AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 2005
Registration No. 333-121991
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
LIFESTREAM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 5047 82-0487965
------ ---- -----------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
510 Clearwater Loop, Suite 101
Post Falls, Idaho 83854
(208) 457-9409
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------
Christopher Maus
President and Chief Executive Officer
510 Clearwater Loop, Suite 101
Post Falls, Idaho 83854
(208) 457-9409
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent For Service)
------------------------------
Copies of all communications to:
Steven I. Weinberger, Esq.
Schneider Weinberger & Beilly LLP
2200 Corporate Blvd NW, Ste 210
Boca Raton, Florida 33431
Telephone: (561) 362-9595
Facsimile No. (561) 362-9612
Approximate Date of Proposed Sale to the Public:
As soon as practicableafter the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AMOUNT TO BE PRICE PER OFFERING REGISTRATION
REGISTERED UNIT (1) PRICE (1) FEE
- ---------------------------------------------------------------------------------------------------------------------
Common stock, $.001 par value per share (2) 10,800,000 $0.043 $464,400 $58.84 *
Common stock, $.001 par value per share, issuable
upon conversion of a convertible note payable (3)
20,833,333 $0.050 $1,041,667 $131.98 *
---------- ---------- -------
TOTAL 31,633,333 $1,506,067 $190.82 *
========== ========== =======
- ----------
* Paid herewith.
(1) Estimated solely for the purpose of computing the amount of the
registration fee in accordance with Rule 457 under the Securities Act
of 1933.
(2) Consists of currently outstanding shares of common stock registered
pursuant to previously granted piggyback registration rights. Fee based
on the last sale price of our common stock, $.001 par value per share,
as reported by the Over-the-Counter Bulletin Board on January 10, 2005.
(3) Shares of our common stock issuable upon the conversion of a
convertible note payable. The note is convertible at the option of the
note holder at a contractual rate of $.05 per share, and may be paid,
at our option, by the issuance of our common stock at a 20% discount to
market. The registration fee is based upon the contractual $.05 per
share conversion rate, which is greater than the last sale price of our
common stock, as reported by the Over-the-Counter Bulletin Board on
January 10, 2005.
Pursuant to Rule 416 under the Securities Act of 1933, this registration
statement also covers such additional number of shares as may be issuable as a
result of stock splits, stock dividends or similar transactions attributable to
the shares being registered.
Lifestream Technologies, Inc., hereby amends this registration statement on the
date or dates as may be necessary to delay its effective date until Lifestream
Technologies, Inc., shall file a further amendment which specifically states
that this registration statement shall thereafter become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until this registration
statement shall become effective on the date as the Securities and Exchange
Commission, acting pursuant to said Section 8(a), may determine.
Subject to Completion
Dated March 7, 2005
Selling Security Holder Offering Prospectus
LIFESTREAM TECHNOLOGIES, INC.
31,633,333 shares of common stock
This prospectus covers the resale of an aggregate of 31,633,333 shares of our
common stock, consisting of 10,800,000 shares of currently outstanding common
stock and 20,833,333 shares of common stock issuable upon conversion of a
convertible note payable. We will not receive any proceeds from the sale of
shares by selling security holders.
Our common stock is listed on the over-the-counter Bulletin Board under the
symbol "LFTC". On March 4, 2005, the last reported sale price for our common
stock was $0.027 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS.
SEE "RISK FACTORS" BEGINNING AT PAGE 3.
----------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is _________________
TABLE OF CONTENTS
Page
Prospectus Summary.............................................................1
Risk Factors...................................................................3
Use of Proceeds................................................................8
Price Range of Common Stock and Dividend Policy................................8
Forward Looking Statements.....................................................9
Business......................................................................10
Properties....................................................................18
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................. 18
Management....................................................................30
Executive Compensation........................................................32
Certain Relationships and Related Transactions................................35
Security Ownership of Certain Beneficial Owners and Management................37
Description of Securities.....................................................38
Selling Security Holders......................................................39
Plan of Distribution .........................................................41
Legal Matters.................................................................42
Experts.......................................................................42
Additional Information........................................................42
Financial Statements.........................................................F-1
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
PROSPECTUS SUMMARY
LIFESTREAM TECHNOLOGIES
We market a proprietary over-the-counter, total cholesterol-monitoring device
for at-home use by both health-conscious and at-risk consumers ("our cholesterol
monitor"). Our cholesterol monitor 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
cholesterol monitor 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 cholesterol monitor to the retail marketplace
in October 2002. It is the successor to a cholesterol monitor that we first
introduced in January 2001.
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 significant marketing activities
critical to building broad market awareness of our cholesterol monitor has been
limited due to financial constraints. However, during our fiscal year ended June
30, 2004 we were successful in obtaining a portion of the long-term financing we
sought to allow us to begin conducting marketing programs. We continue to
require additional long-term financing to allow us to continue conducting
marketing activities.
CHOLESTEROL MONITOR
Our cholesterol monitor has a suggested retail price of $119.95, but is
routinely offered by certain of our more prominent retail store chain customers
at a price below the psychologically important $100.00 price point for many
consumers.
Our cholesterol monitor:
o Provides a quantified total cholesterol reading from a single drop of
blood within three minutes without any prior fasting,
o Meets the measurement precision guidelines set forth by the National
Cholesterol Education Program ("NCEP"), a government agency created
under the auspices of the National Heart, Lung and Blood Institute
("NHLBI") to contribute to reducing illness and death from coronary
heart disease by reducing the percent of Americans with high blood
cholesterol,
o Classifies individual test results using the NCEP's recommended and
defined risk categories of "desirable," "borderline" and "high"
risk-level categories for total cholesterol in adults, resulting in
ease of use and understanding by consumers,
o Utilizes inexpensive, disposable dry-chemistry test strips,
o Computes an individual's rolling average total cholesterol level based
on their six most recent test results,
o Allows for the secure storage, via encryption, of up to 200
chronologically-dated test results onto an optional smart card, which
is inserted into an existing slot on the monitor, for subsequent
retrieval and longer-term trend analysis,
o Is compact, lightweight and portable with dimensions of approximately
5.50" x 4.00" x 1.75" and a weight of approximately one pound,
o Is warranted for one year from defects in materials or workmanship,
and
o Incorporates the newly FDA cleared Health Risk Assessment (HRA), which
displays a full Health Risk Assessment after taking a three-minute
total cholesterol test and inputting eight additional risk factors
including gender, age, height, weight, diabetic status,
smoker/non-smoker, systolic and diastolic blood pressure, and HDL
break-out from a recent lipid profile.
Our "Plus-Edition" Cholesterol Monitor, which has a suggested retail price of
$129.95, includes a cholesterol monitor, a Data Concern" Personal Health
Card(R), a CD-ROM software program, a serial cable and an extended three-year
warranty. By connecting our cholesterol monitor to a personal computer via the
serial cable and installing our software, an individual can compute a
longer-term rolling average of their historical test results and convert such
into detailed, easy-to-understand printable charts. We believe that these
value-added analytical features enable an individual to more readily ascertain
and track the collective benefits being derived over an extended period of time
from diet modification, an exercise regimen and drug therapy, thereby further
reinforcing their ongoing adherence to an effective cholesterol-lowering
program.
1
RELATED SUPPLIES AND ACCESSORIES
We offer the following supplies and accessories for use with our cholesterol
monitor:
o TEST KIT REFILLS. Our test kit refills, which include six individually
packaged test packets, have a suggested retail price of $19.95. Each
single-use, disposable testing packet contains a dry-chemistry total
cholesterol test strip, a sterile lancet, an alcohol swab, and a
band-aid.
o "DATA CONCERN" PERSONAL HEALTH CARD(R). Our "Data Concern" Personal
Health Card(R) is individually packaged and has a suggested retail
price of $19.95. The Personal Health Card(R) stores up to 200
cholesterol test results for subsequent retrieval and longer-term
trend analysis.
Our executive offices are located at 510 Clearwater Loop, Suite 101, Post Falls,
Idaho 83854. Our telephone number is (208) 457-9409; our facsimile number is
(208) 457-9509. Unless otherwise indicated, references in this prospectus to
"Lifestream," "we," "us" and "our" are to Lifestream Technologies, Inc., and our
wholly owned subsidiaries.
THE OFFERING
Common Stock Outstanding: 237,168,735 shares
Common Stock Reserved: 173,845,264 shares, including 20,833,333
shares covered by this prospectus that are
issuable upon conversion of a convertible
note payable, 96,900,000 shares that are
issuable upon conversion of debentures not
covered by this prospectus, 31,246,733
shares issuable upon exercise of common
stock purchase warrants, 13,716,363 issuance
upon exercise of outstanding stock options
and 11,148,835 shares issuable under our
stock option plans
OTCBB Trading Symbol: LFTC
SUMMARY FINANCIAL DATA
The following summary of our financial information has been derived from our
financial statements that are included elsewhere in this prospectus. The
information for the years ended June 30, 2004 and 2003 is derived from our
audited financial statements.
Statement of Operations
SIX MONTHS ENDED
(UNAUDITED) FISCAL YEARS ENDED
------------------------------ ------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales ............... $ 1,658,467 $ 1,412,526 $ 2,603,257 $ 4,236,653
Cost of sales ........... $ 1,190,381 $ 1,085,672 $ 2,698,673 $ 3,516,827
Gross profit (loss) ..... $ 468,086 $ 326,854 $ (95,416) $ 719,826
Loss from operations..... $ (1,739,091) $ (2,154,340) $ (5,364,473) $ (4,281,477)
Net loss ................ $ (4,318,899) $ (3,960,863) $(14,407,557) $ (8,106,945)
Net loss per share ...... $ (0.02) $ (0.04) $ (0.11) $ (0.24)
2
Balance Sheet Data
DECEMBER 31, 2004 JUNE 30,
----------------- ----------------------------
(UNAUDITED) 2004 2003
----------- ----------- -----------
Working capital (deficit)..... $ (554,477) $ (940,698) $ (947,111)
Total assets ................. $ 3,852,469 $ 3,612,177 $ 5,077,925
Current assets ............... $ 2,098,717 $ 2,025,165 $ 3,290,620
Long-term debt ............... $ 6,291,585 $ 2,709,841 $ 3,498,768
Stockholders' deficit ........ $(5,092,310) $(2,063,527) $(2,658,574)
RISK FACTORS
An investment in our common stock is highly speculative. You should be aware you
could lose the entire amount of your investment. Prior to making an investment
decision, you should carefully read this entire prospectus and consider the
following risk factors. If the events described in these risks occur, our
business, financial condition and results of operations could be adversely
affected. This prospectus contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ significantly from the results
discussed in the forward-looking statements.
OUR WEAK FINANCIAL CONDITION HAS RAISED, AND WILL LIKELY CONTINUE TO RAISE,
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. Our significant working capital and
stockholders' deficits as of June 30, 2004 and 2003, among other factors,
resulted in our independent registered public accountants modifying their audit
report on our consolidated financial statements for the fiscal years ended June
30, 2004 and 2003 to express substantial doubt regarding our ability to continue
as a going concern. Although we have been successful in restructuring certain
debt obligations as they have become due and in raising additional investment
capital to fund certain immediate and near-term operating needs, we remain in
need of substantial additional investment capital to fund our longer-term
operating needs, including servicing of our remaining debt obligations and
continued conducting of marketing activities we believe necessary to achieve
meaningful sales growth.
IF WE CANNOT TIMELY SECURE NECESSARY FINANCING OR GENERATE SUBSTANTIAL REVENUE
GROWTH, WE WILL LIKELY BE UNABLE TO FULFILL OUR OUTSTANDING OBLIGATIONS,
INCLUDING DEBT SERVICE AND PURCHASE COMMITMENTS.
We have incurred substantial debt obligations and have entered into operating
commitments.. Although we have been successful in restructuring certain debt
obligations as they have become due and in raising additional investment capital
to fund certain immediate and near-term operating needs, if we are unable to
raise additional capital or generate substantial revenue growth, we will be
unable to service our remaining debt obligations, and other commitments.
IF WE CANNOT TIMELY SECURE NECESSARY FINANCING, WE WILL BE UNABLE TO CONTINUE TO
GROW OUR SALES, IN WHICH EVENT WE WILL LIKELY BE UNABLE TO SUPPORT OUR
OPERATIONS.
We have realized limited sales revenues to date that we primarily attribute to
our continuing inability to sustain funding the marketing activities we believe
necessary to develop broad market awareness and acceptance of our total
cholesterol monitors. Our inability to leverage our operating costs with sales
has resulted in continuing significant operating and net losses, as well as
negative operating cash flows. For the years ended June 30, 2004 and 2003, and
the six months ended December 31, 2004 and 2003, we incurred losses of
$14,407,557, $8,106,945, $4,318,899 and 3,960,863, respectively. Our continuing
losses adversely affect our ability to secure additional funding.
We continue to actively seek substantial investment capital to enable us to
fully execute the balance of our business plan, that primarily being the
conducting of those marketing activities we believe necessary to achieve
3
meaningful sales growth. Our ability to effectively promote our monitors,
support and sustain our existing retail relationships, cultivate, support and
sustain additional retail relationships, and thereby realize meaningful sales
growth, remains dependent upon our timely receipt of substantial additional
investment capital. Absent meaningful sales growth, our ability to achieve net
profitability and positive operating cash flow remains highly unlikely.
OUR CONTINUED SALE OF EQUITY SECURITIES AND OUR ISSUANCE OF SHARES UPON EXERCISE
OF OUTSTANDING OPTIONS AND WARRANTS, WILL DILUTE EXISTING STOCKHOLDERS AND MAY
ADVERSELY AFFECT THE MARKET FOR OUR SHARES.
Our ongoing need for additional capital to sustain marketing activities and
supplement the financing of our operations has required the issuance of a
substantial amount of our common stock or debt convertible into our common
stock. During fiscal 2004 and 2003, we issued a total of 88,447,096 and
67,926,593 common shares, respectively, which increased the number of common
shares outstanding from 24,967,997 at July 1, 2002 to 181,341,686 at June 30,
2004. As of December 31, 2004, we had 237,168,735 common shares outstanding and
an additional 173,845,264 common shares reserved for issuance as follows:
SHARES RESERVED
---------------
Issuable upon conversion of convertible debentures 117,733,333
Issuable upon exercise of outstanding warrants 31,246,733
Issuable upon exercise of outstanding stock options 13,716,363
Available for grant pursuant to outstanding
stock option plans 11,148,835
-----------
Total common shares reserved 173,845,264
===========
The issuance of shares upon exercise of outstanding options and warrants will
dilute the equity ownership of our existing stockholders and, if such shares are
issued at below market prices, will be dilutive to book value per share.
Moreover, the mere possibility that the reserved shares may be issued could be
adversely perceived by the marketplace, causing an increase in selling and a
resulting decrease in the market price for our shares.
We will require additional financing in the future to fund our business plans,
including additional marketing efforts and inventory. To date, our success in
attracting funding has required that we issue our common stock at a discount to
market. We anticipate that future funding may require us to continue to issue
shares at a discount, as a result of which, additional financing will cause
further dilution to existing outstanding stockholders. Moreover, the increase in
the number of shares available in the public marketplace may reduce the market
price for our shares and, consequently, the price investors may receive at the
time of sale.
THE PRICE VOLATILITY FOR OUR COMMON STOCK AND THE LACK OF AN ACTIVE MARKET MAY
ADVERSELY AFFECT THE ABILITY OF STOCKHOLDERS TO BUY AND SELL OUR SHARES.
Our common stock is currently listed and traded on the Over-the-Counter Bulletin
Board. Our common stock has experienced, and continues to experience,
significant volatility in its market price. Additionally, our common stock has
experienced, and continues to experience, limited trading volume on any given
market day. These factors may adversely affect both the liquidity and market
price of our stock.
WE REMAIN DEPENDENT UPON KEY MANAGEMENT PERSONNEL AND IF WE ARE UNABLE TO RETAIN
THEM, OUR OPERATIONS MAY SUFFER.
We believe that our future success currently remains dependent upon the
knowledge, skills, services and vision of Christopher Maus, our Chairman of the
Board of Directors, Chief Executive Officer and President, and to a lesser
extent, Edward Siemens, our Chief Operating Officer. Our dependence upon these
individuals has increased over the past two years as a result of significant
staff reductions we have made to reduce our operating costs. The significant
staff reductions have resulted in substantial additional demands on our existing
officers and staff. Despite our increased dependency on these individuals, they
each agreed, effective April 2003, to prospective one-third reductions in their
contractual salaries until we realized an improvement in our financial
condition. Effective June 2, 2003, we restored one half of the pay cuts
prospectively. In January and June 2004, the Board of Directors approved the
issuance of common stock to these officers in lieu of cash payment for
compensation lost as a result of these pay cuts. Our ability to retain these
individuals remains uncertain and any loss or disablement of these individuals
could have a material adverse effect on our business, and as a result, on our
results of operations, liquidity and cash flows. There can also be no assurance
that the proceeds we would receive under a $5,000,000 key man life insurance
policy we maintain on Mr. Maus would sufficiently compensate us in the event of
his unfortunate death. Our retention and possible recruitment of experienced and
talented management will also be critical to our future success.
4
WE REMAIN DEPENDENT UPON ROCHE DIAGNOSTICS GMBH TO SUPPLY US WITH DRY-CHEMISTRY
TEST STRIPS AND IF WE FAIL TO MEET MINIMUM PURCHASE REQUIREMENTS, ROCHE MAY
DISCONTINUE ITS SUPPLY RELATIONSHIP WITH US.
We are party to a licensing and manufacturing agreement with Roche Diagnostics
GmbH (Roche) of Mannheim, Germany. Our agreement with Roche currently grants us
the exclusive right to market and distribute its proprietary test strips in the
U.S. We are required to purchase our supply of dry-chemistry test strips
utilized in our cholesterol monitors exclusively from Roche. The initial term of
the agreement expired on December 31, 2004, however, absent default by either
party, the agreement automatically renews for additional one-year terms unless
either party gives 12 months written notice of termination. Neither party has
given written notice of termination as of the date of this prospectus, and,
accordingly, on December 31, 2004, the agreement was automatically renewed for
an additional 12 months. Should we fail to meet our contractually mandated
minimum purchase requirements, Roche may elect to discontinue its relationship
with us or to impose price increases. As we did not meet the calendar 2002
minimum sales threshold set forth in the agreement, Roche began prospectively
assessing us a 10% price surcharge in exchange for agreeing to maintain our U.S.
exclusivity. This surcharge was based on our revised sales forecasts for the
duration of the agreement. Should we fail to meet these sales forecasts, Roche
may impose a more significant price surcharge on us as a condition to further
maintaining our U.S. exclusivity. We believe that a suitable technological or
economical alternative to Roche's dry chemistry test strips is available in the
marketplace, however any disruption in our relationship with Roche could cause
us to lose our U.S. exclusivity, which could have a material adverse impact on
our business, and as a result, on our results of operations, liquidity and cash
flows.
WE REMAIN DEPENDENT UPON ROCHE DIAGNOSTICS GMBH TO SUPPLY US WITH DRY-CHEMISTRY
TEST STRIPS AND IF WE FAIL TO SUCCESSFULLY RESOLVE AN ONGOING DISPUTE OVER
ROYALTY PAYMENTS RELATING TO PROPRIETARY OPTICS TECHNOLOGY, ROCHE MAY TERMINATE
OUR U.S. EXCLUSIVITY OR ELECT NOT TO RENEW ITS SUPPLY RELATIONSHIP WITH US.
Our agreement with Roche licenses us its proprietary optics technology, which we
utilized in our predecessor cholesterol monitor in exchange for an agreed-upon
royalty per device sold. However, we recognized no royalty obligation on sales
of our current consumer device, which we began selling in October 2002, as we
viewed the re-engineered optics technology used in this device as being
proprietary to us, and not Roche. In May 2003, Roche asserted in a letter to us
that the subject optics technology was, in their opinion, still subject to
royalties under our agreement. Given our dependency on Roche for its test strips
and in order to avoid jeopardizing such relationship, we responded in July 2003
with a letter proposing a substantially lower royalty on each device sold.
Negotiations are currently ongoing and we have recorded a liability in the
amount of $257,535, which represents the amount claimed by Roche, excluding
interest, and is the maximum amount we currently believe will be necessary to
resolve this matter based on the latest negotiations. We believe that any
incremental royalty obligation resulting from these negotiations would not be
material to our expected future consolidated financial statements, however if we
are unable to successfully resolve this dispute with Roche, Roche may elect not
to renew our license and supply agreement and we could lose our U.S.
exclusivity, which could have a material adverse impact on our business, and as
a result, on our results of operations, liquidity and cash flows.
BECAUSE WE ARE DEPENDENT UPON A FEW MAJOR CONSUMER RETAIL CHAINS FOR
SUBSTANTIALLY ALL OF OUR CURRENT SALES, THE LOSS OF ANY ONE OF THEM WOULD REDUCE
OUR REVENUES, LIQUIDITY AND PROFITABILITY.
Significant portions of our sales to date have been, and continue to be, made
through major consumer retail chains. We do not engage in long-term supply
contracts with these major customers and it is therefore possible that any of
our major customers could cease purchasing our products at any time. Any
disruption in our relationships with one or more of these consumer retail
chains, or any significant variance in the magnitude or the timing of orders
from any one of these chains, may have a material adverse impact on our
business, and as a result, on our results of operations, liquidity and cash
flows.
OUR CONTINUED RELIANCE ON LIMITED SERVICE PROVIDERS FOR THE OUTSOURCED ASSEMBLY
OF OUR PRODUCTS LEAVES US VULNERABLE TO LATE PRODUCT DELIVERY.
We outsource the assembly of our total cholesterol monitors to Servatron Inc.
and/or Opto Circuits (India) Limited. We engage these companies, on an as-needed
basis, under free-standing purchase orders to assemble our total cholesterol
monitors. Any disruption in our relationship with such assemblers would likely
have a material adverse impact on our business, and as a result, on our results
of operations, liquidity and cash flows.
5
OUR RELATIVE INEXPERIENCE WITH ADVERTISING MAY DELAY THE GROWTH OF MARKET
AWARENESS AND PENETRATION FOR OUR CURRENT PRODUCT.
As more extensively discussed elsewhere in this prospectus, we need substantial
additional advertising to promote our cholesterol monitor and yet, we, as a
company, have had limited experience with advertising due to our limited
financial resources. There can be no assurance that our future advertising
initiatives will be successful in building the necessary broad market awareness
for our cholesterol monitor.
IF WE ARE UNSUCCESSFUL IN PROTECTING OUR PATENTS, LICENSES, TRADEMARKS AND
TECHNOLOGIES, OR IF WE INFRINGE UPON THE RIGHTS OF OTHERS, WE COULD INCREASE
COMPETITION AND EXPOSE OURSELVES TO CLAIMS FOR DAMAGES.
Our future success remains dependent upon our ability to obtain, maintain and
enforce our materially important patents, licenses and trademarks, particularly
those critical to our product image and the various technologies employed in our
products. Although we remain actively engaged in protecting all such material
assets, both in the U.S. and abroad, there can be no assurance that these assets
will not be challenged by third parties, invalidated or designed around, or that
they will provide protection that has ongoing commercial significance. It must
also be noted that any related litigation will likely be costly and
time-consuming and there can be no assurance of a favorable outcome. There can
also be no assurance that our actions will not inadvertently infringe upon the
proprietary rights of others, thereby subjecting us to remedial or punitive
sanctions, or that we would be subsequently successful in procuring licensing
rights on commercially reasonable terms. Any failure on our part to successfully
protect these material assets, to avoid inadvertently infringing upon the
proprietary rights of others, or to successfully obtain sought after patents,
licenses or trademarks in the future, may have a material adverse impact on our
business, and as a result, on our results of operations, liquidity and cash
flows.
WE HAVE PLEDGED ALL OF OUR ASSETS AS SECURITY FOR THE REPAYMENT OF INDEBTEDNESS
AND IN THE EVENT WE FAIL TO PAY OUR SECURED DEBT AND OUR ASSETS ARE FORECLOSED
UPON, WE MAY HAVE INSUFFICIENT ASSETS TO PROVIDE FOR ANY PAYMENTS TO COMMON
STOCKHOLDERS.
We have pledged all of our assets, including substantially all of our
intellectual property, as security for borrowed funds in the current principal
amount of $2,869,740. In the event we fail to pay the secured debt as and when
due, the creditors will be entitled to foreclose on our assets to satisfy the
indebtedness to them. In the event of foreclosure by secured debt holders,
including upon our liquidation, the assets then remaining may be insufficient to
permit any distributions to common stockholders, in which event stockholders
would lose their entire investment in us.
WE EXPERIENCE COMPETITION FROM MANY PARTICIPANTS IN THE MEDICAL EQUIPMENT AND
HOME TESTING MARKET AND OUR ABILITY TO COMPETE IN THE MARKETPLACE REMAINS
UNCERTAIN.
We compete with firms that market inexpensive equivocal, non-instrument based,
disposable cholesterol screening tests for the personal-use market as well as
with firms that market more expensive quantitative, instrument-based, reusable
diagnostic measuring devices, such as our cholesterol monitors, for the personal
and professional-use markets. Equivocal, non-instrument-based, disposable
cholesterol screening tests primarily are designed and engineered to indicate to
a consumer user whether a high cholesterol situation exists, and if so, to
provide a crude indication of its likely magnitude. If an elevated cholesterol
level is indicated, the consumer is advised to timely consult a medical doctor
who, in turn, will seek a precise measurement of the individual's total
cholesterol from a quantitative, instrument-based, diagnostic device.
Quantitative, instrument-based, reusable diagnostic measuring devices primarily
are designed and engineered to provide clinically accurate measurements of one
or more components within blood for making risk assessments related to one or
more chronic diseases. These devices vary widely as to their scope,
capabilities, ease-of-use and price. As our total cholesterol monitors are
intended by us to be directly used by individuals and primary-care physicians,
they may also be viewed as indirectly competing with the traditional
patronization of medical laboratories for blood analysis services. Many of our
existing and potential competitors have substantially greater financial,
technical and other resources and larger, more established marketing, sales,
distribution and service organizations than we do. Since the scope,
capabilities, ease-of-use and price of screening tests and diagnostic devices
vary widely, the perceptions and preferences of consumers and medical
professionals may also vary widely. As such, there can be no assurance that our
cholesterol monitors, as currently configured, packaged and marketed, will be
able to successfully compete in the longer term with existing or future
competing products or services.
6
GOVERNMENT REGULATION MAY DELAY OR PREVENT US FROM SUCCESSFULLY MARKETING OUR
PRODUCTS.
We have previously obtained all federal and state regulatory clearances and
approvals we believe applicable to our current line of total cholesterol
monitors. However, many, if not all, of these clearances and approvals remain
subject to continual review, particularly by the United States Food and Drug
Administration. The subsequent claiming of jurisdiction by a federal or state
regulatory agency to which we have not previously obtained regulatory clearances
or approvals, or the subsequent discovery of an actual or perceived problem by
us or a regulatory authority, could give rise to certain marketing restrictions
or to a temporary or permanent withdrawal of one or more of our current products
from the market. We also remain subject to regulatory oversight, particularly
from the FDA, with respect to various other matters, including our manufacturing
practices, record-keeping and reporting. For instance, the FDA requires the
integration of their quality system into any facility it registers as a "medical
device facility". This quality system requirement encompasses product
development and manufacturing, customer service, incident reporting and labeling
control. Our assembly facilities, as well as the assembly facilities of our
outsourced assemblers, are registered with the FDA. As such, these assembly
facilities, and the production processes employed within them, remain subject to
the FDA's quality system requirement and ongoing periodic audits by the FDA. We
believe that all of our current products, as well as all of our related
marketing and assembly activities, including those of our assemblers, continue
to comply in all material respects with all applicable federal and state
regulations, however any failure by us or our agents to maintain material
compliance with existing or future regulations will likely have a material
adverse impact on our business, and as a result, on our results of operations,
liquidity and cash flows. Additionally, while we do not envision the near-term
submission of any potential future products for regulatory clearances or
approvals, it must be noted that the process of obtaining regulatory clearances
or approvals can be costly and time-consuming, and as such, there can be no
assurance that any sought after regulatory clearances or approvals will be
obtained. Also, while our marketing efforts for the foreseeable future will be
primarily directed towards U.S. markets, we anticipate eventually pursuing
overseas markets for which we understand regulatory clearances and approvals
vary widely from country to country. Any longer-term failure by us to obtain
sought after domestic or foreign regulatory clearances or approvals may have a
material adverse impact on our longer-term business, and as a result, our
results of operations, liquidity and cash flows.
ONGOING HEALTH CARE INITIATIVES MAY JEOPARDIZE THE DEMAND FOR OUR PRODUCTS, AS A
RESULT OF WHICH, OUR REVENUES AND PROFITABILITY WILL SUFFER.
The uncertainty of health care reform may have a material impact upon our
business. The income and profitability of medical device companies may be
affected by the efforts of government and third party payers to contain or
reduce the costs of health care through various means. In the United States,
there have been, and we expect that there will continue to be, a number of
federal, state and private proposals to control health care costs. These
proposals may contain measures intended to control public and private spending
on health care. If enacted, these proposals may result in a substantial
restructuring of the health care delivery system. Any significant changes in the
health care system could have a substantial impact over time on the manner in
which we conduct our business and may have a material adverse impact on our
business.
RECENT LEGISLATION DESIGNED TO PROTECT THE INTEGRITY AND CONFIDENTIALITY OF
PATIENT MEDICAL RECORDS MAY INCREASE THE COSTS ASSOCIATED WITH DELIVERY OF OUR
PRODUCTS AND, ACCORDINGLY, OUR PROFIT MARGINS MAY DECREASE.
Federal and state laws relating to confidentiality of patient medical records
could limit the use of our product capability to store and utilize medical
information. The Health Insurance Portability and Accountability Act of 1996,
also known as HIPAA, mandates the adoption of national standards for
transmission of certain types of medical information and the data elements used
in such transmissions to insure the integrity and confidentiality of such
information. The U.S. Secretary of Health and Human Services has promulgated
regulations to protect the privacy of electronically transmitted or maintained,
individually identifiable health information. We believe that our products will
enable compliance with the regulations under HIPAA adopting standards for
electronic healthcare transmissions. However, there can be no assurances that we
will be able to comply with the regulations without altering our products and we
may be required to incur additional expenses in order to comply with these
requirements. Further, some state laws could restrict the ability to transfer
patient information gathered from our product. Any such restrictions could
decrease the value of our applications to our customers, which could have a
material adverse impact on our business, and as a result, on our results of
operations, liquidity and cash flows.
7
THE LACK OF MEDICARE OR OTHER THIRD-PARTY INSURANCE REIMBURSEMENT FOR OUR
PRODUCTS MAY DECREASE THE DEMAND FOR OUR PRODUCTS AND ADVERSELY AFFECT SALES.
Currently, our products are not covered by the reimbursement policies of
Medicare or other third-party insurers. We understand that Congress is favorably
considering reimbursement under Medicare for professional screening of
cholesterol levels in seniors. However, there is no assurance that Medicare or
other third-party insurers will ever provide reimbursement for home cholesterol
monitoring by seniors or others. The lack of Medicare or other third-party
insurance reimbursement for our cholesterol monitors may reduce the demand for
our products, thereby adversely affecting our revenues.
AS A MEDICAL DEVICE MANUFACTURER, WE ARE PRONE TO PRODUCT LIABILITY CLAIMS AND
IF A CLAIM AGAINST US EXCEEDS THE LIMITS OF OUR INSURANCE COVERAGE OR COVERAGE
IS OTHERWISE DENIED, WE MAY BE FACED WITH A JUDGMENT THAT COULD JEOPARDIZE OUR
EXISTENCE.
The marketing of medical diagnostic devices, such as our total cholesterol
monitors, subjects us to the risk of product liability claims. Although we
follow certain quality assurance policies and procedures in the procuring of
components and assembling of our total cholesterol monitors, these precautions
may not insulate us from liability claims. Moreover, while we maintain product
liability insurance, this insurance is expensive and is subject to various
exclusions and limitations. There can be no assurance that our policies and
procedures will prevent us from being subjected to product liability claims or
that the scope and amount of our in force liability insurance coverage will be
sufficient to prevent a material adverse impact on our business, and as a
result, on our results of operations, liquidity and cash flows.
IT IS NOT POSSIBLE TO FORESEE ALL RISKS THAT MAY AFFECT US. MOREOVER, WE CANNOT
PREDICT WHETHER WE WILL SUCCESSFULLY EFFECTUATE OUR CURRENT BUSINESS PLAN. EACH
PROSPECTIVE PURCHASER IS ENCOURAGED TO CAREFULLY ANALYZE THE RISKS AND MERITS OF
AN INVESTMENT IN OUR SECURITIES AND SHOULD CONSIDER, WHEN MAKING SUCH ANALYSIS,
AMONG OTHERS, THE RISK FACTORS DISCUSSED ABOVE.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares by the selling
stockholders.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since October 31, 2003, our common shares have been traded on the
Over-the-Counter Bulletin Board under the symbol "LFTC". From October 10, 2000
until October 30, 2003, our common shares were traded on the American Stock
Exchange under the ticker symbol "KFL". As of March 4, 2005, we had
approximately 8,100 stockholders of record.
The following table sets forth, for the fiscal quarters indicated, the high and
low closing prices for our common stock as reported by the AMEX and, commencing
October 31, 2003, by the Over-the-Counter Bulletin Board. Over-the-counter
quotations reflect inter-dealer prices without retail mark-up, mark-down or
commissions, and may not represent actual transactions.
