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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 000-29058
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LIFESTREAM TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
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NEVADA 82-0487965
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
570 CLEARWATER LOOP, BUILDING 1000, SUITE D, POST FALLS, ID 83854
(Address of principal executive offices) (zip code)
(208) 457-9409
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE TO CORPORATE ISSUERS
As of May 10, 2006, the registrant had 264,374,983 shares of its $.001
par value common stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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LIFESTREAM TECHNOLOGIES, INC.
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE FISCAL QUARTER ENDED MARCH 31, 2006
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Interim Condensed Consolidated Balance Sheets
as of March 31, 2006 and June 30, 2005 (unaudited).................... 3
Interim Condensed Consolidated Statements of Operations
for the three and nine months
ended March 31, 2006 and 2005 (unaudited)............................. 4
Interim Condensed Consolidated Statements of Cash Flows
for the nine months ended
March 31, 2006 and 2005 (unaudited)................................... 5
Notes to Interim Condensed Consolidated
Financial Statements (unaudited)...................................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation.............23
Item 3. Controls and Procedures...............................................34
PART II. OTHER INFORMATION
Item 5. Other Information.....................................................35
Item 6. Exhibits..............................................................35
Signatures....................................................................36
2
PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, JUNE 30,
2006 2005
------------ ------------
Current Assets:
Cash and cash equivalents $ 66,603 $ 250,024
Accounts receivable, net of allowance for
doubtful accounts of $273,751 and $43,551, respectively 172,919 133,411
Inventories, net 492,945 927,910
Prepaid expenses 19,369 260,133
------------ ------------
Total current assets 751,836 1,571,478
Property and equipment, net 95,480 139,780
Patent rights, net of accumulated amortization of
$1,919,879 and $1,799,879 200,000 320,000
Deferred financing costs 3,053 194,691
Other 5,828 9,236
------------ ------------
Total assets $ 1,056,197 $ 2,235,185
============ ============
Current Liabilities:
Accounts payable $ 1,752,654 $ 1,057,914
Accrued liabilities 698,808 695,651
Current maturities of convertible notes,
principal face amounts of $4,029,000 and $4,709,500,
respectively 4,000,358 1,486,277
Current maturities of notes payable, principal face amount
of $2,869,740 as of March 31, 2006 and June 30, 2005 2,869,740 2,742,145
Short term loan payable to related party 125,000 --
Current maturities of capital lease obligations 10,052 17,929
------------ ------------
Total current liabilities 9,456,612 5,999,916
Capital lease obligations, less current maturities -- 2,656
Convertible notes, long term -- 2,631,464
------------ ------------
Total liabilities 9,456,612 8,634,036
Commitments and contingencies
Stockholders' deficit
Preferred stock, $.001 par value; 15,000,000 shares authorized;
none issued or outstanding -- --
Common stock, $.001 par value; 750,000,000 shares
authorized; 262,403,735 and 243,043,735 issued and
outstanding, respectively 262,406 243,046
Additional paid-in capital 58,161,434 57,242,794
Accumulated deficit (66,824,255) (63,884,691)
------------ ------------
Total stockholders' deficit (8,400,415) (6,398,851)
------------ ------------
Total liabilities and stockholders' deficit 1,056,197 $ 2,235,185
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
3
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------------- --------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2006 2005 2006 2005
------------- ------------- ------------- -------------
Net sales $ 377,823 $ 568,761 $ 872,875 $ 2,227,228
Cost of sales 316,922 501,837 925,570 1,692,218
------------- ------------- ------------- -------------
Gross (loss) profit 60,901 66,924 (52,695) 535,010
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing 13,653 180,101 213,541 902,471
General and administrative 234,277 362,314 1,313,318 1,641,697
Product research and development 670 3,210 2,191 32,917
Depreciation and amortization 58,831 93,837 213,400 283,323
------------- ------------- ------------- -------------
Total operating expense 307,431 639,462 1,742,450 2,860,408
------------- ------------- ------------- -------------
Loss from operations (246,530) (572,538) (1,795,145) (2,325,398)
------------- ------------- ------------- -------------
Non-operating income (expense):
Interest income 6 9 1,247 19
Amortization of note and issue discount (86,594) (839,974) (690,711) (2,552,420)
Interest and financing expenses (88,245) (48,719) (263,318) (441,103)
Amortization of deferred financing costs (13,751) (230,804) (191,637) (692,024)
------------- ------------- ------------- -------------
Total non-operating expense, net (188,584) (1,119,488) (1,144,419) (3,685,528)
------------- ------------- ------------- -------------
Net loss $ (435,114) $ (1,692,026) $ (2,939,564) $ (6,010,926)
------------- ------------- ------------- -------------
Net loss per common share - basic and diluted $ (0.00) $ (0.01) $ (0.01) $ (0.03)
============= ============= ============= =============
Weighted average number of common shares
outstanding - basic and diluted 261,514,846 233,597,624 252,421,983 211,410,972
============= ============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
4
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
----------------------------
MARCH 31, MARCH 31,
2006 2005
----------- -----------
Cash flow from operating activities:
Net loss $(2,939,564) $(6,010,926)
Non-cash items:
Depreciation and amortization of property and equipment and patent
and license rights 213,400 283,323
Amortization of note and issue discount 690,711 2,789,345
Amortization of deferred financing costs 191,638 455,099
Provision for bad debts 235,818 235,682
Increase in inventory valuation allowance 5,161 30,476
Issuances of compensatory common stock, options and warrants for
employee and non-employee services 188,800 129,600
Beneficial conversion feature of convertible debt
issued to related party -- 72,600
Net changes in assets and liabilities:
Accounts receivable (275,326) (153,486)
Inventories 429,804 41,715
Prepaid expenses 59,464 (37,626)
Accounts payable 694,740 253,438
Accrued liabilities 253,157 254,912
Change in other non-current assets 3,408 149,100
----------- -----------
Net cash used in operating activities: (248,789) (1,506,748)
----------- -----------
Cash flows from investing activities:
Development stage monitor (49,100) --
----------- -----------
Net cash used in investing activities (49,100) --
----------- -----------
Cash flows from financing activities:
Proceeds from issuances of note payable 125,000 1,500,000
Payments on capital lease obligations (10,532) (24,586)
Payments on note payable -- (248,708)
Restricted cash equivalent -- 25,293
----------- -----------
Net cash provided by financing activities 114,468 1,251,999
----------- -----------
Net decrease in cash and cash equivalents (183,421) (254,749)
Cash and cash equivalents at beginning of year 250,024 590,196
----------- -----------
Cash and cash equivalents at end of year $ 66,603 $ 335,447
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
5
LIFESTREAM TECHNOLOGIES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
(CONTINUED)
NINE MONTHS ENDED
-------------------------
MARCH 31, MARCH 31,
2006 2005
---------- ----------
Supplemental schedule of cash activities:
Interest paid in cash $ -- $ 63,527
Supplemental schedule of non-cash financing activities:
Assets acquired through capital lease obligation $ -- $ 17,128
Issuance of common stock in exchange for:
Conversion of convertible debt and accrued interest $ 830,500 $1,762,155
Financing costs $ -- $ 500,000
Payment of accounts payable and accrued liabilities $ -- $ 644,761
The accompanying notes are an integral part of these
consolidated financial statements.
6
LIFESTREAM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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. The Company also
markets and sells dry-chemistry test strips utilized with its cholesterol
monitor for measuring total cholesterol.
The Company is currently working with an unrelated company to develop a
new device that combines cholesterol and blood pressure monitoring capabilities.
See "Item 2. Management's Discussion and Analysis or Plan of Operation - Recent
Developments and Strategic Initiatives - Development Stage Monitor" for further
details.
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, 2005 and 2004. In
recognition of such, its independent registered public accountants included an
explanatory paragraph in their report on the Company's condensed consolidated
financial statements for the fiscal years ended June 30, 2005 and 2004, which
expressed substantial doubt regarding the Company's ability to continue as a
going concern.
On February 1, 2006 the Company failed to pay $3,369,740 of secured and
unsecured debt payable to RAB Special Situations (Master) Fund Limited ("Master
Fund"). On February 3, 2006, Master Fund advised the Company that, pending the
outcome of negotiations to modify and/or restructure the Company's obligations
to Master Fund, it would not enforce its default remedies against the Company.
See "Note 7. Note Payable" and "Note 8. Convertible Debentures - November 2004
Issuance" below for further details.
Absent Master Fund's forbearance, the terms of the secured and
unsecured debt provide that the Company's failure to make the required payments
of principal on the February 1, 2006 maturity date causes the entire principal
amounts of the secured and unsecured debt to become immediately due and payable.
The Company's obligations under the secured portion of the debt are
collateralized by a security interest in all of the Company's assets.
On April 26, 2006, the Company assigned to Master Fund all of its
right, title, and interest in certain patent applications and the patent
application and trademark license agreements discussed in "Note 15. Patent
Application and Trademark License Agreements." In consideration for these
assignments, the Company's indebtedness under the note payable (described in
Note 7) was reduced to $1,849,740, the Commitment Fee Note of $500,000 issued in
November 2004 (described in Note 8) was cancelled and $2,980,000 of convertible
debt issued from June 2001 through November 2001 (described in Note 8) was
cancelled. See "Note 16. Subsequent Events - Patent and Trademark Assignment and
License Assumption Agreement" for further details.
On February 19, 2006, the Company failed to make required maturity date
payments in the aggregate principal amount of $549,000 under (a) an unsecured
convertible debenture dated February 19, 2004 in the aggregate principal amount
of $427,000 in favor of Alpha Capital AG ("Alpha"), and (b) an unsecured
convertible unwritten obligation incurred on March 1, 2004 to repay the
aggregate principal amount of $122,000 to Mercer Management ("Mercer").
