<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission File Number 333-32934
__________________
LIFEF/X, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
NEVADA 84-1385529
(State of Incorporation) (I.R.S. Employer Identification No.)
153 NEEDHAM STREET, BUILDING ONE, NEWTON, MASSACHUSETTS 02464
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (617) 964-4200
__________________
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 past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
As of November 1, 2000, there were 19,207,401 Common Shares of Lifef/x, Inc.
outstanding.
Transitional Small Business Disclosure Format: Yes [_] No [X]
<PAGE>
LIFEF/X, INC.
FORM 10-QSB
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
------------------------------
Item 1. Consolidated Financial Statements.............................. 1
Item 2. Management's Discussion and
Analysis or Plan of Operation.................................. 11
Part II - Other Information
---------------------------
Item 1. Legal Proceedings.............................................. 20
Item 4. Submission of Matters to
a Vote of Security Holders..................................... 20
Item 6. Exhibits and Reports on Form 8-K............................... 20
Signatures..................................................... 21
</TABLE>
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
Assets 2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,873,994 $ 7,778,040
Restricted cash from stock subscriptions -- 9,051,000
Other receivables 10,212 17,249
Prepaid expenses 45,977 175,000
------------ ------------
Total current assets 8,930,183 17,021,289
Property, plant and equipment (net) 1,609,373 --
Other assets 419,516 --
Net assets of discontinued operation - long-term -- 4,451,701
------------ ------------
$ 10,959,072 $ 21,472,990
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 1,264,418 $ 864,123
Other current liabilities 19,787 --
Net liabilities of discontinued operation - current -- 9,598,372
------------ ------------
Total current liabilities 1,284,205 10,462,495
Other long-term liabilities 275,860 357,250
------------ ------------
1,560,065 10,819,745
------------ ------------
Shareholders' equity:
Common stock, $.001 par value. Authorized 100,000,000
shares: issued and outstanding 19,207,401 shares (2000)
and 18,999,917 shares (1999) 19,207 18,992
Additional paid-in capital 59,246,858 52,635,250
Common stock subscribed -- (579,000)
Deferred compensation related to stock options (2,953,541) (2,272,148)
Deficit accumulated during development stage (46,913,517) (39,149,849)
------------ ------------
Total shareholders' equity 9,399,007 10,653,245
------------ ------------
$ 10,959,072 $ 21,472,990
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue $ -- -- $ -- --
----------- ----------- ----------- -----------
Operating costs and expenses:
General and administrative 2,250,668 46,233 5,077,770 147,060
Research and development 1,426,324 479,774 3,246,924 1,199,361
----------- ----------- ----------- -----------
Total operating costs and expenses 3,676,992 526,007 8,324,694 1,346,421
----------- ----------- ----------- -----------
Loss from operations (3,676,992) (526,007) (8,324,694) 1,346,421
Non operating (income) expense:
Other income -- -- (3,250) --
Interest expense - other 10,461 7,689 35,127 21,459
Interest expense - warrants issued in
connection with debt conversion -- 1,216,140 -- 1,462,383
Interest income (177,784) -- (598,470) --
----------- ----------- ----------- -----------
Loss from continuing operations
before income tax expense (3,509,669) (1,749,836) (7,758,101) (2,830,263)
Income tax expense 1,011 -- 5,567 800
----------- ----------- ----------- -----------
Loss from continuing operations (3,510,680) (1,749,836) (7,763,668) (2,831,063)
Discontinued operation:
Loss on discontinued operation -- -- -- (3,002,332)
Loss on disposal -- -- -- (17,549,874)
----------- ----------- ----------- -----------
Net loss $(3,510,680) (1,749,836) $(7,763,668) (23,383,269)
=========== =========== =========== ===========
Net loss per common share on a basic
and diluted basis:
Continuing operations $ (.18) (5.00) $ (.41) (8.09)
Discontinued operation -- -- -- (58.70)
----------- ----------- ----------- -----------
$ (.18) (5.00) $ (.41) (66.79)
=========== =========== =========== ===========
Weighted average common shares outstanding 19,206,881 350,107 19,125,495 350,107
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Pacific Title / Mirage, Inc. Preferred Stock
-------------------------------------------------------------------
Series A Series B
--------------------------------- -------------------------------
Shares Amount Shares Amount
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 8,000,000 $ -- 7,680,000 $ 7,996,799
Issuance of stock warrants -- -- -- --
Issuance of stock warrants -- -- -- --
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (8,000,000) -- (7,680,000) (7,996,799)
Deferred compensation - stock options -- -- -- --
Vesting of stock options issued
as compensation -- -- -- --
Issuance of shares - private placement
offering -- -- -- --
Private placement offering costs -- -- -- --
Common stock subscribed -- -- -- --
Net loss -- -- -- --
--------------- --------------- --------------- -----------
Balance at December 31, 1999 -- -- -- --
Exercise of stock options -- -- -- --
Completion of stock subscriptons -- -- -- --
Vesting of stock options issued
as compensation -- -- -- --
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc. -- -- -- --
Net loss -- -- -- --
--------------- --------------- --------------- -----------
Balance at September 30, 2000 -- $ -- -- $ --
=============== =============== =============== ============
<CAPTION>
Pacific Title / Mirage, Inc. Lifef/x, Inc.