HIGH LOW
---- ---
Fiscal 2005:
First Quarter.......................... $0.04 $0.02
Second Quarter......................... $0.04 $0.02
Fiscal 2004:
First Quarter.......................... $0.26 $0.13
Second Quarter......................... $0.18 $0.10
Third Quarter.......................... $0.13 $0.05
Fourth Quarter......................... $0.05 $0.03
Fiscal 2003:
Third Quarter.......................... $0.25 $0.11
Fourth Quarter......................... $0.31 $0.10
8
On March 4, 2005, the high and low prices for our common stock as reported by
the Over-the-Counter Bulletin Board were $0.029 and $0.026, respectively.
DIVIDEND POLICY
Our Board of Directors has not declared or paid any cash dividends since our
inception. As the Board of Directors' current policy is to retain any and all
earnings to fund our ongoing operations and growth, it does not anticipate
declaring or paying any cash dividends for the foreseeable future. We are
currently restricted under Nevada corporate law from declaring any cash
dividends due to our current working capital and stockholders' deficits.
We have never paid any dividends on our common stock. We do not anticipate
paying any cash dividends in the foreseeable future because:
o we have experienced losses since inception;
o we have significant capital requirements in the future; and
o we presently intend to retain future earnings, if any, to finance the
expansion of our business.
Future dividend policy will depend on:
o our earnings, if any;
o capital requirements;
o expansion plans;
o financial condition; and
o other relevant factors.
The resale of our securities not covered in this prospectus is subject to Rule
144. Under Rule 144, if certain conditions are satisfied, a person (including
any of our affiliates) who has beneficially owned restricted shares of common
stock for at least one year is entitled to sell within any three-month period a
number of shares up to the greater of 1% of the total number of outstanding
shares of common stock, or if the common stock is quoted on Nasdaq, the average
weekly trading volume during the four calendar weeks preceding the sale. A
person who has not been an affiliate of ours for at least three months
immediately preceding the sale, and who has beneficially owned the shares of
common stock for at least two years, is entitled to sell the shares under Rule
144 without regard to any of the volume limitations described above. As of the
date of this prospectus, approximately 3,500,000 shares of our common stock are
eligible for resale under Rule 144. An additional 59,600,000 common shares not
covered by a current registration statement have been reserved subject to
issuance upon conversion of convertible notes payable and, upon issuance, will
be eligible for resale under Rule 144.
The Securities and Exchange Commission has adopted regulations which generally
define a "penny stock" to be any equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. Currently, our common stock
is a "penny stock". A penny stock is subject to rules that impose additional
sales practice requirements on broker/dealers who sell these securities to
persons other than established customers and accredited investors. For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of these securities. In addition he
must receive the purchaser's written consent to the transaction prior to the
purchase. He must also provide certain written disclosures to the purchaser.
Consequently, the "penny stock" rules may restrict the ability of broker/dealers
to sell our securities, and may negatively affect the ability of holders of
shares of our common stock to resell them.
FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that generally can be
identified by the use of words such as "believe," "expect," "should," intend,"
"may," "anticipate," "likely," "contingent," "could," "estimate," or other
future-oriented statements. 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 products, realize improved gross margins, and timely
obtain required financing. Forward-looking statements involve risks and
uncertainties that could cause actual results to differ from anticipated
results. 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, those described elsewhere
in this prospectus under the caption "Risk Factors". Readers are urged to
carefully review and consider the various disclosures made by us in this
prospectus.
9
BUSINESS
AN 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 cholesterol
monitor"). Our cholesterol monitor 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
cholesterol monitor 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 cholesterol monitor to the retail marketplace
in October 2002. It is the successor to a cholesterol monitor that we first
introduced in January 2001.
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 significant marketing activities
critical to building broad market awareness of our cholesterol monitor has been
limited due to financial constraints. However, during our fiscal year ended June
30, 2004 we were successful in obtaining a portion of the long-term financing we
sought to allow us to begin conducting marketing programs. We continue to
require additional long-term financing to allow us to continue conducting
marketing activities.
CHOLESTEROL MONITOR
Our cholesterol monitor has a suggested retail price of $119.95, but is
routinely offered by certain of our more prominent retail store chain customers
at a price below the psychologically important $100.00 price point for many
consumers.
Our cholesterol monitor:
o Provides a quantified total cholesterol reading from a single drop of
blood within three minutes without any prior fasting,
o Meets the measurement precision guidelines set forth by the National
Cholesterol Education Program ("NCEP"), a government agency created
under the auspices of the National Heart, Lung and Blood Institute
(NHLBI) to contribute to reducing illness and death from coronary
heart disease by reducing the percent of Americans with high blood
cholesterol,
o Classifies individual test results using the NCEP's recommended and
defined risk categories of "desirable," "borderline" and "high" for
total cholesterol in adults, resulting in ease of use and
understanding by consumers,
o Utilizes inexpensive, disposable dry-chemistry test strips,
o Computes an individual's rolling average total cholesterol level based
on their six most recent test results,
o Allows for the secure storage, via encryption, of up to 200
chronologically-dated test results onto an optional smart card, which
is inserted into an existing slot on the monitor, for subsequent
retrieval and longer-term trend analysis,
o Is compact, lightweight and portable with dimensions of approximately
5.50" x 4.00" x 1.75" and a weight of approximately one pound,
o Is warranted for one year from defects in materials or workmanship,
and
o Incorporates our Health Risk Assessment (HRA), which displays a full
Health Risk Assessment after taking a three-minute total cholesterol
test and inputting eight additional risk factors including gender,
age, height, weight, diabetic status, smoker/non-smoker, systolic and
diastolic blood pressure, and HDL break-out from a recent lipid
profile.
Our "Plus-Edition" Cholesterol Monitor, which has a suggested retail price of
$129.95, includes a cholesterol monitor, a Data Concern" Personal Health
Card(R), a CD-ROM software program, a serial cable and an extended three-year
warranty. By connecting our cholesterol monitor to a personal computer via the
serial cable and installing our software, an individual can compute a
longer-term rolling average of their historical test results and convert such
into detailed, easy-to-understand printable charts. We believe that these
value-added analytical features enable an individual to more readily ascertain
and track the collective benefits being derived over an extended period of time
from diet modification, an exercise regimen and drug therapy, thereby further
reinforcing their ongoing adherence to an effective cholesterol-lowering
program.
10
RELATED SUPPLIES AND ACCESSORIES
We offer the following supplies and accessories for use with our cholesterol
monitor:
o TEST KIT REFILLS. Our test kit refills, which include six individually
packaged test packets, have a suggested retail price of $19.95. Each
single-use, disposable testing packet contains a dry-chemistry total
cholesterol test strip, a sterile lancet, an alcohol swab, and a
band-aid.
o "DATA CONCERN" PERSONAL HEALTH CARD(R). Our "Data Concern" Personal
Health Card(R) is individually packaged and has a suggested retail
price of $19.95. The Personal Health Card(R) stores up to 200
cholesterol test results for subsequent retrieval and longer-term
trend analysis.
CONSUMER MARKETPLACE
The American Heart Association ("AHA"), as well as the National Heart, Lung and
Blood Institute's ("NHLBI") renowned Framingham Heart Study ("FHS"), have
identified elevated total cholesterol as a primary contributor to coronary heart
disease ("CHD") and other forms of cardiovascular disease ("CVD"). In its "Heart
Disease and Stroke Statistics -2005 Update," the AHA estimates the following for
U.S. adults based on the most recent available data:
o CHD is the single largest killer of American men and women,
o 38 million adults have "high" total cholesterol levels (240 +
milligrams per deciliter),
o 69 million adults have "borderline-high" total cholesterol levels (200
to 239 milligrams per deciliter),
o 50% of the men and 64% of the women who die suddenly from CHD had no
previous symptoms,
o The lifetime risk of developing CHD after age 40 is 49% for men and
32% for women,
o 700,000 adults are expected to have a new coronary attack during 2005,
o 500,000 adults are expected to have a recurrent coronary attack during
2005,
o $142.1 billion of CHD-related annual costs (including lost
productivity and morbidity) are expected in 2005.
Additionally, the NHLBI established the National Cholesterol Education Program
("NCEP") in 1985 to educate consumers and medical professionals about the
importance of knowing one's total cholesterol level and to establish guidelines
for the detection, evaluation and treatment of elevated total cholesterol in
adults. The NCEP recommends that all adults obtain a complete lipoprotein
profile (i.e., total cholesterol, LDL "bad" cholesterol, HDL "good" cholesterol
and triglycerides), which typically is obtained through a general physician, at
least once every five years. Once an individual is diagnosed with elevated total
cholesterol and prescribed a cholesterol-lowering drug, the NCEP recommends
subsequent testing as frequently as every six weeks. Our cholesterol monitor
provides a measurement of total cholesterol, which is effective in monitoring
cholesterol following a diagnosis of high cholesterol by a physician. Our
monitor is typically used to monitor elevated cholesterol levels through
recommended subsequent testing performed every six weeks.
SALES AND MARKETING EFFORTS
Our ability to conduct significant marketing activities critical to building
broad market awareness of our cholesterol monitor has historically been severely
limited due to financial constraints. As a result, prior to fiscal 2004, our
marketing efforts were limited to using our current base of critical employees
to sustain, cultivate and build upon our existing relationships with national
and regional drug and pharmacy-featuring retail store chains, and, to a lesser
extent, specialty catalog and internet-based direct marketers and independent
pharmacies. During fiscal 2003, our specific marketing activities principally
consisted of periodically participating in cooperative advertising campaigns
with certain of our existing retail customers, providing device brochures and
discount coupons to pharmacies for subsequent distribution to their customers,
occasionally participating in trade shows, and conducting telephonic and
in-person presentations to certain potential customers. In September 2003, we
secured a portion of the long-term financing we sought to enable us to move
forward with our marketing plan and, in October 2003 we began a targeted radio
advertising campaign. In February 2004, we secured additional financing allowing
us to continue implementing our targeted radio advertising campaign. Due to cash
flow constraints we ceased placing media ads in mid-September 2004, and have
been advised by the advertising agent that our outstanding obligation for the
advertising campaign is $300,000, which has been recorded as a liability on our
consolidated financial statements. Also in January 2005, we began a limited
television marketing campaign. Any future marketing campaigns will be highly
dependent upon our ability to obtain additional financing.
We recently developed a continuing education program, which was introduced in
the first quarter of fiscal 2005. The purpose of the continuing education
program is to broaden awareness and educate pharmacists on the benefits of our
product. In addition, we developed a consumer point-of-sale awareness program
for those patients purchasing certain cholesterol-lowering prescriptions at a
major retailer, which began in May 2004. Finally, we have attempted to promote
our corporate web sites (www.lifestreamtech.com, www.knowitforlife.com and
www.testyourcholesterol.com) where we provide, among other things, educational
information regarding cholesterol, online ordering of products and a retail
11
store locator. The information on our websites is not incorporated into this
prospectus.
We continue to pursue further penetration into the U.S. retail marketplace with
our cholesterol monitor by establishing additional relationships with similar
retail organizations. Over the long term, we aspire to add high-volume,
mass-merchandising retail chains in the United States and Canada. Currently we
also sell our professional cholesterol monitor to one customer in the United
Kingdom under the European Community's ("EC") directive for IVDD devices whereby
we provide a self-certification declaration of conformance attesting to our
quality control procedures meeting the standards of the EC's ISO 9001 standards.
Our sales outside of the United States approximate $25,000 per fiscal year for
which we conduct no marketing activities.
SALES CONCENTRATIONS WITH MAJOR CUSTOMERS
Our past sales have been, and we currently expect that our sales for the
foreseeable future will be, dependent upon a few major customers. CVS
Distribution, Eckerd Corporation and Rite Aid accounted for 21%, 12%, and 10%,
respectively, of our consolidated sales during fiscal 2004. Rite Aid, CVS
Distribution, and Eckerd accounted for 24%, 23%, and 7%, respectively, of our
consolidated sales during fiscal 2003. We do not engage in long-term supply
contracts with these major customers and it is therefore possible that any of
our major customers could cease purchasing our products at any time, which would
have a material adverse impact on our business, and as a result, on our results
of operations, liquidity and cash flows. During the first quarter of fiscal
2005, we contacted a major customer regarding non-payment of certain invoices
due to us and were notified that this major customer did not intend to pay the
invoices until their in-house inventory levels of our products reduced. We
ceased any future shipments to this customer, as the customer had continued to
reorder our products. Upon further discussions with this major customer we
ceased our supply relationship. We have fully reserved for all remaining unpaid
invoices due from this customer as of December 31, 2004.
We primarily attribute our historical sales concentrations to our limited
revenue base, our focus on establishing relationships with national and regional
drug and pharmacy-featuring grocery store and retail chains, and our inability,
given financial constraints, to conduct ongoing marketing activities critical to
the establishment of a broad retail customer base. See "Management's Discussion
and Analysis or Plan of Operation - Consolidated Results of Operations", "-
Consolidated Liquidity and Capital Resources" and "- Risks and Uncertainties"
for further details.
PRINCIPAL VENDORS AND RELATED ASSEMBLY, PACKAGING AND DISTRIBUTION OPERATIONS
Our current principal vendors are as follows:
o ROCHE DIAGNOSTICS GMBH. We are party to a licensing and manufacturing
agreement with Roche Diagnostics GmbH (Roche) of Mannheim, Germany.
The initial term of the agreement expired on December 31, 2004,
however, absent default by either party, the agreement automatically
renews for additional one year terms unless either party gives 12
months written notice of termination. Neither party has given written
notice of termination as of the date of this prospectus and,
accordingly, on December 31, 2004, the agreement automatically renewed
for an additional one year term. However, negotiations are ongoing
regarding renewal of the agreement. Under the agreement, we procure
the following:
Disposable, Dry-Chemistry Test Strips. Our agreement with Roche
currently grants us the exclusive right to market and distribute its
proprietary test strips in the U.S. We are required to purchase our
supply of dry-chemistry test strips utilized in our cholesterol
monitors exclusively from Roche. As we did not meet the calendar 2002
minimum sales threshold set forth in the agreement, Roche began
prospectively assessing us a 10% price surcharge on purchases in
exchange for agreeing to maintain our U.S. exclusivity. This surcharge
was based on our revised sales forecasts for the duration of the
agreement.
Optics Technology. Our agreement with Roche licenses us its
proprietary optics technology, which we utilized in our predecessor
cholesterol monitor in exchange for an agreed-upon royalty per device
sold. However, we recognized no royalty obligation on sales of our
current consumer device, which we began selling in October 2002, as we
viewed the re-engineered optics technology used in this device as
being proprietary to us, and not Roche. In May 2003, Roche asserted in
a letter to us that the subject optics technology was, in their
opinion, still subject to royalties under our agreement. Given our
continuing material dependency on Roche for its test strips and in
order to avoid jeopardizing such relationship, we responded in July
2003 with a letter proposing a substantially lower royalty on each
device sold. Negotiations are currently ongoing and we have recorded a
liability in the amount of $257,535, representing the amount invoiced
by Roche, excluding interest, which is the maximum amount we currently
believe is necessary to resolve this matter based on the latest
negotiations. We believe that any incremental royalty obligation
resulting from these negotiations would not be material to our
consolidated financial statements.
12
o SERVATRON INC. Our cholesterol monitor and related calibration keys
are being assembled, on an individual purchase order basis, by
Servatron Inc. in Spokane, Washington.
o OPTO CIRCUITS (INDIA) LIMITED. In October 2003, we began outsourcing a
portion of our cholesterol monitor assembly, on an individual purchase
order basis, to Opto Circuits (India) Limited in Bangalor, India.
Although we are susceptible to short-term disruptions that could materially
adversely impact our business, financial condition, results of operations and
cash flows, we believe that the services currently procured from Servatron and
Opto Circuits could be obtained from a number of companies available to us in
the marketplace. We also believe there is a suitable replacement to Roche's
dry-chemistry total cholesterol test strip currently available to us in the
marketplace, however we are precluded from procuring test strips from any other
source through December 2005 due to our current agreement with Roche. Should we
ever lose our U.S. exclusivity for Roche's total cholesterol dry-chemistry test
strips, our cholesterol monitor could become subject to more direct competition,
including potential direct competition from Roche itself.
Our facilities, as well as the applicable facilities of Servatron, Opto Circuits
and Roche, meet the FDA's Quality System Requirement. All assembled and
individually packaged monitors and bulk packaged calibration keys from Servatron
and Opto Circuits, as well as all bulk packaged test strips from Roche, are
transferred from their respective facilities to our facility in Post Falls,
Idaho for random quality assurance audits, warehousing, and shipping to
customers. We believe that our production facilities and capabilities, as well
as those of Servatron, Opto Circuits and Roche, will be sufficient through at
least fiscal 2005. We have utilized, and plan to continue to utilize, common
carriers for all of our product shipping needs.
PRODUCT RESEARCH AND DEVELOPMENT
We incurred product research and development expenses of $57,510 and $296,963 in
fiscal 2004 and 2003, respectively, principally in connection with the
re-engineering activities associated with developing and refining our current
cholesterol monitor. As these activities were substantially completed as of our
fiscal 2003 second quarter ended December 31, 2002, we have subsequently
incurred, and currently expect to continue to incur, nominal product research
and development expenditures for the foreseeable future.
In view of financial constraints, we have suspended active development,
manufacturing and marketing efforts relating to products other than our
cholesterol monitors and related products and accessories. Such product
initiatives primarily related to the development of our professional cholesterol
monitor and a software product called Privalink that was intended to enable
interconnectivity between various medical diagnostic devices and the
consolidated secured storage, via encryption, of related test results and other
personal and health-related data onto a smart card and via the internet into a
remotely maintained and password accessible database. We will continue to fill
any dry-chemistry test strip orders passively received for our professional
devices on an ongoing basis, as these strips are the same strips utilized by our
cholesterol monitor. As our future financial condition permits, we will consider
whether the recommencement of activities relating to other product development
is warranted.
INTELLECTUAL PROPERTY RIGHTS
We are dedicated to obtaining, maintaining and enforcing the intellectual
property rights covering our corporate image and proprietary technology, both in
the U.S. and abroad. Accordingly, we are actively engaged in creating and
protecting our copyright, trademark, patent, and trade secret assets.
We own various copyright registrations primarily related to the software used by
our current and predecessor cholesterol monitors and our "Data Concern" Personal
Health Smart Card. We own various U.S. trademark registrations primarily related
to the "Lifestream" names and logo designs, as well as the trade names of our
various products such as "Cholestron", "The Data Concern", and "Personal Health
Card". We also own pending U.S. trademark applications for the following
trademarks: Lifestream, Lifestream Technologies (and logo design), Know It for
Life, Privalink, Personal Data Key, Personal Document Key, Personal Financial
Key, and Personal Health Key. Although we believe that all of these marks are
entitled to registration on the Principal Register, the outcome of the
application process for trademark registration cannot be predicted with
certainty.
We own the following material U.S. patents:
o U.S. Patent No. D437,057 which claims the ornamental appearance of our
discontinued professional device. The term of this patent is fourteen
years expiring on January 30, 2015.
o U.S. Patent No. D459,811 which claims the ornamental appearance of our
predecessor consumer device. The term of this patent is fourteen years
expiring on July 2, 2016.
13
o U.S. Patent No. 5,135,716 which claims HDL test strip technology. The
term of this patent is twenty years expiring on August 4, 2012. In
November 2004, we settled a lawsuit relating to this patent, and in
connection with the settlement, we granted the defendant a license to
utilize this patent.
o U.S. Patent No. 6,602,469 which claims aspects of our current consumer
device and operational aspects of our discontinued professional
device, including the display of the user's cardiac age based on the
test result and diagnostic information entered directly into the
device, such as the user's age, weight, personal history of heart
disease, family history of heart disease and other relevant factors.
This patent also covers a test strip validation technique that allows
the device to activate only for authorized test strips used prior to
the test strip's expiration date. In addition, the patent covers the
secure network-based health assessment and medical records maintenance
system that receives medical information from the health monitoring
and diagnostic device and stores the information in a secure medical
records maintenance system. The term of this patent is twenty years
expiring on August 5, 2023.
We also own several United States divisional patent applications claiming
additional inventions disclosed in the application that matured into U.S. Patent
No. 6,602,469. This patent is the subject of an Intellectual Property and
Capital Interest Agreement more fully discussed elsewhere in this prospectus
under "Business - Secured Interactive Technologies, Inc."
In addition, we also have intentional patent applications pending in Canada and
the European Patent Office.
SECURED INTERACTIVE TECHNOLOGIES, INC.
Our subsidiary, Secured Interactive Technologies, Inc., is the owner of a patent
and related technology covering secured data acquisition, transmission, storage
and analysis systems.. For financial reasons, this patent has not matured into
revenue-producing technology and we do not currently have the resources to
develop this technology.
Effective February 1, 2005, we entered into an Intellectual Property and Capital
Interest Agreement ("Agreement") with an unrelated third party, which provides
for the future assignment of certain of these patent applications to the
purchaser. Once the purchaser completes its first round of financing, the
intellectual property will be transferred to the purchaser and, we will receive
as consideration, convertible preferred stock of the purchaser, representing a
49% equity ownership. Upon completion of the purchaser's second round of
financing, a portion of our preferred ownership in the purchaser will convert
into common shares of the purchaser and we will become obligated to reduce our
equity ownership in the purchaser to 30% through sales of our preferred stock in
the purchaser to one or more as yet unidentified third parties. Such sales, if
made, will result in an infusion of cash into Lifestream, the amount of which
cannot be determined at this time. If the purchaser is unable to complete its
first round of financing by July 31, 2005, the Agreement will automatically
terminate unless extended by both parties.
In connection with the assignment, we agreed to allow our president and chief
executive officer, Christopher Maus, to assist the purchaser in the initial
phases of product development and rollout. On March 1, 2005, Mr. Maus entered
into an employment agreement with the purchaser whereby Mr. Maus will serve as
Chairman of the Board and consultant to the purchaser for a period of two years
ending March 1, 2007. In return for these services Mr. Maus will receive annual
compensation of $100,000 and a 10-year option to purchase up to 500,000 common
shares of the purchaser, exercisable at $0.001 per share vesting periodically
upon reaching certain milestones as defined in the agreement.
Mr. Maus and Lifestream believe that Mr. Maus will continue to devote the
majority of his time to Lifestream, and no adjustment is being made in Mr. Maus'
compensation that he is currently receiving from us, for which Mr. Maus had
previously accepted a reduction in his compensation program from us.
See "Business -Corporate History" for further details regarding our past
products and product initiatives.
COMPETITION
We currently compete, directly or indirectly, with the following products and
representative firms:
o EQUIVOCAL, NON-INSTRUMENT-BASED, SINGLE-USE, DISPOSABLE TOTAL
CHOLESTEROL SCREENING TESTS. These inexpensive screening tests, which
are marketed to consumers and medical professionals, employ very basic
color metric technology. An individual, usually without any
significant advance preparation such as fasting, deposits one or more
drops of blood onto a test card, waits several minutes and then
visually interprets the resulting color card reaction to an
accompanying table that broadly converts various color shades into
approximate levels of total cholesterol. If an elevated total
cholesterol level is indicated, the accompanying instructions
typically advise the individual to timely consult a medical doctor.
14
o QUANTITATIVE, INSTRUMENT-BASED, REUSABLE DIAGNOSTIC MEASURING DEVICES.
These diagnostic measuring devices vary widely as to their scope,
capabilities and ease-of-use and are marketed to either consumers or
medical professionals. Prices range from approximately one hundred
dollars for basic cholesterol monitors, such as ours, to several
thousand dollars for more sophisticated devices, such as bench-top
analyzers for high-volume laboratories. Basic devices typically
require little or no advance preparation (e.g. fasting, etc.) and
utilize a single blood drop deposited onto a disposable, single-use,
dry chemistry test strip that is formulated for the specific blood
component being measured. Certain devices, such as ours, are currently
dedicated to measuring a single blood component while others are
capable of measuring a number of individual blood components through
separately conducted tests. More sophisticated devices typically
require prior fasting and utilize a vile of blood deposited into a
test cassette for the simultaneous measurement of multiple blood
components. All such devices are designed and engineered to provide
clinically accurate quantified measurements within several minutes.
Firms marketing basic devices would include, but not necessary are
limited to, us and Polymer Technology Systems, Inc. ("Polymer"). Firms
marketing more sophisticated devices would include, but not necessary
are limited to, Cholestech Corp.
We continue to emphasize the procurement of shelf space among national and
regional drug and pharmacy-featuring grocery store chains. To a significantly
lesser extent, we seek a retail presence with specialty catalog and
internet-based direct marketers and independent pharmacies. Over the longer
term, we aspire to add high-volume, mass-merchandising retail chains.
Within the consumer retail store chains and specialty catalog-based direct
marketers that currently carry our cholesterol monitor, we have experienced some
indirect competition from screening tests, but little, if any, direct
competition from measuring devices. With respect to consumer retail store chains
that currently do not carry our cholesterol monitor and with which we aspire to
ultimately establish a vendor relationship, the competitive presence appears at
this time to be substantially the same. In the internet-based, e-commerce
marketplace, we have continued to primarily note the direct competitive presence
of Polymer's devices.
Based on our current knowledge of potentially competitive products in the
consumer marketplace, Polymer's CardioChek Analyzer is our primary competitor.
The CardioCheck Analyzer is capable of simultaneous measuring, and providing
individually quantified measures of, total cholesterol, HDL cholesterol, LDL
cholesterol and triglycerides from a single drop of blood deposited onto a
lipid-panel. Polymer additionally represents that its CardioChek Analyzer
contains updated analysis software, that is upgradeable to support future
dry-chemistry test strips under development, is more user-friendly to operate,
and is more trouble-free, including being more tolerant of operator errors. The
CardioChek appears to have a suggested retail price of $169.95.
We believe that our primary competitive advantage at this time is the retail
shelf space presence that we have obtained with certain leading national drug
and pharmacy-featuring grocery store chains. We believe, although there can be
no assurance of such, that these retailers will be reluctant for the foreseeable
future to carry a directly competing device given that the market for consumer
cholesterol devices is still in its early formative stages. From a device
standpoint, we currently believe that the primary competitive advantages of our
cholesterol monitor at this time, as compared to Polymer's devices, are that,
for an individual who is merely concerned with obtaining a clinically accurate
quantified measurement of their total cholesterol level, it has a lower
suggested retail price, often being promoted by certain of our more prominent
existing retail chain customers below the psychological important one hundred
dollar price point, and has superior historical test storage capabilities.
However, to the extent that an individual is interested in additionally
obtaining quantified measurements of total cholesterol's sub-components or other
blood components, we currently are at a technological disadvantage.
Many of the firms that we currently directly or indirectly compete against in
the consumer marketplace have substantially greater financial, technical,
research and other resources, and larger, more established marketing, sales,
distribution and service organizations, than we do. As such, there can be no
assurance that we will be able to maintain our competitive position in the
future.
GOVERNMENTAL REGULATORY ENVIRONMENT
Our developing and marketing of total cholesterol monitoring devices subjects us
to the oversight of the United States Food and Drug Administration (FDA) and
similar governmental regulatory agencies abroad. The FDA Act provides for
comprehensive regulation of all stages of development, manufacturing,
distribution and promotion of "medical devices" in the U.S. Products intended
for use in the collection, preparation, and examination of specimens taken from
the human body, such as our cholesterol monitor, are considered a subcategory of
"medical devices." The same regulations apply to consumer diagnostic medical
devices as apply to professional diagnostic medical devices.
There are two primary routes by which to bring a medical device to market in the
U.S.: the Pre-Market Approval Application and the 510(k) Pre-Market
Notification. The Pre-Market Approval Application requires a comprehensive
15
review of specified pre-clinical and clinical data, which results in a finding
as to whether a device is safe and effective for its designated use. The 510(k)
Notification permits marketing upon a demonstration to the FDA's satisfaction
that the device is substantially equivalent to an approved device already in
commercial distribution. Generally, the clearance process can require extended
periods of testing, both prior to and after submissions to the FDA. FDA review
of submissions by a company can entail significant amounts of time and money.
There can be no assurance that the FDA or any similar governmental regulatory
agency abroad will grant market clearance for any particular medical device.
The FDA uses a classification system, i.e., Class I, II or III, to determine the
level of regulation a product will require and the approval process that applies
to the device. The classification system is based on the "potential risk to the
user" with Class I being "low risk," Class II being "moderate risk" and Class
III being "high risk." Because all new products to the marketplace after 1976
are automatically classified as Class III devices (unless otherwise reclassified
by the FDA) in any 510(k) Notification, the applicant must, among other things,
demonstrate that the product to be marketed is "substantially equivalent" to
another legally marketed device in performance, design, safety and intended use
to avoid the more rigorous approval process associated with Class III devices.
The FDA also requires the integration of their quality system into any facility
it registers as a "medical device facility". The quality system requirement
encompasses product development and manufacturing, customer service, incident
reporting and labeling control. Our facilities, as well as the applicable
facilities of Servatron, Opto Circuits and Roche, are registered with the FDA
and meet the quality system requirements.
In October 1998, we received the FDA's order of "substantial equivalence" to
Boehringer Mannheim's Accu-Trend Instant Plus home diabetes test, a Class II
instrument already in commercial distribution and received market clearance of
our professional cholesterol monitor.
In February 1999, the Centers for Disease Control and Prevention, or CDC,
granted our professional monitor for adults a waiver from the requirements of
the Clinical Lab Improvement Amendments of 1988, or CLIA. A waiver of the
Amendments is granted by the CDC to products that meet strict ease-of-use,
accuracy and precision guidelines. The significance of the Amendment-waiver was
that it allowed us to market our professional monitor for adults to healthcare
professionals in medical clinics, hospitals, pharmacies and other settings
without meeting extensive CDC regulatory requirements.
In February 2000, we submitted 510(k) Notification for our consumer cholesterol
monitor and received the FDA's market clearance for such device on July 25,
2000.
In March 2000, the American Medical Association granted a revision to their
Conventional Procedural Code to include a total cholesterol finger stick test,
regardless of the instrument type or sample collection. This revision was
granted on the basis of our submission to the Association's Conventional
Procedural Code Editorial Panel proving widespread use and medical utility. As a
result, a total cholesterol test performed with our device is cleared for public
and private health plan reimbursements under the Conventional Procedural Code
coding system.
All products manufactured or distributed by us pursuant to FDA clearances or
approvals remain subject to pervasive and continuing regulation by the FDA and
certain state agencies, including record keeping requirements and reporting of
adverse experience with the use of the device. In addition, labeling and
promotional activities remain subject to scrutiny by the FDA.
Currently, our products are not covered by the reimbursement policies of
Medicare or other third-party insurers. We understand that Congress is favorably
considering reimbursement under Medicare for professional screening of
cholesterol levels in seniors. However, there is no assurance that Medicare or
other third-party insurers will ever provide reimbursement for home cholesterol
monitoring by seniors or others. The lack of Medicare or other third-party
insurance reimbursement for our cholesterol monitors may reduce the demand for
our products, thereby adversely affecting our revenues.
We have no material environmental compliance requirements and we have not
incurred any material costs in connection with such.
CORPORATE HISTORY
1989 Lifestream Development Partners was organized by two investors as
a general partnership for the purpose of developing a total
cholesterol measuring device.
June 1992 The principals of Lifestream Development Partners organized
Lifestream Diagnostics, Inc. as a Nevada corporation.
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August 1992 Lifestream Development Partners transferred its net assets
to Lifestream Diagnostics in exchange for common shares.
February 1994 Lifestream Diagnostics completed a plan of legal
reorganization to become a public company whereby it executed an
exchange agreement with, and became a subsidiary of, an inactive
public shell company incorporated in Nevada. Concurrent with this
reorganization, the public shell company adopted our current
name, Lifestream Technologies, Inc., and our common shares began
trading on the Over-The-Counter Bulletin Board Market under the
ticker symbol "LFST."
June 1996 We acquired an initial 20% ownership interest in Secured
Interactive Technologies, Inc. with whom we had previously
established a development alliance to jointly create and promote
a software technology.
January 1999 We introduced our professional total cholesterol monitoring
device for adults to the medical community, commenced limited
revenue-generating operations related thereto and ceased being a
development-stage company. However, shortly thereafter, we
elected to redirect our limited operating and financial resources
into the development of an over-the-counter, total cholesterol
monitoring device for at-home use by adult consumers, for which
we envisioned, and continue to envision, substantially greater
revenue potential over the longer term.
September 1999 We acquired the remaining 80% ownership interest in Secured
Interactive by effectuating a merger whereby all of the remaining
outstanding common shares of Secured Interactive were exchanged
for shares of our common stock.
July 2000 We received the over-the-counter market clearance from the
FDA for our consumer cholesterol monitor thereby allowing us to
proceed with related production and marketing.
October 2000 Our common shares began trading on the American Stock
Exchange under the ticker symbol "KFL."
October 2003 Our common shares ceased trading on the American Stock
Exchange and began trading on the Over-the-Counter Bulletin Board
under the symbol "LFTC".
December 2003 Following receipt of approval from our stockholders, we
increased the number of shares of common stock we are authorized
to issue to 250 million shares.
April 2004 Following receipt of approval from our stockholders, we
increased the number of shares of common stock we are authorized
to issue to 750 million shares.
EMPLOYEES
Our full-time employees at December 31, 2004 and 2003, distributed among our
functional areas, were as follows:
DECEMBER 31, 2004 DECEMBER 31, 2003
Administration and Finance ................ 7 10*
Product Assembly, Testing and Packaging ... 8 8**
Sales, Marketing and Customer Service ..... 2 2
Information Technical Services ............ 1 1
-- --
Total Employees ....................... 18 21
-- --
- ----------
* Includes 1 part-time employee
** Includees 2 part-time employees
We currently engage our former Chief Information Technology on an as-needed
consulting basis.
17
None of our employees currently are parties to collective bargaining agreements.
We consider our employee relations overall to be satisfactory. See "Risks and
Uncertainties - We Are Dependent Upon Our Key Management Personnel", for details
regarding our continuing dependency on key management personnel.
