyond. However, should we be successful in procuring the
significant additional financing we currently seek and if such financing were to
be substantially in the form of variable rate debt, then our exposure to these
market risks would increase, possibly significantly.
We currently are not materially exposed to currency market risks. However,
should we in the future enter into significant contracts subjecting us to
foreign currency adjustments or denominated in non-U.S. dollar currencies, then
we would become exposed to these market risks.
We have not used, and currently do not contemplate using, any derivative
financial instruments.
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. We currently
believe that the following 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
policies particularly critical to a materially accurate portrayal of our
historical or reasonably foreseeable financial condition or results of
operations:
20
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR OTHER MATTERS (CONTINUED)
Our Critical Accounting Policies (continued)
o Revenue Recognition. We recognize a sale, including related shipping
and handling income, and the cost of the sale, upon product shipment
provided that all material risks and rewards of ownership are
concurrently transferred from us to our customer, collection of the
related receivable by us is reasonably assured, and we are able to
reliably estimate an appropriate allowance for sales returns based on
our relevent historical product experience and future expectations.
However, our estimates of an appropriate allowance for sales returns
is inherently subjective and actual results could vary from our
estimated outcome, thereby requiring us to make future adjustments to
our net sales and results of operations.
o Allowance for Doubtful Accounts. We record an allowance for doubtful
accounts based on specifically identified amounts that we believe to
be uncollectible and those accounts that are past due beyond a certain
date. However, our estimates of an appropriate allowance for doubtful
accounts are inherently subjective and actual results could vary from
our estimated outcome, thereby requiring us to make future adjustments
to our accounts receivable and results of operations.
o Inventories. Our inventories, which primarily consist of component
parts, assembled devices and related supplies, are stated at the lower
of first-in, first-out cost or market. However, our estimates of
market and an appropriate allowance for inventory obsolescence are
inherently subjective and actual results could vary from our estimated
outcome, thereby requiring us to make future adjustments to our
inventories and results of operations.
o Impairment of Long-Lived Assets. We, on at least a quarterly basis,
evaluate each of our long-lived assets for impairment by comparing our
estimates of related future cash flows, on an undiscounted basis, to
its net book value. If impairment is indicated, we reduce the net book
value to an amount equal to the estimated future cash flows, on an
appropriately discounted basis. However, our estimates of an asset's
related future cash flows are inherently subjective and actual results
could vary from our estimated outcome, thereby requiring us to make
future adjustments to our assets and results of operations.
Our Legal Contingencies
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 "Our Business - Our Intellectual Property Rights" 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. The Court conducted a "claim interpretation"
hearing (also called a "Markman" hearing) January 29-30, 2003, and issued a
Memorandum Decision on May 28, 2003 ruling against our assertion of patent
infringement. Based on the Court's claim interpretation decision, the parties
jointly requested entry of a judgment of non-infringement, a stay of the
counterclaims, and a certification that the claim interpretation decision is
ripe for appeal. The Court entered this order on August 21, 2003. We timely
filed a Notice of Appeal to the Court of Appeals for the Federal Circuit, but
have not yet been advised of the Appeal Number. Although we believe that our
claims are well founded in law and fact, and believe that the counterclaims and
defenses
21
ITEM 2. OUR MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OUR OTHER MATTERS (CONTINUED)
Our Legal Contingencies (continued)
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 have evaluated the effectiveness of the design
and operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d--15(e) of the Exchange Act, as of the end of the period
covered by this report. Based on that evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no changes in our internal control over
financial reporting during our last fiscal quarter ended September 30, 2003 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
22
PART II. OUR OTHER INFORMATION
ITEM 1. OUR 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 "Our Business - Our Intellectual Property Rights" 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. The Court conducted a "claim interpretation"
hearing (also called a "Markman" hearing) January 29-30, 2003, and issued a
Memorandum Decision on May 28, 2003 ruling against our assertion of patent
infringement. Based on the Court's claim interpretation decision, the parties
jointly requested entry of a judgment of non-infringement, a stay of the
counterclaims, and a certification that the claim interpretation decision is
ripe for appeal. The Court entered this order on August 21, 2003. We timely
filed a Notice of Appeal to the Court of Appeals for the Federal Circuit, but
have not yet been advised of the Appeal Number. 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. OUR 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 the following securities during our
fiscal 2004 first quarter ended September 30, 2003.
In August 2003, we issued 4,500,000 shares of our common stock to an
institutional investor in payment of $450,000 in accrued interest on outstanding
convertible notes.
In August 2003, we issued 2,500,000 shares of our common stock to an
institutional investor upon its conversion of a convertible note with a
principal face amount of $250,000.
In August 2003, two vendors returned 100,000 shares and 53,566 shares of our
common stock as refunds of $10,000 and $5,357, respectively, in prepaid services
not ultimately rendered. We retired these returned shares upon receipt.
ITEM 3. OUR DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. OUR SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We have submitted a proposal to our shareholders requesting an increase in our
authorized common shares from 100 million to 250 million. In this connection, a
special meeting of our shareholders has been scheduled for December 1, 2003.
23
PART II. OUR OTHER INFORMATION (CONTINUED)
ITEM 4. OUR SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
We have submitted proposals to our shareholders requesting (i) the election of a
Class III director and (ii) approval of BDO Seidman, LLP as our independent
public accountants for our fiscal year ending June 30, 2004. In this connection,
an annual meeting of our shareholders has been scheduled for December 19, 2003.
Majority shareholder approval is required for each of the above proposals.
ITEM 5. OUR OTHER INFORMATION
Effective October 31, 2003, our common stock began trading on the NASDAQ's
Over-The-Counter Bulletin Board under the ticker symbol "LFTC" and discontinued
trading on the American Stock Exchange.
ITEM 6. OUR EXHIBITS AND REPORTS ON FORM 8-K
We filed a Form 8-K on September 15, 2003 reporting our completion of a
$3,350,000 private placement of convertible notes.
Exhibit Index
3.1 Amended and Restated Articles of Incorporation of Lifestream Technologies,
Inc., dated June 20, 2002.(1)
3.2 By-laws of Lifestream Technologies, Inc.(2)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- --------
1 Filed as an exhibit to the Company's Form DEF-14A with the Securities and
Exchange Commission on April 24, 2002 and incorporated herein by reference.
2 Filed as an exhibit to the Company's form 10-KSB filed with the Securities
and Exchange Commission on December 26, 1996 and incorporated herein by
reference.
24
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 2003.
LIFESTREAM TECHNOLOGIES, INC.
By: /s/ Brett Sweezy
------------------
Brett Sweezy
Chief Financial and Accounting Officer
25