Under the terms of the $549,000 indebtedness, in the event of a payment
default that continues after 15 days following written notice of default sent by
the lender(s), then each lender has the right to demand payment of the greater
of (1) 130% of the principal amount of the indebtedness ($713,700 if both
lenders were to demand payment), plus interest and applicable late fees and (2)
an amount computed under a formula that, based on market prices as of February
19, 2006, would result in a payment of $98,820 (if both lenders were to demand
payment). To date, the Company has not received any notice of default from Alpha
or Mercer.
7
The Company is addressing its ability to continue as a going concern
by, among other actions, the following:
o On April 26, 2006, the Company assigned to Master Fund all of
its right, title, and interest in certain patent applications
and certain patent application and trademark license
agreements in exchange for the cancellation of $4.5 million of
the $6,349,740 of outstanding secured and unsecured debt. See
"Note 16. Subsequent Events - Patent and Trademark Assignment
and License Assumption Agreement" and "Note 15. Patent
Application and Trademark License Agreements" for further
details.
o On October 19, 2005, the Company obtained $125,000 in short
term financing from a greater than 5% shareholder. See "Note
14 Related Party Transaction" for further details.
o During fiscal 2006, CVS Corporation, Rite Aid and Walgreen Co.
returned a total of approximately 16,300 cholesterol monitors
of which approximately 15,000 were considered suitable for
resale. Also, during fiscal 2006, these companies returned
approximately 8,200 test strips of which approximately 7,000
were considered suitable for resale. The resale of this
returned merchandise should enable the Company to generate net
sales and provide working capital to cover a portion of its
ongoing operational expenses. See "Note 11. Rite Aid
Merchandise Return," "Note 12. CVS Corporation Merchandise
Return" and "Note 13. Walgreen Co. Merchandise Return" for
further details.
o The Company is currently working with an unrelated company to
develop a new device that combines cholesterol and blood
pressure monitoring capabilities. See "Item 2. Management's
Discussion and Analysis or Plan of Operation - Recent
Developments and Strategic Initiatives - Development Stage
Monitor" for further details.
o Effective December 12, 2005, the Company entered into an
agreement with Polymer Technology Systems, Inc. for the supply
of test strips for both its current monitor and its
development stage monitor (discussed above). The Company
believes that this agreement will provide it with the
opportunity to obtain test strips at a competitive price with
more favorable terms than under the Company's arrangements
with Roche Diagnostics GmbH. See "Item 2. Management's
Discussion and Analysis or Plan of Operation - Recent
Developments and Strategic Initiatives - New Agreement for Our
Supply of Test Strips" for further details.
o Subsequent to March 31, 2006, the Company received $135,487,
net of refundable overpayment, from Walgreen Co. in final
payment for merchandise purchased and sold by Walgreen Co. The
Company intends to use a portion of the net proceeds to
purchase test strips. See Note 16. Subsequent Events - Payment
Received from Walgreen Co." for further details.
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. 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. As such, substantial doubt
as to the Company's ability to continue as a going concern remains as of the
date of this report.
3. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Principles of Consolidation
These condensed consolidated financial statements include the
operations of the Company and its two wholly-owned subsidiaries, Lifestream
Diagnostics, Inc. and Secured Interactive Technologies, Inc. All material
intercompany transactions and balances have been eliminated in consolidation.
8
Fiscal Periods
The Company's fiscal year-end is June 30. References to three-month
periods, or fiscal quarters, refer to the quarter ended on the date indicated.
References to a fiscal year refer to the calendar year in which such fiscal year
ends.
Use of Estimates
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make certain estimates and assumptions that
affect the reported amounts and timing of revenue and expenses, the reported
amounts and classification of assets and liabilities, and the disclosure of
contingent assets and liabilities. 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, 2005.
Reclassifications
Certain amounts in the condensed consolidated financial statements for
the prior periods have been reclassified to be consistent with the current
periods' 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 March 31, 2006 and 2005, the Company had stock options, stock
warrants and convertible debentures outstanding that could potentially be
exercised or converted into 88,929,858 and 136,650,318 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
options, stock warrants and convertible debentures were exercised or converted
into common shares.
Accounting for Stock Based Compensation
As allowed by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123" and by SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 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 25"), and its related interpretations, for stock options issued to
employees. Under APB No. 25, compensation expense is recognized based upon the
difference, if any, at the measurement date between the market value of the
stock and 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.
9
In December 2004, the FASB issued Statement No. 123R, "Share-Based
Payment" ("SFAS 123R"), which revises SFAS 123 and supersedes APB 25. As a
result, the pro forma disclosures previously permitted under SFAS 123 will no
longer be an alternative to financial statement recognition. In April 2005, the
Securities and Exchange Commission (the "SEC") announced the adoption of a rule
that amends the compliance date for SFAS 123R. This rule requires companies that
are Small Business Issuers, as defined in Rule 12b-2 of the Securities Exchange
Act of 1934, to implement the provisions of SFAS 123R by the first quarter of
the fiscal year beginning after December 15, 2005. Accordingly, the Company is
required to adopt the provisions of SFAS 123R in the first quarter of fiscal
2007. See "Recently Issued Accounting Standards Not Yet Adopted" below for
further details.
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 NINE MONTHS ENDED
------------------------------ ----------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2006 2005 2006 2005
----------- ------------- ----------- -----------
Net loss, as reported $ (435,114) $ (1,692,026) $(2,939,564) $(6,010,926)
Total stock-based employee compensation
expense determined under fair value
based method for all awards -- -- (12,831) (351,623)
----------- ------------- ----------- -----------
Pro forma net loss $ (435,114) $ (1,692,026) $(2,952,395) $(6,362,549)
=========== ============= =========== ===========
Net loss per share:
Basic and diluted - as reported $ (0.00) $ (0.01) $ (0.01) $ (0.03)
=========== ============= =========== ===========
Basic and diluted - pro forma $ (0.00) $ (0.01) $ (0.01) $ (0.03)
=========== ============= =========== ===========
In calculating the preceding, the fair value of each option grant was
estimated on the date of grant using the Black-Scholes option-pricing model and
the following weighted average assumptions:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2006 2005 2006 2005
--------- --------- --------- ---------
Risk-free interest rate N/A N/A 3.7% 2.4%
Expected volatility N/A N/A 113.0% 70.1%
Expected life in years N/A N/A 5 5
Expected dividends N/A N/A None None
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
10
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.
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
gross sales in the first three and nine months of fiscal 2005 and 2004.
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 adopted SFAS No. 151 effective for its fiscal
2006 first quarter, as required, with no material impact on its consolidated
financial statements.
Recently Issued Accounting Standards Not Yet Adopted
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment,"
("SFAS 123R") which revises FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." ("SFAS 123") and supersedes Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25").
SFAS 123R requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments (including grants of
employee stock options) based on the grant-date fair value of the award (with
limited exceptions). That cost will be recognized over the period during which
an employee is required to provide service in exchange for the award--the
requisite service period (usually the vesting period). The pro forma disclosures
previously permitted under SFAS 123 will no longer be an alternative to
financial statement recognition. See "Accounting for Stock Based Compensation"
above for the pro forma net income and earnings per share amounts for the three-
and nine-month periods ended March 31, 2006 and 2005, as if the Company had used
a fair-value based method similar to the methods required under SFAS 123R to
measure compensation expense for employee stock-based compensation awards. The
provisions of SFAS 123R are effective for the first quarter of the fiscal year
beginning after December 15, 2005. Accordingly, the Company is required to adopt
SFAS 123R in its first quarter of fiscal 2007. The Company is currently
evaluating the provisions of SFAS 123R. The impact on net income on a quarterly
basis is expected to be comparable to the amounts presented above under the
caption "Accounting for Stock Based Compensation". However, the impact on net
income may vary depending upon a number of factors including, but not limited
to, the price of the Company's stock and the number of stock options the Company
grants.
In May 2005, the FASB issued Statement No. 154, "Accounting Changes and
Error Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3"
("SFAS 154"). This Statement replaces APB Opinion No. 20, "Accounting Changes",
11
and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial
Statements", and changes the requirements for the accounting for and reporting
of a change in accounting principle. SFAS 154 applies to all voluntary changes
in accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. SFAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. Consequently, the Company will adopt the
provisions of SFAS 154 in its first quarter of fiscal 2007. Management currently
believes that adoption of the provisions of SFAS No. 154 will not have a
material impact on the Company's 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:
MARCH 31, JUNE 30,
2006 2005
--------- ---------
Balance, beginning of year $ 43,551 $ 298,398
Additions to allowance 262,540 255,404
Deductions, net of recoveries (32,340) (510,251)
--------- ---------
Balance, end of year $ 273,751 $ 43,551
========= =========
5. INVENTORIES, NET
Inventories, net, consist of the following:
MARCH 31, JUNE 30,
2006 2005
--------- ---------
Raw materials $ 165,927 $ 214,328
Work in process 7,744 14,496
Finished goods 232,487 167,408
Finished goods at retail locations 137,094 576,824
--------- ---------
543,252 973,056
Less valuation allowance (50,307) (45,146)
--------- ---------
Inventories, net $ 492,945 $ 927,910
========= =========
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
MARCH 31, JUNE 30,
2006 2005
-------- --------
Accrued royalties payable $257,535 $257,535
Accrued sales returns, including warranty obligations 250,251 222,790
Accrued interest payable 143,292 186,531
Accrued wages, benefits and taxes 47,730 25,517
Accrued other -- 3,278
-------- --------
Total accrued liabilities $698,808 $695,651
======== ========
7. NOTE PAYABLE
On May 1, 2003, the Company renewed its then expiring revolving credit
facility agreement with a financial institution. On November 12, 2004, Special
Situations entered into an agreement with this financial institution, under
which the financial institution assigned to Special Situations 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. On May 31, 2005,
Special Situations assigned all of its rights under this note to Master Fund, a
beneficial owner of approximately 1.91% of our common stock as of March 31,
2006.