We currently do not have, nor do we anticipate making, any investments in real
estate or related securities within the foreseeable future.
We believe our properties are in good condition, well-maintained and generally
suitable and adequate to carry on our business. We also believe that we maintain
sufficient insurance coverage on all of our real and personal property.
LEGAL PROCEEDINGS
We, 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.
PROPERTIES
All of our operations continue to be located in modern leased premises within
the Riverbend Commerce Park in Post Falls, Idaho, with the address of our
administrative corporate offices being 510 Clearwater Loop, Suite 101, Post
Falls, Idaho 83854. During fiscal 2003 we decreased the number of square feet
leased from 19,019 to 13,856. We currently operate under two separate leases
including 7,465 square feet of assembly, testing, packaging, warehousing and
shipping space, which expires October 31, 2005, and 6,391 of office space, which
expires May 31, 2005. We believe that suitable alternative lease space is
readily available to us at similar lease rates in proximity to our current
location should such become necessary or desirable.
We believe that our current physical facilities will be sufficient, absent any
unforeseen significant sales increase, to accommodate all of our business needs
through at least fiscal 2005.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
We market a proprietary over-the-counter, total cholesterol monitoring device
for at-home use by both health-conscious and at-risk consumers ("our cholesterol
monitor"). Our cholesterol monitor 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.").
Our revenue is derived from the sale of our cholesterol monitors, as well as
sales of the dry-chemistry test strips utilized in performing a total
cholesterol test with our cholesterol monitors. 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.
During the first half of fiscal 2005 we were successful in the following areas:
o Increased our net revenue 17% over the same period of the prior year
while maintaining personnel levels and decreasing administrative
costs;
o Successfully aired on a national shopping network with our product
being the best selling product in its category for the 24 hour period
in which it was presented;
o Continued to implement our targeted radio advertising campaign through
the middle of September, at which time all media ads were ceased due
to cash flow constraints;
o Developed a commercial for television broadcasting on a test basis
beginning in January 2005;
o Continued to support a large pharmaceutical company in the efforts to
bring cholesterol-lowering drugs over the counter, and
o Developed a second cholesterol monitor prototype for consideration in
bringing a new consumer product to the market.
Our primary focus continues to be to increase consumer awareness of the benefits
of our products though increased distribution, development of new products,
educating pharmacists, and the use of lower-cost marketing campaign tests while
18
seeking additional funding in order to continue conducting more significant
marketing activities.
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 flow, since our inception. As a result, we continued to have
significant working capital and stockholders' deficits including a substantial
accumulated deficit at June 30, 2004 and 2003. In recognition of such, our
independent registered public accountants included an explanatory paragraph in
their report on our consolidated financial statements for the fiscal years ended
June 30, 2004 and 2003, that expressed substantial doubt regarding our ability
to continue as a going concern.
We are addressing our ability to continue as a going concern, as well as our
sales, gross margins and operating expenses, by among other things, the
following:
o During our fiscal year ended June 30, 2004, we completed three private
placement offerings totaling $6,225,000 in unsecured convertible
debentures from which we received $5,244,592 in net cash proceeds;
o On November 8, 2004, our outstanding note payable with a financial
institution was assigned to a beneficial owner of approximately 9.99%
of our common stock as of December 31, 2004. The assignee amended the
terms of the note payable providing additional funding of $1.5 million
with no payments due for 6 months;
o Developing additional products for possible introduction to the
market;
o Sponsoring a continuing education program to broaden awareness and
educate pharmacists on the benefits of our products;
o Developing a consumer point-of-sale awareness program for those
patients purchasing certain cholesterol-lowering prescriptions;
o Conducting marketing activities as funds are available, including a
television commercial test which began in January 2005;
o Continuing to support the Medicare reimbursement considerations of the
federal government for cholesterol testing and monitor the FDA's
consideration of over the counter cholesterol-lowering drugs; and
o Continuing to operate with a core staff of only 18 employees while
implementing cost-cutting measures to maintain personnel levels and
administrative costs.
Our short-term sources of capital are dependent on our ability to defer our
long-term debt payments. We generally fund our operations with a combination of
deferring our trade creditors, borrowings under short-term financing
arrangements and through the sale of common equity. We expect to continue to
require additional equity of debt financings as our source of capital. We
currently do not have sufficient operating revenues or cash to fund operations.
Should we be unsuccessful in any of the initiatives or matters discussed in the
preceding disclosures entitled "Substantial Doubt Regarding 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 prospectus.
CONSOLIDATED RESULTS OF OPERATIONS - SECOND QUARTER AND FIRST HALF OF FISCAL
2005 COMPARED TO SECOND QUARTER AND FIRST HALF OF FISCAL 2004
Consolidated net sales for the fiscal quarter ended December 31, 2004 ("fiscal
2005 second quarter"), were $773,329, a decrease of $13,723, or 1.7%, as
compared to $787,052 for the fiscal quarter ended December 31, 2003 ("fiscal
2004 second quarter"). For the six months ended December 31, 2004 ("fiscal 2005
first half"), our consolidated net sales were $1,658,467, an increase of
$245,941, or 17.4%, as compared to $1,412,526 for the six months ended December
31, 2003 ("fiscal 2004 first half"). Consolidated net sales for our fiscal 2005
second quarter were comparable to the fiscal 2004 second quarter. We attribute
the increase of $245,941 in our fiscal 2005 first half net sales over our fiscal
2004 first half net sales to sales of approximately $348,000 to a national
television network that featured our products on several shows during the first
half of 2005 as compared to only approximately $46,000 during our fiscal 2004
first half. This increase in sales to the national television network is offset
by a decrease in sales of approximately $141,000 related to ceasing our
relationship with a major customer during the first 2005 fiscal quarter due to
this customer's nonpayment of certain invoices due. This major customer had
accounted for approximately 10% of revenues during the fiscal year ended June
30, 2004.
Consolidated cost of sales were $537,575 for our fiscal 2005 second quarter, a
decrease of $120,962, or 18.4%, as compared to consolidated cost of sales of
$658,536 for our fiscal 2004 second quarter. The improvement in our 2005 second
quarter cost of sales is due to an $186,000 inventory obsolescence expense to
increase the allowance for obsolete inventory recorded during the second quarter
19
of 2004. This specific inventory reserve was made due to our decision to suspend
sales of a batch of test strips expiring in May 2004 due to the short term in
which our consumers would be able to utilize the test strips. This improvement
in the cost of goods sold in the fiscal 2005 second quarter is offset by a
$75,649 decrease in a positive material variance experienced during the second
quarter of fiscal 2004, but not during the second quarter of fiscal 2005. The
positive material variance experienced during the second quarter of fiscal 2004
relates to cholesterol monitors received at a discounted price from our previous
manufacturer upon closure of its manufacturing plant. The positive material
variance was recorded as a reduction of cost of goods sold as revenue was
recognized related to these specific units.
For our fiscal 2005 first half, our consolidated cost of sales were $1,190,381,
an increase of $104,709, or 9.6%, as compared to a consolidated cost of sales of
$1,085,672 for our fiscal 2004 first half. Increased sales volume accounts for
$203,099 of this increase, while an additional $86,307 of the increase is
attributable to the positive material variance resulting from discounted pricing
received from our previous manufacturer on certain units of our cholesterol
monitor as discussed above. These increases are offset by a decrease in our
allowance for obsolete inventory related to the test strips noted above,
resulting in an improvement to our cost of goods sold of $197,586 during the
fiscal 2005 first half over the fiscal 2004 first half.
As a result of the above, we realized a consolidated gross profit of $235,754
for our fiscal 2005 second quarter, an increase of $107,238, or 83.4%, as
compared to a consolidated gross profit of $128,516 for our fiscal 2004 second
quarter. For our fiscal 2005 first half, our consolidated gross profit was
$468,086, an increase of $141,232, or 43.2%, as compared to a consolidated gross
profit of $326,854 for our fiscal 2004 first half. Our resulting gross margins
for the fiscal 2005 and 2004 second quarters were 30.5% and 16.3%, respectively,
and 28.2% and 23.1% for our fiscal 2005 and 2004 first halves, respectively. Our
ability to realize consolidated gross profits sufficient to leverage our ongoing
operating expenses, and thus, achieve sustained operating profitability at an
acceptable level, remains highly dependent upon us achieving broad awareness and
acceptance of our monitors among both retailers and consumers. If we are
unsuccessful in our efforts to timely procure equity or debt financing
sufficient to continue to fund these marketing activities during fiscal 2005,
the likelihood of us achieving broad market awareness and acceptance of our
consumer monitors will be remote.
Consolidated total operating expenses were $817,268 (inclusive of $226,083 in
non-cash charges) for our fiscal 2005 second quarter, a decrease of $664,057, or
44.8%, from the $1,481,325 (inclusive of $91,820 in non-cash charges) incurred
during our fiscal 2004 second quarter. For our fiscal 2005 first half, our total
operating expenses were $2,207,177 (inclusive of $319,086 in non-cash charges),
a decrease of $274,017, or 11.0%, from the $2,481,194 (inclusive of $243,532 in
non-cash charges) incurred during our fiscal 2004 first half. As further
detailed below, the decrease in operating expenses for our fiscal 2005 second
quarter and first half is primarily due to a significant radio advertising
campaign, which aired from October of 2003 through September 2004. The remaining
decrease is due to our continued focus on reducing general and administrative
expenses, particularly related to personnel.
Consolidated sales and marketing expenses were $136,756 for our fiscal 2005
second quarter, a decrease of $576,712, or 80.8%, from the $713,468 incurred
during our fiscal 2004 second quarter. Approximately $557,000 of this decrease
is due to the launch of our radio advertising campaign which was in place for
the full second quarter of fiscal 2004 but not during the second quarter of
fiscal 2005. For our fiscal 2005 first half, our sales and marketing expenses
were $722,370, a decrease of $123,016, or 14.6%, from the $845,386 incurred
during our fiscal 2004 first half. Approximately $90,000 of this decrease is due
to the radio advertising campaign airing for a full three months during the
fiscal 2004 first half, but slightly less than three months during the first
fiscal half of 2005. An additional approximately $14,000 of the decrease is due
to our conducting of a market research study in fiscal 2004, but not in fiscal
2005.
Consolidated general and administrative ("G&A") expenses were $564,941 for our
fiscal 2005 second quarter, a decrease of $101,573, or 15.2%, from the $666,514
incurred during our fiscal 2004 second quarter. Aggregate decreases amounted to
$235,593 and were offset by aggregate increases of $133,662. The decreases were
primarily attributable to a reduction in salaries and wages due to a decrease in
number of employees ($72,276), decreased expenses associated with filing two
proxies during the second quarter of fiscal 2005 compared to one proxy during
fiscal 2004 ($56,473), decreased shipping costs ($34,284) and decrease in the
allowance for doubtful accounts allowance ($31,930). The aggregate increases
were primarily attributable to consulting expenses related to a three month
investor communication and awareness campaign ($129,600) and increase in general
liability coverage and rates ($19,206).
For our fiscal 2005 first half, G&A expenses were $1,265,614, a decrease of
$98,314, or 7.2%, from the $1,363,928 incurred during our fiscal 2004 first
half. Aggregate decreases amounted to $389,814 and were offset by aggregate
increases of $290,704. The decreases were primarily attributable to decreased
expenses associated with filing two proxies during the first half of fiscal 2005
and the related expenses associated with a review of one of these proxies by the
SEC compared to filing only one proxy during the fiscal 2004 first half
($65,305), a reduction in salaries and wages due to a decrease in number of
employees ($74,215), decreased shipping costs ($44,244) and decrease in investor
relations and communications consulting fees ($38,000). The aggregate increases
were primarily attributable to consulting expenses related to an increase in bad
debt expense due to ceasing our relationship with a major customer during the
first 2005 fiscal quarter due to this customer's nonpayment of certain invoices
due ($202,243).
20
Product research and development expenses for both fiscal 2005 second quarter
and fiscal 2005 first half were comparable to the similar periods of fiscal
2004.
Non-cash depreciation and amortization expenses were $96,483 for our fiscal 2005
second quarter, an increase of $19,663, or 25.6%, from the $76,820 incurred
during our fiscal 2004 second quarter. For our fiscal 2005 first half, non-cash
depreciation and amortization expenses were $189,486, an increase of $33,353, or
21.4%, from the $156,133 incurred during our fiscal 2004 first half. These
increases primarily are attributable to increased patent amortization due to a
decrease in the remaining estimated useful life of a patent from six to three
years. This patent has been subject to litigation for several years, however, in
November 2004 we entered into an agreement with the defendant, resulting in
termination of the lawsuit. In connection with the settlement agreement, we
granted the defendant a license to utilize our patent in the professional market
and allowed for the possibility of a supply agreement with the defendant to
supply us with dry-chemistry test strips used in our current cholesterol
monitor. If no supply agreement is reached, the license will become fully paid
and unencumbered after December 31, 2007, however if a supply agreement is
reached with the defendant, the license terminates on August 4, 2012, upon
expiration of the patent. As such, based on the status of continuing
negotiations during the first quarter of fiscal 2005, we reduced the estimated
useful life of our patent from six to three years as the supply agreement is not
currently being negotiated.
We incurred an $87,756 loss on the disposal of tooling equipment associated with
our predecessor consumer device during the fiscal 2004 first quarter.
Primarily as a result of the foregoing, our loss from operations for our fiscal
2005 second quarter was $581,514, a decrease of $771,295, or 57.0%, from the
$1,352,809 incurred during our fiscal 2004 second quarter. For our fiscal 2005
first half, our loss from operations was $1,739,091, a decrease of $415,249, or
19.3%, from the $2,154,340 incurred during our fiscal 2004 first half.
Non-operating income and expenses primarily consist of amortization of
convertible debt discount, interest and financing expenses. Net non-operating
expenses were $1,249,916 (inclusive of $1,161,151 in non-cash charges) in our
fiscal 2005 second quarter, as compared to net non-operating expenses of
$1,413,203 (inclusive of $1,319,419 in non-cash charges) in our fiscal 2004
second quarter resulting in a decrease of $163,287 or 11.6%. This decrease is
primarily attributed to a $247,967 decrease in amortization of convertible debt
discount due to a decrease in the amount of convertible debentures that were
converted during the period, as well as the overall decrease in the debt
discount balance to be amortized. The remaining decrease is primarily due to a
$133,538 decrease in interest expense resulting from the reduction of our note
payable balance and interest bearing convertible debentures. These decreases are
offset by an increase in amortization of deferred financing costs of $115,177
due to the increase in deferred financing costs to be amortized related to
amending our outstanding note payable.
For our fiscal 2005 first half, our net non-operating expenses were $2,579,808
(inclusive of $2,380,173 in non-cash charges) as compared to $1,806,523
(inclusive of $1,827,505 in non-cash charges) for our fiscal 2004 first half
resulting in an increase of $773,285 or 42.8%. The increase realized for our
fiscal 2005 first half primarily was attributable to an increase of $329,227 in
amortization of convertible debt discount due to an increase in the amount of
debt discount to be amortized from the closing of a convertible debt financing
transaction in the third quarter of fiscal 2004. The fiscal 2005 first half
increase in non-operating expenses is also due to an increase of $247,851 in
amortization of deferred financing costs due to the increase in deferred
financing costs to be amortized related to the financing transaction that closed
during the third quarter of fiscal 2004, as well as amending our outstanding
note payable in the second quarter of fiscal 2005. The fiscal 2005 first half
net increase in non-operating expenses is offset by non-operating income of
$250,000 received in fiscal 2004 for granting an option to an unrelated third
party to purchase a technology patent, as well as a decrease in interest expense
of $199,029 due to the reduction of our note payable balance, as well as
interest bearing convertible debentures.
Primarily as a result of the foregoing, we incurred a net loss of $1,831,430
($0.01 per basic and diluted share) in our fiscal 2005 second quarter as
compared to a net loss of $2,766,012 ($0.03 per basic and diluted share) in our
fiscal 2004 second quarter. For our fiscal 2005 first half, we incurred a net
loss of $4,318,899 ($0.02 per basic and diluted share) as compared to a net loss
of $3,960,863 ($0.04 per basic and diluted share) for our fiscal 2004 first
half.
CONSOLIDATED RESULTS OF OPERATIONS - FISCAL 2004 COMPARED TO FISCAL 2003
Consolidated net sales for the fiscal year ended June 30, 2004 ("fiscal 2004")
were $2,603,257, a decrease of $1,633,396, or 38.6%, as compared to $4,236,653
for the fiscal year ended June 30, 2003 ("Fiscal 2003"). The decrease in sales
is attributed to the following two items:
o Fiscal 2003 included initial orders aggregating $1.9 million from two
prominent national drug store chains, as well as an additional
21
$500,000 in reorders resulting in total sales to these two customers
during fiscal 2003 of $2.4 million, while fiscal 2004 included only
reorders aggregating $900,000 in sales to these two customers. Initial
orders from large retailers are substantial as the retailer must
initially stock all of its retail stores with the products, as well as
stock their warehouses with additional product. Once the stores and
warehouses are initially stocked, the customer merely needs to replace
units as needed.
o The remaining decrease is due to an unexpected increase in sales
returns for test strips of approximately $142,000 over fiscal 2003
resulting in our increase of the sales returns allowance by an
additional $100,231 to provide an adequate allowance for our estimate
of the returns of the remaining test strips with short-term expiration
dates. The unexpected increase in sales returns resulted from
notification from our major customers that they would no longer accept
test strips with an expiration date of less than 6 months from the
date of shipment. We agreed with the major customers that these
short-term expiration dates would not provide adequate time for the
test strips to be resold to consumers and provide consumers with
adequate time to utilize all test strips. We believe this increase
made to the sales returns allowance is adequate for the expected
returns estimated on these test strips with a short-term expiration
date and do not expect additional increases to the returns allowance
on an ongoing basis.
We realized a consolidated gross loss of $95,416 for fiscal 2004, a decrease of
$815,242, or 113.3%, as compared to a consolidated gross profit of $719,826 for
fiscal 2003. Our resulting consolidated gross margin was (3.7%) for fiscal 2004,
as compared to 17.0% for fiscal 2003. We primarily attribute the significant
decrease in our gross margins to the following, which had an adverse effect on
our gross margin:
o An unexpected increase in sales returns for test strips of
approximately $142,000 over fiscal 2003 resulting in our increase of
the sales returns allowance by an additional $100,231 to provide an
adequate allowance for our estimate of the returns of the remaining
test strips with short-term expiration dates as noted above;
o An increase in the provision for obsolete inventory for fiscal 2004
over fiscal 2003 of approximately $107,000 for test strips with a
short-term expiration date. The increase in obsolete inventory is due
to our decision to suspend sales of test strips expiring in May and
September 2004 due to the short term in which our consumers would be
able to utilize the test strips. This resulted in the obsolescence of
all remaining test strips with May and September 2004 expiration
dates. As of June 30, 2004, all obsolete test strips with short term
expiration dates have been allowed for and we do not expect to incur
similar increases in our obsolescence provision during fiscal 2005 or
beyond;
o An increase of approximately $125,000 in royalty expense related to
our dry chemistry test strips due to the current negotiations with our
principal vendor of these test strips as discussed in Item 1 -
"Principal Vendors and Related Assembly, Packaging and Distribution
Operations";
o An initial order from a major new retailer required us to provide
approximately $201,000 of inventory at no cost to the major retailer.
As a result, the $201,000 was included as a component of our cost of
goods sold in accordance with United States generally accepted
accounting principles; and
o An increase of approximately $77,000 in sales discounts attributed to
offering pricing discounts and incentives to certain retailers to
deplete inventory supplies of our first-generation consumer monitor
during the first half of fiscal 2004.
The above negative effects on our gross margin for fiscal 2004 were offset by
the $102,000 positive effect of a positive material variance experienced during
the second quarter of fiscal 2004 relating to cholesterol monitors received at a
discounted price from our previous manufacturer upon closure of its
manufacturing plant. The positive material variance was recorded as a reduction
of cost of goods sold as the specific units were shipped. No such positive
material variance was experienced during fiscal 2003.
Our ability to realize consolidated gross profits sufficient to leverage our
ongoing operating expenses, and thus, achieve sustained operating profitability
at an acceptable level, remains highly dependent upon us achieving broad
awareness and acceptance of our monitors among both retailers and consumers. If
we are unsuccessful in our efforts to timely procure equity or debt financing
sufficient to continue to fund these marketing activities during fiscal 2005,
the likelihood of us achieving broad market awareness and acceptance of our
consumer monitors will be remote.
Consolidated total operating expenses were $5,269,057 (inclusive of $769,757 in
non-cash charges) for fiscal 2004, an increase of $267,754, or 5.4%, from the
$5,001,303 (inclusive of $624,542 in non-cash charges) incurred during fiscal
2003. As further detailed below, the increase in operating expenses for our
fiscal 2004 is due to increased marketing costs related to the radio marketing
campaign beginning in October 2003 and continuing throughout the remainder of
fiscal 2004.
Consolidated sales and marketing expenses were $2,142,092 for fiscal 2004, an
increase of $1,138,549, or 113.5%, from the $1,003,543 incurred during fiscal
2003. The increase is primarily attributable to the launch of our radio
advertising campaign in October 2003, which continued throughout the fiscal 2004
fourth quarter. This substantial increase is offset by a decrease in salaries
expense due to staffing reductions, commissions due to decreased sales and
curtailed travel to, and participation in, trade shows.
22
Consolidated general and administrative ("G&A") expenses were $2,672,043
(inclusive of $372,345 in non-cash charges) for fiscal 2004, a decrease of
$573,353, or 17.7%, from the $3,245,396 (inclusive of $182,110 in non-cash
charges) incurred during fiscal 2003. This decrease is primarily attributable to
a decrease of $562,412 in bad debt expense due to a recovery of $154,507 during
fiscal 2004 versus a $407,905 expense during fiscal 2003. The decrease in bad
debt expense is due to allowing for bad debt related to one significant retailer
at June 30, 2003, a portion of which was recovered in fiscal 2004. The remaining
decrease in G&A expenses is due to lower professional service costs due to the
previous completion, contraction or discontinuance of non-critical consulting
arrangements. Slightly offsetting the preceding were increased costs for Board
of Directors which had not previously been compensated, increased investor
relation costs incurred in connection with two additional shareholders' meetings
related to the increase in our authorized common shares during fiscal 2004, and
increased insurance costs.
Product research and development expenses were $57,510 for fiscal 2004, a
decrease of $239,453, or 80.6%, from the $296,963 incurred during fiscal 2003.
This decrease primarily was attributable to reductions in salaries, benefits,
and product design costs as the development of our cholesterol monitor was
substantially completed by the end of our fiscal 2003 second quarter. We
currently expect that our product research and development needs and
expenditures will be nominal for the foreseeable future.
Non-cash depreciation and amortization expenses were $309,656 for fiscal 2004, a
decrease of $132,776, or 30.0%, from the $442,432 incurred during fiscal 2003.
This decrease is primarily attributable to certain equipment that became fully
depreciated during fiscal 2003 and 2004. Our planned capital expenditures are
minimal and we believe that our fiscal 2005 depreciation and amortization
expense will materially approximate that which we incurred during fiscal 2004.
However, we are currently a party to a lawsuit in which we allege willful patent
infringement. Should the District Court not rule in our favor or we are unable
to successfully negotiate a settlement including royalties to be received, we
would be required to impair our patent, and as such, we would write down the
patent to its net realizable value through a charge to amortization expense. See
"Legal Contingencies" for further details.
We incurred an $87,756 loss on the disposal of tooling equipment associated with
our predecessor cholesterol monitor during the fiscal 2004 first quarter as
compared to a $12,969 loss on disposal of equipment incurred during fiscal 2003.
Our resulting loss from operations for fiscal 2004 was $5,364,473, an increase
of $1,082,996, or 25.3%, from the $4,281,477 incurred during fiscal 2003.
Non-operating income and expenses primarily consist of amortization of
convertible debt discount, interest and financing expenses. Our net
non-operating expenses for fiscal 2004 were $9,043,084 (inclusive of $8,870,490
in non-cash charges), an increase of $5,217,616, or 136.4%, from net
non-operating expenses of $3,825,468 (inclusive of $2,863,664 in non-cash
charges) in fiscal 2003. The net increase realized during fiscal 2004 primarily
was attributable to increased amortization of convertible debt discount of
$4,095,072. The increased amortization of convertible debt discount is due to
the conversion of $5,480,624 of convertible debentures during fiscal 2004. The
remaining increase in non-operating income and expense is due to $1,728,889 of
expense related to a beneficial conversion feature recognized as a result of
issuing convertible debt at a discount from the stated conversion rate and an
increase of $466,002 in amortization of deferred financing costs related to two
significant private placements funded during fiscal 2004. These decreases were
offset by an increase in other income of $250,000 received for granting an
unrelated third party an option to purchase an unutilized technology patent. The
option expired unexercised during the first quarter of 2004 resulting in our
recognizing the funds received as non-operating income.
Primarily as a result of the foregoing, we incurred a net loss of $14,407,557
($0.11 per basic and diluted share) in fiscal 2004 as compared to a net loss of
$8,106,945 ($0.24 per basic and diluted share) in fiscal 2003.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
General
We have historically sustained our operations and funded our growth through a
combination of deferring our trade creditors, borrowings under short-term
financing arrangements and through the sale of common equity. We expect to
continue to require additional equity or debt financings as our source of
capital. We currently do not have sufficient operating revenues or cash to fund
operations and have had significant working capital and stockholders' deficits
as of our most recently completed fiscal years ending June 30, 2004 and 2003. In
recognition of such, our independent registered public accountants included an
explanatory paragraph in their report on our consolidated financial statements
for our most recently completed fiscal years ended June 30, 2004 and 2003, that
expresses substantial doubt regarding our ability to continue as a going
concern. Should we be unsuccessful in any of the initiatives or matters
discussed in the preceding disclosures entitled "Substantial Doubt Regarding 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
23
likely be materially adversely impacted, the effects from which we may not
recover. As such, substantial doubt regarding our ability to continue as a going
concern remains as of the date of this prospectus.
Our Capital Lease Obligations
We lease certain equipment under capital leases. The aggregate net carrying
values of the underlying collateralizing assets were approximately $124,000 and
$164,000 at December 31, 2004, and June 30, 2004, respectively.
Our aggregate future obligations under capital lease agreements in existence at
December 31, 2004, are as follows:
FISCAL YEARS ENDING JUNE 30,
------------------------------------------------------------
2005 (balance thereof) ......................... $17,672
2006 ........................................... 15,274
2007 ........................................... 2,746
-------
Total lease payments ........................... 35,692
Less imputed interest .......................... 2,636
-------
Present value of net minimum lease payments..... 33,056
Less current maturities ........................ 28,242
-------
Total long-term capital lease obligation ....... $ 4,814
=======
Outstanding Note Payable
Effective May 1, 2003, we renewed our then expiring revolving credit facility
with a then outstanding balance of $2,197,800 with a financial institution. Any
principal and accrued interest balances remaining on the term loan were due and
payable as a lump sum on April 1, 2005. In November 2004, RAB Special Situations
LP ("RAB"), a beneficial owner of approximately 9.99% of our common stock as of
December 31, 2004, entered into an agreement with the above financial
institution, under which the financial institution assigned to the stockholder
all of their rights, title and interest under the note payable. At the time of
the assignment, the outstanding amount due under the note payable was $920,323.
Restricted funds held in escrow by the financial institution served as
additional collateral under the terms of the note payable and were used to
partially pay down the then outstanding loan balance prior to assignment to the
stockholder.
Subsequently, we entered into a series of amendments to the note payable and
related loan documents under which the new note holder modified the following
terms:
o the aggregate amount of the note was increased from $920,323 to
$2,869,740, after giving effect to an original issue discount in the
amount of $449,417;
o $974,709 of the increase was funded November 12, 2004 resulting in net
cash proceeds to us of $750,000;
o $974,708 of the increase was funded December 15, 2004 resulting in an
additional $750,000 in net cash proceeds;
o the new loan balance of $2,869,740 is to be repaid in monthly
installments of $100,000 commencing May 1, 2005, with the outstanding
balance becoming due and payable on February 1, 2006;
o we paid a commitment fee to induce the assignee to enter into the
series of amendments in the amount of $500,000, paid by issuance of a
promissory note (commitment fee note) which is payable on February 1,
2006, in cash or, at our option, in shares of our common stock at a
20% discount to market. The commitment fee note is also convertible at
the option of the note holder at a conversion price of $.05 per share,
subject to adjustment;
o we agreed to use our best efforts to file a registration statement
with the United States Securities and Exchange Commission ("SEC")
covering the resale of shares issuable under the commitment fee note;
and
o the note payable continues to be secured by substantially all of our
assets.
The original issue discount of $449,417 was determined based on an annual
interest rate of 15% over the term of the note payable and was recorded as a
deferred financing cost. This deferred financing cost is being amortized over
the life of the amended note payable and is reflected as "amortization of
deferred financing costs" on the consolidated statement of operations.
Outstanding Convertible Debentures
From June 2001 through November 2001, we issued unsecured convertible
debentures, $3,840,000 of which remains outstanding with one debenture holder
24
(RAB Special Situations LP) at December 31, 2004. These debentures (i) accrue
interest at the prime rate plus two percent (6.25% at December 31, 2004), (ii)
are convertible at the option of the holders into common stock at a stated rate
of $0.05 per share, and (iii) become due and payable on various dates between
July 1, 2006 and November 20, 2006. The holder may not convert its debentures to
the extent that conversion would result in the holder's beneficial ownership of
9.99% or more of our then outstanding common shares. The holder of these
debentures has a one-time right to convert a portion of the debentures after the
closing of any subsequent private offering at less than $0.05 per common share
(limited to 9.99% ownership). We have the right to force conversion of the
debentures if the market price of our common stock exceeds $3.00 per share for
20 consecutive trading days.
In connection with the issuance of the amended and restated promissory note
discussed above, the conversion rate of the debentures issued during June 2001
through November 2001 was reduced from $0.10 to $0.05 per share resulting in a
$72,600 charge to financing expense related to the beneficial conversion
feature.
Subsequent to December 31, 2004, the holder converted $860,000 of the above
notes payable and $190,000 of related accrued interest into shares of our common
stock.
September 2003 Issuances
On September 13, 2003, we issued $3,350,000 in unsecured convertible debentures
to eight investors from which we received $3,067,000 in net cash proceeds. These
debentures (i) accrued interest at a fixed rate of 8.0% per annum, which was
payable at our option in either cash or authorized and unissued shares of its
common stock, (ii) were convertible at the option of the holders at a stated
rate of $0.13 per share, and (iii) were due and payable on September 12, 2006.
For every two dollars of original debenture 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. A
registration statement filed with the SEC registering the resale of the
preceding debentures and warrants became effective on December 23, 2003.
On January 13, 2004, we entered into an exchange agreement with each holder of
our convertible debentures that were issued in September 2003. Under the
exchange agreement, each debenture holder agreed to exchange the principal
amount of its debenture for shares of our common stock, at the rate of $0.09 of
debenture principal per share of common stock. Holders could not convert their
debentures to the extent that conversion would result in the holders' beneficial
ownership of 4.99% or more of our then outstanding common shares. Accrued but
unpaid interest of $149,659 related to these debentures was paid at the time of
the exchange by the issuance of additional shares of common stock at the rate of
$0.09 per share. Accordingly, in January 2004 we issued 32,427,204 shares of
common stock upon exchange of debenture principal in the amount of $2,975,624
and the payment of accrued but unpaid interest of $149,659. Additionally, we
issued 2,227,807 shares of common stock to adjust the conversion rate applied to
$175,000 of principal previously converted by a debenture holder to the $0.09
rate stated in the exchange agreement. As a result of the above, in January 2004
we recognized approximately $1,489,000 of additional financing expense related
to the beneficial conversion features of the exchange and amortized to expense
approximately $2,668,000 of previously existing debt discount related to the
convertible debentures issued in September 2003.
The remaining principal balance from the September issuance of $199,376 at June
30, 2004 was subsequently converted during the first quarter of fiscal 2005,
resulting in no further convertible debenture principal or interest related to
the September 2003 issuance outstanding as of this date.
February 2004 Issuances
On February 19, 2004, we completed a private placement offering of $2,775,000 in
unsecured convertible debentures with four investors (all of which also
participated in the September 2003 private placement discussed above) from which
we received $2,077,592 in net cash proceeds. The purchase price for the
convertible debentures gives effect to an original issue discount of
approximately $500,000, the amount of which was withheld from the proceeds at
the time of the closing of the financing and are being amortized to deferred
financing costs over the term of the debentures. The $2,775,000 of convertible
debentures are convertible at a conversion price of $0.05 per share, or 55.5
million common shares as of February 19, 2004. The conversion price is subject
to adjustment upon the occurrence of certain events including stock dividends,
subdivisions, combinations and reclassifications of our common stock. In
connection with this transaction participating warrant holders agreed to
exercise outstanding warrants held by them to the extent such exercise would not
result in any particants' beneficial ownership of 4.9% or more of our then
outstanding common shares. These debentures have an aggregate principal face
amount of $1,375,000 at December 31, 2004 and become due and payable on February
19, 2006.
Participants in the February 19, 2004 offering received detachable stock
purchase warrants allowing for the purchase of a number of common shares equal
to 30% of the number of shares which could be obtained upon conversion of the
debenture principal outstanding on February 19, 2004. The warrants can be
25
exercised over a nineteen-month period and have an exercise price of $0.065 per
share of our common stock, subject to adjustment upon the occurrence of events
substantially identical to those provided for in the debentures. We have the
right to call the warrants in the event that the average closing price of our
common stock exceeds 200% of the exercise price for a consecutive 20-day trading
period. Holders may not convert debentures or exercise warrants to the extent
that conversion or exercise would result in the holders' beneficial ownership of
4.9% or more of our then outstanding common shares.