common stock common stock
-------------------------------- --------------------------------
Shares Amount Shares Amount
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1999 320,100 $ 3,201 -- $ --
Issuance of stock warrants -- -- -- --
Issuance of stock warrants -- -- -- --
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger (320,100) (3,201) 12,960,750 12,601
Deferred compensation - stock options -- -- -- --
Vesting of stock options issued
as compensation -- -- -- --
Issuance of shares - private placement
offering -- -- 6,000,000 6,000
Private placement offering costs -- -- 39,167 391
Common stock subscribed -- -- -- --
Net loss -- -- -- --
-------------- --------------- --------------- -------------
Balance at December 31, 1999 -- -- 18,999,917 18,992
Private placement offering costs -- -- -- --
Exercise of stock options -- -- 207,484 215
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Completion of stock subscriptons -- -- --
Vesting of stock options issued
as compensation -- -- -- --
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc. -- -- -- --
Net loss -- -- -- --
-------------- --------------- --------------- --------------
Balance at September 30, 2000 -- $ -- 19,207,401 $ 19,207
============== =============== =============== ==============
<CAPTION>
Deferred
Common compensation Total
Additional stock related to Accumulated shareholders'
paid-in capital subscribed stock options deficit equity
--------------- ------------ --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 6,000 $ -- $ -- $ (6,533,074) $ 1,472,926
Issuance of stock warrants 1,462,383 -- -- -- 1,462,383
Issuance of stock warrants 23,389,176 -- -- -- 23,389,176
Conversion of PTM Preferred and common
stock into LifeF/X common stock and
warrants upon Merger 7,987,399 -- -- -- --
Deferred compensation - stock options 2,928,689 -- (2,928,689) -- --
Vesting of stock options issued
as compensation 25,950 -- 656,541 -- 682,491
Issuance of shares - private placement
offering 17,994,000 -- -- -- 18,000,000
Private placement offering costs (1,158,347) -- -- -- (1,157,956)
Common stock subscribed -- (579,000) -- -- (579,000)
Net loss -- -- -- (32,616,775) (32,616,775)
------------ ---------- ------------- ------------ -----------
Balance at December 31, 1999 52,635,250 (579,000) (2,272,148) (39,149,849) 10,653,245
Private placement offering costs (236,984) -- -- -- (236,984)
Exercise of stock options 195,581 -- -- -- 195,796
Completion of stock subscriptions -- 579,000 -- -- 579,000
Deferred compensation - stock options 1,950,000 -- (1,950,000) -- --
Vesting of stock options issued
as compensation 958,144 -- 1,268,607 -- 2,226,751
Issuance of stock warrants 40,000 -- -- -- 40,000
Increase in capital on transfer of
assets and liabilities to PTM
Productions, Inc., net 3,704,867 -- -- -- 3,704,867
Net loss for the period -- -- -- (7,763,668) (7,763,668)
------------ ---------- -------------- ------------- -----------
Balance at September 30, 2000 $ 59,246,858 $ -- $ (2,953,541) $ (46,913,517) $ 9,399,007
============ ========== ============== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------ -------------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,510,680) $ (1,749,836) $(7,763,668) $ (23,383,269)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation expense 108,126 -- 167,351 --
Loss on disposal -- -- -- 17,549,874
Noncash interest expense - warrants issued in
connection with loans -- 1,216,140 -- 1,462,383
Noncash compensation expense - stock options 682,869 -- 1,268,607 --
Noncash rent expense - stock warrants -- -- 40,000 --
Changes in operating assets and liabilities:
Other receivables, prepaid expenses
and other assets (73,172) -- (283,458) --
Accounts payable, accrued expenses and
other long-term liabilities 9,945 (20,199) 338,694 (47,490)
------------ ------------ ----------- -------------
Net cash (used in) operating activities (2,782,912) (553,895) (6,232,474) (4,418,502)
------------ ------------ ----------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (809,493) -- (1,776,724) --
------------ ------------ ----------- -------------
Net cash (used in) investing activities (809,493) -- (1,776,724) --
------------ ------------ ----------- -------------
Cash flows from financing activities:
Proceeds from note payable to related party -- 2,250,000 -- 9,525,000
Proceeds from sale of stock through private placement
related to common stock subscribed -- -- 579,000 --
Restricted cash from stock subscriptions -- -- 9,051,000 --
Proceeds from exercise of stock options 8,748 -- 195,796 --
Net cash (used in) financing activities -
discontinued operation -- (1,696,105) (720,644) (5,106,498)
------------ ------------ ----------- -------------
Net cash provided by financing activities 8,748 553,895 9,105,152 4,418,502
------------ ------------ ----------- -------------
Net increase in cash and cash equivalents (3,583,657) -- 1,095,954 --
Cash and cash equivalents at beginning of period 12,457,651 -- 7,778,040 --
------------ ------------ ----------- -------------
Cash and cash equivalents at end of period $ 8,873,994 $ -- $ 8,873,994 $ --
============ ============ =========== =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, including discontinued operation $ 10,461 $ 155,390 $ 212,067 $ 500,754
Income taxes 1,011 -- 5,567 800
============ ============ =========== =============
Supplemental disclosure of noncash financing activities:
Transfer of assets and liabilities of discontinued
operation to PTM Productions, Inc., net $ -- $ -- $ 3,704,867 $ --
============ ============ =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
LIFEF/X, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
For the three months and nine months ended September 30, 2000 and 1999
(Unaudited)
Basis of Presentation
The information furnished is unaudited but reflects all adjustments which
are, in the opinion of management, necessary for a fair statement of
results for the interim periods. Results for interim periods are not
necessarily indicative of results to be expected for the entire year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Reference should be made to the
Notes to the Consolidated Financial Statements in the 1999 Form 10-KSB
filed by Lifef/x, Inc. for a further discussion of accounting policies and
other significant matters.