Subsequent to November 12, 2004, the aggregate amount of the note was
increased from $920,323 to $2,869,740, which was to be repaid in monthly
installments of $100,000 commencing on May 1, 2005. The note payable amount gave
12
effect to an original issue discount of approximately $449,417. The original
issue discount was recorded as a deferred financing cost and was amortized using
the interest method over the life of the note payable. Additionally, the Company
signed a promissory note in the amount of $500,000 (the "Commitment Fee Note")
to induce Special Situations to make certain amendments to the note payable.
Both the note payable and the Commitment Fee Note became due and payable on
February 1, 2006.
On February 1, 2006 the Company failed to pay $3,369,740 of secured and
unsecured debt payable to Master Fund. On February 3, 2006, Master Fund advised
the Company that, pending the outcome of negotiations to modify and/or
restructure the Company's obligations to Master Fund, it would not enforce its
default remedies against the Company.
Absent Master Fund's forbearance, the terms of the secured and unsecured
debt provide that the Company's failure to make the required payments of
principal on the February 1, 2006 maturity date causes the entire principal
amounts of the secured and unsecured debt to become immediately due and payable.
The Company's obligations under the secured portion of the debt are
collateralized by a security interest in all of the Company's assets.
On April 26, 2006, the Company assigned to Master Fund all of its
right, title, and interest in certain patent applications and the patent
application and trademark license agreements discussed in "Note 15. Patent
Application and Trademark License Agreements." In consideration for these
assignments, the Company's indebtedness under the note payable was reduced to
$1,849,740, the Commitment Fee Note of $500,000 issued in November 2004
(described in Note 8) was cancelled and $2,980,000 of convertible debt issued
from June 2001 through November 2001 (described in Note 8) was cancelled. See
"Note 16. Subsequent Events - Patent and Trademark Assignment and License
Assumption Agreement" for further details.
During the three- and nine-month period ended March 31, 2006,
amortization related to this deferred financing cost totaled $4,717 and
$127,596, respectively. During the three- and nine-month period ended March 31,
2005, amortization related to this deferred financing cost totaled $149,005 and
$205,457, respectively. As of March 31, 2006, the entire balance of the deferred
financing cost related to this note payable had been amortized.
8. CONVERTIBLE DEBENTURES
June through November 2001 Issuances
From June 2001 through November 2001, the Company issued unsecured
convertible debentures, $2,980,000 of which remains outstanding with one
debenture holder (Master Fund) at March 31, 2006. These debentures (i) accrue
interest at the prime rate plus two percent (9.75% at March 31, 2006), (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.
Master Fund may not convert its debentures to the extent that
conversion would result in its beneficial ownership of 9.99% or more of the
Company's then outstanding common shares. 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 7, 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 expense related to the beneficial conversion
feature during the second quarter of fiscal 2005.
On December 27, 2005, the Company issued 5,000,000 shares of its common
stock in connection with Master Fund's conversion of $250,000 of accrued
interest.
On April 26, 2006, the Company assigned to Master Fund all of its
right, title, and interest in certain patent applications and the patent
application and trademark license agreements discussed in "Note 15. Patent
Application and Trademark License Agreements." In consideration for these
assignments, the Company's indebtedness under the note payable (described in
Note 7) was reduced to $1,849,740, the Commitment Fee Note of $500,000 was
cancelled and $2,980,000 of convertible debt issued from June 2001 through
November 2001 was cancelled. See "Note 16. Subsequent Events - Patent and
Trademark Assignment and License Assumption Agreement" for further details.
13
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
September 30, 2005, 6,346,155 detachable stock purchase warrants expired. There
are no remaining detachable stock purchase warrants associated with the
September 2003 convertible debenture issuances.
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 and accrued but unpaid interest for shares of
the Company's common stock, at the rate of $0.09 of debenture principal per
share of common stock.
During the first six months of fiscal 2005, the following conversions
of the above outstanding convertible debentures occurred:
PRINCIPAL # SHARES
AMOUNT UNAMORTIZED ISSUED
PRIOR TO DISCOUNT PRIOR PRINCIPAL AND/OR CONVERSION UPON
CONVERSION DATE CONVERSION TO CONVERSION INTEREST CONVERTED RATE CONVERSION
--------------- ---------- -------------- ------------------ ---------- ----------
7/9/2004 $199,376 $117,762 $207,154 $0.09 2,468,004
There are no further convertible debenture principal or accrued
interest balances 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 gave 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. The original issue discount was recorded as a reduction to the
convertible debt balance on the Company's consolidated balance sheet and is
being amortized using the effective interest method to "amortization of
convertible debt discount" on the Company's consolidated statement of operations
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 $427,000 at
March 31, 2006 and became due and payable on February 19, 2006. The Company
failed to make required maturity date payments under the debenture. The Company
does not have the current ability to repay this indebtedness. To date, the
Company has not received any notice of default from the debenture holder. See
"Note 2. Substantial Doubt Regarding the Company's Ability to Continue as a
Going Concern" for further details.
14
During the nine months ending March 31, 2006 and 2005, the following
conversions of the above outstanding convertible debentures occurred:
PRINCIPAL # SHARES
AMOUNT UNAMORTIZED ISSUED
PRIOR TO DISCOUNT PRIOR PRINCIPAL AND/OR CONVERSION UPON
CONVERSION DATE CONVERSION TO CONVERSION INTEREST CONVERTED RATE CONVERSION
--------------- ---------- -------------- ------------------ ---------- ----------
7/10/2004 $1,875,000 $1,596,088 $200,000 $0.05 4,000,000
11/9/04 $1,675,000 $ 990,727 $300,000 $0.05 6,000,000
2/3/05 $1,375,000 $ 590,589 $ 5,000 $0.05 100,000
-------- ----------
Total $505,000 10,100,000
-------- ----------
7/7/2005 $1,107,500 $ 200,082 $ 82,500 $0.05 1,650,000
10/17/05 $1,025,000 $ 69,712 $198,000 $0.05 3,960,000
11/8/05 $ 827,000 $ 43,066 $100,000 $0.05 2,000,000
11/16/05 $ 727,000 $ 35,337 $100,000 $0.05 2,000,000
12/1/05 $ 627,000 $ 24,606 $100,000 $0.05 2,000,000
2/9/06 $ 527,000 $ 2,450 $100,000 $0.05 2,000,000
-------- ----------
Total $680,500 13,610,000
======== ==========
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 could be
exercised over a nineteen-month period and had 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 had 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 could not convert debentures nor
could they 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. During the fiscal 2006 first quarter 16,649,999
detachable stock purchase warrants expired. There are no remaining detachable
stock purchase warrants associated with the February 2004 convertible debenture
issuances.
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 stipulated that no debenture may be prepaid
without the consent of the holder and that each debenture holder had a right of
first refusal to participate in any new equity financing transaction undertaken
through June 10, 2005.
15
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 of $122,000 became
due and payable on February 19, 2006. The Company does not have the current
ability to repay this indebtedness. To date, the Company has not received any
notice of default from the lender. See "Note 2. Substantial Doubt Regarding the
Company's Ability to Continue as a Going Concern" for further details.
On October 1, 2005, 732,000 detachable stock purchase warrants expired.
There are no remaining detachable stock purchase warrants associated with the
March 2004 convertible debenture issuance.
November 2004 Issuance
As discussed above in "Note 7. Note Payable", in November 2004, the
Company paid a commitment fee to induce Special Situations to enter into a
series of amendments to an existing note payable. On May 31, 2005, Special
Situations assigned all of its rights under this note to Master Fund. The
commitment fee of $500,000 was paid through the issuance of a convertible
promissory note (the "Commitment Fee Note") which was payable on February 1,
2006. The $500,000 Commitment Fee Note was amortized into deferred financing
costs over the life of the note payable. On May 10, 2005, the United States
Securities and Exchange Commission ("SEC") declared effective the registration
statement that the Company filed covering the resale of shares issuable under
the commitment fee note.
The Company did not repay the Commitment Fee Note on the maturity date.
On February 3, 2006, Master Fund advised the Company that, pending the outcome
of negotiations to modify and/or restructure the Company's obligations to Master
Fund, it would not enforce its default remedies against the Company.
On April 26, 2006, the Company assigned to Master Fund all of its
right, title, and interest in certain patent applications and the patent
application and trademark license agreements discussed in "Note 15. Patent
Application and Trademark License Agreements." In consideration for these
assignments, the Company's indebtedness under the note payable (described in
Note 7) was reduced to $1,849,740, the Commitment Fee Note of $500,000 was
cancelled and $2,980,000 of convertible debt issued from June 2001 through
November 2001 was cancelled. See "Note 16. Subsequent Events - Patent and
Trademark Assignment and License Assumption Agreement" for further details.
The remaining $4,029,000 in principal of our outstanding convertible
debentures at March 31, 2006, matures during our fiscal years ending as follows:
FISCAL YEARS ENDING JUNE 30, PRINCIPAL (1) NET OF DISCOUNT
------------- ---------------
2006 (remaining) $1,049,000 $1,049,000
2007 2,980,000 2,951,357
---------- ----------
Total principal payments $4,029,000 $4,000,357
(1) On April 26, 2006, $3,480,000 of convertible debt was cancelled.
See "Note 16. Subsequent Events - Patent and Trademark Assignment and License
Assumption Agreement" for further details.