On March 22, 2004, we filed a registration statement with the SEC registering
the resale of the common shares underlying the debentures and warrants issued on
February 19, 2004, which became effective April 5, 2004. We also agreed to seek
stockholder approval to increase the number of authorized common shares to a
minimum of 500 million shares before April 30, 2004. Stockholder approval to
increase the number of authorized common shares to 750 million was obtained on
April 28, 2004.
Investors in the February 19, 2004, financing were granted the option to
purchase up to an additional $1,220,000 of convertible debentures and warrants
with terms and conditions substantially identical to those applicable to the
February 19, 2004, transaction. This option expired on October 28, 2004.
The agreements entered into in connection with the February 19, 2004 transaction
requires that we obtain the unanimous approval of the debenture holders prior to
the occurrence of certain events including stock dividends, subdivisions,
combinations and reclassifications of our common stock until less than 20% of
the principal remains outstanding on the debentures. The agreement further
stipulates that no debenture may be prepaid without the consent of the holder
and that each debenture holder has a right of first refusal to participate in
any new financing transaction consented to through June 10, 2005.
March 2004 Issuance
In March 2004, we issued an unsecured convertible debenture to an existing
shareholder and beneficial owner of approximately 3.6% of our common shares as
of December 31, 2004, in the amount of $122,000 from which we received $100,000
in net proceeds after an original issue discount of $22,000. We also issued
732,000 detachable stock purchase warrants in connection with this transaction.
The convertible debenture and common stock purchase warrants have identical
terms and conditions to those issued on February 19, 2004. The principal balance
outstanding for this debenture was $122,000 at December 31, 2004.
November 2004 Issuance
As discussed above, in November 2004, we paid a commitment fee to induce RAB
Special Situations LP, a principal stockholder, to enter into a series of
amendments to an existing note payable. The commitment fee of $500,000 was paid
through the issuance of a convertible promissory note (the commitment fee note)
which is payable on February 1, 2006, in cash or, at our option, in shares of
our common stock at a 20% discount to market. The commitment fee note is also
convertible at the option of the note holder at a conversion price of $.05 per
share, subject to adjustment. The $500,000 commitment fee in included in
deferred financing costs and is being amortized over the life of the amended
note payable. We agreed to file a registration statement covering the shares
issuable under the commitment fee note.
The remaining $5,837,000 in principal of our outstanding convertible debentures
at December 31, 2004, mature during our fiscal years ending as follows:
FISCAL YEARS ENDING JUNE 30, PRINCIPAL
--------------------------------------------
2005 ........................ $ --
2006 ........................ 1,497,000
2007 ........................ 4,340,000
----------
Total principal payments..... $5,837,000
==========
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 debenture issuances the fair value of the detachable stock
warrants and resulting beneficial conversion feature. For each debenture
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 using the effective interest method over the respective
lives of the underlying debentures, the amortizatin of which is included in
"amortizatin of convertible debt discount" on the consolidated statement of
operations. The original debt discount and related amortization expense for each
of the above convertible debenture issuances are as follows as of December 31,
2004:
26
AMORTIZATION EXPENSE FOR THE AMORTIZATION EXPENSE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
ORIGINAL DEBT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
ISSUANCE DATE DISCOUNT 2004 2003 2004 2003
------------- ----------- ----------- ----------- -----------
June -Nov. 2001 $ 5,211,200 $ 297,030 $ 561,879 $ 625,577 $ 887,514
September 2003 3,350,000 -- 433,668 128,542 495,705
February 2004 2,775,000 429,798 -- 914,236 --
March 2004 122,000 20,753 -- 44,091 --
----------- ----------- ----------- ----------- -----------
$11,458,200 $ 747,581 $ 995,547 $ 1,712,446 $ 1,383,219
=========== =========== =========== =========== ===========
The remaining debt discount of $1,619,969 related to our outstanding convertible
debentures at December 31, 2004, is expected to amortize to expense during our
fiscal years ending as follows:
DISCOUNT
FISCAL YEARS ENDING JUNE 30, AMORTIZATION
------------------------------------------------
2005 (Remaining) ............... $ 909,087
2006 ........................... 710,882
----------
Total discount amortization..... $1,619,969
==========
Off-Balance Sheet Liabilities
Under SEC regulations, we are required to disclose our off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. An off-balance sheet arrangement means
a transaction, agreement or contractual arrangement to which any entity that is
not consolidated with us is a party, under which we have:
o Any obligation under certain guarantee contracts;
o Any retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets;
o Any obligation under a contract that would be accounted for as a
derivative instrument, except that it is both indexed to our stock and
classified in stockholder's equity in our statement of financial
position; and
o Any obligation arising out of a material variable interest held by us
in an unconsolidated entity that provides financing, liquidity, market
risk or credit risk support to us, or engages in leasing, hedging or
research and development services with us.
As of the date of this prospectus, we do not have any off-balance sheet
arrangements that we are required to disclose pursuant to these regulations. In
the ordinary course of business, we enter into operating lease commitments,
purchase commitments and other contractual obligations. These transactions are
recognized in our financial statements in accordance with generally accepted
accounting principles in the United States.
Contractual Obligations
The following table sets forth our contractual obligations as of December 31,
2004:
Contractual Obligations Payments Due by Period
- ------------------------------------------ -------------------------------------------------------
More
Less than 3-5 than 5
Total 1 year 1-3 Years Years Years
---------- ---------- ---------- ---------- ----------
Note Payable $2,869,740 $ 800,000 $2,069,740 $ -- $ --
Convertible Debt (1)(2) 5,837,000 -- 5,837,000 -- --
Capital Lease Obligations 35,692 30,593 5,099 -- --
Operating Lease Obligations
105,960 81,396 12,168 12,396 --
Advertising Obligation (3) 300,000 300,000 -- -- --
---------- ---------- ---------- ---------- ----------
Total $9,148,392 $1,211,989 $7,924,007 $ 12,936 $ --
========== ========== ========== ========== ==========
27
- ----------
(1) Amounts do not include interest to be paid.
(2) Convertible into shares of common stock at the option of the debenture
holder at conversion rates of $0.05 per share.
(3) Represents advertising liabilities incurred under an advertising campaign
contract.
Consolidated Cash Flows
Operating activities utilized $1,089,055 in cash and cash equivalents during our
fiscal 2005 first half, a decrease of $2,453,949, or 69.3%, from the $3,543,004
in cash and cash equivalents utilized during our fiscal 2004 first half. On a
comparative fiscal period-to-period basis, our lower utilization primarily
reflects the positive cash flow effects of increased accounts payable during
fiscal 2005 first half as opposed to the utilization of cash to decrease
accounts payable $1,379,244 during the first half of fiscal 2004. The lower
utilization also reflects increased non-cash charges for amortization of
discount on convertible debentures ($329,227), deferred financing costs
($247,851), and bad debt expense ($202,956). The above decreases in the
utilization of cash resources for operating activities are offset by our
increased net loss.
There were minimal cash flow effects from investing activities during the six
months ended December 31, 2004 and 2003.
Financing activities provided $1,258,485 in cash and cash equivalents during our
fiscal 2005 first half, a decrease of $1,280,104, or 50.4%, from the $2,538,589
in cash and cash equivalents provided during our fiscal 2004 first half. Our
fiscal 2005 decrease reflects the receipt of the $3,067,000 net cash proceeds
received from our issuance of convertible debentures during the fiscal 2004
first half as compared to only $1,500,000 from proceeds of financing
transactions during fiscal 2005.
As a result of the foregoing, our unrestricted cash and cash equivalents
increased by $169,430 to $759,626 at December 31, 2004, from $590,196 at June
30, 2004. Our working capital deficit improved by $386,221 to a deficit of
$554,477 at December 31, 2004, from a deficit of $940,698 at June 30, 2004
primarily due to the decrease in the current portion of our note payable by
$369,031 resulting from the series of amendments which extended the maturity
date and payment terms as discussed under "Outstanding Note Payable" above.
Planned Capital Expenditures
We have no significant planned capital expenditures for fiscal 2005.
OTHER MATTERS
Seasonal and Inflationary Influences
To date, we have not been materially impacted by seasonal or inflationary
influences.
Quantitative and Qualitative Disclosures About Market Risk
We currently are exposed to financial market risks from changes in short-term
interest rates as certain of our interest-bearing outstanding convertible
debentures, as discussed above, have an interest rate that fluctuates with the
prime rate. Based on the aggregate outstanding balance of these convertible
debentures at December 31, 2004, we believe that the prime rate would have to
significantly increase for the resulting adverse impact on our interest expense
to be material to our expected results of operations for fiscal 2005, 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 and we have not
used, nor do we contemplate using, any derivative financial instruments.
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:
28
Revenue Recognition. We generate revenue primarily from sales of our
cholesterol monitors and dry-chemistry test strips utilized in our
cholesterol monitors. We recognize a sale, including related shipping and
handling income, and the cost of the sale, when each of the criteria
established by Staff Accounting Bulletin 104 ("SAB 104") have been met as
follows:
o Pervasive evidence of an arrangement exists - We require a
purchase order from our customers for each sale prior to shipment
of product.
o Delivery has occurred - We do not recognize revenue until the
product is shipped and all material risks and rewards of
ownership are concurrently transferred to the customer. In
limited instances, we may enter into "pay-on-scan" sales
arrangements whereby the risk of ownership does not transfer to
the customer until the customer has sold the product to a third
party (the consumer). In these limited instances, revenue is not
recognized until we have been notified by the customer that the
product has been sold to the consumer.
o Seller's price to the buyer is fixed or determinable - We require
the sales price to be detailed on the customers purchase order,
which may not be changed after acceptance.
o Collection of the related receivable is reasonably assured - We
must determine that collection of the related account receivable
is reasonably assured prior to recognition of revenue. We make
estimates to allow for an appropriate allowance for uncollectible
receivables, as well as for sales returns expected from our
customers.
Sales Returns Allowance. We record an allowance for sales returns and for
warranty repairs at the time revenue is recognized. Our estimates of an
appropriate allowance for sales returns is based upon historical returns as
a percentage of sales, as well as future expectations on returns of test
strips based upon the length of time from their expiration date at the time
of sale. Management reviews the adequacy of the allowance on a quarterly
basis, however the nature of these estimates are inherently subjective
causing actual results to vary from our estimated outcome, thereby
requiring us to make future adjustments to our net sales and results of
operations.
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.
Management reviews the adequacy of the allowance on a quarterly basis by
reviewing the accounts receivable aging and considering the historical
default rates of customers with past due receivables. 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.
Inventory Obsolescence Allowance. Our inventories, which primarily consist
of component parts and assembled cholesterol monitors, are stated at the
lower of first-in, first-out cost or market. Obsolete inventory has
historically consisted of component parts no longer utilized in the current
model of our cholesterol monitor, as well as, expired dry-chemistry test
strips or excess test strips with short-term expiration dates that will
likely not be sold prior to expiration. Management considers the above
factors in our quarterly review of the inventory obsolescence allowance.
Our estimates of an appropriate inventory obsolescence allowance is
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.
Impairment of Long-Lived Assets. Our long-lived assets consist primarily of
various patents for technology utilized in our cholesterol monitors, as
well as, currently unutilized technology for the measurement of cholesterol
in its component parts. On a quarterly basis, we evaluate the value of our
patents for impairment by comparing our estimates of related future cash
flows, on an undiscounted basis, to its net book value. Factors considered
by management in its review of the value of patents include the status of
any litigation surrounding a patent, likelihood of development or sale of
the patent (if unutilized), and likely cash flows from royalties to be
received from others for use of the patented technology. 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. Our estimates of
an asset's related future cash flows are inherently subjective and actual
results could vary from our estimated outcome, including any future
royalties to be received under a settlement agreement allowing an unrelated
third party to utilize our patent under a royalty agreement.
New Accounting Pronouncements
In November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151 - Inventory Costs ("SFAS No. 151"), which amends the provisions of
Chapter 4 of Accounting Research Bulletin No. 43 - "Inventory Pricing". SFAS No.
151 requires that certain production costs, such as idle facility expense,
freight, handling costs, and spoilage be charged as a current period expense.
Under the previous accounting principles, these costs were charged to current
period expense only under certain circumstances. SFAS No. 151 also requires that
fixed production overhead be allocated based on normal production capacity. We
are required to adopt SFAS No. 151 for the first quarter of fiscal year 2006 and
29
do not expect the adoption to have a material impact on the consolidated
financial statements.
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment ("SFAS No. 123(R), which supercedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations,
and will require all companies to estimate the fair value of incentive stock
options granted and then amortize that estimated fair value to expense over the
options' vesting period. We are required to adopt SFAS No. 123(R) for the first
quarter of fiscal year 2006 and have not yet assessed the impact that this new
standard will have on our consolidated financial statements.
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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are set forth below:
NAME AGE POSITION(S) HELD
- ---- --- ----------------
Christopher Maus 51 Chairman of the Board, President and Chief Executive Officer
Robert Boyle 58 Director, Secretary, Treasurer, and Audit Committee Chairman
Michael Crane 49 Director and Member of Audit Committee
William Gridley 75 Director and Member of Audit Committee
Neil Luckianow 47 Director
Edward Siemens 50 Chief Operating Officer
Jackson Connolly 56 Vice President - Product Development
Nikki Nessan 34 Vice President - Finance
CHRISTOPHER MAUS has served as our Chairman of the Board, President and Chief
Executive Officer since February 1994, except for a brief period from September
1998 to March 1999 when he served only as Chairman of the Board. From June 1996
until its acquisition by us in September 1999, Mr. Maus served on the Board of
Directors of Secured Interactive Technologies, Inc., a privately held company
co-founded by Mr. Maus that developed our Privalink software technology. From
June 1992 to February 1994, Mr. Maus served as President of Lifestream
Diagnostics, Inc., our privately held legal predecessor. From 1989 to June 1992,
Mr. Maus was a General Partner in Lifestream Development Partners, the privately
held legal predecessor to Lifestream Diagnostics, Inc. Mr. Maus attended North
Texas State University.
ROBERT BOYLE has served as a Director since June 1999, at which time he was also
appointed as our Secretary and Treasurer. Since 1995, Mr. Boyle has served as
President of Robert Boyle, Certified Public Accountant, a local public
accounting firm located in Idaho. From 1980 to 1995, Mr. Boyle served as
President of Boyle and Stoll, Certified Public Accountants, P.A., a local public
accounting firm, located in California. Prior thereto, Mr. Boyle served with the
consulting, tax and audit staffs of a predecessor to KPMG, an international
accounting and consulting firm. Mr. Boyle has a Bachelor of Arts degree in
Accounting from San Diego State University and is licensed as a Certified Public
Accountant in the State of Idaho.
MICHAEL CRANE has served as a Director since April 1998. Since September 1993,
Mr. Crane has served as Chairman of the Board of Directors and Chief Executive
30
Officer of privately held Dulles Greenway, Trip II (Toll Investors Partnership
II, L.P.). Since October 1996, Mr. Crane has also served as President of Alchemy
International, a privately held developer of non-evasive, passive chemistry
treatments for various forms of cancer. Mr. Crane has also served on the Board
of Directors of Discflo Corporation, a privately held manufacturer of medical
and industrial pumps, since 1988, and as Chairman of the Board of Directors for
Lochnau, Inc., a privately held investment management corporation, since 1985.
Mr. Crane has a Bachelor of Science degree in Banking from the University of
Richmond.
WILLIAM GRIDLEY has served as a Director since April 1997. Since November 1995,
Mr. Gridley, who is now retired, served as the Chairman of the Board of
Directors of Hymedix Inc., a polymer chemicals company, for which he previously
served as its President and Chief Executive Officer from August 1993 to November
1995. Mr. Gridley has a Bachelor of Arts degree in English Literature from Yale
University.
NEIL LUCKIANOW has served as a Director since October 2003. Since May 2002, Mr.
Luckianow has served as Principal of NCL & Associates, LLC, a privately held
consulting firm specializing in providing commercial solutions to health care
product companies, which we retained as a commissioned sales agent effective
September 1, 2003. From October 1997 to March 2002, Mr. Luckianow served as a
Sales Director for Amira Medical, Inc., a privately held manufacturer and
marketer of blood glucose measuring devices that was acquired in November 2001
by publicly held Roche Diagnostics. From 1988 to January 1997, Mr. Luckianow
served in a number of progressive positions, including as Director of Sales, for
LifeScan, Inc., a manufacturer and marketer of blood glucose measuring devices
and a subsidiary of publicly held Johnson & Johnson Company. Mr. Luckianow has a
Bachelor of Arts degree in History from Purdue University.
EDWARD SIEMENS has served as Chief Operating Officer since June 2002, and prior
thereto, upon joining us in August 2000, as Chief Operating Officer - Devices.
From April 1999 to June 2000, Mr. Siemens served as President of Omron
Healthcare, Inc. ("Omron"), a publicly held manufacturer and marketer of
personal-use medical diagnostic products. Mr. Siemens previously served as
Omron's Senior Vice President of Sales and Marketing from April 1994 to April
1999 and as Omron's Vice President of Sales and Marketing from April 1992 to
April 1994. Prior thereto, Mr. Siemens was employed by McKesson Corporation, a
publicly held wholesale distributor of medical products and supplies, where he
served as Vice President of Sales from 1987 to 1992 and as Product Manager from
1985 to 1987. Mr. Siemens has a Masters degree in Business Administration from
Pepperdine University and a Bachelor of Fine Arts degree from the California
College of Arts and Crafts.
JACKSON CONNOLLY has served as Vice President - Product Development since
November 2000. Mr. Connolly previously served as our Director of Development
from January 1997 to November 2000. Prior to joining us, Mr. Connolly served as
a Senior Sales Engineer at Advanced Input Devices, a subsidiary of publicly held
Esterline Technologies, from January 1991 to April 1997. Mr. Connolly has a
combined Bachelor of Arts and Science degree in Industrial Technology and Arts
from California State University at Fresno.
NIKKI NESSAN has served as our Vice President - Finance since April 2004 and
prior thereto, since joining us in October 2003, as Controller. From August 2002
through October 2003, Ms. Nessan served as the Accounting Manager for a publicly
held educational travel company that organizes and promotes international and
domestic educational travel programs. From September 1998 to June 2001, Ms.
Nessan served as a senior auditor and then manager in the audit department of
PricewaterhouseCoopers, LLP, an international accounting and consulting firm.
From January 1994 to June 1998, Ms. Nessan was an auditor for KPMG Peat Marwick,
LLP (KPMG), an international accounting and consulting firm. Ms. Nessan has a
Bachelor of Science degree in Accounting from Metropolitan State College of
Denver and is licensed as a Certified Public Accountant in the State of
Washington.
There are no family relationships among any of our directors and executive
officers.
31
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table sets forth certain information regarding compensation earned
by our Chief Executive Officer and each of our other most highly compensated
executive officers for the fiscal year ended June 30, 2004, and who earned in
excess of $100,000 in salary and bonus for such fiscal year. The persons named
in the table are hereinafter referred to as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION -
ANNUAL COMPENSATION AWARDS
------------------------------- -----------
SECURITIES ALL OTHER
NAME AND FISCAL SALARY BONUS OTHER UNDERLYING COMPEN-SATION
PRINCIPAL POSITION(S) YEAR (1) ($) ($) ($) OPTIONS (#) ($)
- ------------------------------- -------- ------- ------ ----- ----------- -------------
Christopher Maus............... 2004 181,023 55,021 7,800 4,984,597 25,000
Chairman of the Board, 2003 166,730 3,389 7,800 -- --
President and Chief Executive 2002 180,000 60,000 7,800 -- --
Officer (2)(3)(4)(9)
Edward Siemens................. 2004 150,489 -- -- 1,661,532 --
Chief Operating Officer (5) 2003 138,944 -- -- 300,000 --
2002 150,000 -- -- 35,000 --
Brett Sweezy................... 2004 92,423 -- -- -- 30,950
Chief Financial Officer 2003 119,668 -- -- 400,000 --
(6)(7)(8) 2002 139,731 -- -- 30,000 --
- ----------
(1) References to a fiscal year refer to the calendar year in which such fiscal
year ends.
(2) Included in Mr. Maus's fiscal 2004 salary is $31,023 of compensation Mr.
Maus agreed to receive in shares of our common stock to improve our cash
flow.
(3) The Other Annual Compensation amounts for Mr. Maus represent a vehicle
allowance.
(4) The All Other Compensation for Mr. Maus represents $25,000 for services
rendered during the past five years as a member of our Board of Directors.
Mr. Maus received shares of our common stock with a fair value at date of
issuance for these services. See "Director Remuneration" for further
details.
(5) Included in Mr. Siemens' fiscal 2004 salary is $25,489 of compensation Mr.
Siemens agreed to receive in shares of our common stock to improve our cash
flow.
(6) Effective April 5, 2004, Mr. Sweezy resigned as our Chief Financial
Officer.
(7) Included in Mr. Sweezy's fiscal 2004 salary is $19,468 of compensation Mr.
Sweezy agreed to receive in shares of our common stock to improve our cash
flow.
(8) We periodically engage Mr. Sweezy for consulting services as needed. Other
Compensation for Mr. Sweezy includes $18,000 received for consulting
services rendered through June 30, 2004, as well as, common stock issued to
Mr. Sweezy under a consulting agreement with a fair value on the date of
issuance of $12,950
(9) The Company agreed to allow its president and chief executive officer,
Christopher Maus, to serve as a director and assist the purchaser of
certain intellectual property rights in the initial phases of product
development and rollout (see further discussion elsewhere in this
prospectus under "Business - Secured Interactive Technology, Inc."). On
March 1, 2005, Mr. Maus entered into an employment agreement with the
purchaser wbereby Mr. Maus will serve as Chairman of the Board and
consultant to the purchaser for a period of two years ending March 1, 2007.
In return for these services Mr. Maus will receive annual compensation of
$100,000 and a 10-year option to purchase up to 500,000 common shares of
the purchaser, exercisable at $0.001 per share and vesting periodically
upon reaching certain milestones as defined in the agreement. Mr. Maus has
agreed to remain available to devote the majority of his time to our
business operations, no adjustment is being made to Mr. Maus' current
compensation from us, the amount of which had previously been reduced by
mutual agreement as a cost cutting measure.
32
Mr. Maus is currently employed as our Chief Executive Officer on an at will
basis and currently receives an annual salary of $150,000. In addition, Mr.
Maus' 2004 salary above reflects additional compensation of $31,023 of
compensation he received in shares of our common stock authorized by the Board
of Directors to compensate Mr. Maus for a portion of the salary reductions taken
in recent years, while still preserving our cash flow. Mr. Maus is entitled to
participate in benefit plans made available to all employees. In addition, we
pay for his family's health insurance coverage. Mr. Maus was granted 800,000
stock options with an exercise price of $1.50 per share, of which 300,000 are
vested at this time, 100,000 vesting on December 31, 2004, and the remaining
400,000 vesting based upon achieving market capitalizations ranging from $100
million to $400 million. Any of the above unvested options vest immediately
should we change ownership through sale, merger, acquisition and should Mr. Maus
terminate his employment with us, any vested options can be exercised within two
years of the termination date, at which time all options expire. Should
Lifestream change ownership through sale, merger, acquisition, or stock
exchange, Mr. Maus has agreed to continue employment with the acquiring company
for two years and should we Mr. Maus' employment other than for cause, we agreed
to pay Mr. Maus' current salary and health insurance coverage for nine months.
Edward Siemens is currently employed as our Chief Operating Officer on an at
will basis and currently receives an annual salary of $125,000. In addition, Mr.
Siemens' 2004 salary above reflects additional compensation of $25,489 of
compensation he received in shares of our common stock authorized by the Board
of Directors to compensate Mr. Siemens for a portion of the salary reductions
taken in recent years, while still preserving our cash flow. Mr. Siemens is
entitled to participate in benefit plans made available to all employees. In
addition, we pay for his family's health insurance coverage. Mr. Siemens was
granted 300,000 stock options with an exercise price of $3.00 per share, of
which 260,000 are vested at this time with the remainder vesting at 40,000 on
December 31, 2005. Any of the above unvested options vest immediately should we
change ownership through sale, merger, acquisition and should Mr. Siemens
terminate his employment with us, any vested options can be exercised within 6
months of the termination date, at which time all options expire. Should
Lifestream change ownership through sale, merger, acquisition, or stock
exchange, Mr. Siemens has agreed to continue employment with the acquiring
company for two years.
Jackson Connolly is currently employed as our VP - Product Development on an at
will basis and currently receives an annual salary of $72,930. Mr. Connolly is
entitled to participate in benefit plans made available to all employees. In
addition, we pay for his family's health insurance coverage.
Nikki Nessan is currently employed as our VP - Finance on an at will basis and
currently receives an annual salary of $75,000. Mrs. Nessan is entitled to
participate in benefit plans made available to all employees. In addition, we
are obligated to pay for her family's health insurance coverage.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information relating to equity compensation plans
as of June 30, 2004:
Number of Securities Weighted-average Number of Securities Remaining
to Be Issued Upon Exercise Price of Available for Future Issuance
Exercise of Outstanding Under Equity Compensation Plan
Outstanding Options, Options, Warrants (excluding securities reflected
Warrants and Rights and Rights in column a)
------------------------ -------------------- ---------------------------------
Equity Compensation Plans Approved by Security Holders:
o 1998 Employee
Stock Option Plan 949,195 $2.31 1,050,805
o 2002 Employee
Stock Option Plan -- - 2,000,000
---------- ----- ----------
949,195 $2.31 3,050,805
Equity Compensation Plans Not Approved by Security Holders:
o 2004 Stock
Compensation Plan 9,138,427(2) $0.03 8,098,030
o Other (1) 3,906,612 $1.68
---------- ----- ----------
Total 13,994,234 $0.65 11,148,835
========== ===== ==========
- ----------
(1) Comprised of options granted and/or restricted stock and warrants issued to
employees and non-employees, including directors, consultants, advisers,
suppliers, vendors, customers and lenders for purposes including to provide
continued incentives, as compensation for services and/or to satisfy
outstanding indebtedness to them.
33
(2) Does not include 7,763,543 shares of common stock issued as stock awards
under the 2004 Stock Compensation Plan. The 2004 Stock Compensation Plan is
being submitted to our stockholders for ratification at the Annual Meeting.
1998 Employee Stock Option Plan. We have reserved 2,000,000 shares of our Common
Stock for issuance pursuant to stock options or stock appreciation rights
granted under its 1998 Employee Stock Option Plan (hereinafter, "the 1998
Plan"). The 1998 Plan is administered by either the Board or its Compensation
Committee, which determines, without limitation, the selection of the persons
who will be granted options under the 1998 Plan, the type of options to be
granted, the number of optioned shares and the option exercise price per share.
The terms and conditions of each option grant may differ and will be set forth
in the optionee's individual stock option agreement. Our officers, Directors,
key employees and consultants and those of our subsidiaries are eligible to
receive non-qualified stock options under the 1998 Plan. Only our officers,
Directors and employees or those of our subsidiaries are eligible to receive
incentive stock options.
2002 Employee Stock Option Plan. We have reserved 2,000,000 shares of our Common
Stock for issuance pursuant to stock options or stock appreciation rights
granted under its 2002 Stock Option Plan (hereinafter, "the 2002 Plan"). The
2002 Plan is administered by either the Board, or its Compensation Committee,
which determines, without limitation, the selection of the persons who will be
granted options under the 2002 Plan, the type of options to be granted, the
number of optioned shares and the option exercise price per share. The terms and
conditions of each option grant may differ and will be set forth in the
optionee's individual stock option agreement. Our officers, Directors, key
employees and consultants and those of our subsidiaries are eligible to receive
non-qualified stock options under the 2002 Plan. Only our officers, Directors
and employees or its subsidiaries are eligible to receive incentive stock
options.
2004 Stock Compensation Plan. We have reserved 25,000,000 shares of its Common
Stock for issuance pursuant to stock options, stock appreciation rights,
restricted stock, deferred stock or other stock based awards granted under its
2004 Stock Compensation Plan (hereinafter, "the 2004 SCP"). The 2004 SCP is
administered by either the Board, or its Compensation Committee, which
determines, without limitation, the selection of the persons who will be granted
awards under the 2004 SCP, the type of awards to be granted, the number of
optioned or restricted shares and the option exercise price per share. The terms
and conditions of each award may differ and will be set forth in the individual
agreement. Our officers, Directors, key employees and consultants and those of
its subsidiaries are eligible to receive non-qualified stock options under this
Plan.
We have periodically granted outside of its established plans non-qualified
stock options to purchase restricted shares of its Common Stock to key
individuals it desired to recruit, retain or motivate. All such grants were
approved by our Board. Each option was granted with an exercise price equal to,
or in excess of, the market price of our common stock as of the date of grant.
The following table contains information concerning stock options granted to the
Named Executive Officers during the most recently completed fiscal year ended
June 30, 2004. All of the options issued to these officers during fiscal 2004
were issued under the 2004 Stock Compensation Plan and were fully vested at time
of issuance.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
NAME OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION DATE
GRANTED (#) FISCAL YEAR (%) ($/SHARE)
- --------------------------- ----------- ---------------- ------------ ---------------
Christopher Maus........... 4,984,597 54.5% $0.03 6/22/14
Edward Siemens ............ 1,661,532 18.2% $0.03 6/22/14
Jack Connolly.............. 996,919 10.9% $0.03 6/22/14
Nikki Nessan............... 664,613 7.3% $0.03 6/22/14
34
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the Named Executive
Officers regarding exercises of options/SARs during the most recently completed
fiscal year ended June 30, 2004 and unexercised options/SARs held as of June 30,
2004.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED FY-END (#) FY-END (#)
ON VALUE
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE (1)
- --------------------- -------- -------- ---------------------- --------------------
Christopher Maus..... -- -- 5,706,597/600,000 $0/$0
Edward Siemens....... -- -- 2,070,032/286,500 $0/$0
Jack Connolly........ -- -- 1,143,658/67,335 $0/$0
Nikki Nessan......... -- -- 664,613/0 $0/$0
- ----------
(1) Based upon the market price of $0.029 per share on June 30, 2004,
determined on the basis of the closing selling price per share of our
Common Stock on the Over-The-Counter Bulletin Board, less the option
exercise price payable per share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 2004, the Board of Directors approved, and we subsequently issued,
2,288,002 shares of common stock to the following officers, in consideration for
a reduction in wages and as an incentive to continue employment with us:
AMOUNT OF WAGE
NAME TITLE SHARES (#) REDUCTION ($)
---- ----- ---------- --------------
Christopher Maus President & Chief Executive
Officer 820,001 29,869
Edward Siemens Chief Operating Officer 673,714 24,528
Brett Sweezy Former Chief Financial Officer 514,286 19,468
Jackson Connolly VP - Product Development 280,001 10,599
--------- -------
2,288,002 84,464
========= ======
Effective April 28, 2004, the Board approved each member of the Board be granted
common shares equal to $5,000 per year for up to five years of past service to
us. As a result 3,499,999 common shares were subsequently issued to members of
the Board for $105,000 of services performed as follows:
BOARD
BOARD MEMBER SHARES (#) COMPENSATION ($)
------------ ---------- ----------------
Christopher Maus 833,333 25,000
Robert Boyle 833,333 25,000
Michael Crane 833,333 25,000
William Gridley 833,333 25,000
Neil Luckianow 166,667 5,000
--------- -------
3,499,999 105,000
========= =======
35
Effective April 5, 2004, we engaged Brett Sweezy, CPA as a financial consultant
through June 30, 2004. Mr. Sweezy was previously our Chief Financial Officer
through April 4, 2004. We believe that the terms of our consulting arrangement
with Mr. Sweezy are at least as favorable to us as we could obtain from other
consultants with similar expertise and experience. For the fiscal year ended
June 30, 2004, we paid Mr. Sweezy consulting fees of $30,950.
On September 1, 2003, we engaged NCL & Associates, LLC, as a commissioned sales
agent. Neil Luckianow, who became a member of our Board on October 16, 2003, is
the Principal of NCL & Associates, LLC. We believe that the terms of our
arrangements with NCL & Associates, LLC are at least as favorable to us as we
could obtain from an unrelated third party performing similar services. For each
of the two years ended June 30, 2004 and 2003, we paid NCL & Associates, LLC
commissions of $ 3,444 and $0, respectively.
During fiscal 2003, Robert Boyle, a member of our Board, and Brett Sweezy, our
former Chief Financial Officer, purchased 50,000 and 97,500 common shares,
respectively, pursuant to our private placement of common shares. These common
shares were purchased by Mssrs. Boyle and Sweezy at the same $0.10 per share
price paid by all investors in this offering.
Through fiscal 2001, the Board periodically approved the advancement of funds to
Christopher Maus, our Chairman of the Board, President and Chief Executive
Officer. The underlying promissory note was unsecured, had a stated interest
rate of 8.75% and required bi-weekly repayments of principal and interest
through May 23, 2014. On May 1, 2002, the Board indefinitely suspended the
bi-weekly servicing requirement. During fiscal 2002, Mr. Maus made principal
repayments of $61,621, which included the application of a $60,000 bonus awarded
by the Board to Mr. Maus for his fiscal 2002 performance. On August 29, 2003,
the Board awarded Mr. Maus a $3,389 bonus for his fiscal 2003 performance with
such bonus applied in its entirety against the accrued interest on the
outstanding note receivable balance. On June 22, 2004, the Board awarded Mr.
Maus a $48,840 bonus for his fiscal 2004 performance with a portion of such
bonus applied to the note receivable balance reducing the outstanding balance to
$0 at June 30, 2004.
During fiscal 2001 and 2002, we conducted a private placement offering of
unsecured convertible notes from which it received $7,647,500 in proceeds. For
every two dollars of 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. RAB Europe Fund Ltd., together with its affiliates (hereinafter
"RAB"), purchased notes having an aggregate principal face amount of $5,470,000.