(1) Summary of Significant Accounting Policies
(a) Organization and Description of Business
On December 14, 1999, Fin Sports U.S.A., Inc. (Fin Sports) completed a
transaction (the Merger), whereby Fin Sports acquired all of the
outstanding capital stock of Pacific Title/Mirage, Inc. (Pac
Title/Mirage) through the merger of a wholly owned subsidiary of Fin
Sports with and into Pac Title/Mirage, with Pac Title/Mirage as the
surviving corporation. In connection with the Merger, Fin Sports
changed its name to Lifef/x, Inc. (LifeF/X or the Company) and Pac
Title/Mirage changed its name to Lifef/x Networks, Inc. For a detailed
discussion of this transaction, refer to note 2 - Acquisition of
Pacific Title/Mirage, Inc. by Fin Sports U.S.A., Inc.
Lifef/x, Inc. and its wholly-owned subsidiary, Lifef/x Networks, Inc.,
have been engaged in the following operations: (1) the development of
LifeF/X technology, and (2) the non-LifeF/X operations, which provides
film title, credits, special effects, digital effects and related
services to the motion picture and television industry. The non-
LifeF/X operations were sold to PTM Productions in March 2000.
The Company is a development stage enterprise as defined in Statement
of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting by Development Stage Enterprises." The Company is devoting
substantially all of its present efforts to developing the LifeF/X
technology. Planned principal operations have commenced, but have not
produced LifeF/X technology revenue to date.
The Company's inception was June 1, 1997 when development of LifeF/X
technology commenced, and the Company was formally incorporated on
September 11, 1997.
6
<PAGE>
The Company has incurred losses from its inception to date. During
this period, Safeguard Scientifics, Inc. (Safeguard), which owned
approximately 49% of Pac Title/Mirage, loaned the Company significant
amounts to support the operations of the business and to finance
capital expenditures. In March 1999, Pac Title/Mirage's Board of
Directors decided to concentrate the Company's efforts on LifeF/X
development, with primary emphasis on Internet applications and
initiated steps to dispose of the remaining non-LifeF/X operations,
intending to reduce cash outflows from the non-LifeF/X operations and
to reduce or eliminate Pac Title/Mirage's bank debt. The LifeF/X
technology development is continuing as the primary business of
LifeF/X. Therefore, the non-LifeF/X operations have been reflected as
a discontinued operation in the accompanying consolidated financial
statements for all periods presented. Refer to note 3 - Discontinued
Operation and Spin Off Transaction.
(b) Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net income
(loss) available to common shareholders by the weighted average number
of common shares outstanding during the period in accordance with SFAS
No. 128, "Earnings Per Share." Diluted earnings (loss) per share
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the entity. Diluted earnings (loss) per
share is computed similarly to fully diluted earnings (loss) per share
pursuant to APB Opinion No. 15.
There were 7,416,397 and 741,013 common stock options outstanding at
September 30, 2000 and 1999, respectively, and 27,975,365 warrants to
purchase shares of common stock at September 30, 2000 which were not
included in the computation of diluted loss per share because the
impact would have been antidilutive.
(2) Acquisition of Pacific Title/Mirage, Inc.
by Fin Sports U.S.A., Inc.
On December 14, 1999, Fin Sports acquired all of the outstanding capital
stock of Pac Title/Mirage through the merger of a wholly owned subsidiary
of Fin Sports with and into Pac Title/Mirage, with Pac Title/Mirage as the
surviving corporation. Since the shareholders of Pac Title/Mirage received
the majority voting interests in the combined company, Pac Title/Mirage is
the acquiring enterprise for financial reporting purposes. The transaction
was recorded as a reverse acquisition using the purchase method of
accounting whereby equity of Pac Title/Mirage was adjusted for the fair
value of the acquired tangible net assets of the wholly owned subsidiary of
Fin Sports.
7
<PAGE>
Because Pac Title/Mirage was the acquirer for accounting purposes, the
operating results for the period January 1, 1999 through the date of the
transaction, December 14, 1999, reflect those of Pac Title/Mirage, not Fin
Sports. Operating results thereafter reflect the combined operations of Pac
Title/Mirage and Fin Sports.
The operating results reflected in the accompanying consolidated financial
statements do not include Fin Sport's operating activities prior to
December 14, 1999, the date of the Merger. The following summarized pro
forma information assumes the Merger occurred on January 1, 1999.
<TABLE>
<CAPTION>
Three Nine
Months ended Months ended
September 30, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Revenue $ -- $ --
Loss from continuing operations (1,750,643) (2,833,816)
Loss per share from continuing operations (.13) (.22)
Weighted average shares outstanding 12,999,917 12,999,917
</TABLE>
(3) Discontinued Operation and Spin Off Transaction
On March 20, 2000, the Company sold all of its non-LifeF/X assets and
liabilities (collectively, the "Spin Off Assets and Liabilities") to PTM
Productions, Inc. (PTM Productions), an entity owned by the pre-Merger Pac
Title/Mirage stockholders. The Spin Off Assets and Liabilities consisted
primarily of the assets and liabilities relating to Pac Title/Mirage's
Optical Division, Scanning and Recording Division and now defunct Digital
Division, including: certain leased and owned real property; outstanding
bank debt; and certain debt owed to Safeguard for loans made by Safeguard
to Pac Title/Mirage during the period between October 1, 1999 and the
consummation of the spin off transaction (the Post September 30 Debt).
Neither the Company nor its stockholders will be entitled to any beneficial
interest in the Spin Off Assets and Liabilities. At the date of the spin
off transaction, the liabilities of the non-LifeF/X operations exceeded the
assets of the non-LifeF/X operations by $3,704,867 and, as a result, the
Company recorded an increase to additional paid-in capital to reflect that
the liabilities assumed by PTM Productions exceeded the net assets
transferred to PTM Productions.