16
The following tables summarize the principal balance, unamortized debt
discount, original issue discount and net carrying value of each of the above
debt issuances as reported on the consolidated balance sheet as of March 31,
2006 and June 30, 2005:
AS OF MARCH 31, 2006 AS OF JUNE 30, 2005
---------------------------------------------- ----------------------------------------------
PRINCIPAL NET PRINCIPAL NET
BALANCE UNAMORTIZED CARRYING BALANCE UNAMORTIZED CARRYING
OF DEBT AND VALUE OF OF DEBT AND VALUE OF
CONVERTIBLE ISSUE CONVERTIBLE CONVERTIBLE ISSUE CONVERTIBLE
DEBT ISSUANCE DEBT DISCOUNT DEBENTURES DEBT DISCOUNT DEBENTURES
------------- ---------- ---------- ---------- ---------- ---------- ----------
2001 Issuances (1) $2,980,000 $ 28,643 $2,951,357 $2,980,000 $ 348,536 $2,631,464
September 2003 -- -- -- -- -- --
February 2004 427,000 -- 427,000 1,107,500 221,553 885,947
March 2004 122,000 -- 122,000 122,000 21,670 100,330
November 2004 (1) 500,000 -- 500,000 500,000 -- 500,000
---------- ---------- ---------- ---------- ---------- ----------
$4,029,000 $ 28,643 $4,000,357 $4,709,500 $ 591,759 $4,117,741
========== ========== ========== ========== ========== ==========
(1) On April 26, 2006, $3,480,000 of convertible debt was cancelled.
See "Note 16. Subsequent Events - Patent and Trademark Assignment and License
Assumption Agreement" for further details.
The following tables summarize the related amortization of convertible
notes discount, amortization of deferred financing costs, and interest and
financing costs for each of the above convertible debt issuances for the three-
and nine-month periods ended March 31, 2006 and 2005:
FOR THE THREE MONTHS ENDING MARCH 31, 2006 FOR THE THREE MONTHS ENDING MARCH 31, 2005
---------------------------------------------- ----------------------------------------------
AMORTIZATION AMORTIZATION INTEREST AMORTIZATION
OF OF OF OF AMORTIZATION
CONVERTIBLE DEFERRED AND CONVERTIBLE OF DEFERRED INTEREST AND
NOTES FINANCING FINANCING NOTES FINANCING FINANCING
DEBT ISSUANCE DISCOUNT COSTS EXPENSES DISCOUNT COSTS EXPENSES
------------- ---------- ---------- ---------- ---------- ---------- ----------
2001 Issuances $ 69,482 $ 7,695 $ 69,173 $ 415,962 $ 50,561 $ 56,527
September 2003 -- -- -- -- -- --
February 2004 11,101 585 -- 252,499 15,087 --
March 2004 1,294 -- -- 22,508 -- --
November 2004 -- 5,472 -- 149,005 165,156 --
---------- ---------- ---------- ---------- ---------- ----------
$ 81,877 $ 13,752 $ 69,173 $ 839,974 $ 230,804 $ 56,527
========== ========== ========== ========== ========== ==========
FOR THE NINE MONTHS ENDING MARCH 31, 2006 FOR THE NINE MONTHS ENDING MARCH 31, 2005
---------------------------------------------- ----------------------------------------------
AMORTIZATION AMORTIZATION INTEREST AMORTIZATION
OF OF OF OF AMORTIZATION
CONVERTIBLE DEFERRED AND CONVERTIBLE OF DEFERRED INTEREST AND
NOTES FINANCING FINANCING NOTES FINANCING FINANCING
DEBT ISSUANCE DISCOUNT COSTS EXPENSES DISCOUNT COSTS EXPENSES
------------- ---------- ---------- ---------- ---------- ---------- ----------
2001 Issuances $ 319,894 $ 36,736 $ 199,987 $1,041,540 $ 133,228 $ 186,377
September 2003 -- -- -- 128,542 11,600 --
February 2004 221,553 11,960 -- 1,338,485 82,700 --
March 2004 21,669 -- -- 75,321 -- --
November 2004 -- 142,941 -- 205,457 227,570 --
---------- ---------- ---------- ---------- ---------- ----------
$ 563,116 $ 191,637 $ 199,987 $2,789,345 $ 455,098 $ 186,377
========== ========== ========== ========== ========== ==========
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 loss. The aggregate unamortized debt discount and original issue
discount amounted to $28,643 and $591,759 at March 31, 2006 and June 30, 2005,
respectively.
The remaining debt and issue discount of $28,643 related to the
Company's outstanding convertible debentures at March 31, 2006, is expected to
amortize to expense during the Company's fiscal year ending June 30, 2006.
17
9. 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 from 250 million to 750 million at
two special shareholders' meetings held on December 1, 2003 and April 28, 2004,
respectively.
Common Shares Issued for Services
In January 2005, the Company issued 6,000,000 shares of its common
stock to two consultants in consideration of $264,000 in services rendered under
two four month agreements to develop and implement two investor awareness and
communications programs.
Common Shares Issued In Payment of Accrued Interest and Upon Conversion of
Convertible Note
In January 2005, the Company issued 17,200,000 shares of its common
stock to an institutional investor upon conversion of convertible debentures
with a principal amount of $860,000 and 3,800,000 shares upon conversion of
related accrued interest in the amount of $190,000.
In February 2005, the Company issued 100,000 shares of its common stock
to an institutional investor upon conversion of convertible debentures with a
principal amount of $5,000.
In July 2005, the Company issued 1,650,000 shares of its common stock
to an institutional investor upon conversion of convertible debentures with a
principal amount of $82,500.
In October 2005, the Company issued 3,960,000 shares of its common
stock to two institutional investors upon conversion of convertible debentures
with a principal amount of $198,000.
In November 2005, the Company issued 4,000,000 shares of its common
stock to an institutional investor upon conversion of convertible debentures
with a principal amount of $200,000.
In December 2005, the Company issued 2,000,000 shares of its common
stock to an institutional investor upon conversion of convertible debentures
with a principal amount of $100,000.
In December 2005, the Company issued 5,000,000 shares of its common
stock in connection with Master Fund's conversion of $250,000 of accrued
interest.
In February 2006, the Company issued 2,000,000 shares of its common
stock to an institutional investor upon conversion of convertible debentures
with a principal amount of $100,000.
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
18
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. The license terminates on August 4, 2012, upon expiration of the
patent.
Effective December 12, 2005, the Company entered into an agreement with
Polymer Technology Systems, Inc. for the supply of test strips for both its
current monitor and its development stage monitor. This agreement does not
require the Company to make minimum annual purchases. Accordingly, it does not
require the Company to make compensating payments in the event it fails to meet
a minimum purchase requirement. See "Item 2. Management's Discussion and
Analysis or Plan of Operation - Recent Developments and Strategic Initiatives -
New Agreement for Our Supply of Test Strips" for further details.
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.
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. Due to cash flow constraints, the
Company ceased placing media ads in September 2004. On January 6, 2006, a
judgment was entered against the Company in favor of the former radio
advertising vendor. This judgment was entered in the district court of the first
judicial district of the state of Idaho. The judgment stipulated that the
Company must pay $349,106 to this former radio advertising vendor. The Company
has since recorded additional interest expense of $10,330 related to this
judgment. At March 31, 2006, the Company had a total liability related to this
judgment of $359,436 recorded on its consolidated financial statements.
Purchase Commitments Under Supplier Agreement
In August 2003, the Company entered into a manufacturing services
agreement under which it is obligated to pay for the finished product specified
in the agreement. Due to cash flow constraints, the Company has not taken
ownership of the finished product and therefore has not recorded a liability for
the finished product. The Company has an off-balance sheet commitment for
finished product in the amount of approximately $118,000.
Notice of Arbitration from TheSubway.com
In January 2005, the Company was served with a Notice of Arbitration
from TheSubway.com, Inc. ("Subway"), a former consultant to the Company
regarding an outstanding invoice of $75,000 for various public relations and
marketing services to be undertaken by Subway. In June 2005, the Company and
Subway entered into a settlement agreement pursuant to which the Company agreed
to pay Subway $60,000 in the form of common shares of the Company to be
registered with the SEC. The agreement stated that the Company was to complete
the registration process for the common shares issuable to Subway by September
1, 2005. The Company did not complete the registration process by that agreed
upon date, the commons shares were not issued to Subway, and, as a result,
Subway has the right to declare the settlement agreement in default and to
reschedule the hearing before arbitration. On November 2, 2005, the Company
informed Subway that it would not oppose entry of an arbitration award in the
amount of $60,000. Accordingly, during the fiscal 2006 first quarter, the
Company recorded a liability in the amount of $60,000 on its consolidated
financial statements.
11. RITE AID MERCHANDISE RETURN
During the first quarter of fiscal 2005, the Company contacted Rite Aid
regarding non-payment of certain invoices due. Rite Aid notified the Company
19
that it did not intend to pay the invoices until their in-house inventory levels
of the Company's products reduced. Upon further discussions with Rite Aid the
Company ceased its supply relationship. On July 13, 2005, the Company reached an
agreement with Rite Aid that stipulated that all remaining merchandise held by
Rite Aid would be returned to the Company. The Company recorded the impact of
this agreement on June 30, 2005. The Company received the final shipment of
merchandise from Rite Aid in the fiscal 2006 third quarter.
12. CVS CORPORATION MERCHANDISE RETURN
During the fiscal 2006 second quarter, CVS Corporation informed the
Company of its intent to return approximately 5,000 monitors. However, the
Company and CVS Corporation continue to have a supply relationship. The Company
received approximately 4,000 of these monitors during the fiscal 2006 second
quarter. In January 2006 the Company received the remaining approximately 1,000
monitors and recorded the related financial statement impact in its consolidated
financial statements as of December 31, 2005.
The Company determined that approximately 25% of the returned
merchandise was obsolete and, accordingly, recorded an adjustment to its
consolidated cost of sales in the approximate amount of $102,000 during the
fiscal 2006 second quarter. The other 75% of the returned monitors were brought
back into inventory available for sale and totaled approximately $122,000 at
cost.
13. WALGREEN CO. MERCHANDISE RETURN
During January 2006, Walgreen Co. notified the Company of its intent to
return approximately 8,000 to 9,000 monitors and approximately 4,000 test
strips. During the fiscal 2006 third quarter, Walgreen Co. returned to the
Company approximately 5,200 monitors and approximately 4,600 test strips.