RAB beneficially owns in excess of 5% of our common stock. The notes issued to
RAB exclusively contained an anti-dilution provision providing for a
formula-driven, then indeterminable downward adjustment of their conversion rate
should we subsequently issue common shares at a price below the conversion rate
while such notes remained outstanding. In connection with the preceding
offering, we agreed to pay certain individuals and entities, including RAB, each
a commission, payable in common shares, equal to five percent of the offering
proceeds they procured. RAB earned and received commissions of $120,000 in
fiscal 2002.
During fiscal 2003, the conversion rate of the notes held by RAB was adjusted
downward from the original $1.00 per common share to $0.10 per common share in
connection with a private placement of our common stock at $0.10 per share that
commenced in March 2003. RAB was also granted a one-time right to convert a
portion of the debentures after the closing of any subsequent private offering
at less than $0.10 per common share (limited to 9.99% ownership). Concurrently,
we obtained RAB's agreement to forfeit its prospective anti-dilution rights and
to cancel the stock purchase warrants held by it in exchange for 1,000,000
shares of our common stock. The aggregate fair value assigned to the common
shares of $100,000 was recognized by us as a financing cost in fiscal 2003. At
June 30, 2004, notes with an aggregate principal face amount of $3,840,000
remained outstanding that accrue interest at the prime rate plus two percent
(6.25% at June 30, 2004) and become due and payable on various dates between
July 1, 2006 and November 20, 2006, all of which are held by RAB. In November
2004, RAB Europe Fund Ltd assigned these outstanding notes to its affiliate RAB
Special Situations LP.
In November 2004, RAB Special Situations LP entered into an agreement with the
Holder of Lifestream's note payable, under which the Holder assigned to RAB
Special Situations LP all of their right, title and interest under the note
payable. At the time of the assignment, the outstanding amount due under the
note payable was $920,323. Subsequently, Lifestream and RAB Special Situations
LP entered into a series of amendments to the note payable and related loan
documents under which:
o the aggregate amount of the note was increased from $920,323 to
$2,869,740, after giving effect to an original issue discount in the
amount of $449,417;
o $974,709 of the increase was funded November 12, 2004 resulting in net
cash proceeds to us of $750,000;
o $974,708 of the increase was funded December 15, 2004, resulting in
net cash proceeds to us of $750,000;
o the new loan balance of $2,869,740 is to be repaid in monthly
installments of $100,000 commencing May 1, 2005, with the outstanding
balance becoming due and payable on February 1, 2006;
36
o we paid a commitment fee to induce the principal stockholder to enter
into the series of amendments in the amount of $500,000, paid by
issuance of a promissory note (commitment fee note) which is payable
on February 1, 2006, in cash or, at our option, in shares of its
common stock at a 20% discount to market. The commitment fee note is
also convertible at the option of the note holder at a conversion
price of $.05 per, subject to adjustment;
o we agreed to use our best efforts to file a registration statement
covering the shares issuable under the commitment fee note, and
o the note payable continues to be secured by substantially all of
Lifestream's assets.
As an inducement to modify the terms of the above note payable, we reduced the
conversion rate on the $3,840,000 outstanding notes payable held by RAB from
$0.10 to $0.05.
During fiscal 2002, we executed an agreement with Michael Crane, a principal
shareholder and member of the Board, whereby we repaid $200,000 in outstanding
principal and accrued interest against debt obligations incurred to Mr. Crane
during fiscal 2001 and issued Mr. Crane an unsecured convertible note for the
remaining $469,984 aggregate principal balance. The note accrued interest at the
prime rate plus two percent, was immediately convertible at Mr. Crane's option
into common stock of our at a rate of $1.00 per share, and was to become due and
payable on August 1, 2003. In connection with the preceding agreement, we issued
Mr. Crane 40,000 common shares and warrants allowing him to purchase 134,000
additional common shares at $1.00 per share. The agreement further stipulated
that for every subsequent quarter the note remained outstanding that we would
issue Mr. Crane additional warrants for the purchase of 23,500 common shares at
$1.00 per share. The aggregate fair value assigned to the common shares and
warrants of $322,159 was recognized by us as a financing cost in fiscal 2002.
During fiscal 2003, Mr. Crane agreed to convert the $469,984 principal balance,
as well as $58,622 in accrued interest thereon, into 5,286,060 common shares,
concurrent with a private placement by us of our common stock to unrelated
parties at $0.10 per share. As of the date of this prospectus, there are no
warrants or principal balances outstanding related to this transaction.
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT (1)
The following table sets forth certain information regarding the beneficial
ownership of our Common Stock as of the date of this prospectus by (a) each
person known by us to be the beneficial owner of more than five percent of the
outstanding shares of Common Stock, (b) each director, (c) each of the Named
Executive Officers and (d) all current directors and executive officers as a
group. A person is also deemed to be a beneficial owner of any securities to
which the person has the right to acquire beneficial ownership within sixty
days. All shares are subject to the named person's sole voting and investment
power unless otherwise indicated.
SHARES PERCENT OF SHARES
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER (2) OWNED OWNED (3)
-------------------------------------------------------------- ------------ ------------------
DIRECTORS AND OFFICERS
Christopher Maus (4)..................................... 10,066,131 4.14%
Michael Crane (5)........................................ 6,792,926 2.86%
Robert Boyle (6)......................................... 989,233 Less than 1%
William Gridley (7)...................................... 1,032,333 Less than 1%
Neil Luckianow........................................... 166,667 Less than 1%
Edward Siemens (8)....................................... 2,867,631 1.20%
All Directors and Officers as a Group (8 persons) (9).... 23,750,027 9.61%
37
OTHER BENEFICIAL OWNERS:
RAB Special Situations LP (10)............................ 24,223,333 9.99%
c/o RAB Partners Ltd
No. 1 Adam Street
London W2CN 6LE
United Kingdom
- ----------
(1) Based upon information furnished to us by the beneficial owners or
otherwise obtained from our stock transfer books.
(2) Unless otherwise indicated, the business address for each beneficial owner
is c/o Lifestream Technologies, Inc., 510 Clearwater Loop, Suite 101, Post
Falls, Idaho 83854.
(3) Percentage of ownership includes 237,168,735 actual shares of Common Stock
outstanding on the date of this prospectus. Shares of Common Stock subject
to stock options or warrants that are currently exercisable or will become
exercisable within 60 days of the date of this prospectus, and shares of
Common Stock subject to convertible term notes that are currently
convertible or will become convertible within 60 days of the date of this
prospectus, are deemed outstanding for computing the beneficial ownership
percentage of the person or group holding such options, warrants and notes,
but are not deemed outstanding for computing the percentage of any other
person or group.
(4) Includes 5,806,597 shares issuable upon exercise of options.
(5) Includes 72,000 shares issuable upon exercise of options.
(6) Includes 122,000 shares issuable upon exercise of options.
(7) Includes 72,000 shares issuable upon exercise of options.
(8) Includes 2,189,532 shares issuable upon exercise of options.
(9) Includes 10,095,235 shares issuable upon exercise of options.
(10) RAB Special Situations LP owns convertible term notes of ours that can be
converted into 69,600,000 shares of our Common Stock. However, RAB Special
Situations LP does not have the right to convert any debt, to the extent
such conversion would cause RAB Special Situations LP, together with its
affiliates, to have acquired a number of shares of our Common Stock during
the 60-day period ending on the date of conversion which, when added to the
number of shares of our Common Stock held at the beginning of such 60-day
period, would exceed 9.99% of the number of shares of our Common Stock then
outstanding. Lifestream also may not elect to pay the convertible notes
through the issuance of our common stock if such issuance would cause RAB
to exceed the 9.99% limitation on beneficial ownership. The number of
shares beneficially owned by RAB Special Situations LP in the table above,
reflects this limitation.
DESCRIPTION OF SECURITIES
Lifestream is currently authorized to issue up to 750,000,000 shares of common
stock, par value $.001 per share and 15,000,000 shares of preferred stock, par
value $.001 per share. As of the date of this prospectus, there are 237,168,735
shares of common stock and no shares of preferred stock outstanding.
On December 1, 2003, a special meeting of our stockholders was held, at which,
stockholders authorized an increase in the number of shares of common stock we
are authorized to issue from 100,000,000 to 250,000,000. On the October 15, 2003
record date for the meeting, there were 99,741,024 shares of common stock issued
and outstanding. At the meeting, holders of 74,504,565 shares of common stock
were present, in person or by proxy. Of the shares present, 72,982,396 shares
were voted in favor of the increase in authorized shares, 1,371,492 shares were
voted against the increase and 150,677 shares abstained.
38
On April 28, 2004, a special meeting of our stockholders was held, at which,
stockholders authorized an increase in the number of shares of common stock we
are authorized to issue from 250,000,000 to 750,000,000. On the March 4, 2004
record date for the meeting, there were 154,475,276 shares of common stock
issued and outstanding. At the meeting, holders of 108,649,129 shares of common
stock were present, in person or by proxy. Of the shares present, 104,064,854
shares were voted in favor of the increase in authorized shares, 4,327,267
shares were voted against the increase and 257,008 shares abstained.
COMMON STOCK
Subject to the dividend rights of preferred stockholders, common stockholders
share dividends on a proportionate basis, as may be declared by the board of
directors. Upon our liquidation, dissolution or winding up, after payment to
creditors and holders of our outstanding preferred stock, our remaining assets,
if any, would be divided proportionately on a per share basis among the holders
of our common stock.
Each share of our common stock has one vote. Holders of our common stock do not
have cumulative voting rights. This means that the holders of a plurality of the
shares voting for the election of directors can elect all of the directors. In
that event, the holders of the remaining shares will not be able to elect any
directors. Our by-laws provide that a majority of the outstanding shares of our
common stock are a quorum to transact business at a stockholders' meeting. Our
common stock has no preemptive, subscription or conversion rights. Also, our
common stock is not redeemable.
PREFERRED STOCK
We are authorized to issue a total of 15,000,000 shares of preferred stock, par
value $.001 per share. Our board of directors may issue preferred stock by
resolutions, without any action of the stockholders. These resolutions may
authorize issuance of preferred stock in one or more series. In addition, the
board of directors may fix and determine all privileges and rights of the
authorized preferred stock series including:
o dividend and liquidation preferences,
o voting rights,
o conversion privileges, and
o redemption terms.
We include preferred stock in our capitalization to improve our financial
flexibility. However, we could use preferred stock to preserve control by
present management, in the event of a potential hostile takeover. In addition,
the issuance of large blocks of preferred stock could have a dilutive effect to
existing holders of our common stock.
We have neither created any series of preferred stock nor issued any shares of
preferred stock as of the date of this prospectus.
TRANSFER AGENT
The transfer agent for the shares of our common stock is Nevada Agency and Trust
Company, 50 West Liberty, Suite 880, Reno, Nevada 89501.
As permitted by the Nevada General Corporation Law, our bylaws require that, to
the maximum extent and in the manner permitted by the General Corporation Law,
indemnify each of our directors and officers against expenses (including
attorneys' fees), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was acting as our agent.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors and officers, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933, and is,
therefore, unenforceable.
SELLING SECURITY HOLDERS
ASSIGNMENT OF AND MODIFICATIONS TO NOTE PAYABLE
On November 8, 2004, RAB Special Situations LP, an affiliate of a principal
stockholder of Lifestream, entered into an agreement with the holder of
Lifestream's note payable, under which the holder assigned to RAB Special
Situations LP all of their right, title and interest under the note payable. At
the time of the assignment, the outstanding amount due under the note payable
was $920,323.
Subsequently, Lifestream and RAB Special Situations LP entered into a series of
amendments to the note payable and related loan documents, the terms of which
are described elsewhere in this prospectus.
39
In connection with the amended loan documents, we paid a $500,000 commitment fee
to induce the principal stockholder to enter into the amendments, paid by our
issuance of a convertible promissory note that is payable on February 1, 2006,
in cash or, at our option, in shares of our common stock at a 20% discount to
market. The promissory note is also convertible at the option of the note holder
at a conversion price of $.05 per share, subject to adjustment.
We agreed to file a registration statement covering the shares issuable under
the commitment fee note. This prospectus covers the resale of those shares.
The number of shares issuable upon conversion of the convertible promissory note
and the conversion price are subject to adjustment in the event of:
o stock splits, subdivisions, dividends and combinations and/or
reclassifications or our common stock;
o distributions on account of our common stock; and/or
o issuance of additional common stock upon the completion of certain
equity financings at less than the conversion price of the convertible
promissory note.
In connection with this transaction, Lifestream agreed to reduce the conversion
rate of $3,840,000 previously outstanding convertible debentures held by RAB
Europe Fund, Ltd, an affiliate of RAB Special Situations LP, from $0.10 to
$0.05. Conversion of all outstanding convertible notes payable with these two
entities is limited to the extent such exercise would not result in their
beneficial ownership of 9.9% or more of our then outstanding common shares
OTHER SHARES COVERED BY THIS PROSPECTUS
This prospectus also covers an aggregate of 10,800,000 shares of our common
stock as follows:
o On October 29, 2004, we issued 4,800,000 shares of our common stock to
the James C. Czirr Trust, as the designee of James C. Czirr, in
consideration of services rendered under a three-month agreement dated
September 8, 2004, to develop and implement an investor relations
program for us.
o On January 11, 2005, we issued 3,000,000 shares of our common stock to
Equitilink LLC under a four-month agreement dated January 11, 2005 to
implement and maintain a program directed to its subscriber base to
increase the investment community's awareness of our products and
operations.
o On January 11, 2005 we issued 3,000,000 shares of our common stock to
Bernard Schmitt, as designee of Market Pulse, under a four month
agreement dated January 11, 2005 to develop and coordinate a program
directed to its subscriber base to increase public awareness of
Lifestream through the preparation and dissemination of newsletters
and website profiles.
In connection with each of the foregoing agreements, we agreed to register the
resale of our common stock issued thereunder.
OWNERSHIP TABLE The following table sets forth:
o the name of each selling security holder;
o the amount of common stock owned beneficially by each selling security
holder (which includes those shares underlying the convertible
debentures);
o the number of shares that may be offered by each selling security
holder pursuant to this prospectus;
o the number of shares to be owned by each selling security holder
assuming sale of the shares covered by this prospectus; and
o the percentage of our common stock to be owned by each selling
security holder assuming sale of the shares covered by this prospectus
(based on 237,168,735 shares of common stock of Lifestream outstanding
as of the date of this prospectus), as adjusted to give effect to the
issuance of shares upon the exercise of the named selling security
holder's warrants, but no other person's warrants.
Beneficial ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to outstanding voting
securities, as well as any voting securities that the person has the right to
acquire within 60 days, through the conversion or exercise of any security or
other right. The information as to the number of shares of our common stock
owned by each selling security holder is based upon our books and records and
the information provided by our transfer agent.
We may amend or supplement this prospectus, from time to time, to update the
disclosure set forth in the table. Because the selling security holders
40
identified in the table may sell some or all of the shares owned by them which
are included in this prospectus, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the shares, no
estimate can be given as to the number of shares available for resale hereby
that will be held by the selling security holders upon termination of this
offering. We have, therefore, assumed for purposes of the following table, that
the selling security holders will sell all of the shares owned beneficially by
them, which are covered by this prospectus, but will not acquire or sell any
other shares of our common stock.
NUMBER OF NUMBER OF
NUMBER OF SHARES SHARES TO BE SHARES OWNED PERCENT AFTER
NAME OF SELLING SECURITY HOLDER BENEFICIALLY OWNED OFFERED AFTER OFFERING OFFERING
- ------------------------------- ------------------ ------------ -------------- -------------
RAB Special Situations LP 24,223,333 (1) 20,833,333 3,390,000 1.4%
Equitilink LLC 3,000,000 (2) 3,000,000 - --
Bernard Schmitt 3,000,000 3,000,000 - --
James C. Czirr Trust 4,800,000 4,800,000 - --
---------- ---------- --------- ---
TOTAL 35,023,333 31,633,333 3,390,000
========== ========== ========= ===
- ----------
* less than 1%
(1) RAB Special Situations LP owns convertible term notes of ours that can be
converted into 69,600,000 shares of our Common Stock. However, RAB Special
Situations LP does not have the right to convert any debt, to the extent
such conversion would cause RAB Special Situations LP, together with its
affiliates, to have acquired a number of shares of our Common Stock during
the 60-day period ending on the date of conversion which, when added to the
number of shares of our Common Stock held at the beginning of such 60-day
period, would exceed 9.99% of the number of shares of our Common Stock then
outstanding. The number of shares beneficially owned by RAB Special
Situations LP in the table above, reflects this limitation. Richard Phillip
Richards, Director- RAB Special Situations LP, makes decisions on behalf of
the selling security holder relating to voting, investment and disposition
of the shares registered to RAB Special Situations LP. Mr. Richards
disclaims beneficial ownership of the securities registered in the name of
the selling security holder.
(2) Tom Mahoney makes decisions on behalf of the selling security holder
relating to voting, investment and disposition of the shares registered to
Equitilink LLC. Mr. Mahoney disclaims beneficial ownership of the
securities registered in the name of the selling security holder.
Lifestream agreed to pay for all costs and expenses in the issuance, offer, sale
and delivery of the shares of our common stock. These include all expenses and
fees of preparing, filing and printing the registration statement and mailing of
these items. Lifestream will not pay selling commissions and expenses for any
sales by the selling security holders, but will indemnify the selling security
holders against civil liabilities including liabilities under the Securities Act
of 1933.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
41
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
Broker-dealers may agree to sell a specified number of such shares at a
stipulated price per share, and, to the extent such broker-dealer is unable to
do so acting as agent for us or a selling stockholder, to purchase as principal
any unsold shares at the price required to fulfill the broker-dealer commitment.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions, which may involve block transactions and
sales to and through other broker-dealers, including transactions of the nature
described above, in the over-the-counter markets or otherwise at prices and on
terms then prevailing at the time of sale, at prices then related to the
then-current market price or in negotiated transactions. In connection with such
resales, broker-dealers may pay to or receive from the purchasers of such
shares, commissions as described above.
The selling stockholders may, from time to time, pledge or grant a security
interest in some or all of the shares or common stock or warrants owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock, from
time to time, under this prospectus; provided that, if the change is material,
we will file a post effective amendment to the registration statement of which
this prospectus forms a part, including modifications to this prospectus
amending the list of selling stockholders to include the pledgees, transferees
or other successors-in-interest.
The selling stockholders also may transfer the shares of common stock in other
circumstances, in which case, a supplement to this prospectus will be filed to
disclose appropriate information about the transferees, unless the change is
material in which case we will file a post-effective amendment to the
registration statement of which this prospectus forms a part.
The selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act of 1933 in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933.
The selling stockholders have informed us that they do not have any agreement or
understanding, directly or indirectly, with any person to distribute the common
stock.
We are required to pay all fees and expenses incident to the registration of the
shares. We have agreed to indemnify the selling stockholders against certain
losses, claims, damages and liabilities, including liabilities under the
Securities Act of 1933.
LEGAL MATTERS
Schneider Weinberger & Beilly LLP has reviewed the validity of the issuance of
the shares of common stock offered by this prospectus. Schneider Weinberger &
Beilly LLP is located at 2200 Corporate Blvd., NW, Boca Raton, Florida 33431.
EXPERTS
The financial statements of Lifestream Technologies, Inc. as of and for the
fiscal years ended June 30, 2004 and 2003, appearing in this prospectus have
been audited by BDO Seidman, LLP, independent registered public accountants, to
the extent and for the periods set forth in their report (which contained an
explanatory paragraph regarding the Company's ability to continue as a going
concern) appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
We have filed with the SEC the registration statement on Form SB-2 under the
Securities Act for the common stock offered by this prospectus. This prospectus,
which is a part of the registration statement, does not contain all of the
information in the registration statement and the exhibits filed with it,
42
portions of which have been omitted as permitted by SEC rules and regulations.
For further information concerning us and the securities offered by this
prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any
contract or other document referred to are not necessarily complete. In each
instance, we refer you to the copy of the contracts and/or other documents filed
as exhibits to the registration statement, and these statements are qualified in
their entirety by reference to the contract or document.
The registration statement, including all exhibits, may be inspected without
charge at the SEC's Public Reference Room at 450 Fifth Street, N.W. Washington,
D.C. 20549. You may request copies of these documents by writing to the
Securities and Exchange Commission and paying the required fee for copying.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for more
information about the operation of their public reference room. Copies of our
filings are also available at the Securities and Exchange Commission website at
http://www.sec.gov.
The registration statement, including all exhibits and schedules and amendments,
has been filed with the SEC through the Electronic Data Gathering, Analysis and
Retrieval system. Following the effective date of the registration statement
relating to this prospectus, we will continue to be subject to the reporting
requirements of the Exchange Act and in accordance with these requirements, will
continue to file annual, quarterly and special reports, and other information
with the SEC. We also intend to furnish our stockholders with annual reports
containing audited financial statements and other periodic reports as we think
appropriate or as may be required by law.
Copies of our SEC filings and other information about us are also available on
our website at http://www.lifestreamtech.com. The information on our website is
neither incorporated into, nor a part of, this prospectus.
43
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
-----
Report of Independent Registered Public Accounting Firm................F-2
Consolidated Balance Sheets............................................F-3
Consolidated Statements of Loss........................................F-5
Consolidated Statements of Changes in Stockholders' Deficit............F-6
Consolidated Statements of Cash Flows..................................F-7
Notes to Consolidated Financial Statements.............................F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Lifestream Technologies, Inc. and Subsidiaries
Post Falls, Idaho
We have audited the accompanying consolidated balance sheets of Lifestream
Technologies, Inc. and subsidiaries as of June 30, 2004 and 2003, and the
related consolidated statements of loss, changes in stockholders' deficit and
cash flows for the fiscal years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Lifestream Technologies, Inc. and subsidiaries at June 30, 2004 and 2003, and
the results of their operations and their cash flows for the fiscal years then
ended, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
accompanying consolidated financial statements, 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 a
stockholders' deficit, including a substantial accumulated deficit, at June 30,
2004. The aforementioned factors raise substantial doubt as to the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
Spokane, Washington
August 16, 2004
F-2
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (Note 2)
JUNE 30,
-------------------------
2004 2003
---------- ----------
Current assets:
Cash and cash equivalents (Note 11) .......................................... $ 590,196 $1,370,126
Restricted cash held in escrow (Note 11) ..................................... 25,293 --
Accounts receivable, net of allowance for doubtful accounts of
$298,398 and $453,645, respectively (Notes 4 and 11) ....................... 495,460 269,398
Inventories, net (Notes 5 and 11) ............................................ 749,304 1,612,590
Prepaid expenses ............................................................. 164,912 38,506
---------- ----------
Total current assets ............................................................ 2,025,165 3,290,620
Property and equipment, net (Notes 6, 11 and 12) ................................ 339,207 647,527
Patent rights, net of accumulated amortization of $1,639,794 and $1,556,851......
Notes 11 and 17) ........................................................... 480,002 562,945
Deferred financing costs (Note 13) .............................................. 609,467 422,897
Note receivable - officer (Note 7) .............................................. -- 38,728
Other ........................................................................... 158,336 115,208
---------- ----------
Total assets .................................................................... $3,612,177 $5,077,925
========== ==========
F-3
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' DEFICIT (NOTE 2)
JUNE 30,
------------------------------
2004 2003
------------ ------------
Current liabilities:
Accounts payable .............................................................. $ 940,889 $ 2,173,720
Accrued liabilities (Note 9) .................................................. 827,795 766,047
Deferred income (Note 10) ..................................................... -- 250,000
Current maturities of notes payable (Note 11) ................................. 1,169,031 900,000
Current maturities of capital lease obligations (Note 12) ..................... 28,148 147,964
------------ ------------
Total current liabilities ........................................................ 2,965,863 4,237,731
Note payable, less current maturities (Note 11) .................................. -- 1,069,932
Capital lease obligations, less current maturities (Note 12) ..................... 5,880 42,754
Convertible notes, principal face amounts of $6,036,376 and $5,270,000,
respectively (Note 13) ........................................................ 2,703,961 2,386,082
------------ ------------
Total liabilities ................................................................ 5,675,704 7,736,499
Commitments and contingencies (Notes 9, 11, 12, 13, 15, 16 and 17)
Stockholders' deficit (Notes 14 and 15):
Preferred stock, $.001 par value; 15,000,000 shares authorized; none issued
or outstanding............................................................... -- --
Common stock, $.001 par value; 750,000,000 and 100,000,000 shares
authorized, respectively; 181,341,686 and 92,894,590 issued and
outstanding, respectively ................................................... 181,342 92,895
Additional paid-in capital .................................................... 54,425,383 39,511,226
Accumulated deficit ........................................................... (56,670,252) (42,262,695)
------------
Total stockholders' deficit ...................................................... (2,063,527) (2,658,574)
------------ ------------
Total liabilities and stockholders' deficit ...................................... $ 3,612,177 $ 5,077,925
============ ============
F-4
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
FISCAL YEAR FISCAL YEAR
ENDED ENDED
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Net sales ............................................................. $ 2,603,257 $ 4,236,653
Cost of sales ......................................................... 2,698,673 3,516,827
------------- -------------
Gross profit (loss) ................................................... (95,416) 719,826
------------- -------------
Operating expenses:
Sales and marketing .............................................. 2,142,092 1,003,543
General and administrative ....................................... 2,672,043 3,245,396
Product research and development ................................. 57,510 296,963
Depreciation and amortization .................................... 309,656 442,432
Loss on disposal of equipment .................................... 87,756 12,969
------------- -------------
Total operating expense ............................................... 5,269,057 5,001,303
------------- -------------
Loss from operations .................................................. (5,364,473) (4,281,477)
------------- -------------
Non-operating income (expense):
Interest income .................................................. 8,476 17,624
Amortization of convertible notes discount (Note 13) ............. (5,798,503) (1,703,431)
Interest and financing expenses (Notes 11 and 13) ................ (2,662,394) (1,733,437)
Amortization of deferred financing costs (Notes 11 and 13) ....... (815,838) (349,835)
Gain on unexercised option and purchase agreement (Note 10)....... 250,000 --
Other, net ....................................................... (24,825) (56,389)
------------- -------------
Total non-operating expense, net ...................................... (9,043,084) (3,825,468)
------------- -------------
Net loss .............................................................. $ (14,407,557) $ (8,106,945)
============= =============
Net loss per common share - basic and diluted ......................... $ (0.11) $ (0.24)
============= =============
Weighted average number of common shares outstanding -
basic and diluted .................................................. 127,862,844 33,229,702
============= =============
F-5
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ------------ ------------ ------------ ------------
Balances as of July 1, 2002 ...................... 24,967,997 $ 24,968 $ 32,805,527 $(34,155,750) $ (1,325,255)
Common stock issued for cash, net of issuance
costs (Note 14) ............................... 34,837,500 34,838 3,448,912 -- 3,483,750
Common stock issued for services (Note 14) ....... 4,567,140 4,567 468,397 -- 472,964
Common stock issued upon conversion of
convertible debt and accrued interest
(Note 14) ..................................... 22,901,730 22,902 2,267,272 -- 2,290,174
Common stock issued in settlement of a stock
purchase agreement dispute (Note 14) .......... 1,040,816 1,041 (1,041) -- --
Retroactive issuance of additional note
conversion shares to a principal shareholder
(Note 14) ..................................... 4,579,407 4,579 453,362 -- 457,941
Compensatory stock options issued for services
(Note 15) ................................... -- -- 68,797 -- 68,797
Net loss ......................................... -- -- -- (8,106,945) (8,106,945)
----------- ------------ ------------ ------------ ------------
Balances as of June 30, 2003 ..................... 92,894,590 92,895 39,511,226 (42,262,695) (2,658,574)
Common stock issued for services (Note 14) ....... 1,505,844 1,506 204,981 -- 206,487
Common stock issued for loan issuance costs
(Note 11) ..................................... 2,593,333 2,593 189,107 -- 191,700
Common stock issued to employees for services
(Note 14) ................................... 975,669 976 116,105 -- 117,081
Common stock issued for cash upon conversion of
warrants, net of issuance costs (Note 14) ..... 6,538,461 6,538 320,385 -- 326,923
Common stock issued upon conversion of
convertible debt and accrued interest
(Note 14) .................................... 76,833,789 76,834 6,107,690 -- 6,184,524
Beneficial conversion feature and fair value of
warrants issued with the convertible debt
(Notes 13 and 14) ............................. -- -- 7,975,889 -- 7,975,889
Net loss ......................................... -- -- -- (14,407,557) (14,407,557)
----------- ------------ ------------ ------------ ------------
Balances as of June 30, 2004...................... 181,341,686 $ 181,342 $ 54,425,383 $(56,670,252) $ (2,063,527)
=========== ============ ============ ============ ============
F-6
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR FISCAL YEAR
ENDED ENDED
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Cash flows from operating activities:
Net loss ................................................................. $(14,407,557) $ (8,106,945)
Non-cash items:
Depreciation and amortization of property and equipment and patent
and license rights ................................................... 309,656 442,432
Amortization of convertible debt discount (Note 13) .................... 5,798,503 1,703,431
Amortization of deferred financing costs (Notes 11 and 13) ............. 815,838 349,835
Provision for (recovery of) doubtful accounts .......................... (155,247) 407,905
Increase (reduction) in inventory valuation allowance .................. (353,759) 315,734
Bonus compensation applied to note receivable - officer (Note 7) ....... 38,728 --
Loss on disposal of equipment .......................................... 87,756 12,969
Retroactive issuance of additional note conversion shares to a
principal shareholder as an inducement (Note 14) ..................... -- 457,941
Issuances of compensatory common stock, options and warrants for
employee and non-employee services (Note 14) ......................... 323,568 296,922
Beneficial conversion feature of convertible debt issued to related
party (Note 13) ...................................................... 1,728,889 --
Net changes in assets and liabilities:
Accounts receivable .................................................... (70,815) (369,285)
Inventories ............................................................ 1,217,045 658,301
Prepaid expenses ....................................................... (126,406) 107,607
Accounts payable ....................................................... (1,232,831) 802,345
Accrued liabilities .................................................. 765,648 461,075
Deferred income (Note 10) .............................................. (250,000) 250,000
Change in other non-current assets ..................................... 148,572 (423)
------------ ------------
Net cash used in operating activities ....................................... (5,362,412) (2,210,156)
------------ ------------
Cash flows from investing activities:
Capital expenditures ..................................................... (6,149) (16,407)
------------ ------------
Net cash used in investing activities ....................................... (6,149) (16,407)
------------ ------------
Cash flows from financing activities:
Proceeds from issuances of convertible notes, net (Note 13) .............. 5,244,592 --
Proceeds from sales of common stock (Note 14) ........................... 326,923 3,483,750
Payments on capital lease obligations (Note 12) .......................... (156,690) (42,527)
Payments of borrowings under credit facility (Note 11) ................... -- (251,086)
Payments on notes payable (Note 11) ...................................... (800,901) (33,302)
Payments on convertible notes (Note 13) .................................. -- (750,000)
Restricted cash equivalent (Note 11) ..................................... (25,293) 600,000
------------ ------------
Net cash provided by financing activities ................................... 4,588,631 3,006,835
------------ ------------
Net increase (decrease) in cash and cash equivalents ........................ (779,930) 780,272
Cash and cash equivalents at beginning of year .............................. 1,370,126 589,854
------------ ------------
Cash and cash equivalents at end of year .................................... $ 590,196 $ 1,370,126
============ ============
F-7
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR FISCAL YEAR
ENDED ENDED
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Supplemental schedule of cash activities:
Interest paid in cash ......................................... $ 264,277 $ 459,398
Supplemental schedule of non-cash financing activities:
Discount on beneficial conversion feature and fair value of
detachable stock warrants (Note 13) ......................... $6,247,000 $ --
Convertible notes and accrued interest converted to common
stock (Note 14) ............................................. $6,184,524 $2,290,174
Issuance of common stock in exchange for financing costs
(Notes 11 and 14) .......................................... $ 191,700 $ 807,941
F-8
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND ORGANIZATIONAL STRUCTURE
Lifestream Technologies, Inc., together with its wholly-owned subsidiaries (the
"Company"), is a Nevada corporation headquartered in Post Falls, Idaho, and is a
marketer of a proprietary cholesterol monitor 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
cholesterol monitors 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. The Company also markets and sells dry-chemistry test strips utilized
with its cholesterol monitor for measuring total cholesterol.
The Company's 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 throughout the United States.
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 flow, since its inception. As a result, the Company
continued to have significant working capital and stockholders' deficits
including a substantial accumulated deficit at June 30, 2004. In recognition of
such, its independent registered public accountants included an explanatory
paragraph in their report on the Company's consolidated financial statements for
the fiscal years ended June 30, 2004 and 2003, that expressed substantial doubt
regarding the Company's ability to continue as a going concern.
In order to address the Company's ability to continue as a going concern, it has
initiated or completed the following financing activities:
o On September 13, 2003, the Company completed a private placement
offering of $3,350,000 in unsecured convertible debentures from which
it received $3,067,000 in net cash proceeds;
o On February 19, 2004, the Company completed an additional private
placement offering of $2,775,000 in unsecured convertible debentures
from which it received $2,077,592 in net cash proceeds;
o On March 1, 2004, the Company received $100,000 in net proceeds from
the issuance of an unsecured convertible debenture in the principal
amount of $122,000;
o On April 28, 2004, the Company's shareholders elected to increase its
authorized common shares to 750 million shares for use in future
financing transactions; and
o During the second half of fiscal 2004, the Company received
approximately $327,000 in proceeds from the exercise of warrants
issued in connection with prior financings.