8
<PAGE>
In connection with the spin off transaction, the Company obtained consents
from a number of third parties, including its bank lender, which held a
lien covering all of its assets, including the LifeF/X technology. Assets
relating to the LifeF/X technology were released from the bank lien in
conjunction with the spin off. As part of the spin off transaction, the
Company transferred this bank debt to PTM Productions and Safeguard has
agreed to indemnify the Company from and against any and all losses and
liabilities relating to, or arising from, the bank debt. In addition, in
connection with the spin off transaction, PTM Productions and Safeguard
have provided certain indemnities to the Company for the Spin Off Assets
and Liabilities. In consideration for the Safeguard indemnification,
Safeguard has been granted a security interest, subject to any senior
liens, in the Spin Off Assets and Liabilities, and will be entitled to any
excess operating proceeds or sale proceeds from the Spin Off Assets and
Liabilities to secure repayment of the Post September 30 Debt and
reimbursement of indemnification amounts paid by Safeguard to the Company.
In addition to the Safeguard indemnity described above, Safeguard will
indemnify the Company for shortfalls in the day-to-day operating expenses
of the Optical and Scanning and Recording Divisions under contracts and
other arrangements entered into in the ordinary course of business of such
Divisions, but not for claims, losses or liabilities outside the ordinary
course of the day-to-day operations of these Divisions or any other unusual
claims or liabilities including, without limitation, any disputes,
litigation or other proceedings whether arising under contracts or other
arrangements entered into in the ordinary course or otherwise, claims by
present or former employees and claims relating to any sale or transfer
(whether or not consummated) of any or all of the Spin Off Assets and
Liabilities.
Safeguard has indemnified LifeF/X against all liabilities associated with
the discontinued operations except for any losses or liabilities relating
to any Spin Off Assets and Liabilities, to the extent they are actually
used in the LifeF/X business.
As discussed in note 1 - Summary of Significant Accounting Policies, the
Company's Board of Directors decided to dispose of the non-LifeF/X
operations in March 1999 and the Company has accounted for the non-LifeF/X
operations as a discontinued operation.
The operating loss incurred by the discontinued operation during the period
from January 1, 2000 to March 20, 2000 was $1,839,500. This amount was
applied to the "Accrued liability for estimated operating losses of
discontinued operation for remaining disposal period" established in the
year ended December 31, 1999.
(4) Other Long-term Liabilities
Other long-term liabilities of $275,860 represents the long-term portion of
accrued severance payable to a former executive of $237,021 and the long-
term portion of a capitalized equipment lease of $38,839. The accrued
severance is payable quarterly over three years beginning in March 2000. At
September 30, 2000, the current portion included in accrued expenses
amounted to $163,882. The capitalized equipment lease is payable over
thirty-six months, beginning in September 2000. The current portion
included in other current liabilities is $19,787.
9
<PAGE>
(5) Stock Options
During the quarter ended March 31, 2000 the Company's Board of Directors
accelerated the vesting of certain stock options held by employees of the
discontinued operation who are no longer LifeF/X employees after the date
of the spin-off. This modification of terms and the increase in the
intrinsic value of these stock options resulted in expense of $812,745. In
addition, the Company extended the exercise period for stock options held
by a former employee of the discontinued operation. This modification of
terms resulted in an expense of $145,399. These items, which totaled
$958,188, were provided for in the "Accrued liability for estimated
operating losses of the discontinued operation" established in the year
ended December 31, 1999 and were included in the loss of the discontinued
operation applied to that account in the quarter ended March 31, 2000, with
an offsetting increase in additional paid-in capital.
In the quarter ended September 30, 2000, LifeF/X granted stock options for
650,000 shares of common stock to key employees under the LifeF/X Long Term
Incentive Plan. The options are exercisable at $5.00 per share. Twenty
percent of the options vested at the date of grant and the balance of the
options vest on an annual basis over three years. For financial reporting
purposes, the Company has recorded deferred compensation of $1,950,000
during the quarter ended September 30, 2000, representing the difference
between the exercise price and the fair value of the company's common stock
on the grant date. This amount is being amortized by a charge to
operations, twenty percent upon grant and the balance ratably over the
vesting period. Such amortization expense amounted to $390,000 for the
quarter ended September 30, 2000.
10
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------
The following discussion should be read with the consolidated financial
statements and the related notes included herein. Certain statements that are
not related to historical results, including statements regarding LifeF/X's
business strategy and objectives, future financial position, expectations about
pending litigation and estimated cost savings, are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and involve risks and uncertainties. Although
management believes that the assumptions on which these forward-looking
statements are based are reasonable, there can be no assurance that such
assumptions will prove to be accurate and actual results could differ materially
from those discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include regulatory policies, competition from
other similar businesses, and market and general economic factors. All forward-
looking statements contained in this Form 10-QSB are qualified in their entirety
by this statement.
Background - Merger Transaction and Sale of Non-LifeF/X Technology Assets
On December 14, 1999, Fin Sports acquired all of the outstanding capital
stock of Pac Title/Mirage as a result of the merger (the "Merger") of a newly-
formed subsidiary of Fin Sports into Pac Title/Mirage, which was the surviving
corporation. Fin Sports was formed in 1987 and was involved in the manufacture
and marketing of sports equipment. From September 1993 until the Merger, Fin
Sports had no active business operations.