Additionally, in April 2006, Walgreen Co. returned to the Company approximately
1,400 monitors and approximately 1,200 test strips. The Company believes that
Walgreen Co. has completed returning all the merchandise it has in its
possession. Further, the Company believes that this denotes the end of its
supply relationship with Walgreen Co. for its current model of cholesterol
monitor and related test strips.
The Company had an agreement with Walgreen commonly known as
"Pay-on-Scan" whereby a sale is completed at the time a Walgreen Co. customer
purchases the Company's product at a Walgreen Co. retail store. Consequently,
the majority of the product that was returned from Walgreen Co. had not been
previously recorded as a sale and had been included in the Company's reported
inventory balances as shown in "Note 5. Inventories, net" under the caption
"Finished goods at retail locations".
The Company estimated that sales to Walgreen Co. amounted to $237,136
during the first nine months of fiscal 2006. The Company has fully reserved an
allowance for doubtful accounts against this net sales amount due to the fact
that Walgreen Co. has not communicated to the Company that it agrees with this
sales figure. Subsequent to March 31, 2006 the Company received $135,487, net of
refundable overpayment, from Walgreen Co. in final payment for merchandise
purchased and sold by Walgreen Co.. See "Note 16. Subsequent Events - Payment
Received from Walgreen Co." below for further details.
14. RELATED PARTY TRANSACTIONS
On October 1, 2005, the Company entered into non-exclusive patent
application and trademark license agreements with a company whose Chairman of
the Board was the President, CEO and Chairman of the Board for Lifestream
Technologies, Inc. at the time the agreement was entered into. Effective April
14, 2006, the Company's President, CEO and Chairman of the Board resigned. The
Company's former President, CEO and Chairman of the Board continues to serve as
Chairman of the Board of the licensee. See "Note 15. Patent Application and
Trademark License Agreements" below and "Item 5. Other Information" for further
details.
On October 19, 2005, the Company obtained $125,000 in short-term
financing from a greater than 5% shareholder. Pursuant to the terms of the
verbal agreement with the lender, in October 2006 the Company is required to
make total payments for principal and interest of $140,000.
20
15. PATENT APPLICATION AND TRADEMARK LICENSE AGREEMENTS
On October 1, 2005, the Company entered into a non-exclusive patent
application license agreement with a related company to utilize a patent
application covering secured data acquisition, transmission, storage and
analysis systems. This patent application license agreement has an initial
period of three full calendar years plus the remaining portion of the present
calendar year. This patent application license agreement will automatically
extend for subsequent one calendar year periods provided that it has not been
terminated. This patent application license agreement stipulates that the
Company will receive 2.5% of the net sales revenue earned by the licensing
company. To date, there have been no sales revenues requiring the payment of
license fees under the agreement.
Also, on October 1, 2005, the Company entered into a non-exclusive
trademark license agreement with a related company to utilize the trade name
"Personal Health Card". This trademark license agreement has an initial period
of three full calendar years plus the remaining portion of the present calendar
year. This trademark license agreement will automatically extend for subsequent
one calendar year periods provided that it has not been terminated. This
trademark license agreement stipulates that the Company will receive 0.5% of the
net sales revenue earned by the licensing company. To date, there have been no
sales revenues requiring the payment of license fees under the agreement.
On April 26, 2006, the Company assigned to Master Fund all of its
right, title, and interest in certain patent applications and the patent
application and trademark license agreements (discussed above) in exchange for
the cancellation of $4.5 million of the $6,349,740 of outstanding secured and
unsecured debt. See "Note 16. Subsequent Events - Patent and Trademark
Assignment and License Assumption Agreement" for further details.
16. SUBSEQUENT EVENTS
Patent and Trademark Assignment and License Assumption Agreement
At March 31, 2006, the Company was indebted to Master Fund in the
amount of $2,869,740 under the Loan and Security Agreement dated as of November
12, 2004 (the "Loan Agreement"). The Company was further indebted to Master Fund
in the amount of $3,480,000 under various convertible notes.
On April 26, 2006, the Company assigned to Master Fund all of its
right, title and interest in certain patent applications, trademarks and related
license agreements in exchange for the cancellation of $4.5 million of the
$6,349,740 of outstanding secured and unsecured debt. The cancelled debt
consisted of (a) $3,480,000 evidenced by various convertible term notes
previously issued by the Company in favor of Master Fund and (b) $1,020,000 of
the outstanding balance of $2,869,740 as of the date of the assignment as
evidenced by a loan agreement dated November 12, 2004 between the Company and
Master Fund. See "Note 7. Note Payable" and "Note 8. Convertible Debentures -
November 2004 Issuance" for further details.
Common Shares Issued In Payment of Accrued Interest
In April 2006, the Company issued 1,971,248 shares of its common stock
in connection with Master Fund's conversion of $98,562 of accrued interest on
the principal balance of $2,980,000 of various convertible term notes cancelled
in connection with the assignment to Master Fund discussed above.
Payment Received from Walgreen Co.
Subsequent to March 31, 2006, the Company received $135,487, net of
refundable overpayment, from Walgreen Co. in final payment for merchandise
purchased and sold by Walgreen Co. The Company recorded net sales of $237,136 to
Walgreen Co. during the first nine months of fiscal 2006 and established a
reserve against the account receivable balance in an equal amount.
During the fourth quarter of 2006, the Company determined that actual
net sales to Walgreen Co. amount to a total of $373,300 during fiscal 2006. The
payment from Walgreen Co. of $135,487, net of refundable overpayment, was less
than the total net sales to Walgreen Co. primarily due to certain fees that the
Company owed to Walgreen Co. During the fourth quarter of fiscal 2006, the
Company eliminated the allowance for doubtful accounts established for the
$237,136 receivable from Walgreen Co. and reduced bad debt expense by $237,136.
21
Resignation of Our Chairman, President and Chief Executive Officer
Effective April 14, 2006, Christopher Maus resigned as the Company's
Chairman, President and Chief Executive Officer. Mr. Maus will continue to serve
on the Company's Board of Directors (the "Board"), in addition to acting as a
consultant to the Company for financing and strategic business development. Mr.
Maus has been the Chairman of the Board since its inception.
On April 14, 2006, the Company entered into a consulting agreement with
Christopher T. Maus, a director. Mr. Maus will consult with the Company in a
business development role, more specifically to head up Strategic Financing and
oversight of Product Development, with strategic responsibilities in corporate
financing and oversight of the Company's product offering, as well as other
services that may be deemed material to further business development pursuant to
the business plan adopted by the Board. Under the consulting agreement, Mr. Maus
will receive the sum of $11,500.00 per month for his services, which will be
payable in two equal payments on the first and fifteenth of each month. The
consulting agreement shall be for a fixed period beginning April 14, 2006, and
ending April 13, 2009.
Effective April 14, 2006, Matt Colbert, the Company's Vice President of
Finance, was appointed to serve as its President and Chief Financial Officer.
Mr. Colbert is currently a member of the Board and has been with the Company
since 1999.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain disclosures in this Quarterly Report on Form 10-QSB include
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Statements that include words such as "believe,"
"expect," "should," intend," "may," "anticipate," "likely," "contingent,"
"could," "may," "estimate," or other future-oriented statements, are
forward-looking statements.
Such forward-looking statements include, but are not limited to,
statements regarding our business plans, strategies and objectives, and, in
particular, statements referring to our expectations regarding our ability to
continue as a going concern, generate increased market awareness of our current
cholesterol monitor, realize improved gross margins, and timely obtain required
financing.
These forward-looking statements involve risks and uncertainties that
could cause actual results to differ from anticipated results. The
forward-looking statements are based on our current expectations and what we
believe are reasonable assumptions given our knowledge of the markets; however,
our actual performance, results and achievements could differ materially from
those expressed in, or implied by, these forward-looking statements.
Factors, within and beyond our control, that could cause or contribute
to such differences include, among others, the following:
o those associated with our marketing of a relatively new total
cholesterol monitoring device for consumers in a relatively
unestablished product marketplace;
o consumer preferences, perceptions and receptiveness with
respect to our monitor;
o our critical capital raising efforts in an uncertain and
volatile economic environment and any dilutive effect these
efforts may have on the market price of our common stock;
o our ability to maintain existing relationships with critical
vendors and customers;
o our cash-preservation and cost-containment efforts;
o our ability to retain key management personnel;
o our ability to pay and/or restructure our indebtedness and
alleviate cash flow difficulties;
o our inexperience with advertising;
o our competition and the potential impact of technological
advancements thereon;
o the impact of changing economic, political, and regulatory
environments on our business;
o the impact on demand for devices such as ours due to the
availability, affordability and coverage terms of private and
public medical insurance; and
o our exposure to product liability claims.
Additionally, please refer to our "Risk Factors" elsewhere in this
Quarterly Report on Form 10-QSB and in our most recent Annual Report on Form
10-KSB for the fiscal year ended June 30, 2005, filed with the United States
Securities and Exchange Commission. We assume no future obligation to update our
forward-looking statements or to provide periodic updates or guidance.
Readers are urged to carefully review and consider the various
disclosures made by us in this report, in our Annual Report on Form 10-KSB, and
those detailed from time to time in our reports and filings with the United
States Securities and Exchange Commission that discuss the risks, uncertainties
and factors that are likely to affect our business.
Our fiscal year ends on June 30. References to three-month periods, or
fiscal quarters, refer to the quarter ended on the date indicated. References to
a fiscal year refer to the calendar year in which such fiscal year ends.
COMPANY PROFILE
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
23
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.").
We are currently working with an unrelated company to develop a new
device that combines cholesterol and blood pressure monitoring capabilities. See
"Item 2. Management's Discussion and Analysis or Plan of Operation - Recent
Developments and Strategic Initiatives - Development Stage Monitor" for further
details.
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
includes national and regional drug store chains, the Home Shopping Network and,
to a lesser extent, pharmacy-featuring grocery store chains, specialty catalog
and internet-based direct marketers and independent pharmacies.