With respect to the Company's sales, gross margins and operating expenses, it
has:
o Continued to reduce the cost of its current cholesterol monitor and
expects to realize improved gross margins;
o Depleted the remaining inventory of its higher-cost, predecessor
device during fiscal 2004;
o Continued negotiations with a major retailer, as well as smaller
retailers, to sell its products;
o Developed a continuing education program implemented in the first
quarter of fiscal 2005 to broaden awareness and educate pharmacists on
the benefits of the it's products;
o Developed a consumer point-of-sale awareness program for those
patients purchasing certain cholesterol-lowering prescriptions, which
is currently being tested;
o Continued to conduct marketing activities it began in October 2003,
primarily targeted radio advertising;
o Continued to support and monitor the Medicare reimbursement
considerations of the federal government for cholesterol testing;
o Continued to operate with a core staff of only 19 employees; and
o Continued to implement cost-cutting measures to reduce administrative,
research and development costs.
F-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company will continue to require additional financing to fund its
longer-term operating needs, including continuing marketing activities to build
broad public awareness of its cholesterol monitor. The amount of additional
funding needed to support the Company until that point in time at which it
forecasts that its business will become self-sustaining from internally
generated cash flow is highly dependent upon the Company's ability to continue
conducting marketing activities and the success of these campaigns on increasing
awareness to consumers and pharmacists.
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 flow will likely be materially
adversely impacted, the effects from which it may not recover.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
These 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 YEAR-END
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 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 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 consolidated financial statements for the prior fiscal
year have been reclassified to be consistent with the current fiscal year's
presentation.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid debt instruments with a maturity date
of three months or less at the date of purchase. The Company maintains its cash
and cash equivalents with high quality financial institutions thereby minimizing
any associated credit risks.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an allowance for doubtful accounts based on specifically
identified amounts that the Company believes to be uncollectible and those
accounts that are past due beyond a certain date. If actual collections
experience changes, revisions to the allowance may be required. After all
attempts to collect a receivable have failed, the receivable is written off
against the allowance.
INVENTORIES
Inventories, which primarily consist of component parts, dry-chemistry test
strips, assembled devices and related supplies, are stated at the lower of
first-in, first-out cost or market. The Company records an allowance for
obsolete inventory based on a)specifically identified component parts the
Company believes will no longer be utilized in its current model of cholesterol
monitor and b) based upon specifically identified finished goods the Company
believes will not be sold prior to its expiration date.
F-10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PATENT RIGHTS
Direct costs incurred in acquiring each patent right have been capitalized and
are being subsequently amortized into operating results on a straight-line basis
over seventeen years, such period being equal to both the statutory and
estimated useful life of each respective patent. Management, on at least a
quarterly basis, evaluates the patents for impairment by comparing the related
estimated future cash flows, on an undiscounted basis, to its net book value.
Factors considered in estimating future cash flows include the status of current
litigation surrounding its most significant patent, the likelihood of
development or sale of the patent (if unutilized), and likely cash flows from
royalties to be received from others for use of the patented technology. If
impairment is indicated, the net book value is reduced to an amount equal to the
estimated future cash flows, on an appropriately discounted basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Cost includes expenditures for
major additions and improvements as well as any incremental interest costs
incurred during the period in which activities necessary to get the asset ready
for its intended use are in progress. Maintenance and repairs which do not
extend the useful life of the related property or equipment are charged to
operations as incurred. The provision for related depreciation has been computed
using the straight-line method over the following estimated useful lives:
production machinery and equipment - five years; technology hardware and
software - three years; and office furniture and equipment - five years. The
provision for related amortization is computed using the straight-line method
over the shorter of the estimated useful lives of the leasehold improvements,
being five years, or the contractual lives of the underlying capital leases.
The net book value of property and equipment sold or retired is removed from the
asset and related depreciation and amortization accounts with any resulting net
gain or loss included in the determination of net loss.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized using the interest method over the term
of the related debt agreement.
DEFERRED INCOME TAXES
Deferred income tax assets and liabilities are recognized for the expected
future income tax benefits or consequences, based on enacted laws, of temporary
differences between tax and financial statement reporting. Deferred tax assets
are then reduced by a valuation allowance for the amount of any tax benefits
that more likely than not, based on current circumstances, are not expected to
be realized.
PRODUCT WARRANTIES
The Company's products are accompanied by limited liability warranties of
varying durations against defects in material or workmanship. At the time of
each product's sale, the Company's management makes an estimate based on its
historical experience and future expectations of the probable future cost to be
incurred in honoring the accompanying warranty and accrues a corresponding
liability. To date, the Company's warranty liabilities, in the aggregate, have
not been material.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values reported for cash equivalents, restricted cash equivalents,
accounts receivable, accounts payable and accrued expenses materially
approximated their respective fair values at each balance sheet date due to the
immediate or short-term maturity of these financial instruments. The carrying
values reported for non-current obligations materially approximated their
respective fair values at each balance sheet date as the stated or discounted
rates of interest reflected then prevailing market rates of interest.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The Company generates revenue primarily from sales of its cholesterol monitors
and dry-chemistry test strips utilized in its cholesterol monitors. The Company
recognizes revenue, including related shipping and handling income, and the cost
of the sale, in when each of the criteria established by Staff Accounting
Bulletin 104 ("SAB 104") have been met as follows:
o Pervasive evidence of an arrangement exists - The Company requires a
purchase order from its customers for each sale prior to shipment of
product.
o Delivery has occurred - The Company does not recognize revenue until
the product is shipped and all material risks and rewards of ownership
are concurrently transferred to the customer. In limited instances,
the Company may enter into "pay-on-scan" sales arrangements whereby
the risk of ownership does not transfer to the customer until the
customer has sold the product to a third party (the consumer). In
these limited instances revenue is not recognized until the Company
has been notified by the customer that the product has been sold to a
third party.
F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
o Seller's price to the buyer is fixed or determinable - The Company
requires the sales price to be detailed on the customers purchase
order, which may not be changed after acceptance.
o Collection of the related receivable is reasonably assured - The
Company must determine that collection of the related account
receivable is reasonably assured prior to recognition of revenue. The
Company must make estimates to allow for an appropriate allowance for
uncollectible receivables, as well as for sales returns expected from
its customers (see below).
SALES RETURNS ALLOWANCE
The Company records an allowance for sales returns at the time revenue is
recognized based upon relevant historical product experience, remaining period
until the expiration date for the dry-chemistry test strips from date of sale,
and future expectations.
MAJOR CUSTOMERS
Three customers individually accounted for approximately 21%, 12% and 10% of the
Company's consolidated net sales for fiscal 2004 and approximately 37%, 13%, and
44% of accounts receivable, net at June 30, 2004, respectively. Two customers
individually accounted for approximately 24% and 23% of the Company's
consolidated net sales for fiscal 2003 and approximately 10% and 30% of accounts
receivable, net at June 30, 2003, respectively.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Consolidated sales and
marketing expenses include advertising costs of $1,762,041 and $469,669 during
fiscal 2004 and 2003, respectively.
PRODUCT RESEARCH AND DEVELOPMENT
The Company expenses all product research and development costs as incurred.
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 losses
presented below:
FISCAL YEARS ENDED
------------------------------------
JUNE 30, 2004 JUNE 30, 2003
------------ ------------
Net loss, as reported ..................... $(14,407,557) $ (8,106,945)
Add: SFAS No. 123 compensation expense..... (878,387) (1,609,790)
------------ ------------
Pro forma net loss ........................ $(15,285,994) $ (9,716,735)
============ ============
Net loss per share:
Basic and diluted - as reported ...... $ (0.11) $ (0.24)
============ ============
Basic and diluted - pro forma ......... $ (0.12) $ (0.29)
============ ============
F-12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
FISCAL YEARS ENDED
------------------------------
JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Risk-free interest rate ... 4.1% 4.3%
Expected volatility ....... 130.0% 123.9%
Expected life in years..... 5 - 10 2 - 10
Expected dividends ........ None None
The estimated fair values for stock options granted during 2003 ranged from
$0.19 to $0.75. The estimated fair value for stock options granted during 2004
was $0.03.
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 June 30, 2004 and 2003, the Company had stock options, stock warrants and
convertible debt outstanding that could potentially be exercised or converted
into 118,277,677 and 64,833,575 additional 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 option, stock warrants and
convertible debt were exercised or converted into common shares.
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.
To date, the Company's products have been principally marketed to customers
residing within the United States of America. Net sales realized from customers
residing in other geographic markets were less than 1% of consolidated net sales
in fiscal 2004 and 2003.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," addresses
consolidation by business enterprises of variable interest entities that possess
certain characteristics. FIN 46 requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the business
enterprise. FIN 46 applies immediately to variable interest entities created
after January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. As the Company has not had, and continues
not to have, any ownership in variable interest entities, the Company's adoption
of FIN 46, as required on January 31, 2003, had no impact on its consolidated
financial statements.
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 consolidated financial statements.
F-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 were effective beginning with the Company's
fiscal 2004 first quarter ending September 30, 2003. The Company adopted these
remaining provisions of SFAS No. 150, as required, with no impact on the
consolidated financial statements.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE
The following schedules set forth the activity in the Company's allowance for
doubtful accounts receivable for the following periods:
FISCAL YEARS ENDED
-----------------------------
JUNE 30, JUNE 30,
2004 2003
--------- ---------
Balance, beginning of year........ $ 453,645 $ 91,188
Additions to allowance............ 40,189 427,617
Deductions, net of recoveries..... (195,436) (65,160)
--------- ---------
Balance, end of year ............. $ 298,398 $ 453,645
========= =========
5. INVENTORIES, NET
Inventories, net, consist of the following:
JUNE 30,
---------------------------------
2004 2003
----------- -----------
Raw materials ................................ $ 444,880 $ 1,203,877
Work in process .............................. 80,814 63,861
Finished goods ............................... 176,971 719,548
Finished goods at retail locations ........... 67,576 --
----------- -----------
770,241 1,987,286
Less allowance for inventory obsolescence..... (20,937) (374,696)
----------- -----------
Inventories, net ............................. $ 749,304 $ 1,612,590
=========== ===========
6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net, consists of the following:
JUNE 30,
---------------------------------
2004 2003
----------- -----------
Production machinery and equipment ................ $ 687,735 $ 889,545
Technology hardware and software .................. 588,307 583,844
Leasehold improvements ............................ 368,495 368,495
Office furniture and equipment .................... 125,250 123,565
----------- -----------
1,769,787 1,965,449
Less accumulated depreciation and amortization..... (1,430,580) (1,317,922)
----------- -----------
Property and equipment, net ....................... $ 339,207 $ 647,527
=========== ===========
F-14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. 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 was unsecured, accrued interest at a stated interest rate of
8.75% per annum and required 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. The Board of Directors subsequently awarded in
August 2003, 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.
On June 22, 2004 and August 29, 2003, the Board of Directors awarded the
Company's Chief Executive Officer a bonus of $48,840 and $3,389 for his fiscal
2004 and 2003 performance. These bonuses were applied against the remaining
outstanding principal and accrued interest of the note receivable.
8. DEFERRED TAX ASSETS
The Company's deferred tax assets principally relate to (i) net operating loss
carry-forwards that are available, within statutory annual limits, to offset
future taxable income, if any, (ii) purchased software technology and (iii)
compensatory stock options granted. These deferred tax assets, which
approximated $17.9 million and $15.5 million at June 30, 2004 and 2003,
respectively, were fully offset by valuation allowances for financial reporting
purposes. At June 30, 2004, the Company had net operating loss carry-forwards of
approximately $40.7 million that expire in calendar years 2006 through 2024.
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
JUNE 30,
--------------------------
2004 2003
-------- --------
Accrued royalties payable ................................ $257,535 $104,104
Accrued sales returns, including warranty obligations..... 238,064 103,947
Accrued wages, benefits and related taxes ................ 184,784 79,672
Accrued interest payable ................................. 138,759 472,413
Accrued other ............................................ 8,653 5,911
-------- --------
Total accrued liabilities ................................ $827,795 $766,047
======== ========
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 currently unutilized
technology patent to which the Company claims ownership. The Company has
reflected the $250,000 received as deferred income at June 30, 2003. As this
option and purchase agreement subsequently expired unexercised on July 10, 2003,
the Company recognized $250,000 as non-operating income during its fiscal 2004
first quarter.
11. NOTE PAYABLE
Effective May 1, 2003, the Company renewed its then expiring 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 accrued interest at 15% and was repaid on March 31, 2004, 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. On March 31, 2004, the financial
institution became 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 "escrowed funds". These
escrowed funds are intended to serve as additional collateral on the outstanding
note payable and may, at the Company's discretion, be used to pay down the final
principal of the note payable upon maturity or final repayment of the note. As
of June 30, 2004, $25,293 had been retained and was being held in an escrow
account. The term loan is secured and collateralized by the Company's
F-15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
cash and cash equivalents, 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. Any principal and accrued interest
balances remaining on the term loan will be due and payable as a lump sum on
April 1, 2005. The remaining term loan may be prepaid at any time, without
penalty, at the Company's option. In consideration for extending the above
loans, the Company agreed to pay 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. During fiscal 2004 the Company issued
2,593,333 shares of common stock as partial payment of the annual fee for the
May 1, 2004 through April 30, 2005 period and a balance of approximately $24,500
remains payable at June 30, 2004. These annual fees are amortized to deferred
financing costs over the renewal period.
12. OPERATING AND CAPITAL LEASES
The Company leases its corporate facilities as well as certain equipment under
operating leases. Certain of these operating leases are noncancellable and
contain rent escalation clauses. The Company incurred aggregate rent expense
under operating leases of $109,117 and $128,866 during fiscal years 2004 and
2003, respectively. The Company also leases certain equipment under capital
leases. The aggregate net carrying value of the underlying collateralizing
assets was approximately $194,000 and $285,000 at June 30, 2004 and 2003,
respectively, and depreciation of leased capital assets is charged to
depreciation expense.
The future aggregate minimum lease payments under lease agreements in existence
at June 30, 2004 are as follows:
OPERATING CAPITAL
FISCAL YEARS ENDING JUNE 30, LEASES LEASES
------------------------------------------------- --------- -------
2005............................................. $69,026 $30,612
2006............................................. 1,116 6,172
2007............................................. 1,116 --
2008............................................. 1,116 --
2009............................................. 372 --
Thereafter....................................... -- --
------- -------
Total lease payments............................. $72,746 36,784
=======
Less imputed interest............................ 2,756
-------
Present value of net minimum lease payments...... 34,028
Less current maturities.......................... 28,148
-------
Total long-term capital lease obligation......... 5,880
=======
13. CONVERTIBLE DEBT
June through November 2001 Issuances
From June 2001 through November 2001, the Company issued unsecured convertible
debentures, $3,840,000 of which remains outstanding with one debenture holder at
June 30, 2004. These debentures (i) accrue interest at the prime rate plus two
percent (6.25% at June 30, 2004), (ii) are currently convertible at the option
of the holder 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 holder may not convert its debentures to the extent
that conversion would result in the holder's beneficial ownership of 9.99% or
more of the Company's then outstanding common shares. The holder of these
debentures has a one-time right to convert a portion of the debentures after the
closing of any subsequent private offering at less than $0.10 per common share
(limited to 9.99% ownership). The holder exercised this right during the third
quarter of 2004 and converted $180,000 of principal and $60,000 of accrued
interest at $0.05 resulting in $240,000 of additional expense upon conversion
related to the beneficial conversion feature. The Company has the right to force
conversion of the debentures if the market price of its common stock exceeds
$3.00 per share for 20 consecutive trading days.
F-16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 2003 Issuances
On September 13, 2003, the Company issued $3,350,000 in unsecured convertible
debentures from which it received $3,067,000 in net cash proceeds. These
debentures, which have an aggregate principal face amount of $199,376 at June
30, 2004, (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. The debentures were convertible at the option of the
holders at a stated rate of $0.13 per share and were due and payable on
September 12, 2006. For every two dollars of original debenture 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. Holders may not convert their debentures or exercise their
warrants to the extent that conversion or exercise would result in the holders'
beneficial ownership of 4.99% or more of the Company's then outstanding common
shares. A registration statement filed with the United States Securities and
Exchange Commission ("SEC") registering the resale of the preceding debentures
and warrants became effective on December 23, 2003.
On January 13, 2004, the Company entered into an exchange agreement with each
holder of its convertible debentures that were issued in September 2003. Under
the exchange agreement, each debenture holder agreed to exchange the principal
amount of its debenture for shares of the Company's common stock, at the rate of
$0.09 of debenture principal per share of common stock. Holders may not convert
their debentures to the extent that conversion would result in the holders'
beneficial ownership of 4.99% or more of the Company's then outstanding common
shares. Accrued but unpaid interest of $149,659 related to these debentures was
paid at the time of the exchange by the issuance of additional shares of common
stock at the rate of $0.09 per share. Accordingly, in January 2004, the Company
issued 32,427,204 shares of common stock upon exchange of debenture principal in
the amount of $2,975,624 and the payment of accrued but unpaid interest of
$149,659. Additionally, the Company issued 2,227,807 shares of common stock to
adjust the conversion rate applied to $175,000 of principal previously converted
by a debenture holder to the $0.09 rate stated in the exchange agreement. As a
result of the above, in January 2004 the Company recognized $1,488,889 of
additional financing expense related to the beneficial conversion features of
the exchange and amortized to expense $2,667,676 of previously existing debt
discount related to the convertible debentures issued in September 2003.
The remaining principal balance from the September issuance of $199,376 at June
30, 2004 was subsequently converted during the first quarter of fiscal 2005,
resulting in no further convertible debenture principal or interest outstanding
related to the September 2003 issuance.
February 2004 Issuances
On February 19, 2004, the Company completed a private placement offering of
$2,775,000 in unsecured convertible debentures from which we received $2,077,592
in net cash proceeds. These debentures, which have an aggregate principal face
amount of $1,997,000 at June 30, 2004, become due and payable on February 19,
2006. The purchase price for the convertible debentures gives effect to an
original issue discount of approximately $500,000, or an effective annual
interest rate of 9%, the amount of which was withheld from the proceeds at the
time of the closing of the financing and are being amortized to deferred
financing costs over the term of the debentures. The debentures are convertible
at a conversion price of $0.05 per share (66% of the average of the five
consecutive closing bid prices immediately prior to the closing date of the
offering). The conversion price is subject to adjustment upon the occurrence of
certain events including stock dividends, subdivisions, combinations and
reclassifications of the Company's common stock. In connection with this
transaction participating warrant holders agreed to exercise outstanding
warrants held by them to the extent such exercise would not result in any
participant's beneficial ownership of 4.99% or more of the Company's then
outstanding common shares.
Participants in the February 19, 2004 offering received detachable stock
purchase warrants allowing for the purchase of a number of common shares equal
to 30% of the number of shares which could be obtained upon conversion of the
debenture principal outstanding on February 19, 2004. The warrants can be
exercised over a nineteen-month period and have an exercise price of $0.065 per
share of the Company's common stock, subject to adjustment upon the occurrence
of events substantially identical to those provided for in the debentures. The
Company has the right to call the warrants in the event that the average closing
price of the Company's common stock exceeds 200% of the exercise price for a
consecutive 20-day trading period. Holders may not convert debentures or
exercise warrants to the extent that conversion or exercise would result in the
holders' beneficial ownership of 4.99% or more of the Company's then outstanding
common shares.
F-17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On March 22, 2004, the Company filed a registration statement with the United
States Securities and Exchange Commission ("SEC") registering the resale of the
common shares underlying the debentures and warrants issued on February 19,
2004, which became effective April 5, 2004. The Company also agreed to seek
shareholder approval to increase the number of authorized common shares to a
minimum of 500 million shares before April 30, 2004. Shareholder approval to
increase the authorized common shares to 750 million was obtained on April 28,
2004.
Investors in the February 19, 2004, financing have been granted the option to
purchase up to an additional $1,220,000 of convertible debentures and warrants
with terms and conditions substantially identical to those applicable to the
February 19, 2004, transaction. This option expires on October 28, 2004.
The agreements entered into in connection with the February 19, 2004 transaction
requires that the Company obtain the unanimous approval of the debenture holders
prior to the occurrence of certain events including stock dividends,
subdivisions, combinations and reclassifications of the Company's common stock
until less than 20% of the principal remains outstanding on the debentures. The
agreement further stipulates that no debenture may be prepaid without the
consent of the holder and that each debenture holder has a right of first
refusal to participate in any new financing transaction consented to through
June 10, 2005.
March 2004 Issuance
In March 2004, the Company issued an unsecured convertible debenture in the
amount of $122,000 from which it received $100,000 in net proceeds after an
original issue discount of $22,000. The Company also issued 732,000 detachable
stock purchase warrants in connection with this transaction. The convertible
debenture and common stock purchase warrants have identical terms and conditions
to those issued on February 19, 2004. The principal balance outstanding for this
debenture was $122,000 at June 30, 2004.
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 debenture issuances the fair value of the detachable stock
warrants and resulting beneficial conversion feature. For each debenture
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 debentures. The
aggregate unamortized debt discount amounted to $3,332,415 and $2,883,918 at
June 30, 2004 and 2003, respectively.
The remaining $6,036,376 in principal of the Company's outstanding convertible
debentures at June 30, 2004, mature during the Company's fiscal years ending as
follows:
FISCAL YEARS ENDING JUNE 30, PRINCIPAL
---------------------------- ----------
2005............................................. $ --
2006............................................. 1,997,000
2007............................................. 4,039,376
----------
Total principal payments......................... $6,036,376
==========
F-18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCKHOLDERS' DEFICIT
General
The Company is restricted under Nevada corporate law from declaring any
dividends to shareholders due to current working capital and stockholders'
deficits.
The Company's shareholders elected to increase its authorized common shares from
100 million to 250 million and 750 million at a special shareholders' meetings
held on December 1, 2003 and April 28, 2004, respectively.
Common Stock Issued For Cash
During fiscal 2003 the Company issued 34,837,500 shares of its common stock in a
"best efforts" private placement with accredited investors from which it
received $3,483,750 (net of $55,000 in issuance costs). The fiscal 2003
placements included 50,000 and 97,500 common shares sold, at the same price paid
by unrelated parties, to a member of the Company's Board of Directors and the
Company's Chief Financial Officer, respectively.
During fiscal 2004 the Company issued 6,538,461 shares of its common stock upon
exercise of outstanding warrants by accredited investors from which it received
$326,923 in proceeds.
Common Stock Issued For Services
During fiscal 2004 and 2003, the Company issued 1,505,844 and 4,567,140 common
shares, respectively, to unrelated parties for the performance of various
services. The Company recognized associated expenses of $206,487 and $472,964
during fiscal 2004 and 2003, respectively, based upon the fair market value of
the common shares at their respective dates of issuance. The fiscal 2004 amount
includes 350,000 common shares issued to its former Chief Financial Officer.
Common Shares Issued Upon Conversion of Convertible Debt
During fiscal 2004, holders of $5,480,624 in principal amount (gross of the
related discount on convertible debentures) of the Company's then outstanding
convertible notes converted such notes, and $703,900 in accrued interest
thereon, into 76,833,789 common shares. During fiscal 2003, holders of
$1,794,984 in principal amount (gross of the related discount on convertible
debentures) of the Company's then outstanding convertible notes converted such
notes, and $495,190 in accrued interest thereon, into 22,901,730 common shares.
Other Issuances of Common Shares
In January 2003, the Company issued 1,040,816 previously escrowed registered
shares of its common stock to an institutional shareholder in full and final
resolution of a dispute regarding the number of common shares it was entitled to
under an anti-dilution guarantee. As part of this resolution, the institutional
shareholder agreed to the cancellation of all outstanding stock purchase
warrants held by it and to waive any potential liquidated damage claims it may
have had against the Company pursuant to a related registration rights
agreement.
In March 2003, the Company elected to retroactively issue a principal
shareholder, who had previously converted certain outstanding notes of the
Company at the then stated rate of $1.00 per common share, an additional
4,579,407 common shares as an inducement for him to participate in a subsequent
private placement of common shares at $0.10 per share.
In January 2004, the Company issued 975,669 restricted shares of its common
stock to certain employees as payment for $117,081 in compensation expense.
During fiscal 2004, the Company issued 2,593,333 shares of its common stock to a
financing company in partial settlement of its annual loan renewal fee for the
May 2004 through April 2005 period.
Stock Options and Warrants
During fiscal 2004, the Company issued 9,138,427 stock options to various
employees under its newly adopted 2004 Stock Compensation Plan (See Note 15). No
stock options or warrants were issued to consultants during fiscal 2004 and no
stock options or warrants were issued during fiscal 2003 to employees or
consultants.
F-19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In previous years, the Company entered into several agreements with third
parties for the performance of various services over subsequent two to three
year periods. In connection therewith, the Company granted these service
providers stock options with various exercise prices and expiration dates.
During fiscal 2004 and 2003, the Company recognized various expenses aggregating
$0 and $68,797, respectively, for the fair value of the issued stock options. As
of June 30, 2004, all stock options had been fully vested and the related
expense had been fully recognized.
15. STOCK OPTIONS AND WARRANTS
The Company has an Employee Stock Option Plan (the "Plan") that provides for the
grant of options to employees to purchase shares of the Company's common stock
at exercise prices determined by the Board of Directors. As of June 30, 2004,
1,050,805 options originally made available under the Plan remain available for
grant. The Company also grants from time to time stock options and warrants
outside the Plan to directors, vendors and others to purchase shares of the
Company's common stock at exercise prices as determined by the Chief Executive
Officer and approved by the Board of Directors. These options are granted as
payment of services or as an inducement to provide the Company with financing.
No stock options or warrants were issued to consultants during the fiscal years
ended June 30, 2004 or 2003. As discussed Note 13 above, the Company issued
30,266,615 warrants to participants of the Company's private placements during
fiscal 2004.
On June 10, 2002, the Company's shareholders approved the adoption of the 2002
Stock Option Plan ("2002 Plan") pursuant to which two million shares of the
Company's common stock were reserved for future issuance upon exercise of
options granted at exercise prices to be approved by the Board of Directors.
These options may be issued to directors, officers, employees, or other persons
who perform services on behalf of the Company. No options have been granted
under the 2002 Plan as of June 30, 2004.
On June 22, 2004, the Company adopted the 2004 Stock Compensation Plan ("2004
Plan") pursuant to which twenty-five million shares of the Company's common
stock were reserved for future issuance of common stock or common stock options
to be approved by the Board of Directors. These options may be issued to
directors, officers, employees, or consultants who perform services on behalf of
the Company at exercise prices to be approved by the Board of Directors. As of
June 30, 2004, 16,901,970 shares of common stock or stock options had been
issued under the 2004 Plan.
The following table summarizes stock option and warrant activity during fiscal
2004 and 2003:
WEIGHTED
AVERAGE
OPTIONS/ EXERCISE
WARRANTS PRICE
---------- --------
Options/warrants outstanding at July 1, 2002..... 12,345,623 $2.33
Granted ......................................... 1,609,500 0.85
Expired ......................................... (5,995,738) 2.62
----------
Options/warrants outstanding at June 30, 2003 ... 7,959,385 1.81
Granted ......................................... 39,405,042 0.05
Expired ......................................... (3,103,578) 1.82
Exercised ....................................... (6,538,461) 0.05
----------
Options/warrants outstanding at June 30, 2004 ... 37,722,388 0.28
==========
Exercisable at June 30, 2004 .................... 36,508,364 $0.23
==========
F-20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes information about the Company's outstanding stock
options and warrants at June 30, 2004:
OPTIONS/WARRANTS OPTIONS/WARRANTS
OUTSTANDING EXERCISABLE
-------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YRS) PRICE EXERCISABLE PRICE
------------- ----------- ----------- -------- ------------ --------
$0.03 9,138,427 9.98 $0.03 9,138,427 $0.03
$0.05 6,346,155 (1) 1.20 0.05 6,346,155 0.05
$0.07 17,381,999 (1) 1.22 0.07 17,381,999 0.07
$0.25 40,000 1.81 0.25 40,000 0.25
$0.75 650,000 8.10 0.75 240,000 0.75
$0.98 - $1.00 413,612 0.92 1.00 413,612 1.00
$1.02 - $1.25 647,100 4.77 1.24 636,900 1.24
$1.50 1,470,155 6.25 1.50 922,617 1.50
$1.69 - $2.44 112,000 4.18 1.84 112,000 1.84
$2.50 575,000 1.66 2.50 575,000 2.50
$3.00 592,440 5.46 3.00 446,154 3.00
$3.25 - $3.63 205,500 1.14 3.27 205,500 3.27
$5.00 150,000 2.02 5.00 50,000 5.00
------------- ---------- ---- ----- ---------- -----
$0.03 - $5.00 37,722,388 3.80 $0.28 36,508,364 $0.23
============= ========== ==== ===== ========== =====
- ----------
(1) Represents outstanding warrants issued with convertible debt.
16. EMPLOYEE SAVINGS, RETIREMENT AND PROFIT SHARING PLAN
Effective March 1, 2002, the Company established a tax-qualified employee
savings, retirement and profit sharing plan qualified under Section 401(k) of
the Internal Revenue Code ("the "401(k) Plan") pursuant to which eligible
employees may elect to defer a portion of their current compensation, up to
certain statutorily prescribed annual limits, and make corresponding periodic
contributions into the 401(k) Plan. Contributions to the 401(k) Plan, as well as
any income earned thereon, are not taxable to the employee until withdrawn from
the 401(k) Plan. All employees with 1,000 hours of service who have been
employed by the Company for at least one year are eligible to participate in the
401(k) Plan. The Company, at its discretion, may elect to (i) contribute a
matching percentage of the employees' overall contribution and/or (ii) make a
profit sharing contribution based on the overall profitability of the Company.
The Company did not make any contributions for the fiscal years ended June 30,
2004 and 2003.
17. COMMITMENT AND 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.
Patent Litigation
The Company is the plaintiff in patent infringement litigation, in which the
Company alleges willful patent infringement. The defendants have brought a
number of counterclaims, including antitrust, unfair competition, tortious
interference with business relations and patent misuse, and have asserted
unspecified general damages. In May 2003, the District Court ruled against our
assertion of patent infringement. The Company timely filed a Notice of Appeal to
the Court of Appeals for the Federal Circuit and in August 2004, the Court of
Appeals reversed the District Court's ruling and remanded the matter back to the
District Court for a new hearing. Following the remand, the Company returned to
F-21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
settlement negotiations with the defendant. Pursuant to these negotiations, the
parties have now entered into a Letter of Intent requiring the parties to
negotiate in good faith an agreement that would, among other things, resolve the
litigation through a license under the patent. A final agreement has not yet
been reached, and the litigation remains pending before the Idaho District
Court. Should the District Court not rule in our favor and/or we are unable to
successfully negotiate a settlement including royalties to be received, we would
be required to impair our patent, and as such, we would write down the patent to
its net realizable value through a charge to amortization expense.
Royalty Obligation Dispute on Proprietary Optics Technology
The Company licensed the use of proprietary optics technology previously
utilized in its predecessor cholesterol monitor from a principal vendor in
exchange for payment of a royalty to the vendor for each monitor manufactured
with the optics technology. Beginning in October 2002, the Company developed and
began utilizing its own proprietary optics technology in its current cholesterol
monitor. In October 2002, the Company ceased accruing and paying the royalty
obligation as the Company viewed the re-engineered optics technology used in its
current cholesterol monitor as being proprietary to the Company. The vendor
asserted in a letter to the Company that the subject optics technology was, in
their opinion, still subject to royalties under the licensing agreement.
Negotiations have continued throughout fiscal 2004 and remain ongoing as of this
date to resolve the royalty obligation dispute. The Company has accrued
approximately $257,535 and $104,104 as of June 30, 2004 and 2003, respectively,
and believes that any reasonably likely incremental royalty obligation resulting
from these negotiations would not be material to our expected future
consolidated financial statements.
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 required the Company to make minimum
annual purchases and required certain compensating payments in the event the
Company fails to meet the minimum purchase requirements. As the Company has not
met these minimum purchase commitments, the vendor increased the price of the
test strips by 10% for fiscal 2004. Should the Company continue to not meet
these minimum purchase requirements, the vendor could require the Company to
make additional compensating payments. The dollar amount of such future
payments, if any, is currently indeterminable.
Purchase Commitments Under Marketing Contract
In February 2004, the Company entered into a marketing contract, which
contractually obligated the Company to purchase a minimum number of radio
advertising spots through January 7, 2005. As of June 30, 2004, the Company had
$864,248 of purchase obligations remaining under this contract.