Since the shareholders of Pac Title/Mirage received the majority voting
interests in the combined company, Pac Title/Mirage is the acquiring enterprise
for financial reporting purposes. Because Pac Title/Mirage was the acquirer for
accounting purposes, the financial statements presented are those of Pac
Title/Mirage, not Fin Sports. Following the merger, the corporate name of Fin
Sports was changed to Lifef/x, Inc. and Pac Title/Mirage changed its name to
Lifef/x Networks, Inc. Lifef/x Networks, Inc. is a wholly-owned subsidiary of
Lifef/x, Inc.
Pac Title/Mirage was formed in 1997 as the combination of the LifeF/X
technology that was contributed by Mirage Technologies LP and an optical 2D and
restoration business that was acquired from Pacific Title and Art Studio, a post
production company founded in 1918. From Pac Title/Mirage's formation until the
Merger, Pac Title/Mirage operated primarily as a visual effects company
providing services to the U.S. film and television entertainment industry. Its
operations consisted of four activities: LifeF/X technology development; optical
2D effects and film restoration; film scanning and recording services; and
digital effects. Because of the combined effects of unfavorable market
conditions in the film entertainment industry and continued operating losses,
the digital effects division was closed in early 1999. The LifeF/X technology
development is continuing as the primary business of LifeF/X.
11
<PAGE>
Pac Title/Mirage incurred losses from its inception. Safeguard Scientifics,
Inc., which owned approximately 49% of Pac Title/Mirage, loaned Pac Title/Mirage
significant amounts to support the operations of the business and to finance
capital expenditures. In March 1999, Pac Title/Mirage's Board of Directors
decided to concentrate Pac Title/Mirage's efforts on LifeF/X development, with
primary emphasis on Internet applications, and initiated steps to dispose of the
remaining non-LifeF/X operations, intending to reduce cash outflows from the
non-LifeF/X operations and to reduce or eliminate Pac Title/Mirage's bank debt.
Therefore, the non-LifeF/X operations have been reflected as a discontinued
operation in the accompanying consolidated financial statements for all periods
presented.
In March 2000, LifeF/X sold its remaining non-LifeF/X operations, which
consisted of optical 2D film and restoration and scanning and recording
services, to PTM Productions, Inc. PTM Productions, Inc. is owned by the pre-
Merger Pac Title/Mirage shareholders. This sale included a transfer of all
liabilities associated with the discontinued operation, including all debt. As a
result, LifeF/X is presently debt-free, other than accounts payable and accrued
expenses. In addition, Safeguard has indemnified LifeF/X against all liabilities
associated with the discontinued operation. See note 3 to the accompanying
consolidated financial statements.
Plan of Operations
The Company expects the cash balance of $8,870,000 as of September 30, 2000,
will be adequate to satisfy cash requirements for our operations in the year
2000 and the first quarter of 2001. The Company expects to seek additional
capital in the first quarter of 2001 through either a private placement offering
or public equity offering to satisfy future cash requirements from operations.
LifeF/X will continue to perform research and development related to LifeF/X
technology. Development will continue throughout the remainder of 2000 and 2001
to support and enhance existing products and technology and to develop and
introduce new products.
The Company expects to purchase or lease equipment, including hardware, software
and other equipment, necessary to develop our technology and products as well as
support the growth of the Company's infrastructure.
LifeF/X plans to increase the number of employees in 2001. The increase in the
number of employees will be attributable to the continued development and
support of its technology and products, sales efforts and administrative
functions necessary to support operations. The number of employees as of
September 30, 2000 was 38.
Results of Operations
Quarter Ended September 30, 2000 Compared to Quarter Ended September 30, 1999
Revenue - All of our products are currently in the research and development
or planning stages and there have been no sales from the LifeF/X technology
through September 30, 2000, and we do not expect any revenue until 2001.
General and administrative expenses - General and administrative expenses
were $2,250,668 for the quarter ended September 30, 2000 compared to $46,233 for
the quarter ended September 30, 1999, an increase of $2,204,435. This increase
is primarily due to the following items:
(1) In December 1999, LifeF/X recorded deferred stock compensation of
$2,928,689 on stock options issued to an officer. This amount is being
amortized ratably as options vest over the two year vesting period of the
options. The related expense recorded in the quarter ended September 30,
2000 and included in general and administrative expenses was $292,869.
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(2) In September 2000, LifeF/X recorded deferred stock compensation of
$1,950,000 on stock options issued to key employees. This amount is
amortized ratably as the options vest. The related expense recorded in the
quarter ended September 30, 2000 and included in general and administrative
expenses was $390,000.
(3) Administrative wages and taxes increased by $346,000 for the quarter
ended September 30, 2000 over the comparable period last year as a result
of the increased number of employees.
(4) Professional services were $465,000 higher than the same period of
1999. This resulted from significant legal and audit expenses relating to
the registration of LifeF/X common stock, other filings, general corporate
matters relating to on-going corporate administration, expenses related to
the development of corporate infrastructure and expenses related to
investor and public relations.
(5) LifeF/X incurred expenses, under agreements with certain of its
shareholders, relating to the delay in the approval of its common stock
registration. The expenses were incurred through August 8, 2000, when the
stock was registered. The related expense recorded in the quarter ended
September 30, 2000 and included in general and administrative expenses was
$201,000.
(6) Depreciation expense increased by $108,000 for the quarter ended
September 30, 2000 over the comparable period last year as a result of the
addition of leasehold improvements and equipment.
(7) Other general and administrative expenses increased by $400,000 for
the quarter ended September 30, 2000 over the comparable period last year
as a result of full time administrative operations. This is primarily due
to increases in rent and utilities of $67,000, travel of $31,000, insurance
of $45,000, filing and other fees of $117,000 and miscellaneous advertising
expense of $30,000.