Our primary focus continues to be to increase consumer awareness of the
benefits of our products through increased distribution, development of new
products, and the use of lower-cost marketing campaign tests while 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, 2005 and 2004. 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, 2005 and 2004, which expressed substantial doubt
regarding our ability to continue as a going concern.
RECENT DEVELOPMENTS AND STRATEGIC INITIATIVES
Patent and Trademark Assignment and License Assumption Agreement
On February 1, 2006 we failed to pay $3,369,740 of secured and
unsecured debt payable to RAB Special Situations (Master) Fund Limited ("Master
Fund"). On February 3, 2006, Master Fund advised us that, pending the outcome of
negotiations to modify and/or restructure our obligations to Master Fund, it
would not enforce its default remedies against us. See "Note 7. Note Payable"
and "Note 8. Convertible Debentures - November 2004 Issuance" in our
consolidated financial statements for further details.
Absent Master Fund's forbearance, the terms of the secured and
unsecured debt provide that our failure to make the required payments of
principal on the February 1, 2006 maturity date causes the entire principal
amounts of the secured and unsecured debt to become immediately due and payable.
Our obligations under the secured portion of the debt are collateralized by a
security interest in all of our assets.
On April 26, 2006, we assigned to Master Fund all of our right, title,
and interest in certain patent applications and certain patent application and
trademark license agreements in exchange for the cancellation of $4.5 million of
the $6,349,740 of outstanding secured and unsecured debt. See "Note 16.
Subsequent Events - Patent and Trademark Assignment and License Assumption
Agreement" and "Note 15. Patent Application and Trademark License Agreements" in
our consolidated financial statements for further details.
Development Stage Monitor
Effective November 29, 2005, we entered into an agreement with
GenExel-Sein, Inc. ("GenExel"). This agreement provides that GenExel will
incorporate our cholesterol monitoring technology and GenExel's blood pressure
monitoring technology into a single product that the Company intends to market
as the "Lifestream Two in One Blood Pressure and Cholesterol Monitor".
We expect that this combination cholesterol and blood pressure monitor
would be presented alongside other models of blood pressure monitors in a retail
setting. We believe that the market for blood pressure monitors is more
established than that for cholesterol monitors. Accordingly, we anticipate that
more customers will be exposed to this new combination monitoring device thereby
providing enhanced visibility for our cholesterol monitors. We believe that this
enhanced visibility will allow us to cost effectively acquire market share.
24
New Agreement for Our Supply of Test Strips
Effective December 12, 2005, we entered into an agreement with Polymer
Technology Systems, Inc. for the supply of test strips for our current monitor
and our development stage monitor (discussed above). We believe that this
agreement will provide us with the opportunity to obtain test strips at a
competitive price with more favorable terms than under our arrangement with
Roche Diagnostics GmbH.
Rite Aid Merchandise Return
During the first quarter of fiscal 2005, we contacted Rite Aid
regarding non-payment of certain invoices due. Rite Aid notified us that it did
not intend to pay the invoices until their in-house inventory levels of our
products reduced. Upon further discussions with Rite Aid we ceased our supply
relationship. On July 13, 2005, we reached an agreement with Rite Aid that
stipulated that all remaining merchandise held by Rite Aid would be returned to
us. We recorded the impact of this agreement on June 30, 2005. We received the
final shipment of merchandise from Rite Aid in the fiscal 2006 third quarter.
CVS Corporation Merchandise Return
During the fiscal 2006 second quarter, CVS Corporation informed us of
its intent to return approximately 5,000 monitors. However, we continue to have
a supply relationship with CVS Corporation. We received approximately 4,000 of
these monitors during the fiscal 2006 second quarter. In January 2006 we
received the remaining 1,000 monitors and recorded the related financial
statement impact in its condensed consolidated financial statements as of
December 31, 2005.
We determined that approximately 25% of the returned merchandise was
obsolete and, accordingly, recorded an adjustment to our consolidated cost of
sales in the approximate amount of $102,000 in the fiscal 2006 second quarter.
The other 75% of the returned monitors were brought back into inventory
available for sale and amounted to approximately $122,000 at cost.
Walgreen Merchandise Return
During January 2006, Walgreen Co. notified us of its intent to return
approximately 8,000 to 9,000 monitors and approximately 4,000 test strips.
During the fiscal 2006 third quarter, Walgreen Co. returned to us approximately
5,200 monitors and approximately 4,600 test strips. Additionally, in April 2006,
Walgreen Co. returned to us approximately 1,400 monitors and approximately 1,200
test strips. We believe that Walgreen Co. has completed returning all the
merchandise it has in its possession. Further, we believe that this denotes the
end of our supply relationship with Walgreen Co. for our current model of
cholesterol monitor and related test strips.
We have an agreement with Walgreen commonly known as "Pay-on-Scan"
whereby a sale is completed at the time a Walgreen Co. customer purchases our
product at a Walgreen Co. retail store. The majority of the product returned had
not been previously recorded as a sale and had been included in our reported
inventory balances under the caption "Finished goods at retail locations." See
"Note 5. Inventories, net" and "Note 16. Subsequent Events - Payment Received
from Walgreen Co." in our consolidated financial statements for further details.
RESULTS OF OPERATIONS
The following tables set forth certain information regarding the
components of our consolidated statements of operations for the three- and
nine-month periods ended March 31, 2006 compared with the same periods in the
prior year. They are provided to assist in assessing differences in our overall
performance:
25
THREE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, % OF MARCH 31, % OF
2006 NET SALES 2005 NET SALES $ CHANGE % CHANGE
----------- --------- ----------- --------- ----------- --------
Net sales / Loss $ 377,823 100.0% $ 568,761 100.0% $ (190,938) -33.6%
Cost of sales 316,922 83.9% 501,837 88.2% (184,915) -36.8%
----------- ------ ----------- ------ ----------- ------
Gross (loss) profit 60,901 16.1% 66,924 11.8% (6,023) -9.0%
----------- ------ ----------- ------ ----------- ------
Operating expenses
Sales and marketing 13,653 3.6% 180,101 31.7% (166,448) -92.4%
General and administrative 234,277 62.0% 362,314 63.7% (128,037) -35.3%
Product research and development 670 0.2% 3,210 0.6% (2,540) -79.1%
Depreciation and amortization 58,831 15.6% 93,837 16.5% (35,006) -37.3%
----------- ------ ----------- ------ ----------- ------
Total operating expense 307,431 81.4% 639,462 112.4% (332,031) -51.9%
----------- ------ ----------- ------ ----------- ------
Loss from operations (246,530) -65.3% (572,538) -100.7% 326,008 -56.9%
----------- ------ ----------- ------ ----------- ------
Non-operating income (expense):
Interest income 6 0.0% 9 0.0% (3) -33.3%
Amortization of note and issue discount (86,594) -22.9% (839,974) -147.7% 753,380 -89.7%
Interest and financing expenses (88,245) -23.4% (48,719) -8.6% (39,526) 81.1%
Amortization of deferred financing costs (13,751) -3.6% (230,804) -40.6% 217,053 -94.0%
----------- ------ ----------- ------ ----------- ------
Total non-operating expense, net (188,584) -49.9% (1,119,488) -196.8% 930,904 -83.2%
----------- ------ ----------- ------ ----------- ------
Net loss $ (435,114) -115.2% $(1,692,026) -297.5% $ 1,256,912 -74.3%
=========== ====== =========== ====== =========== ======
NINE MONTHS ENDED
---------------------------------------------------------------------------------
MARCH 31, % OF MARCH 31, % OF
2006 NET SALES 2005 NET SALES $ CHANGE % CHANGE
----------- --------- ----------- --------- ----------- --------
Net sales $ 872,875 100.0% $ 2,227,228 100.0% $(1,354,353) -60.8%
Cost of sales 925,570 106.0% 1,692,218 76.0% (766,648) -45.3%
----------- ------ ----------- ------ ----------- ------
Gross (loss) profit (52,695) -6.0% 535,010 24.0% (587,705) -109.8%
----------- ------ ----------- ------ ----------- ------
Operating expenses
Sales and marketing 213,541 24.5% 902,471 40.5% (688,930) -76.3%
General and administrative 1,313,318 150.5% 1,641,697 73.7% (328,379) -20.0%
Product research and development 2,191 0.3% 32,917 1.5% (30,726) -93.3%
Depreciation and amortization 213,400 24.4% 283,323 12.7% (69,923) -24.7%
----------- ------ ----------- ------ ----------- ------
Total operating expense 1,742,450 199.6% 2,860,408 128.4% (1,117,958) -39.1%
----------- ------ ----------- ------ ----------- ------
Loss from operations (1,795,145) -205.7% (2,325,398) -104.4% 530,253 -22.8%
----------- ------ ----------- ------ ----------- ------
Non-operating income (expense):
Interest income 1,247 0.1% 19 0.0% 1,228 6463.2%
Amortization of note and issue discount (690,711) -79.1% (2,552,420) -114.6% 1,861,709 -72.9%
Interest and financing expenses (263,318) -30.2% (441,103) -19.8% 177,785 -40.3%
Amortization of deferred financing costs (191,637) -22.0% (692,024) -31.1% 500,387 -72.3%
----------- ------ ----------- ------ ----------- ------
Total non-operating expense, net (1,144,419) -131.1% (3,685,528) -165.5% 2,541,109 -68.9%
----------- ------ ----------- ------ ----------- ------
Net loss $(2,939,564) -336.8% $(6,010,926) -269.9% $ 3,071,362 -51.1%
=========== ====== =========== ====== =========== ======
CONSOLIDATED RESULTS OF OPERATIONS
The decrease in net sales during the fiscal 2006 third quarter was
primarily due to the cessation of a business relationship with CVS Corporation.
The Company recorded no sales from CVS Corporation during the fiscal 2006 third
quarter compared with $203,864 in the same period last year.