F-22
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2004 2004
------------ ------------
ASSETS (NOTE 2)
Current assets:
Cash and cash equivalents .................................................... $ 759,626 $ 590,196
Restricted cash held in escrow (Note 6) ...................................... -- 25,293
Accounts receivable, net ..................................................... 461,506 495,460
Inventories, net (Note 4) .................................................... 779,628 749,304
Prepaid expenses ............................................................. 97,957 164,912
------------ ------------
Total current assets .................................................... 2,098,717 2,025,165
Deferred financing costs, net (Notes 6 and 7) ................................... 1,097,665 609,467
Patent rights, net (Note 9) ..................................................... 400,002 480,002
Property and equipment, net ..................................................... 246,849 339,207
Other ........................................................................... 9,236 158,336
------------ ------------
Total assets ............................................................ $ 3,852,469 3,612,177
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT (NOTE 2)
Current liabilities:
Accounts payable ............................................................. $ 1,055,333 $ 940,889
Accrued liabilities (Note 5) ................................................. 769,619 827,795
Capital lease obligations .................................................... 28,242 28,148
Note payable (Note 6) ........................................................ 800,000 1,169,031
------------ ------------
Total current liabilities ............................................... 2,653,194 2,965,863
Capital lease obligations ....................................................... 4,814 5,880
Note payable (Note 6) ........................................................... 2,069,740 --
Convertible debentures, principal face amounts of $5,837,000 and $6,036,376,.....
respectively (Note 7) ........................................................... 4,217,031 2,703,961
------------ ------------
Total liabilities ....................................................... 8,944,779 5,675,704
------------ ------------
Commitments and contingencies (Notes 6, 7, 10 and 11)
Stockholders' deficit (Note 8):
Preferred stock, $.001 par value; 15,000,000 shares authorized; none
issued or outstanding ..................................................... -- --
Common stock, $.001 par value; 750,000,000 shares authorized; 210,068,735
and 181,341,686 issued and outstanding, respectively ....................... 210,069 181,342
Additional paid-in capital ................................................... 55,686,772 54,425,383
Accumulated deficit .......................................................... (60,989,151) (56,670,252)
------------ ------------
Total stockholders' deficit ............................................. (5,092,310) (2,063,527)
------------ ------------
Total liabilities and stockholders' deficit ............................. $ 3,852,469 $ 3,612,177
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-23
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales ................................................ 773,329 787,052 1,658,467 1,412,526
Cost of sales ............................................ 537,575 658,536 1,190,381 1,085,672
------------ ------------ ------------ ------------
Gross profit ............................................. 235,754 128,516 468,086 326,854
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing ................................ 136,756 713,468 722,370 845,386
General and administrative ......................... 564,941 666,514 1,265,614 1,363,928
Product research and development ................... 19,088 24,523 29,707 27,991
Depreciation and amortization ...................... 96,483 76,820 189,486 156,133
Loss on disposal of equipment ...................... -- -- -- 87,756
------------ ------------ ------------ ------------
Total operating expenses ................................. 817,268 1,481,325 2,207,177 2,481,194
------------ ------------ ------------ ------------
Loss from operations ..................................... (581,514) (1,352,809) (1,739,091) (2,154,340)
------------ ------------ ------------ ------------
Non-operating income (expenses):
Amortization of convertible debt discount (Note 7) .. (747,581) (995,547) (1,712,446) (1,383,219)
Amortization of deferred financing costs (Notes 6
and 7) .......................................... (270,962) (155,785) (461,219) (213,368)
Interest and financing expenses (Notes 6 and 7) ..... (231,373) (261, 871) (406,143) (459,936)
Gain on unexercised option and purchase agreement
(Note 9) ........................................ -- -- -- 250,000
------------ ------------ ------------ ------------
Total non-operating expenses, net ........................ (1,249,916) (1,413,203) (2,579,808) (1,806,523)
------------ ------------ ------------ ------------
Net loss ................................................. (1,831,430) (2,766,012) (4,318,899) (3,960,863)
============ ============ ============ ============
Net loss per share - Basic and diluted (Note 3) .......... (0.01) (0.03) (0.02) (0.04)
============ ============ ============ ============
Weighted average number of shares - Basic and diluted
(Note 3) .............................................. 205,946,996 102,553,484 200,558,805 99,271,612
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
F-24
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
2004 2003
----------- -----------
OPERATING ACTIVITIES:
Net loss ................................................................. $(4,318,899) $(3,960,863)
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization .......................................... 189,486 156,133
Loss on disposal of equipment .......................................... -- 87,756
Amortization of deferred financing costs (Notes 6 and 7) ............... 461,219 213,368
Amortization of discount on convertible debentures (Note 7) ............ 1,712,446 1,383,219
Provision for doubtful accounts ........................................ 235,682 32,726
Increase in inventory valuation allowance (Note 4) ..................... 6,410 163,281
Other .................................................................. -- (15,357)
Issuances of compensatory common stock, options and warrants for
employee and non-employee services (Note 8) .......................... 129,600 183,898
Beneficial conversion feature of convertible debt issued (Note 6) ....... 72,600 --
Net changes in assets and liabilities:
Accounts receivable .................................................... (201,728) (461,702)
Inventories (Note 4) ................................................... (36,734) 461,549
Prepaid expenses ....................................................... 66,955 (597,247)
Accounts payable ....................................................... 302,534 (1,379,244)
Accrued liabilities (Note 5) ........................................... 142,274 372,503
Deferred income (Note 9) ............................................... -- (250,000)
Other non-current assets ............................................... 149,100 66,976
----------- -----------
Net cash used in operating activities ............................. (1,089,055) (3,543,004)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures ..................................................... -- (1,685)
----------- -----------
Net cash used in investing activities ............................. -- (1,685)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from issuance of note payable, net of debt issuance costs of
$449,417 and $283,000, respectively (Note 7) ......................... 1,500,000 3,067,000
Principal payments of capital lease obligations .......................... (18,100) (136,344)
Principal payments of notes payable (Note 6) ............................. (248,708) (392,067)
Decrease in restricted cash equivalent (Note 6) .......................... 25,293 --
----------- -----------
Net cash provided by financing activities ......................... 1,258,485 2,538,589
----------- -----------
Net decrease in cash and cash equivalents ................................... 169,430 (1,006,100)
Cash and cash equivalents at beginning of period ............................ 590,196 1,370,126
----------- -----------
Cash and cash equivalents at end of period .................................. $ 759,626 $ 364,026
=========== ===========
SUPPLEMENTAL SCHEDULE OF CASH ACTIVITIES:
Interest paid in cash ................................................... $ 62,500 $ 144,903
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 7) .............................................................. $ -- $ 3,350,000
Assets acquired through capital lease obligation ......................... $ 17,128 $ --
Issuance of convertible note payable for loan commitment fees ............ $ 500,000 $ --
Issuance of common stock in exchange for:
Conversion of convertible debt and accrued interest (Note 7) ........... $ 707,154 $ 1,979,241
Payment of accounts payable and accrued expenses ....................... $ 380,761 --
The accompanying notes are an integral part of these
condensed consolidated financial statements
F-25
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO 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 developer and 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 the Company's monitors
enables a patient to readily ascertain the cholesterol-lowering 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 flow, since its inception. As a result, the Company
continued to have significant working capital and stockholders' deficits
including a substantial accumulated deficit at June 30, 2004 and 2003. In
recognition of such, its independent registered public accountants included an
explanatory paragraph in their report on the Company's consolidated financial
statements for the fiscal years ended June 30, 2004 and 2003, that expressed
substantial doubt regarding the Company's ability to continue as a going
concern.
The Company is addressing its ability to continue as a going concern, as well as
its sales, gross margins and operating expenses, by among other things, the
following:
o During the Company's fiscal year ended June 30, 2004, the Company
completed three private placement offerings totaling $6,225,000 in
unsecured convertible debentures from which it received $5,244,592 in
net cash proceeds;
o On November 8, 2004, the Company's outstanding note payable with a
financial institution was assigned to a beneficial owner of
approximately 9.99% of the Company's common stock as of December 31,
2004. The assignee amended the terms of the note payable providing
additional funding of $1.5 million with no payments due for 6 months;
o Developing additional products for possible introduction to the
market;
o Sponsoring a continuing education program to broaden awareness and
educate pharmacists on the benefits of its products;
o Developing a consumer point-of-sale awareness program for those
patients purchasing certain cholesterol-lowering prescriptions;
o Conducting marketing activities as funds are available, including a
television commercial test which began in January 2005;
o Continuing to support the Medicare reimbursement considerations of the
federal government for cholesterol testing and monitoring and the
FDA's consideration of over the counter cholesterol-lowering drugs;
and
o Continuing to operate with a core staff of only 18 employees while
implementing cost-cutting measures to maintain personnel levels and
decrease administrative costs.
The Company's short-term sources of capital are dependent on its ability to
defer its long-term debt payments. The Company generally funds its operations
with a combination of deferring its trade creditors, borrowings under short-term
financing arrangements and through the sale of common equity. The Company
expects to continue to require additional equity or debt financings as its
source of capital as it does not have sufficient operating revenues or cash to
fund operations. 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 regarding 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 30th. References to a fiscal year refer to
the calendar year in which such fiscal year ends.
F-26
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. The accounting estimates that require management's most
difficult and subjective judgments include the assessment and valuation of the
patent rights, allowance for doubtful accounts receivable and the sales returns
allowance. 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.
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, 2004.
Reclassifications
Certain amounts in the condensed consolidated financial statements for the prior
period have been reclassified to be consistent with the current period's
presentation.
Net Loss Per Share
Basic and diluted net loss per share have been computed by dividing net loss by
the weighted average number of common shares outstanding during the fiscal
period. At December 31, 2004 and 2003, the Company had stock options, stock
warrants and convertible debentures outstanding that could potentially be
exercised or converted into 154,184,518 and 83,304,128 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 debentures 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.
F-27
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 SIX MONTHS ENDED
---------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss, as reported ..................... $(1,831,430) $(2,766,012) $(4,318,899) $(3,960,863)
Add: SFAS No. 123 compensation expense..... (285,780) (511,764) (351,623) (657,634)
----------- ----------- ----------- -----------
Pro forma net loss ........................ (2,117,210) (3,277,776) (4,670,522) (4,618,497)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted - as reported ...... (0.01) (0.03) (0.02) (0.04)
=========== =========== =========== ===========
Basic and diluted - pro forma ......... (0.01) (0.03) (0.02) (0.05)
=========== =========== =========== ===========
Revenue Recognition
The Company generates revenue primarily from sales of its cholesterol monitors
and dry-chemistry test strips utilized in its cholesterol monitors. The Company
recognizes a sale, including related shipping and handling income, and the cost
of the sale, when each of the criteria established by Staff Accounting Bulletin
104 ("SAB 104") have been met as follows:
o Pervasive evidence of an arrangement exists - The Company requires a
purchase order from its customers for each sale prior to shipment of
product.
o Delivery has occurred - The Company does not recognize revenue until
the product is shipped and all material risks and rewards of ownership
are concurrently transferred to the customer. In limited instances,
the Company may enter into "pay-on-scan" sales arrangements whereby
the risk of ownership does not transfer to the customer until the
customer has sold the product to a third party (the consumer). In
these limited instances, revenue is not recognized until the Company
has been notified by the customer that the product has been sold to
the consumer.
o Seller's price to the buyer is fixed or determinable - The Company
requires the sales price to be detailed on the customers purchase
order, which may not be changed after acceptance.
o Collection of the related receivable is reasonably assured - The
Company must determine that collection of the related account
receivable is reasonably assured prior to recognition of revenue. The
Company makes estimates to allow for an appropriate allowance for
uncollectible receivables, as well as for sales returns expected from
its customers.
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 November 2004, the FASB issued Statement of Financial Accounting Standards
No. 151 - Inventory Costs ("SFAS No. 151"), which amends the provisions of
Chapter 4 of Accounting Research Bulletin No. 43 - "Inventory Pricing". SFAS No.
151 requires that certain production costs, such as idle facility expense,
freight, handling costs, and spoilage be charged as a current period expense.
Under the previous accounting principles, these costs were charged to current
period expense only under certain circumstances. SFAS No. 151 also requires that
fixed production overhead be allocated based on normal production capacity. The
Company is required to adopt SFAS No. 151 for the first quarter of fiscal year
2006 and does not expect the adoption to have a material impact on the
consolidated financial statements.
F-28
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment ("SFAS No. 123(R)"), which supercedes APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations, and will require all companies to estimate the fair value of
incentive stock options granted and then amortize that estimated fair value to
expense over the options' vesting period. The Company is required to adopt SFAS
No. 123(R) for the first quarter of fiscal year 2006 and has not yet assessed
the impact that this new standard will have on the Company's consolidated
financial statements.
4. INVENTORIES, NET
Inventories, net, consist of the following:
DECEMBER 31, JUNE 30,
2004 2004
------------ ---------
Raw materials ......................... $ 425,900 $ 444,880
Work in process ....................... 68,691 80,814
Finished goods ........................ 37,447 176,971
Finished goods at retail locations..... 274,937 67,576
--------- ---------
806,975 770,241
Less valuation allowance .............. (27,347) (20,937)
--------- ---------
Inventories, net ...................... $ 779,628 $ 749,304
========= =========
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
DECEMBER 31, JUNE 30,
2004 2004
------------ ---------
Accrued royalties payable ................................ $257,535 $257,535
Accrued sales returns, including warranty obligations..... 207,876 238,064
Accrued interest payable ................................. 252,316 138,759
Accrued wages, benefits and related taxes ................ 42,379 184,784
Accrued other ............................................ 9,513 8,653
-------- --------
Total accrued liabilities ................................ $769,619 $827,795
======== ========
6. NOTE PAYABLE
Effective May 1, 2003, the Company renewed its expiring revolving credit
facility with a then outstanding balance of $2,197,800 with a financial
institution. Any principal and accrued interest balances remaining on the term
loan were due and payable as a lump sum on April 1, 2005.
In November 2004, RAB Special Situations LP, a beneficial owner of approximately
9.99% of the Company's common stock as of December 31, 2004, entered into an
agreement with the above financial institution, under which the financial
institution assigned to the stockholder all of their rights, title and interest
under the note payable. At the time of the assignment, the outstanding amount
due under the note payable was $920,323. Restricted funds held in escrow by the
financial institution as additional collateral under the terms of note payable
were used to partially pay down the then outstanding loan balance prior to
assignment to the stockholder.
Subsequently, the Company and the assignee entered into a series of amendments
to the note payable and related loan documents under which the following terms
were modified:
o the aggregate amount of the note was increased from $920,323 to
$2,869,740, after giving effect to an original issue discount in the
amount of $449,417;
o $974,709 of the increase was funded November 12, 2004 resulting in net
cash proceeds to the Company of $750,000;
o $974,708 of the increase was funded December 15, 2004 resulting in an
additional $750,000 in net cash proceeds to the Company;
o the new loan balance of $2,869,740 is to be repaid in monthly
installments of $100,000 commencing May 1, 2005, with the outstanding
balance becoming due and payable on February 1, 2006;
F-29
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTE PAYABLE (CONTINUED)
o the Company paid a commitment fee to induce the assignee to enter into
the series of amendments in the amount of $500,000, paid by issuance
of a promissory note (commitment fee note) which is payable on
February 1, 2006, in cash or, at the Company's option, in shares of
its common stock at a 20% discount to market. The commitment fee note
is also convertible at the option of the note holder at a conversion
price of $.05 per share, subject to adjustment;
o the Company agreed to use its best efforts to file a registration
statement with the United States Securities and Exchange Commission
("SEC") covering the resale of the shares issuable under the
commitment fee note, and
o the note payable continues to be secured by substantially all of the
assets of the Company.
The original issue discount of $449,417 was determined based on an annual
interest rate of 15% over the term of the note payable and was recorded as a
deferred financing cost. This deferred financing cost is being amortized over
the life of the amended note payable and is reflected as "amortization of
deferred financing costs" on the consolidated statement of operations.
7. CONVERTIBLE DEBENTURES
June through November 2001 Issuances
From June 2001 through November 2001, the Company issued unsecured convertible
debentures, $3,840,000 of which remains outstanding with one debenture holder
(RAB Special Situations LP) at December 31, 2004. These debentures (i) accrue
interest at the prime rate plus two percent (6.25% at December 31, 2004), (ii)
are convertible at the option of the holder into common stock of the Company at
a stated rate of $0.05 per share, and (iii) become due and payable on various
dates between July 1, 2006 and November 20, 2006. The holder may not convert its
debentures to the extent that conversion would result in the holder's beneficial
ownership of 9.99% or more of the Company's then outstanding common shares. The
holder of these debentures has a one-time right to convert a portion of the
debentures after the closing of any subsequent private offering at less than
$0.05 per common share (limited to 9.99% ownership). The Company has the right
to force conversion of the debentures if the market price of its common stock
exceeds $3.00 per share for 20 consecutive trading days.
In connection with the Company's issuance of the amended and restated promissory
note discussed in Note 6, the conversion rate of the debentures issued during
June 2001 through November 2001 was reduced from $0.10 to $0.05 per share
resulting in a $72,600 charge to financing expense related to the beneficial
conversion feature.
Subsequent to December 31, 2004, the holder converted $860,000 of the above
notes payable and $190,000 in related accrued interest into shares of the
Company's common stock.
September 2003 Issuances
On September 13, 2003, the Company issued $3,350,000 in unsecured convertible
debentures to eight investors from which it received $3,067,000 in net cash
proceeds. The debentures (i) accrued interest at a fixed rate of 8.0% per annum,
which was payable at the Company's option in either cash or authorized and
unissued shares of its common stock, (ii) were convertible at the option of the
holders at a stated rate of $0.13 per share, and (iii) were due and payable on
September 12, 2006. For every two dollars of original debenture 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. Holders could not convert their debentures or exercise their
warrants to the extent that conversion or exercise would result in the holders'
beneficial ownership of 4.99% or more of the Company's then outstanding common
shares. A registration statement filed with the SEC registering the resale of
the preceding debentures and warrants became effective on December 23, 2003.
On January 13, 2004, the Company entered into an exchange agreement with each
holder of its convertible debentures that were issued in September 2003. Under
the exchange agreement, each debenture holder agreed to exchange the principal
amount of its debenture for shares of the Company's common stock, at the rate of
$0.09 of debenture principal per share of common stock. Accrued but unpaid
interest of $149,659 related to these debentures was paid at the time of the
exchange by the issuance of additional shares of common stock at the rate of
$0.09 per share. Accordingly, in January 2004, the Company issued 32,427,204
shares of common stock upon exchange of debenture principal in the amount of
$2,975,624 and the payment of accrued but unpaid interest of $149,659.
Additionally, the Company issued 2,227,807 shares of common stock to adjust the
conversion rate applied to $175,000 of principal previously converted by a
debenture holder to the $0.09 rate stated in the exchange agreement. As a result
F-30
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE DEBENTURES (CONTINUED)
of the above, in January 2004 the Company recognized $1,488,889 of additional
financing expense related to the beneficial conversion features of the exchange
and amortized to expense $2,667,676 of previously existing debt discount related
to the convertible debentures issued in September 2003.
In July 2004, the remaining principal balance from the September issuance of
$199,376 and related interest of $7,778 was converted into 2,468,004 shares of
the Company's common stock. There are no further convertible debenture principal
or accrued interest remaining outstanding related to the September 2003
issuance.
February 2004 Issuances
On February 19, 2004, the Company completed a private placement offering of
$2,775,000 in unsecured convertible debentures with four investors (all of which
also participated in the September 2003 private placement discussed above) from
which it received $2,077,592 in net cash proceeds. The purchase price for the
convertible debentures gives effect to an original issue discount of
approximately $500,000, or an effective annual interest rate of 9%, the amount
of which was withheld from the proceeds at the time of the closing of the
financing and are being amortized to deferred financing costs over the term of
the debentures. The $2,775,000 of convertible debentures are convertible at a
conversion price of $0.05 per share, or 55.5 million common shares as of
February 19, 2004. The conversion price is subject to adjustment upon the
occurrence of certain events including stock dividends, subdivisions,
combinations and reclassifications of the Company's common stock. In connection
with this transaction participating warrant holders agreed to exercise
outstanding warrants held by them to the extent such exercise would not result
in any participant's beneficial ownership of 4.99% or more of the Company's then
outstanding common shares. These debentures have an aggregate principal face
amount of $1,375,000 at December 31, 2004 and become due and payable on February
19, 2006.
Participants in the February 19, 2004 offering received detachable stock
purchase warrants allowing for the purchase of a number of common shares equal
to 30% of the number of shares which could be obtained upon conversion of the
debenture principal outstanding on February 19, 2004. The warrants can be
exercised over a nineteen-month period and have an exercise price of $0.065 per
share of the Company's common stock, subject to adjustment upon the occurrence
of events substantially identical to those provided for in the debentures. The
Company has the right to call the warrants in the event that the average closing
price of the Company's common stock exceeds 200% of the exercise price for a
consecutive 20-day trading period. Holders may not convert debentures or
exercise warrants to the extent that conversion or exercise would result in the
holders' beneficial ownership of 4.99% or more of the Company's then outstanding
common shares.
On March 22, 2004, the Company filed a registration statement with the SEC
registering the resale of the common shares underlying the debentures and
warrants issued on February 19, 2004, which became effective April 5, 2004. The
Company also agreed to seek stockholder approval to increase the number of
authorized common shares to a minimum of 500 million shares before April 30,
2004. Stockholder approval to increase the authorized common shares to 750
million was obtained on April 28, 2004. Investors in the February 19, 2004,
financing were granted the option to purchase up to an additional $1,220,000 of
convertible debentures and warrants with terms and conditions substantially
identical to those applicable to the February 19, 2004, transaction. This option
expired on October 28, 2004.
The agreements entered into in connection with the February 19, 2004 transaction
required that the Company obtain the unanimous approval of the debenture holders
prior to the occurrence of certain events including stock dividends,
subdivisions, combinations and reclassifications of the Company's common stock
until less than 20% of the principal remains outstanding on the debentures. The
agreement further stipulates that no debenture may be prepaid without the
consent of the holder and that each debenture holder has a right of first
refusal to participate in any new equity financing transaction undertaken
through June 10, 2005.
March 2004 Issuance
In March 2004, the Company issued an unsecured convertible debenture to an
existing shareholder and beneficial owner of approximately 3.6% of the Company's
common shares as of December 31, 2004, in the amount of $122,000 from which it
received $100,000 in net proceeds after an original issue discount of $22,000.
The Company also issued 732,000 detachable stock purchase warrants in connection
with this transaction. The convertible debenture and common stock purchase
warrants have identical terms and conditions to those issued on February 19,
2004. The principal balance outstanding for this debenture was $122,000 at
December 31, 2004.
F-31
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CONVERTIBLE DEBENTURES (CONTINUED)
November 2004 Issuance
As discussed in Note 6, in November 2004, the Company paid a commitment fee to
induce RAB Special Situations LP, a principal stockholder to enter into a series
of amendments to an existing note payable. The commitment fee of $500,000 was
paid through the issuance of a convertible promissory note (the commitment fee
note) which is payable on February 1, 2006, in cash or, at the Company's option,
in shares of its common stock at a 20% discount to market. The commitment fee
note is also convertible at the option of the note holder at a conversion price
of $.05 per share, subject to adjustment.
The $500,000 commitment fee is included in deferred financing costs and is being
amortized over the life of the amended note payable. The Company agreed to file
a registration statement covering the shares issuable under the commitment fee
note.
The remaining $5,837,000 in principal of the Company's outstanding convertible
debentures at December 31, 2004, mature during the Company's fiscal years ending
as follows:
FISCAL YEARS ENDING JUNE 30, PRINCIPAL
------------------------------------------------- ----------
2005............................................. $ --
2006............................................. 1,497,000
2007............................................. 4,340,000
----------
Total principal payments......................... $5,837,000
==========
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 debenture issuances the fair value of the detachable stock
warrants and resulting beneficial conversion feature. For each debenture
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 using the effective interest method over the respective
lives of the underlying debentures, the amortization of which is included in
"amortization of convertible debt discount" on the consolidated statement of
operations. The original debt discount and related amortization expense for each
of the above convertible debenture issuances are as follows as of December 31,
2004:
AMORTIZATION EXPENSE FOR THE THREE AMORTIZATION EXPENSE FOR THE
MONTHS ENDED SIX MONTHS ENDED
--------------------------------- ---------------------------------
ORIGINAL DEBT DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
ISSUANCE DATE DISCOUNT 2004 2003 2004 2003
- ------------- ------------- ------------ ------------ ------------ ------------
June -Nov. 2001 $ 5,211,200 $ 297,030 $ 561,879 $ 625,577 $ 887,514
September 2003 3,350,000 -- 433,668 128,542 495,705
February 2004 2,775,000 429,798 -- 914,236 --
March 2004 122,000 20,753 -- 44,091 --
----------- ----------- ----------- ----------- -----------
$11,458,200 $ 747,581 $ 995,547 $ 1,712,446 $ 1,383,219
=========== =========== =========== =========== ===========
The remaining debt discount of $1,619,969 related to the Company's outstanding
convertible debentures at December 31, 2004, is expected to amortize to expense
during the Company's fiscal years ending as follows:
DISCOUNT
FISCAL YEARS ENDING JUNE 30, AMORTIZATION
-------------------------------------------------------------
2005 (Remaining)................................. $ 909,087
2006............................................. 710,882
----------
Total discount amortization...................... $1,619,969
==========
F-32
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' DEFICIT
General
The Company is restricted under Nevada corporate law from declaring any
dividends to stockholders due to current working capital and stockholders'
deficits.
The Company's stockholders elected to increase its authorized common shares from
100 million to 250 million and 750 million at special stockholders' meetings
held on December 1, 2003 and April 28, 2004, respectively.
Common Shares Issued In Payment of Accrued Interest and Upon Conversion of
Convertible Debenture In November 2004, the Company issued 6,000,000 shares of
its common stock to an institutional investor upon conversion of convertible
debentures with a principal amount of $300,000.
Common Shares Issued for Services
In October 2004, the Company issued 4,800,000 shares of its common stock to a
consultant in consideration of $129,600 in services rendered under a three-month
agreement dated September 8, 2004, to develop and implement an investor
awareness and communication program.
9. 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 during the first quarter of
fiscal 2004.
10. 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.
Patent Litigation
The Company was the plaintiff in patent infringement litigation, in which the
Company alleged willful patent infringement. The defendants brought a number of
counterclaims, including antitrust, unfair competition, tortious interference
with business relations and patent misuse, and had asserted unspecified general
damages. In May 2003, the District Court ruled against our assertion of patent
infringement. The Company timely filed a Notice of Appeal to the Court of
Appeals for the Federal Circuit and in August 2004, the Court of Appeals
reversed the District Court's ruling and remanded the matter back to the
District Court for a new hearing. Following the remand, the Company returned to
settlement negotiations with the defendant. In November 2004, the Company
entered into an agreement with the defendant, resulting in termination of the
lawsuit. In connection with the settlement agreement, the Company granted the
defendant a license to utilize its patent in the professional market and allowed
for the possibility of a supply agreement with the defendant to supply the
Company with dry-chemistry test strips used in the Company's current cholesterol
monitor. If no supply agreement is reached, the license will become fully paid
and unencumbered after December 31, 2007, however if a supply agreement is
reached with the defendant, the license terminates on August 4, 2012, upon
expiration of the patent. As such, based on the status of continuing
negotiations during the first quarter of fiscal 2005, the Company reduced the
estimated useful life of its patent from six to three years as the supply
agreement is not currently being negotiated.
Royalty Obligation Dispute on Proprietary Optics Technology
The Company licensed the use of proprietary optics technology previously
utilized in its predecessor cholesterol monitor from a principal vendor in
exchange for payment of a royalty to the vendor for each monitor manufactured
with the optics technology. Beginning in October 2002, the Company developed and
began utilizing its own proprietary optics technology in its current
F-33
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CONTINGENCIES (CONTINUED)
cholesterol monitor. In October 2002, the Company ceased accruing and paying the
royalty obligation as the Company viewed the re-engineered optics technology
used in its current cholesterol monitor as being proprietary to the Company. The
vendor asserted in a letter to the Company that the subject optics technology
was, in their opinion, still subject to royalties under the licensing agreement.
Negotiations are currently ongoing and the Company has recorded a liability in
the amount of $257,535, which it believes is necessary for full and final
settlement of this matter based on the latest negotiations. The Company believes
that any incremental royalty obligation resulting from these negotiations would
not be material to the Company's expected future consolidated financial
statements, however no assurances can be given.
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 requires the Company to make minimum
annual purchases and requires certain compensating payments in the event the
Company fails to meet the minimum purchase requirements. As the Company has not
met these minimum purchase commitments, the vendor increased the price of the
test strips by 10%. Should the Company continue to not meet these minimum
purchase requirements, the vendor could require the Company to make additional
compensating payments. The dollar amount of such future payments, if any, is
currently indeterminable.
11. SUBSEQUENT EVENT
Effective February 1, 2005, the Company entered into an Intellectual Property
and Capital Interest Agreement ("Agreement") with an unrelated third party
("purchaser"). The Agreement assigns certain unutilized intellectual property
rights owned by the Company's wholly-owned subsidiary, Secured Interactive
Technologies, Inc. Once the purchaser completes its first round of financing,
the intellectual property will be transferred to the purchaser and the Company
will receive as consideration, convertible preferred stock of the purchaser,
representing a 49% equity ownership. Upon completion of the purchaser's second
round of financing, a portion of the Company's preferred ownership in the
purchaser will convert into common shares of the purchaser and the Company
becomes obligated to reduce its equity ownership in the purchaser to 30% through
sales of the preferred stock to one or more as yet unidentified third parties.
Such sales, if made, will result in an infusion of cash into Lifestream, the
amount of which cannot be determined at this time. If the purchaser is unable to
complete its first round of financing by July 31, 2005, the Agreement will
automatically terminate unless extended by both parties.
In connection with this assignment, the Company agreed to allow its president
and chief executive officer, Christopher Maus, to serve as a director and assist
the purchaser in the initial phases of product development and rollout for an
undetermined period of time. Mr. Maus will receive compensation, which may
include a combination of salary, bonus and/or equity participation from the
purchaser. Mr. Maus and the Company believe that Mr. Maus will remain available
to devote the majority of his time to the Company and no adjustment is being
made to Mr. Maus' current compensation from the Company, the amount of which had
previously been reduced by mutual agreement as a cost cutting measure.
F-34
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(A) The Company is a Nevada corporation. Section 78.7502 of the Nevada
Revised Statutes, provides in regard to indemnification of directors and
officers that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another entity, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the action, suit or proceeding if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
(B) Section 78.7502 also provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses, including amounts paid in settlement and attorneys'
fees actually and reasonably incurred by him in connection with the defense or
settlement of the action or suit if he acted in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter as
to which such a person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation or
for amounts paid in settlement to the corporation, unless and only to the extent
that the court determines upon application that in view of all the circumstances
of the case, the person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to above or in defense of any claim, issue
or matter therein, the corporation shall indemnify him against expenses,
including attorneys' fees, actually and reasonably incurred by him in connection
with the defense.
(C) Section 78.751 of the Nevada Revised Statutes, further provides
that any discretionary indemnification under NRS 78.7502 unless ordered by a
court or otherwise advanced pursuant to statute, may be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made either by the stockholders, by the
board of directors by majority vote of a quorum consisting of directors who were
not parties to the action, suit or proceeding, or, under certain circumstances,
by independent legal counsel in a written opinion. The statute provides that the
corporate articles, bylaws or an agreement made by the corporation may provide
that the expenses of officers and directors incurred in defending a civil or
criminal action, suit or proceeding must be paid by the corporation as they are
incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he is not entitled to be indemnified by the
corporation. This right continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the heirs, executors and
administrators of such a person.
(D) Section 78.752 of the Nevada Revised Statutes, provides that a
corporation may purchase and maintain insurance or make other financial
arrangements on behalf of any person who may be indemnified as set forth above
or whether or not the corporation has the authority to indemnify him against
such liability and expenses. Provided, however, no financial arrangement made
for protection for a person adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable for intentional misconduct,
fraud or a knowing violation of law, except with respect to the advancement of
expenses or indemnification ordered by a court.
(E) Section 6.1 of the by-laws of Lifestream provide that the
corporation shall, to the maximum extent and in the manner permitted by the
General Corporation Law of Nevada, indemnify each of its directors and officers
against expenses (including attorneys' fees), judgments, fines, settlements, and
II-1
other amounts actually and reasonably incurred in connection with any
proceeding, arising by reason of the fact that such person is or was an agent of
the corporation. For purposes of this Section 6.1, a "director" or "officer" of
the corporation includes any person (i) who is or was a director or officer of
the corporation, (ii) who is or was serving at the request of the corporation as
a director or officer of another corporation, partnership, joint venture, trust
or other enterprise, or (iii) who was a director or officer of a corporation
which was a predecessor corporation of the corporation or of another enterprise
at the request of such predecessor or corporation.
(F) Section 6.2 of the by-laws of Lifestream provides that the
corporation shall have the power, to maximum extent and in the manner permitted
by the General Corporation Law of Nevada, to indemnify each of its employees and
agents (other than directors and officers) against expenses (including
attorneys' fees), judgments, fines, settlements, and other amounts actually and
reasonably incurred in connection with any proceeding, arising by reason of the
fact that such person is or was an agent of the corporation. For purposes of
this Section 6.2, an "employee" or "agent" of the corporation (other than a
director or officer) includes any person (i) who is or was an employee or agent
of the corporation, (ii) who is or was serving at the request of the corporation
as an employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
(G) Section 6.3 of the by-laws of Lifestream provides that the
corporation may purchase and maintain insurance on behalf of any person who is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Nevada.
The effect of these provisions would be to permit indemnification by
the Company of, among other liabilities, liabilities arising under the
Securities Act of 1933 (the "Securities Act").
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling
Lifestream pursuant to the foregoing provisions, Lifestream has been informed
that in the opinion of the Securities and Exchange Commission, indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
these liabilities, other than the payment by Lifestream in the successful
defense of any action, suit or proceeding, is asserted, Lifestream will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
indemnification by it is against public policy. Lifestream will be governed by
the final adjudication of this issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable by the Company in connection with the
distribution of the securities being registered are as follows:
SEC Registration and Filing Fee.......................... $ 191
Legal Fees and Expenses*................................. $ 5,000
Accounting Fees and Expenses*............................ $10,000
Financial Printing*...................................... $ 200
Blue Sky Fees and Expenses*.............................. $ 1,000
Miscellaneous*........................................... $ 100
-------
TOTAL.......................................... $16,491
=======
- ----------
* Estimated
All of the expenses associated with the registration of the securities included
in this registration statement are being paid by the Company.
II-2
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In March 2002, we issued 12,773 common shares to Schwartz Communications, a
public relations firm, in exchange for services provided over a three-month
contract period beginning January 2002 with an estimated aggregate fair market
value of $27,000. The consultant had a preexisting business relationship with
the Company, was provided access to business and financial information about the
Company and had such knowledge and experience in business and financial matters
that they were able to evaluate the risks and merits of an investment in the
Company. Accordingly, the consultant was "sophisticated" within the meaning of
federal securities laws. The certificate evidencing securities issued in the
transaction included a legend to the effect that the securities were not
registered under the Securities Act and could not be resold absent registration
or the availability of an applicable exemption therefrom. No general
solicitation or advertising was used in connection with the transaction. The
transaction was exempt from the registration requirements of the Securities Act
by reason of Section 4(2) thereunder as a transaction by an issuer not involving
any public offering.