Research and development expenses - Research and development expenses were
$1,426,324 for the quarter ended September 30, 2000 compared to $479,774 for the
quarter ended September 30, 1999, an increase of $946,550. Research and
development consists of costs related to LifeF/X development activities.
Salaries and wages, related personnel benefits and outside contractors expenses
included in research and development were $1,072,586 for the quarter ended
September 30, 2000 compared to $231,722 for the quarter ended September 30,
1999, an increase of $840,864. This reflects increased full-time research and
development personnel and consulting staff, primarily at LifeF/X's Boston
office, over the comparable period last year.
LifeF/X has an exclusive, world-wide, perpetual license and support
agreement from Auckland UniServices Limited for the use of certain continuum
modeling technology in commercial applications, excluding professional, medical,
engineering and scientific applications. Recurring license and development fees
paid under the agreement included in research and development costs were
$112,500 for the quarter ended September 30, 2000 and $125,000 for the quarter
ended September 30, 1999.
Results for the quarter ended June 30, 2000 include interest income of
$177,784. This interest income relates to the proceeds from the private
placement offering that are being held in highly liquid short-term investments.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Revenue - All of our products are currently in the research and development
or planning stages and there have been no sales from the LifeF/X technology
through September 30, 2000, and we do not expect any revenue until 2001.
General and administrative expenses - General and administrative expenses
were $5,077,770 for the nine months ended September 30, 2000 compared to
$147,060 for the nine months ended September 30, 1999, an increase of
$4,930,710. This increase is primarily due to the following items:
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(1) In December 1999, LifeF/X recorded deferred stock compensation of
$2,928,689 on stock options issued to an officer. This amount is being
amortized ratably as options vest over the two year vesting period of the
options. The related expense recorded for the nine months ended September
30, 2000 and included in general and administrative expenses was $878,607.
(2) In September 2000, LifeF/X recorded deferred stock compensation of
$1,950,000 on stock options issued to key employees. This amount is
amortized as the options vest. The related expense recorded for the nine
months ended September 30, 2000 and included in general and administrative
expenses was $390,000.
(3) Administrative wages and taxes increased by $885,000 for the nine
months ended September June 30, 2000 over the comparable period last year
as a result of the increased number of employees.
(4) Professional services increased by $1,308,000 over the same period of
1999 due to significant legal and audit expenses relating to the
registration of LifeF/X common stock and other filings, general corporate
matters relating to corporate organization, development of corporate and
administrative infrastructure and expenses related to investor and public
relations.
(5) LifeF/X incurred expenses, under agreements with certain of its
shareholders, relating to the delay in the approval of its common stock
registration. Expenses were incurred from May 13, 2000 through August 8,
2000, when the stock was registered. The related expense recorded in the
nine months ended September 30, 2000 and included in general and
administrative expenses was $347,000.
(6) LifeF/X issued 25,000 stock warrants to a related party, with an
exercise price of $17.55 and a ten year expiration, for consideration of
rent. The fair value of the warrants of $40,000 is reflected as rent
expense in the first nine months ended September 30, 2000.
(7) Depreciation expense increased by $167,000 for the nine months ended
September 30, 2000 over the comparable period last year as a result of the
addition of leasehold improvements and equipment.
(8) Other general and administrative expenses increased by $780,000 for
the nine months ended September 30, 2000 over the comparable period last
year as a result of full time administrative operations. This is primarily
due to increases in rent and utilities of $149,000 (excluding rent from the
issue of warrants), travel of $88,000, insurance of $139,000, recruitment
expense of $59,000, filing and other fees of $117,000 and miscellaneous
advertising expense of $30,000.
Research and development expenses - Research and development expenses were
$3,246,924 for the nine months ended September 30, 2000 compared to $1,199,361
for the nine months ended September 30, 1999, an increase of $2,047,563.
Research and development consists of costs related to LifeF/X development
activities. Salaries and wages, related personnel benefits and outside
contractors expenses included in research and development were $2,419,000 for
the nine months ended September 30, 2000 compared to $491,000 for the nine
months ended September 30, 1999, an increase of $1,928,000. This reflects
increased full-time research and development personnel and consulting staff,
primarily at LifeF/X's Boston office, over the comparable period of last year.
LifeF/X has an exclusive, world-wide, perpetual license and support
agreement with Auckland UniServices Limited for the use of certain continuum
modeling technology in commercial applications, excluding professional medical,
engineering and scientific applications. Recurring license and development fees
paid under the agreement included in research and development costs were
$337,500 for the nine months ended September 30, 2000 and $375,000 for the nine
months ended September 30, 1999.
Results for the nine months ended September 30, 2000 include interest
income of $598,470. This interest income relates to the proceeds from the
private placement offering that are being held in highly liquid short-term
investments.
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<PAGE>
Discontinued operation - In March 1999, Pac Title/Mirage's Board of
Directors decided to concentrate on LifeF/X development and initiated steps to
dispose of non-LifeF/X operations. Results from the discontinued operation for
the nine months ended September 30, 1999 consist of the following: (1) An
operating loss on discontinued operation prior to the measurement date (March
31, 1999) of $3,002,332 (which includes a $1,400,000 impairment loss on
long-lived assets), and (2) a $17,549,874 provision for loss on disposal of
discontinued operation for the following: an $11,949,874 reserve for estimated
operating losses on discontinued operation from the measurement date through the
estimated remaining disposal period and an estimated loss on disposal of
$5,600,000.