The decrease in net sales during the nine-month period ended March 31,
2006, was primarily due to the return of merchandise from CVS Corporation. They
returned approximately 5,000 monitors during the first nine months of fiscal
2006. The impact of this was recorded in the second quarter and approximated a
reduction to net sales of $383,000. See "Recent Developments and Strategic
Initiatives - CVS Corporation Merchandise Return" above for further details.
Additionally, we experienced decreased sales activity with several of
our customers during both the three- and nine-month periods ended March 31,
26
2006. We attribute this decrease to the cessation of the radio advertising
campaign we conducted through mid-September 2004. Due to a lack of adequate
funding, no similar advertising campaign has been conducted to date during
fiscal 2006. While we believe that this advertising campaign had a positive
effect on revenues, unless we are able to secure additional financing, we will
be unable to reinstitute this advertising campaign.
The negative impacts we experienced during the first nine months of
fiscal 2006 were partially offset by increased net sales from Walgreen Co. We
have a sales arrangement with Walgreen Co. commonly known as "Pay-on-Scan"
whereby a sale is completed at the time a Walgreen Co. customer purchases our
product at a Walgreen Co. retail store. We estimated that sales to Walgreen Co.
approximated $237,136 during the first nine months of fiscal 2006 as compared
with none during the same period last year. The absence of Walgreen Co. as a
customer may adversely impact upon our future revenues. See "Recent Developments
and Strategic Initiatives - Walgreen Merchandise Return" and "Note 16.
Subsequent Events - Payment Received from Walgreen Co." in our consolidated
financial statements above for further details.
During the fiscal 2006 third quarter and first nine months we received
merchandise returns from Rite Aid in the retail sales amount of $134,390 and
$383,331, respectively. We had recorded a reserve for these returns of $400,408
at June 30, 2005 in conjunction with an agreement we reached with Rite Aid.
Consequently, the financial impact of the returned merchandise during the fiscal
2006 third quarter and first nine months was included in our financial
statements as of June 30, 2005. The absence of Rite-Aid as a customer may
adversely impact upon our future revenues. See "Recent Developments and
Strategic Initiatives - Rite Aid Merchandise Return" above for further details.
Our gross profit during the fiscal 2006 third quarter was comparable in
amount and percentage of net sales to our fiscal 2005 third quarter gross
profit. We incurred a gross loss of $52,695 during the first nine months of
fiscal 2006 compared with gross profit of $535,010 in the same period last year.
This decline is primarily due to a significant decrease in net sales from period
to period and the return of merchandise by CVS Corporation during the fiscal
2006 second quarter. We considered approximately 25% of the merchandise returned
by CVS Corporation to be obsolete. Accordingly, this obsolete merchandise was
charged against our consolidated cost of sales and approximated $102,000. The
Company and CVS Corporation continue to have a business relationship. See
"Recent Developments and Strategic Initiatives - CVS Corporation Merchandise
Return" above for further details.
Our ability to realize consolidated gross profits sufficient to meet
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 marketing activities during fiscal
2006, the likelihood of us achieving broad market awareness and acceptance of
our consumer monitors is remote.
Our consolidated sales and marketing expenses decreased during the
fiscal 2006 third quarter primarily due to decreased cooperative advertising
campaigns conducted with certain of our existing retail customers. We primarily
attribute the decrease in cooperative advertising campaigns to decreased
business with Rite Aid, CVS Corporation and Walgreen Co.
Our consolidated sales and marketing expenses decreased during the
first nine months of fiscal 2006 primarily from the cessation of a significant
radio advertising campaign which we began in October 2003 and ended in
mid-September 2004. There was no such campaign during the first nine months
fiscal 2006.
The decreases in our consolidated general and administrative expenses
were primarily attributable to the following:
o a reduction in employee expenses of $73,957 and $267,063
during the fiscal 2006 third quarter and first nine months,
respectively, primarily related to our reducing personnel
levels. Our core staff decreased by approximately 50% during
both fiscal 2006 periods compared to the same periods a year
ago; and
27
o an increase in bad debt expense of approximately $220,000
during our fiscal 2005 first quarter related to our cessation
of our business relationship with Rite Aid. This impacted only
the comparison of the fiscal 2006 nine month period to the
same period last year.
Partially offsetting these decreases were:
o an increase in bad debt expense $237,136 during the first nine
months of fiscal 2006 related to our estimated "Pay-on-Scan"
sales to Walgreen Co. as discussed above;
o an increase of $59,200 in expense associated with issuing
stock in exchange for consulting services during the fiscal
2006 first nine months compared to the same period last year;
and
o an increase of $60,000 related to TheSubway.com, Inc.'s entry
of an arbitration award in this amount during the fiscal 2006
first nine months compared to the same period last year, See
"Note 10. Contingencies - Notice of Arbitration from
TheSubway.com".
Product research and development expenses were insignificant in both
the three- and nine month periods of fiscal 2005 and 2004.
Our non-operating income and expenses primarily consist of amortization
of convertible debt and issuance discount, interest and financing expenses.
These decreases in our non-operating income and expenses are primarily
attributed to decreases of $753,380 and $1,861,709 in amortization of debt and
issue discount during the three-and nine-month periods of fiscal 2006,
respectively. This amortization decreased because fewer debentures were
converted and there was an overall decrease in the debt and issue discount
balance to be amortized.
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 and
debt. We expect to continue to require additional equity or debt financings as
our source of capital. Our working capital deficit was $8,704,776 and $4,428,438
at March 31, 2006 and June 30, 2005, respectively. This increase in the working
capital deficit is primarily due to $2,641,676 of convertible notes that became
current during the nine-month period ended March 31, 2006. Our accumulated
deficit was $66,824,255 and $63,884,691 at March 31, 2006 and June 30, 2005,
respectively. This increase was due to our net loss of $2,939,564 during the
first nine months of fiscal 2006.
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, 2005 and 2004. 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, 2005 and 2004, which
expresses substantial doubt regarding our ability to continue as a going
concern. See "Note 2. Substantial Doubt Regarding the Company's Ability to
Continue as a Going Concern" in our condensed consolidated financial statements
for further details.
On February 1, 2006 we failed to pay $3,369,740 of secured and
unsecured debt payable to RAB Special Situations (Master) Fund Limited ("Master
Fund"). On February 3, 2006, Master Fund advised us that, pending the outcome of
negotiations to modify and/or restructure our obligations to Master Fund, it
would not enforce its default remedies against us. See "Note 7. Note Payable"
and "Note 8. Convertible Debentures - November 2004 Issuance" in our
consolidated financial statements for further details.
Absent Master Fund's forbearance, the terms of the secured and
unsecured debt provide that our failure to make the required payments of
principal on the February 1, 2006 maturity date causes the entire principal
amounts of the secured and unsecured debt to become immediately due and payable.
Our obligations under the secured portion of the debt are collateralized by a
security interest in all of our assets.
28
On April 26, 2006, we assigned to Master Fund all of our right, title,
and interest in certain patent applications and certain patent application and
trademark license agreements in exchange for the cancellation of $4.5 million of
the $6,349,740 of outstanding secured and unsecured debt. See "Note 16.
Subsequent Events - Patent and Trademark Assignment and License Assumption
Agreement" and "Note 15. Patent Application and Trademark License Agreements" in
our consolidated financial statements for further details.
On February 19, 2006, we failed to make required maturity date payments
in the aggregate principal amount of $549,000 under (a) an unsecured convertible
debenture dated February 19, 2004 in the aggregate principal amount of $427,000
in favor of Alpha Capital AG ("Alpha"), and (b) an unsecured convertible
unwritten obligation incurred on March 1, 2004 to repay the aggregate principal
amount of $122,000 to Mercer Management ("Mercer").
Under the terms of the $549,000 indebtedness, in the event of a payment
default that continues after 15 days following written notice of default sent by
the lender(s), then each lender has the right to demand payment of the greater
of (1) 130% of the principal amount of the indebtedness ($713,700 if both
lenders were to demand payment), plus interest and applicable late fees and (2)
an amount computed under a formula that, based on market prices as of February
19, 2006, would result in a payment of $98,820 (if both lenders were to demand
payment). To date, we have not received any notice of default from Alpha or
Mercer.
Should we be unsuccessful in any of the initiatives or matters
discussed in our disclosures entitled "Note 2. 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 regarding our ability to continue as a going
concern remains as of the date of this Report, in which event we may be required
to cease some or all of our operations in which event investors could lose their
investment in our company. Our financial statements do not include any
adjustments that may be necessary in the event we are unable to continue as a
going concern.
Capital Lease Obligations
We lease certain equipment under capital leases. The aggregate net
carrying values of the underlying collateralizing assets were approximately $0
and $75,000 at March 31, 2006, and June 30, 2005, respectively.
Our aggregate future obligations under capital lease agreements in
existence at March 31, 2006, are as follows:
FISCAL YEARS ENDING JUNE 30,
-----------------------------------------------------
2006 $ 3,160
2007 7,556
-------
Total lease payments 10,716
Less imputed interest 663
-------
Present value of net minimum lease payments 10,052
Less current maturities 10,052
-------
Total long-term capital lease obligation $ 0
=======
Outstanding Note Payable
Please refer to "Note 7. Note Payable" in our consolidated financial
statements for details related to our note payable.
Outstanding Convertible Debentures
Please refer to "Note 8. Convertible Debentures" in our consolidated
financial statements for details related to our outstanding convertible
Debentures.
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,
29
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.
30
As of the date of this report, other than as discussed below, 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.
In August 2003, we entered into a manufacturing services agreement
under which we are obligated to pay for the finished product specified in the
agreement. Due to cash flow constraints, we have not taken ownership of the
finished product and therefore have not recorded a liability for the finished
product. We have an off-balance sheet commitment for finished product in the
amount of approximately $118,000.