In May 2002, we issued 7,500 common shares to International Consulting Partners,
a public relations firm in exchange for consulting services previously provided
with an estimated aggregate fair market value of $7,875. The consultant had a
preexisting business relationship with the Company, was provided access to
business and financial information about the Company and had such knowledge and
experience in business and financial matters that they were able to evaluate the
risks and merits of an investment in the Company. Accordingly, the consultant
was "sophisticated" within the meaning of federal securities laws. The
certificate evidencing securities issued in the transaction included a legend to
the effect that the securities were not registered under the Securities Act and
could not be resold absent registration or the availability of an applicable
exemption therefrom. No general solicitation or advertising was used in
connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
In June 2002, we issued 17,857 common shares to Helmut Kamlah, a product
development consultant, in exchange for services to be subsequently provided
over a twelve-month contract period beginning September 1, 2001 with an
estimated aggregate fair market value of $17,500. The consultant had a
preexisting business relationship with the Company, was provided access to
business and financial information about the Company and had such knowledge and
experience in business and financial matters that they were able to evaluate the
risks and merits of an investment in the Company. Accordingly, the consultant
was "sophisticated" within the meaning of federal securities laws. The
certificate evidencing securities issued in the transaction included a legend to
the effect that the securities were not registered under the Securities Act and
could not be resold absent registration or the availability of an applicable
exemption therefrom. No general solicitation or advertising was used in
connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
In June 2002, we issued 25,000 common shares to The Wall Street Group, a public
relations firm, in exchange for consulting services previously provided with an
aggregate fair market value of $36,000. The consultant had a preexisting
business relationship with the Company, was provided access to business and
financial information about the Company and had such knowledge and experience in
business and financial matters that they were able to evaluate the risks and
merits of an investment in the Company. Accordingly, the consultant was
"sophisticated" within the meaning of federal securities laws. The certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
In June 2002, we issued 6,338 common shares to Schwartz Communications, a public
relations firm, in exchange for consulting services provided over a three-month
contract period beginning April 2002 with an estimated aggregate fair market
value of $9,000. The consultant had a preexisting business relationship with the
Company, was provided access to business and financial information about the
Company and had such knowledge and experience in business and financial matters
that they were able to evaluate the risks and merits of an investment in the
Company. Accordingly, the consultant was "sophisticated" within the meaning of
federal securities laws. The certificate evidencing securities issued in the
transaction included a legend to the effect that the securities were not
registered under the Securities Act and could not be resold absent registration
or the availability of an applicable exemption therefrom. No general
solicitation or advertising was used in connection with the transaction. The
transaction was exempt from the registration requirements of the Securities Act
by reason of Section 4(2) thereunder as a transaction by an issuer not involving
any public offering.
II-3
During fiscal 2002 the Company executed stock option agreements with the
following third parties for the performance of consulting and legal services.
These stock option agreements covered 142,500 shares of the Company's common
stock. The option agreements contain exercise prices ranging from $1.00 to $1.69
per share and have contractual lives ranging from one three and one-half years
to five years. In connection with these stock option agreements and the related
services obtained, the Company recognized various expenses aggregating $135,842
.. Each of the consultants had a preexisting business relationship with the
Company, was provided access to business and financial information about the
Company and had such knowledge and experience in business and financial matters
that they were able to evaluate the risks and merits of an investment in the
Company. Accordingly, the consultants were "sophisticated" within the meaning of
federal securities laws. No general solicitation or advertising was used in
connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
NAME SHARES
---- -------
Helmut Kamlah 50,000
Ronald Kiima 17,500
GGM Holdings 75,000
During fiscal 2002 the Company entered into several agreements with third
parties for the performance of various services over subsequent two to three
year periods. In connection therewith, the Company granted these service
providers 362,000 stock options with various exercise prices and expiration
dates. During fiscal 2002 and 2001, the Company recognized various expenses
aggregating $576,631 for the fair value of the issued stock options, which was
recognized as the stock options vest based on the terms of the stock option
agreements. Each of the consultants had a preexisting business relationship with
the Company, was provided access to business and financial information about the
Company and had such knowledge and experience in business and financial matters
that they were able to evaluate the risks and merits of an investment in the
Company. Accordingly, the consultants were "sophisticated" within the meaning of
federal securities laws. No general solicitation or advertising was used in
connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
NAME SHARES
---- -------
San Rafael Consulting Group 300,000
Boyd Lyles, MD 42,000
Mary Ann Malloy, MD 10,000
Michael Davidson 10,000
We issued 18,750 common shares to Broadmark Capital LLC, 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,
2002. The consultant had a preexisting business relationship with the Company,
was provided access to business and financial information about the Company and
had such knowledge and experience in business and financial matters that they
were able to evaluate the risks and merits of an investment in the Company.
Accordingly, the consultant was "sophisticated" within the meaning of federal
securities laws. The certificate evidencing securities issued in the transaction
included a legend to the effect that the securities were not registered under
the Securities Act and could not be resold absent registration or the
availability of an applicable exemption therefrom. No general solicitation or
advertising was used in connection with the transaction. The transaction was
exempt from the registration requirements of the Securities Act by reason of
Section 4(2) thereunder as a transaction by an issuer not involving any public
offering.
On January 31, 2003, the Company issued 1,040,816 previously escrowed registered
shares of its common stock to Triton West Group, an institutional shareholder,
in full and final resolution of a dispute regarding the number of common shares
it was entitled to under a make-whole/anti-dilution provision of the original
private placement offering. As part of this resolution, the institutional
shareholder agreed to the cancellation of all outstanding stock purchase
warrants held by it and to waive any potential liquidated damage claims it may
have had against the Company pursuant to a related registration rights
agreement. This institutional investor had a preexisting business relationship
with the Company, was provided access to business and financial information
about the Company and had such knowledge and experience in business and
financial matters that they were able to evaluate the risks and merits of an
investment in the Company. Accordingly, the investor was "sophisticated" within
the meaning of federal securities laws. The certificate evidencing securities
issued in the transaction included a legend to the effect that the securities
were not registered under the Securities Act and could not be resold absent
registration or the availability of an applicable exemption therefrom. No
general solicitation or advertising was used in connection with the transaction.
The transaction was exempt from the registration requirements of the Securities
Act by reason of Section 4(2) thereunder as a transaction by an issuer not
involving any public offering.
II-4
During January 2003, the Company issued 448,390 shares of its common stock to
Jacklin Land Company, the leaseholder of its office facilities in satisfaction
of $44,839 in accrued rent. The vendor had a preexisting business relationship
with the Company, was provided access to business and financial information
about the Company and had such knowledge and experience in business and
financial matters that they were able to evaluate the risks and merits of an
investment in the Company. Accordingly, the vendor was "sophisticated" within
the meaning of federal securities laws. The certificate evidencing securities
issued in the transaction included a legend to the effect that the securities
were not registered under the Securities Act and could not be resold absent
registration or the availability of an applicable exemption therefrom. No
general solicitation or advertising was used in connection with the transaction.
The transaction was exempt from the registration requirements of the Securities
Act by reason of Section 4(2) thereunder as a transaction by an issuer not
involving any public offering.
During February 2003, the Company issued 50,000 shares of its common stock to
Global Mail Inc., a consultant in exchange for services with an estimated fair
market value of $10,000. The consultant had a preexisting business relationship
with the Company, was provided access to business and financial information
about the Company and had such knowledge and experience in business and
financial matters that they were able to evaluate the risks and merits of an
investment in the Company. Accordingly, the consultant was "sophisticated"
within the meaning of federal securities laws. The certificate evidencing
securities issued in the transaction included a legend to the effect that the
securities were not registered under the Securities Act and could not be resold
absent registration or the availability of an applicable exemption therefrom. No
general solicitation or advertising was used in connection with the transaction.
The transaction was exempt from the registration requirements of the Securities
Act by reason of Section 4(2) thereunder as a transaction by an issuer not
involving any public offering.
During March 2003, the Company's Board of Directors authorized management to
proceed with a "best efforts" private placement offering of up to 40,000,000
shares of the Company's common stock at a fixed price of $0.10 per common share.
Pursuant to this private placement we issued 35,387,500 restricted shares of our
common stock to nineteen investors, including certain related parties, at $0.10
per share. Net proceeds were $3,355,750 (net of $183,000 of commissions). Each
of the investors had a preexisting business relationship with the Company, was
provided access to business and financial information about the Company and had
such knowledge and experience in business and financial matters that they were
able to evaluate the risks and merits of an investment in the Company.
Accordingly, the investors were "sophisticated" within the meaning of federal
securities laws. The certificate evidencing securities issued in the transaction
included a legend to the effect that the securities were not registered under
the Securities Act and could not be resold absent registration or the
availability of an applicable exemption therefrom. No general solicitation or
advertising was used in connection with the transaction. The transaction was
exempt from the registration requirements of the Securities Act by reason of
Section 4(2) thereunder as a transaction by an issuer not involving any public
offering.
NAME SHARES
---- ---------
Alpha Capital 4,000,000
Brett Sweezy 97,500
Cheyenna Whittier 50,000
Commercial Management Research 250,000
Crescent International 5,000,000
David Sappier 3,000,000
Eagle & Dominion Euro American Growth Fund LP 76,000
Eagle & Dominion Euro American Growth Fund LTD 274,000
Ellis Enterprises 1,000,000
Forest Nominees 6,400,000
J. Christopher Hecht 50,000
Lucrative Investments 700,000
Markham Holdings 300,000
Mercer Management 6,500,000
Michael Knepper 600,000
Palisades Master Fund 5,000,000
RAB Europe Fund 1,000,000
Robert Boyle 50,000
Steve Ahl 1,040,000
II-5
In May 2003, we issued 833,333 and 166,667 shares of our common stock to RAB
Europe Fund Ltd and RAB Europe Partners, respectively, in exchange for their
forfeiting an anti-dilution guarantee and warrants. Each is an institutional
holder of our convertible notes. Each of the investors had a preexisting
business relationship with the Company, was provided access to business and
financial information about the Company and had such knowledge and experience in
business and financial matters that they were able to evaluate the risks and
merits of an investment in the Company. Accordingly, the investors were
"sophisticated" within the meaning of federal securities laws. The certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
In June 2003, we issued 500,000 shares of our common stock to Forest Nominees, a
consultant, in exchange for services with an estimated aggregate fair market
value of $50,000. The consultant had a preexisting business relationship with
the Company, was provided access to business and financial information about the
Company and had such knowledge and experience in business and financial matters
that they were able to evaluate the risks and merits of an investment in the
Company. Accordingly, the consultant was "sophisticated" within the meaning of
federal securities laws. The certificate evidencing securities issued in the
transaction included a legend to the effect that the securities were not
registered under the Securities Act and could not be resold absent registration
or the availability of an applicable exemption therefrom. No general
solicitation or advertising was used in connection with the transaction. The
transaction was exempt from the registration requirements of the Securities Act
by reason of Section 4(2) thereunder as a transaction by an issuer not involving
any public offering.
In June 2003, we issued 1,000,000 shares of our common stock to Capital South
Financial Services, a financing company in settlement of a $100,000 loan
commitment fee. The financing company had a preexisting business relationship
with the Company, was provided access to business and financial information
about the Company and had such knowledge and experience in business and
financial matters that they were able to evaluate the risks and merits of an
investment in the Company. Accordingly, the financing company was
"sophisticated" within the meaning of federal securities laws. The certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
In June 2003, we issued 1,000,000 shares of our common stock to GGM Holdings
Ltd, a legal firm in exchange for services with an estimated aggregate fair
market value of $100,000. The consultant had a preexisting business relationship
with the Company, was provided access to business and financial information
about the Company and had such knowledge and experience in business and
financial matters that they were able to evaluate the risks and merits of an
investment in the Company. Accordingly, the consultant was "sophisticated"
within the meaning of federal securities laws. The certificate evidencing
securities issued in the transaction included a legend to the effect that the
securities were not registered under the Securities Act and could not be resold
absent registration or the availability of an applicable exemption therefrom. No
general solicitation or advertising was used in connection with the transaction.
The transaction was exempt from the registration requirements of the Securities
Act by reason of Section 4(2) thereunder as a transaction by an issuer not
involving any public offering.
On September 13, 2003, we completed a private placement of $3,350,000 in
convertible notes to eight institutional investors identified below, from which
we received $3,067,000 in net cash proceeds (net of $268,000 in commissions and
$15,000 in related legal fees). We were required to immediately place $1,533,500
of the proceeds into escrow, the future release of such funds to us was
contingent upon the approval by a majority of our stockholders of the proposed
increase in our authorized common shares from 100 million to 250 million. This
approval was obtained at a special meeting of stockholders held on December 1,
2003. All notes had a stated 8.0% annual rate of interest, were payable at our
option in either cash or authorized and unissued shares of our common stock,
matured on September 10, 2006, and were convertible, only if we had sufficient
authorized and unissued common shares, into shares of our common stock at a
stated rate of $0.13 per share. Each noteholder received stock purchase warrants
enabling them to purchase shares of our common stock at $0.2144 per share over a
subsequent two-year period equal to 50% of the common shares they would be
entitled to receive upon their immediate conversion of the note principal. Any
related subsequent issuances of our common stock are limited to any individual
noteholder beneficially owning no more than 4.99% of our then outstanding common
shares.
II-6
On January 13, 2004, we entered into an exchange agreement with each holder of
our convertible debentures that were issued in September 2003. Under the
Exchange Agreement, each debenture holder agreed to exchange the principal
amount of its debenture for shares of our common stock, at the rate of $0.09 of
debenture principal per share of common stock. Holders could not exchange their
debentures to the extent that exchange would result in the holders' beneficial
ownership of 4.99% or more of our then outstanding common shares. As of the date
of this prospectus all $3,350,000 in convertible notes and $101,678 of accrued
interest thereon had been converted into common shares of the Company. The
following table summarizes the number of common shares issued to each
institutional investor upon conversion of the convertible debentures and related
accrued interest, as well as the number of common stock purchase warrants issued
to each institutional investor:
NAME SHARES WARRANTS
---- --------- ----------
Alpha Capital AG 5,708,819 1,923,077
Bristol Investment Fund 5,137,937 1,730,769
Congregation Mishkan 1,141,764 384,616
Crescent International 9,386,819 3,076,923
Ellis International 2,283,527 769,231
Gryphon Master Fund 5,708,819 1,923,077
Lucrative Investments 570,882 192,308
Palisades Master Fund 8,563,226 2,884,615
Each of the above institutional investors had a preexisting business
relationship with the Company, was provided access to business and financial
information about the Company and had such knowledge and experience in business
and financial matters that they were able to evaluate the risks and merits of an
investment in the Company. Accordingly, the investors were "sophisticated"
within the meaning of federal securities laws. The certificate evidencing
securities issued in the transaction included a legend to the effect that the
securities were not registered under the Securities Act and could not be resold
absent registration or the availability of an applicable exemption therefrom. No
general solicitation or advertising was used in connection with the transaction.
The transaction was exempt from the registration requirements of the Securities
Act by reason of Section 4(2) thereunder as a transaction by an issuer not
involving any public offering.
In October 2003, we issued 211,426 and 172,984 common shares to Arthur Gardner
and Bradley Groff of Gardner & Groff, a legal firm, in satisfaction of $82,648
in unpaid legal fees and related accrued interest. Each attorney had a
preexisting business relationship with the Company, was provided access to
business and financial information about the Company and had such knowledge and
experience in business and financial matters that they were able to evaluate the
risks and merits of an investment in the Company. Accordingly, the attornies
were "sophisticated" within the meaning of federal securities laws. The
certificate evidencing securities issued in the transaction included a legend to
the effect that the securities were not registered under the Securities Act and
could not be resold absent registration or the availability of an applicable
exemption therefrom. No general solicitation or advertising was used in
connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
In October 2003, we issued 575,000 shares of common stock to Michael Mehrman, a
patent attorney, in satisfaction of $36,250 in unpaid legal fees and $50,000 as
a non-refundable flat-fee payment for legal services to be rendered. This
attorney had a preexisting business relationship with the Company, was provided
access to business and financial information about the Company and had such
knowledge and experience in business and financial matters that they were able
to evaluate the risks and merits of an investment in the Company. Accordingly,
the attorney was "sophisticated" within the meaning of federal securities laws.
The certificate evidencing securities issued in the transaction included a
legend to the effect that the securities were not registered under the
Securities Act and could not be resold absent registration or the availability
of an applicable exemption therefrom. No general solicitation or advertising was
used in connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
In October 2003, we issued 100,000 shares of common stock to H. Eric Seachris,
an independent consultant, in final settlement of consulting services rendered
by the consultant in the amount of $45,000. The services consisted of
introducing us to prospective investors. The consultant had a preexisting
II-7
business relationship with the Company, was provided access to business and
financial information about the Company and had such knowledge and experience in
business and financial matters that they were able to evaluate the risks and
merits of an investment in the Company. Accordingly, the consultant was
"sophisticated" within the meaning of federal securities laws. The certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
On January 7, 2004, we issued 975,669 restricted shares of our common stock to
the following employees as payment for $117,080 in compensation expense. The
employees had preexisting business relationships with the Company, were provided
access to business and financial information about the Company and had such
knowledge and experience in business and financial matters that they were able
to evaluate the risks and merits of an investment in the Company. Accordingly,
the employees were "sophisticated" within the meaning of federal securities
laws. The certificate evidencing securities issued in the transaction included a
legend to the effect that the securities were not registered under the
Securities Act and could not be resold absent registration or the availability
of an applicable exemption therefrom. No general solicitation or advertising was
used in connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
NAME SHARES
---- -------
Brett Sweezy 150,000
Christopher Maus 239,167
Craig Coad 183,334
Ed Siemens 196,500
Gerri Vance 41,667
Jack Connolly 81,667
Matt Colbert 41,667
Shirley Vesser 41,667
On January 9, 2004, we issued 1,000,000 restricted shares of our common stock to
Capital South Financial Services, a financing company in partial settlement of
an annual $100,000 renewal fee relating to our then outstanding note payable.
The financing company had a preexisting business relationship with the Company,
was provided access to business and financial information about the Company and
had such knowledge and experience in business and financial matters that they
were able to evaluate the risks and merits of an investment in the Company.
Accordingly, the financing company was "sophisticated" within the meaning of
federal securities laws. The certificate evidencing securities issued in the
transaction included a legend to the effect that the securities were not
registered under the Securities Act and could not be resold absent registration
or the availability of an applicable exemption therefrom. No general
solicitation or advertising was used in connection with the transaction. The
transaction was exempt from the registration requirements of the Securities Act
by reason of Section 4(2) thereunder as a transaction by an issuer not involving
any public offering.
On January 21, 2004, we issued 250,000 restricted shares of our common stock to
HPC Capital Management, an investment-banking firm, in exchange for investment
banking services and research coverage. The consultant had a preexisting
business relationship with the Company, was provided access to business and
financial information about the Company and had such knowledge and experience in
business and financial matters that they were able to evaluate the risks and
merits of an investment in the Company. Accordingly, the consultant was
"sophisticated" within the meaning of federal securities laws. The certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
On February 19, 2004, we completed a private placement offering of $2,775,000 in
unsecured convertible debentures to four institutional investors from which we
received $2,077,592 in net cash proceeds. The purchase price for the convertible
debentures issued in February 2004 gives effect to an original issue discount of
approximately $500,000, the amount of which was withheld from the proceeds at
the time of the closing of the financing. The term of the debentures is two
II-8
years, and the debentures are convertible at a conversion price of $0.05 per
share (66% of the average of the 5 consecutive closing bid prices immediately
prior to the closing date of the offering). The conversion price is subject to
adjustment upon the occurrence of certain events including stock dividends,
subdivisions, combinations and reclassifications of our common stock. In
connection with this transaction participating warrant holders agreed to
exercise outstanding warrants held by them to the extent such exercise would not
result in any participants' beneficial ownership of 4.9% of our then outstanding
common shares. We paid $181,968 in commissions to a placement agent in
connection with this financing transaction. As of the date of this prospectus,
we have issued 28,100,000 common shares upon conversion of these debentures. The
following table summarizes the common shares issued to each investor through the
date of this prospectus, as well as the number of warrants issued each
institutional investor at completion of the private placement:
Name Shares Warrants
---- ------ ---------
Alpha Capital AG -- 2,562,000
Bristol Investment Fund 10,000,000 3,660,000
Crescent International -- 2,928,000
Palisades Master Fund 18,000,000 7,499,999
In March 2004 we issued a $122,000 of convertible debentures to Mercer
Management, an institutional investor, from which we received $100,000 in net
proceeds after an original issue discount of $22,000. We also issued 732,000 of
detachable stock purchase warrants in connection with this transaction. The
convertible debentures and common stock purchase warrants have identical terms
and conditions to those issued on February 19, 2004 discussed above. As of the
date of this prospectus, no shares have been issued upon conversion of these
debentures and no warrants have been exercised.
In May 2004, we issued 350,000 shares to Brett Sweezy, a consultant and former
Chief Financial Officer of the Company. The consultant had a preexisting
business relationship with the Company, was provided access to business and
financial information about the Company and had such knowledge and experience in
business and financial matters that they were able to evaluate the risks and
merits of an investment in the Company. Accordingly, the consultant was
"sophisticated" within the meaning of federal securities laws. The certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
In May 2004, we issued a convertible promissory note to Capital South Financial
Services, a financing company, in the amount of $71,700 in satisfaction of the
balance owed for the annual renewal fee on our note payable with them. Upon
conversion of this promissory note in June 2004, we issued 1,593,333 shares of
our common stock. The financing company had a preexisting business relationship
with the Company, was provided access to business and financial information
about the Company and had such knowledge and experience in business and
financial matters that they were able to evaluate the risks and merits of an
investment in the Company. Accordingly, the financing company was
"sophisticated" within the meaning of federal securities laws. The certificate
evidencing securities issued in the transaction included a legend to the effect
that the securities were not registered under the Securities Act and could not
be resold absent registration or the availability of an applicable exemption
therefrom. No general solicitation or advertising was used in connection with
the transaction. The transaction was exempt from the registration requirements
of the Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
In October 2004, we issued 4,800,000 shares to James Czirr, a consultant, for
investor and public relations services of $129,600. The consultant had a
preexisting business relationship with the Company, was provided access to
business and financial information about the Company and had such knowledge and
experience in business and financial matters that they were able to evaluate the
risks and merits of an investment in the Company. Accordingly, the consultant
was "sophisticated" within the meaning of federal securities laws. The
certificate evidencing securities issued in the transaction included a legend to
the effect that the securities were not registered under the Securities Act and
could not be resold absent registration or the availability of an applicable
exemption therefrom. No general solicitation or advertising was used in
connection with the transaction. The transaction was exempt from the
registration requirements of the Securities Act by reason of Section 4(2)
thereunder as a transaction by an issuer not involving any public offering.
On January 11, 2005, we issued 3,000,000 shares each to Equitilink LLC and
Bernard Schmitt, consultants, in consideration for consulting services related
to separate investor and public relations services of $264,000 for services to
be provided over four months. Each consultant had a preexisting business
relationship with the Company, were provided access to business and financial
II-9
information about the Company and had such knowledge and experience in business
and financial matters that they were able to evaluate the risks and merits of an
investment in the Company. Accordingly, the consultants were "sophisticated"
within the meaning of federal securities laws. The certificate evidencing
securities issued in the transaction included a legend to the effect that the
securities were not registered under the Securities Act and could not be resold
absent registration or the availability of an applicable exemption therefrom. No
general solicitation or advertising was used in connection with the transaction.
The transaction was exempt from the registration requirements of the Securities
Act by reason of Section 4(2) thereunder as a transaction by an issuer not
involving any public offering.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of Lifestream
Technologies, Inc. (1)
3.1.1 Certificate of Amendment to Articles of Incorporation dated May 14,
2004 (2)
3.2 By-laws of Lifestream Technologies, Inc. (3)
4.1 Form of Convertible Term Note related to June 2001 Private Placement
(31)
4.2 Form of Warrant related to June 2001 Private Placement (32)
4.3 Form of Registration Rights Agreement related to June 2001 Private
Placement (33)
4.5 Form of Securities Purchase Agreement dated June 5, 2003. (34)
4.6 Form of Registration Rights Agreement dated June 5, 2003. (35)
5.1 Opinion of Schneider Weinberger & Beilly LLP ***
10.1 Lease between Jacklin Land Company Limited Partnership and Lifestream
Diagnostics, Inc., a wholly-owned subsidiary of Lifestream
Technologies, Inc. dated as of May 19, 1998. (4)
10.2 Promissory Note between Lifestream Technologies, Inc. and Capital South
Financial Services, Inc., dated May 1, 2003 (5)
10.3 Form of Convertible Term Note related to June 2001 Private Placement
(31)
10.4 Amended Form of Restated Note with RAB Europe Fund Limited dated May
12, 2003 (6)
10,5 Exchange and Amendment Agreement with RAB Europe Fund Limited dated May
12, 2003 (7)
10.6 Securities Purchase Agreement dated June 5, 2003. (8)
10.7 Registration Rights Agreement dated June 5, 2003 (9)
10.8 Securities Purchase Agreement related to September 10, 2003 Private
Placement (10)
10.9 Form of Convertible Debenture related to September 10, 2003 Private
Placement (11)
10.10 Registration Rights Agreement related to September 10, 2003 Private
Placement (12)
10.11 Form of Common Stock Purchase Warrant related to September 10, 2003
Private Placement (13)
10.12 Securities Purchase Agreement related to February 19, 2004 Private
Placement (14)
10.13 Form of Convertible Debenture related to February 19, 2004 Private
Placement (15)
10.14 Registration Rights Agreement related to February 19, 2004 Private
Placement (16)
II-10
10.15 Form of Common Stock Purchase Warrant related to February 19, 2004
Private Placement (17)
10.16 Exchange Agreement dated January 12, 2004 and related to September 10,
2003 Private Placement (18)
10.17 1998 Employee Stock Option Plan (19) *
10.18 2002 Employee Stock Option Plan (20) *
10.19 2004 Stock Compensation Plan (21) *
10.20 Amended and Substituted Promissory note dated November 12, 2004 in
favor of RAB Special Situations LP (22)
10.21 Amended and Restated Loan and Security Agreement dated November 12,
2004 with RAB Special Situations LP (23)
10.22 Amendment Agreement dated November 12, 2004 with RAB Special Situations
LP (24)
10.23 Convertible Term Note dated November 12, 2004 in favor of RAB Special
Situations LP (25)
10.24 Registration Rights Agreement dated November 12, 2004 with RAB Special
Situations LP (26)
10.25 Intellectual Property and Capital Interest Agreement with LifeNexus
effective as of February 1, 2005. (27)
10.26 Settlement Agreement with Polymer Technology Systems, Inc. dated
November 16, 2004 (28)
10.27 License and Supply Agreement between Lifestream Technologies, Inc. and
Roche Diagnostics GmbH dated December 12, 2000 (29)
10.28 Compensation Agreement between Mr. Maus and LifeNexus, Inc. dated March
1, 2005 (36)
10.29 Financial Consulting Agreement with Extol Corporation dated October 29,
2004 **
10.30 Consulting Agreement with Equitilink, LLC dated January 11, 2005 **
10.31 Financial Consulting Agreement with Market Pulse dated January 11, 2005
**
14 Code of Business Conduct and Ethics (30)
23.1 Consent of BDO Seidman, LLP **
23.2 Consent of Schneider Weinberger & Beilly LLP (included in Exhibit 5)
***
- ----------
* Management or compensatory agreement.
** Filed herewith.
*** Previously filed.
(1) Filed as Exhibit A to our Definitive Proxy Statement filed with
the Securities and Exchange Commission on April 24, 2002 and
incorporated herein by reference.
(2) Filed as Exhibit 3.1.1 to our Registration Statement on Form SB-2
filed with the Securities and Exchange Commission on June 1, 2004
and incorporated herein by reference.
(3) Filed as Exhibit 3.3 to our Annual Report on Form 10-SB filed with
the Securities and Exchange Commission on December 26, 1996 and
incorporated herein by reference.
(4) Filed as Exhibit 10.1 to our Quarterly Report on Form 10-QSB filed
with the Securities and Exchange Commission on August 14, 1998 and
incorporated herein by reference.
(5) Filed as Exhibit 10.3 to our Registration Statement on Form SB-2
filed with the Securities and Exchange Commission on December 10,
2003 and incorporated herein by reference.
(6) Filed as Exhibit 10.2 to our Registration Statement on Form S-3
filed with the Securities and Exchange Commission on July 10, 2003
and incorporated herein by reference.
II-11
(7) Filed as Exhibit 10.1 to our Registration Statement on Form S-3
filed with the Securities and Exchange Commission on July 10, 2003
and incorporated herein by reference.
(8) Filed as Exhibit 99.2 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 20, 2003 and
incorporated herein by reference.
(9) Filed as Exhibit 99.3 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 20, 2003 and
incorporated herein by reference.
(10) Filed as Exhibit 10.6 to our Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on October 1, 2003 and
incorporated herein by reference.
(11) Filed as Exhibit 10.7 to our Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on October 1, 2003 and
incorporated herein by reference.
(12) Filed as Exhibit 10.8 to our Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on October 1, 2003 and
incorporated herein by reference.
(13) Filed as Exhibit 10.9 to our Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on October 1, 2003 and
incorporated herein by reference.
(14) Filed as Exhibit 99.2 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on March 1, 2004 and
incorporated herein by reference.
(15) Filed as Exhibit 99.3 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on March 1, 2004 and
incorporated herein by reference.
(16) Filed as Exhibit 99.5 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on March 1, 2004 and
incorporated herein by reference.
(17) Filed as Exhibit 99.4 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on March 1, 2004 and
incorporated herein by reference.
(18) Filed as Exhibit 10.14 to our Registration Statement on Form SB-2
filed with the Securities and Exchange Commission on March 22,
2004 and incorporated herein by reference.
(19) Filed as Addendum A to our Definitive Proxy Statement filed with
the Securities and Exchange Commission on May 29, 1998 and
incorporated herein by reference.
(20) Filed as Exhibit B to our Definitive Proxy Statement filed with
the Securities and Exchange Commission on April 24, 2002 and
incorporated herein by reference.
(21) Filed as Exhibit 10.1 to our Registration Statement on Form S-8
filed with the Securities and Exchange Commission on August 6,
2004 and incorporated herein by reference.
(22) Filed as Exhibit 10.1 to our Current Report on Form 8-K filed with
the Securities and Exchange on November 15, 2004 and incorporated
herein by reference.
(23) Filed as Exhibit 10.2 to our Current Report on Form 8-K filed with
the Securities and Exchange on November 15, 2004 and incorporated
herein by reference.
(24) Filed as Exhibit 10.3 to our Current Report on Form 8-K filed with
the Securities and Exchange on November 15, 2004 and incorporated
herein by reference.
(25) Filed as Exhibit 10.4 to our Current Report on Form 8-K filed with
the Securities and Exchange on November 15, 2004 and incorporated
herein by reference.
(26) Filed as Exhibit 10.5 to our Current Report on Form 8-K filed with
the Securities and Exchange on November 15, 2004 and incorporated
herein by reference.
(27) Filed as exhibit 10.25 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on February 8, 2005,
and incorporated herein by reference.
(28) Filed as exhibit 10.26 to our Quarterly Report on Form 10-QSB
filed with the Securities and Exchange Commission on February 22,
2005, and incorporated herein by reference.
(29) Filed as Exhibit 10.4 to our Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on October 15, 2001
and incorporated herein by reference.
(30) Filed as Exhibit 14 to our Post-effective Amendment No. 1 to our
Registration Statement on Form SB-2 filed with the Securities and
Exchange Commission on December 3, 2004 and incorporated herein by
reference.
(31) Filed as Exhibit 4.1 to our Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission on October 15, 2001
and incorporated herein by reference.
(32) Filed as Exhibit 4.6 to our Registration Statement on Form S-3
filed with the Securities and Exchange Commission on October 31,
2001 and incorporated herein by reference.
(33) Filed as Exhibit 4.7 to our Registration Statement on Form S-3
filed with the Securities and Exchange Commission on October 31,
2001 and incorporated herein by reference.
(34) Filed as Exhibit 99.2 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 20, 2003 and
incorporated herein by reference.
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(35) Filed as Exhibit 99.3 to our Current Report on Form 8-K filed with
the Securities and Exchange Commission on June 20, 2003 and
incorporated herein by reference.
(36) Filed as Exhibit 10.28 to our Current Report on Form 8-K filed
with the Securities and Exchange Commission on March 4, 2005 and
incorporated herein by reference.
ITEM 28. UNDERTAKINGS
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to section 13 or section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission (the "Commission") such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or preceding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this amended
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Town of Post Falls, State of Idaho, on March 7, 2005.
LIFESTREAM TECHNOLOGIES, INC.
By: /s/ Christopher Maus
---------------------------------------
Christopher Maus, President,
Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
indicated.
SIGNATURE DATE TITLE
--------- ---- -----
/s/ Christopher Maus March 7, 2005 President, Chief Executive Officer,
- --------------------
Christopher Maus Chairman of the Board, and Director
(Principal Executive Officer)
/s/ Nikki Nessan March 7, 2005 Chief Financial Officer
- -----------------
Nikki Nessan (Principal Financial and Accounting Officer)
/s/ Robert Boyle March 7, 2005 Secretary, Treasurer, and Director
- -----------------
Robert Boyle
/s/ Michael Crane March 7, 2005 Director
- ------------------
Michael Crane
/s/ William Gridley March 7, 2005 Director
- --------------------
William Gridley
/s/ Neil Luckianow March 7, 2005 Director
- ------------------
Neil Luckianow