Liquidity and Capital Resources
On March 20, 2000, LifeF/X sold its non-LifeF/X assets, which consisted of
film title and special effects services, to PTM Productions, Inc., an entity
owned by the pre-Merger Pac Title/Mirage shareholders. The sale included a
transfer of all liabilities associated with the discontinued operation,
including all debt. As a result, LifeF/X is presently debt-free, other than
accounts payable and accrued expenses. In addition, Safeguard has indemnified
LifeF/X against all liabilities associated with the discontinued operation. See
note 3 to the accompanying consolidated financial statements. Historically, our
revenues have been solely related to our discontinued operation.
We expect the cash balances of $8.87 million at September 30, 2000 will be
adequate to satisfy our cash requirements for our operations in the year 2000
and the first quarter of 2001. The Company expects to seek additional capital in
the first quarter of 2001 through either a private placement offering or public
equity offering to satisfy future cash requirements from operations.
Concurrent with the Merger, LifeF/X initiated a private placement offering
to raise $18,000,000 through the sale to certain investors of 6,000,000 units at
$3.00 per unit, each unit consisting of: (i) one share of Common Stock and (ii)
a warrant to purchase .01 share of Common Stock at $7.50 per share, exercisable
within 18 months after purchase. The private placement was fully subscribed and
we received all funds. At December 31, 1999 we or our escrow agent had received
over $17,000,000. The first portion of the private placement closed in December
1999 and the second portion closed in February 2000.
These proceeds were raised to fund continuing LifeF/X development, with
primary emphasis on Internet applications of the technology. The funds raised in
the private placement will be used for the continuing LifeF/X business. In
addition to LifeF/X Internet development, the proceeds of the private placement
will be used to fund product marketing and distribution, acquire management and
support resources, and build the infrastructure to facilitate future growth. The
proceeds of the private placement have been and, until expended, will be
invested in highly liquid short-term investments.
Net cash used in operating activities was $2,783,000 for three months ended
September 30, 2000. This use was primarily due to the net loss for the period
and a $73,000 increase in other assets and prepaid expenses, partially offset by
a non-cash expense of $683,000 relating to stock options. Net cash used in
operating activities for the comparable period of the prior year was $554,000.
This was primarily due to the $1,750,000 net loss for the period, partially
offset by non-cash interest expense of $1,216,000 for warrants issued in
connection with loans.
Net cash used in investing activities was $809,000 for the three months
ended September 30, 2000 representing purchases of plant and equipment. No cash
was used in investing activities for the comparable period of the prior year by
LifeF/X.
Net cash provided by financing activities for the three months ended
September 30, 2000 was $9,000. This represents the receipt of proceeds received
through the exercise of stock options. Net cash provided by financing activities
for the comparable period of the prior year were $554,000, primarily
representing proceeds from loans from Safeguard offset by proceeds used in
discontinued operations.
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Net cash used in operating activities was $6,232,000 for nine months ended
September 30, 2000. This use was primarily due to the net loss for the period
and a $283,000 increase in prepaid and other assets, partially offset by a
non-cash expense of $1,269,000 relating to stock options, $40,000 relating to
stock warrants, and a $338,000 increase in accounts payable and accrued
liabilities. Net cash used in operating activities for the comparable period of
the prior year was $4.4 million. This was primarily due to the $23.3 million net
loss for the period, partially offset by non-cash expense of $17.5 million to
provide for an estimated loss on disposal of discontinued business and $1.5
million of non-cash interest expense for warrants issued in connection with
loans related to discontinued operations.
Net cash used in investing activities was $1,777,000 for the nine months
ended September 30, 2000 representing purchases of plant and equipment. No cash
was used in investing activities for the comparable period of the prior year by
LifeF/X.
Net cash provided by financing activities for the nine months ended
September 30, 2000 was $9,100,000. This primarily represents the receipt of
proceeds of $9,100,000 from the sale of stock through private placement. Net
cash provided by financing activities for the comparable period of the prior
year were $4,400,000, primarily representing proceeds from loans from Safeguard.
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Quantitative and Qualitative Disclosures about Market Risk
To date, we have not utilized derivative financial instruments or derivative
commodity instruments. We do not expect to employ these or other strategies to
hedge market risk in the foreseeable future. We invest our cash in money market
accounts and short-term marketable securities. We believe the market risks
associated with these financial instruments are immaterial.
Risk Factors
You should carefully consider the risks described below. The risks and
uncertainties described below are not the only ones facing Lifef/x, and there
may be additional risks that we do not presently know of or that we consider
immaterial. All of these risks may impair our business operations. If any of the
following risks actually occurs, our business, financial condition or results of
operations could be materially adversely affected. In such case, the trading
price of our common stock could decline.
(1) All products we intend to introduce are currently in planning or research
and development. It may be more difficult or complicated to complete these
products than we now believe, so we may encounter delays or greater costs than
we expect or find that we cannot make any product at a commercially viable
price. Without products to sell, we will have no revenue. Early stage ventures
like LifeF/X have a high failure rate.
(2) We must develop or acquire text-to-speech technology and integrate it with
our LifeF/X technology before we can release any product. We must develop or
acquire text-to-speech software to complete our first product offerings, and may
be unable to do so economically. Our failure to successfully integrate this
technology would cause our products to fail commercially.
(3) In the absence of a market for realistic animations of speaking human faces,
we will be unable to sell our products. We do not know of any Web site using
products similar to those we plan to sell. We have only limited means to
determine the interest our products will generate. We expect this uncertainty to
continue at least to the second half of 2001, when we first expect to receive
revenue from our proposed products.