Contractual Obligations
The following table sets forth our contractual obligations as of March
31, 2006:
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
----------------------- ----------------------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
---------- ---------- ---------- ---------- ---------
Note Payable $2,869,740 $2,869,740 $ -- $ -- $ --
Convertible Debt (1) (2) 4,029,000 4,029,000 -- -- --
Capital Lease Obligations (3) 10,716 10,716 -- -- --
Operating Lease Obligations 67,027 47,630 13,668 5,729 --
Interest Obligations (4) 112,283 112,283 -- -- --
---------- ---------- ---------- ---------- ----
Total $7,088,766 $7,069,369 $ 13,668 $ 5,729 $ --
========== ========== ========== ========== ====
(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) Includes imputed interest
(4) Interest obligation on convertible debt is based on an interest rate of
prime plus 2%, currently 9.75%, on the three tranches that comprise the
$2,980,000 at various maturity dates.
Consolidated Cash Flows
Our operating activities utilized $248,789 in cash and cash equivalents
during the first nine months of fiscal 2006, an improvement of $1,257,959, or
83.5%, from the $1,506,748 in cash and cash equivalents utilized during the
first nine months of fiscal 2005. On a comparative basis, our lower utilization
reflects the positive cash flow effects of reduced net loss and, to a lesser
extent, increased accounts payable. The decreased net loss is primarily
attributable to decreased amortization of debt and issue discount. Our accounts
payable have increased as we have been unable to pay our vendors due to our
significantly reduced net sales. Partially offsetting the preceding was the
negative cash flow effect of decreased amortization of note and issue discount.
This decrease was due to a reduction in the amount of convertible debentures
that were converted during the period, as well as the overall decrease in the
debt and issue discount balance to be amortized.
Our invested activities used $49,100 during the first nine months of
fiscal 2006 which consisted of our investment in our development stage monitors.
See "Item 2. Management's Discussion and Analysis or Plan of Operation - Recent
Developments and Strategic Initiatives - Development Stage Monitor" for further
details. There were no cash flow effects from investing activities during the
first six months of fiscal 2005.
Our financing activities provided $114,468 in cash and cash equivalents
during the first nine months of fiscal 2006, a decrease of $1,137,531 or 90.9%
compared to the $1,251,999 in cash and cash equivalents provided by financing
31
activities during the first nine months of fiscal 2005. This decrease primarily
reflects the receipt of $1,500,000 in net cash proceeds from financing
transactions in the first nine months of fiscal 2005 compared with only $125,000
during the first nine months of fiscal 2006.
As a result of the foregoing, our cash and cash equivalents decreased
to $66,603 at March 31, 2006 as compared with $250,024 at June 30, 2005 and
$335,447 at March 31, 2005.
Planned Capital Expenditures
We have no significant planned capital expenditures for fiscal 2006.
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 March 31, 2006, 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
2006, 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:
o the reported amounts and timing of revenue and expenses;
o the reported amounts and classification of assets and
liabilities; and
o the 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 significant accounting policies list below 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. Please
refer to the discussion of our critical accounting policies in our most recent
Annual Report on Form 10-KSB for the fiscal year ended June 30, 2005 for further
details.
o Revenue Recognition
o Sales Returns Allowance
o Allowance for Doubtful Accounts
o Inventory Obsolescence Allowance
o Impairment of Long-Lived Assets
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.
32
RISK FACTORS
Investing in our common stock is subject to a number of risks and
uncertainties. We have updated the following risk factors to reflect changes
during the third quarter of fiscal 2006 we believe to be material to the risk
factors set forth in our Annual Report on Form 10-KSB for the fiscal year ended
June 30, 2005 filed with the Securities and Exchange Commission. The risks and
uncertainties described below are not the only ones that we face and are more
fully described in our Annual Report on Form 10-KSB and in other reports we file
with the Securities and Exchange Commission. Additional risks and uncertainties
not presently known to us or that we currently believe are immaterial also may
negatively impact our business.
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, 2005 and 2004, 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, 2005 and 2004 to express substantial doubt regarding our ability
to continue as a going concern. We are in need of substantial additional
investment capital to fund our longer-term operating needs, including servicing
of our debt obligations and continued conducting of marketing activities we
believe necessary to achieve meaningful sales growth. See "Note 2. Substantial
Doubt Regarding the Company's Ability to Continue as a Going Concern" in our
consolidated financial statements for further details.
We are currently operating on minimum cash reserves primarily related
to $125,000 in proceeds from short-term financing from a greater than 5%
shareholder and to $135,487, net of refundable overpaymentreceived from Walgreen
Co. during the fiscal 2006 fourth quarter. While we have several thousand units
of inventory in stock for sale, we will require substantial additional
investment capital to fund our longer-term operating needs. We currently have no
commitments from or understandings with potential investors to provide us with
the funding we require. If we are unable to raise additional capital or generate
substantial revenue growth, we will be unable to fund our ongoing operations or
service our debt obligations, and other commitments. See "Note 16. Subsequent
Events - Payment Received from Walgreen Co." in our consolidated financial
statements for further details.
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.
During fiscal 2006, CVS Corporation, Rite Aid and Walgreen Co. returned
a total of approximately 16,300 cholesterol monitors and a total of
approximately 8,200 test strips. We no longer have a supply relationship with
Rite Aid or Walgreen Co. but we continue to have a supply relationship with CVS
Corporation. The merchandise these vendors returned represented a substantial
percentage of our total merchandise sales during the twelve months ended March
31, 2006. While we believe this high return rate to be anomalous, it does raise
significant uncertainty about our ability to realize final sales transactions in
the future.
See "Recent Developments and Strategic Initiatives - Rite Aid
Merchandise Return" above for further details.
See "Recent Developments and Strategic Initiatives - Walgreen
Merchandise Return" above for further details.
See "Recent Developments and Strategic Initiatives - CVS Corporation
Merchandise Return" above for further details.
33
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. On February 1, 2006, this debt became due and payable. We
were unable to repay this debt and we are currently in negotiations with the
lender to restructure the debt. Absent restructuring of the current indebtedness
and/or the receipt of additional financing, we will be in default of our debt
repayment obligations and may be forced to cease operations and our assets may
be subject to foreclosure by both secured and, thereafter, unsecured investors.
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.
ITEM 3. CONTROLS AND PROCEDURES
As of March 31, 2006, the Company carried out an evaluation, under the
supervision and with the participation of the Company's management, including
its Acting Chief Executive Officer and its Interim Chief Financial Officer, of
the design and operation of the Company's disclosure controls and procedures.
Based on this evaluation, the Company's Acting Chief Executive Officer and
Interim Chief Financial Officer concluded that the Company's disclosure controls
and procedures are effective for gathering, analyzing and disclosing the
information the Company is required to disclose in the reports it files under
the Securities Exchange Act of 1934, within the time periods specified in the
SEC's rules and forms. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of this evaluation and through the date of the
filing of this form 10-QSB.
34
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Resignation of Our Chairman, President and Chief Executive Officer
Effective April 14, 2006, Christopher Maus resigned as our Chairman,
President and Chief Executive Officer. Mr. Maus will continue to serve on our
Board of Directors (the "Board"), in addition to acting as a consultant to us
for financing and strategic business development. Mr. Maus has been the Chairman
of the Board since its inception.
On April 14, 2006, we entered into a consulting agreement with
Christopher T. Maus, a director, Mr. Maus will consult with us in a business
development role, more specifically to head up Strategic Financing and oversight
of Product Development, with strategic responsibilities in corporate financing
and oversight of our product offering, as well as other services that may be
deemed material to further business development pursuant to the business plan
adopted by the Board. Under the consulting agreement, Mr. Maus will receive the
sum of $11,500.00 per month for his services, which will be payable in two equal
payments on the first and fifteenth of each month. The consulting agreement
shall be for a fixed period beginning April 14, 2006, and ending April 13, 2009.
Effective April 14, 2006, Matt Colbert, our Vice President of Finance,
was appointed to serve as our President and Chief Financial Officer. Mr. Colbert
is currently a member of the Board and has been with us since 1999.
Patent and Trademark Assignment and License Assumption Agreement
On April 26, 2006, the Company assigned to Master Fund all of its
right, title and interest in certain patent applications, trademarks and related
license agreements in exchange for the cancellation of $4.5 million of the
$6,349,740 of outstanding secured and unsecured debt. The cancelled debt
consisted of (a) $3,480,000 evidenced by various convertible term notes
previously issued by the Company in favor of Master Fund and (b) $1,020,000 of
the outstanding balance of $2,869,740 as of the date of the assignment as
evidenced by a loan agreement dated November 12, 2004 between the Company and
Master Fund.
ITEM 6. EXHIBITS
10.1 Consulting Agreement Between Christopher T. Maus and Lifestream
Technologies, Inc.*
10.2 Patent and Trademark Assignment and License Agreement Between
Lifestream Technologies, Inc. and Master Fund *
10.3 Consent and Agreement Between Lifestream Technologies, Inc. and
LifeNexus, Inc. *
31.1 Rule 13a-14(a)/15d-14(a) Certification of Acting Chief Executive
Officer and Interim Chief Financial Officer *
32.1 Certification of Acting Chief Executive Officer and Interim Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 *
- ----------
* Filed Herewith
35
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: May 15, 2006
LIFESTREAM TECHNOLOGIES, INC.
By: /s/ Matt Colbert
----------------
Matt Colbert
Acting Executive Officer
and Interim Chief Financial Officer
(Acting Principal Executive Officer
and Interim Principal Financial
and Accounting Officer)
36
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------------------------------------------------------------------
10.1 Consulting agreement between Christopher T. Maus and Lifestream
Technologies, Inc.
10.2 Patent and Trademark Assignment and License Agreement Between
Lifestream Technologies, Inc. and Master Fund
10.3 Consent and Agreement Between Lifestream Technologies, Inc. and
LifeNexus, Inc.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Acting Chief Executive
Officer and Interim Chief Financial Officer
32.1 Certification of Acting Chief Executive Officer and Interim Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002