(4) We believe it imperative to our success that we obtain significant Internet
market share for our products quickly, before other competitors enter the
market. We believe that, if a market for products like ours develops, an early
entrant that gains significant market share will dominate the market, as
Microsoft has dominated the market for operating systems, significantly reducing
opportunities for competitors. We have very limited experience conducting
marketing campaigns for Internet products, and we may fail to generate
significant interest. We cannot be certain that we will be able to build our
brand and realize commercial acceptance of our products and services.
(5) Our intended market might prefer the products of well-established
competitors, which could result in our revenues falling below expectations and
prevent us from becoming profitable.
The principal competitive products in the computer-generated animated images
market that we know of include Microsoft V-Chat 2.0 and Microsoft Agent.
Microsoft has substantially more financial, technical, marketing, distribution
and other resources, greater name recognition and stronger market presence than
we do, which might result in greater market acceptance of Microsoft's products
than ours.
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(6) Competing inferior products could impair the market for products like ours,
preventing us from establishing profitable levels of sales of our products, even
if they are technologically superior. If consumers are disappointed with a
product similar to ours, even though inferior, they may be reluctant to try our
products. LifeF/X might be required to spend substantial amounts to
differentiate Lifef/x products from those of competitors.
(7) We only have sufficient funds to operate through early 2001. Without
additional funds, we will cease operating. We cannot be certain of the amount of
additional capital we will need. Our future capital needs depend on many
factors, including the success and timing of our development efforts; market
acceptance of our LifeF/X technology; the level of promotion and advertising
required to launch our services; changes in technology; and unanticipated
competition. We cannot be certain that additional funds will be available when
needed on satisfactory terms, if at all. Without additional funds, we will cease
operating.
(8) Development of the LifeF/X technology is very technical and we depend on
key technical personnel, who combine specialized technical knowledge of highly
realistic computer representations of human animation with broad knowledge of
the Internet.
There are four key technical employees, the loss of any of whom would be a
setback to our product development schedule. Each of these key technical
employees is under contract to LifeF/X and incentivized with stock options.
Dr. Ian Hunter is a director of, and technical consultant to, LifeF/X. Dr.
Hunter's brother, Peter Hunter, is one of the Auckland UniServices Limited
technical personnel driving development of the technology LifeF/X licenses from
UniServices. Peter Hunter, as the leader of the UniServices scientific
development team supporting LifeF/X technology development, is also LifeF/X's
key interface at UniServices. Our relationship with UniServices is critical to
our business and prospects. We have an excellent working relationship with Ian
Hunter, Peter Hunter and UniServices. This positive relationship is an asset to
LifeF/X but, conversely, deterioration of the relationship between the brothers
or our relationship with either of them or with UniServices could delay our
product development.
Inflation
We do not believe that inflation has had any material effect on our
business over the past two years.
Year 2000 Issues
The Year 2000 computer problem refers to the potential for system and
processing failure of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the Year 2000. This could
result in a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. To date, we have
not experienced any Year 2000 issues with any of our internal systems or
services, and we do not expect to experience any.
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Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which establishes accounting and reporting requirements for derivative
instruments and for hedging activities. SFAS 133 requires companies to recognize
all derivatives as either assets or liabilities in the statement of financial
position at fair value. If certain conditions are met, a derivative may be
specifically designated as a hedge of the exposures to changes in fair value of
recognized assets or liabilities or unrecognized firm commitments, a hedge of
the exposure to variable cash flows of a forecasted transaction, or a hedge of
the foreign currency exposure of a net investment in a foreign operation,
unrecognized firm commitments, an available-for-sale security or a
foreign-currency denominated forecasted transaction. The accounting changes in
fair value under SFAS 133 depends on the intended use of the derivative and the
resulting designation. In June 1999, the FASB decided that the effective date
for adopting the requirements of SFAS 133 should be delayed to fiscal years
beginning after June 15, 2000. This delay, published as SFAS 137, applies to
quarterly and annual financial statements. In June 2000, the FASB issued SFAS
138, which addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133. The Company is currently
evaluating the effect SFAS 133 will have on the results of its operations and
its financial position.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition" (SAB 101"). This bulletin, as
amended, established guidelines for revenue recognition and originally was
effective for periods beginning after March 15, 2000. In June 2000, the SEC
announced that the effective date of SAB 101 was being delayed until no later
than the quarter ending December 31, 2000. The Company does not expect that the
adoption of the guidance required by SAB 101 will have a material impact on its
financial condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB Opinion No.
25, "Accounting for Stock Issued to Employees". This interpretation clarified
the application of Opinion 25, including among other issues: (a) the definition
of an employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a stock ownership plan qualifies as noncompensatory, (c) the
accounting implications of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for the exchange of stock
compensation awards in a business combination. The Interpretation is effective
July 1, 2000 and the effects of applying the Interpretation are recognized on a
prospective basis. The Company does not expect that the adoption will have a
material impact on its financial condition or results of operations.
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PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
--------------------------
The Company was not involved in any material claims or legal proceedings,
nor has it been involved in any such proceedings that have had or may have a
significant effect on its financial position.
Item 4. Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
No matters were submitted to a vote of security holders through the
solicitation of proxies or otherwise, during the quarter ended September 30,
2000.
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a). Exhibit 27.1 - Financial Data Schedule
(b). Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 2000.
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SIGNATURES
In accordance with section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LIFEF/X, INC.
-------------
/s/ Michael Rosenblatt
---------------------------
Michael Rosenblatt
Chairman of the Board
and Co-President
November 10, 2000
/s/ Lucille S. Salhany
---------------------------
Lucille S. Salhany
Co-President and Chief
Executive Officer
November 10, 2000
/s/ Richard A. Guttendorf, Jr.
------------------------------
Richard A. Guttendorf, Jr.
Chief Financial Officer
and Secretary
November 10, 2000
21
