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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-OR-
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from...to...
Commission File No. 333-36379
PACIFICHEALTH LABORATORIES, INC.
(Exact name of issuer as specified in its charter)
DELAWARE 22-3367588
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1480 Route 9 North, Suite 204
Woodbridge, NJ 07095
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 636-6141
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [_]
At November 1, 1998 there were 4,554,367 shares of common stock, par value
$.0025 per share, of the registrant outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
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<PAGE>
PACIFICHEALTH LABORATORIES, INC.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of September 30, 1998
and December 31, 1997....................................3
Statements of Operations for the three and nine
months ended September 30, 1998 and 1997.................4
Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997........................5
Notes to Financial Statements.............................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 7
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds........... 10
ITEM 6. Exhibits and Reports................................ 11
SIGNATURES................................................................ 11
2
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,110,891 $ 5,865,881
Accounts receivable, net 337,476 408,110
Inventories 711,239 553,098
Prepaid expenses 284,125 244,581
Other 802 2,906
------------ ------------
Total current assets 5,444,533 7,074,576
Property and equipment, net 99,801 101,750
Other assets:
Deposits 9,266 --
Organization cost, net of accumulated
amortization 4,903 7,288
------------ ------------
Total other assets 14,169 7,288
------------ ------------
$ 5,558,503 $ 7,183,614
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 80,292 $ 74,658
Accounts payable and accrued expenses 453,584 255,630
Reserve for product replacement 432,640 610,491
------------ ------------
Total current liabilities 966,516 940,779
Long-term debt 21,320 82,264
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 1,000,000 shares;
issued and outstanding -0- shares
shares of 10% convertible preferred -- --
Common stock, $.0025 par value;
authorized 10,000,000 shares;
issued and outstanding 4,554,367 shares
at December 31, 1997 and September 30, 1998 11,386 11,386
Additional paid-in capital 10,803,085 10,803,085
Accumulated deficit (6,243,804) (4,653,900)
------------ ------------
4,570,667 6,160,571
------------ ------------
$ 5,558,503 $ 7,183,614
============ ============
</TABLE>
3
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 176,051 $ 645,250 $ 834,207 $ 2,834,236
Cost of goods sold:
Inventories, beginning 674,515 326,513 553,098 905,950
Purchases 75,694 546,425 379,858 1,000,198
----------- ----------- ----------- -----------
750,209 872,938 932,956 $ 1,906,148
Less: inventories, ending 711,239 700,179 711,239 700,179
----------- ----------- ----------- -----------
38,970 172,759 221,717 1,205,969
----------- ----------- ----------- -----------
Gross Profit 137,081 472,491 612,490 1,628,267
Selling, general and
administrative expenses 769,91 912,255 2,279,761 4,923,936
Research & Development 21,847 8,750 72,352 39,637
Amortization expense 795 795 2,385 2,385
Depreciation expense 11,749 13,411 41,468 57,198
Provision for replacement of
product -- 4,471 -- 564,749
----------- ----------- ----------- -----------
804,302 939,682 2,395,966 5,587,905
----------- ----------- ----------- -----------
Net operating loss (667,221) (467,191) (1,783,476) (3,959,638)
Other income (expense)
Interest income 61,424 4,280 201,695 36,442
Investment fees (411) -- (7,924) --
----------- ----------- ----------- -----------
61,013 4,280 193,771 36,442
----------- ----------- ----------- -----------
Loss before income taxes (606,208) (462,911) (1,589,705) (3,923,196)
Provision for income taxes -- -- 200 38,212
----------- ----------- ----------- -----------
Net loss $ (606,208) $ (462,911) $(1,589,905) $(3,961,408)
=========== =========== =========== ===========
Basic loss per share $ (0.13) $ (0.16) $ (0.35) $ (1.32)
=========== =========== =========== ===========
Diluted loss per share $ (0.13) $ (0.16) $ (0.35) $ (1.32)
=========== =========== =========== ===========
Weighted average common shares:
Basic 4,554,367 3,185,672 4,554,367 3,089,211
=========== =========== =========== ===========
Diluted 4,647,470 3,834,605 4,754,543 3,721,303
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,589,905) $(3,961,408)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss on retirement of fixed assets -- 58,061
Depreciation 41,468 57,198
Amortization 2,385 2,385
Deferred taxes 38,012
Deferred offering -- (43,748)
Changes in assets and liabilities:
Decrease in accounts receivable 70,634 1,427,580
(Increase) decrease in prepaid expense (39,544) 7,700
(Increase) decrease in inventories (158,141) 205,771
Decrease in other current assets 2,104 22,928
Increase in deposits (9,266) --
Increase (decr.) in accounts payable
and accrued expenses 197,954 (139,530)
(Decrease) increase in reserve for
product replacement (177,851) 752,250
---------- ----------
Net cash used in operating activities (1,660,162) (1,572,801)
---------- ----------
Cash flows from investing activities:
Purchase of fixed assets (39,518) (52,082)
----------- -----------
Net cash used in investing activities (39,518) (52,082)
----------- -----------
Cash flows from financing activities:
Issuance of common stock -- 994,055
Repayments of long-term debt (55,310) --
Dividends paid -- (465)
----------- -----------
Net cash (used in) provided by
by financing activities (55,310) 993,590
----------- -----------
Net decrease in cash (1,754,990) (631,293)
Cash, beginning balance 5,865,881 743,313
---------- ----------
Cash, Ending balance $ 4,110,891 $ 112,020
=========== ===========
Non-cash financing activity:
Preferred stock dividend $ -- $ 102,300
=========== ===========
</TABLE>
5
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
1. Basis of presentation:
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-QSB and Item 310 of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. The unaudited financial statements should be read in
conjunction with the financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1997.
2. Inventories:
At the beginning of 1997, the Company decided to reformulate its ENDUROX product
into a caplet, rather than a capsule, because the capsule form was very
hygroscopic and became altered in size and color in conditions of high heat and
humidity. As a result, the Company abandoned its inventory of capsules and,
whenever necessary, either exchanged its retailers' inventory of capsules with
caplets or issued a credit for returned capsules. The exchange of caplets for
capsules was recorded as a charge to the provision for product replacement.
Refunds were recorded as a reduction of revenue.
At June 30, 1997, the Company's management estimated that approximately 170,000
packages of capsule product were in retailers' inventory and recorded a reserve
totaling $752,250. The estimate assumed that seventy-five percent of the
packages would be returned for replacement and twenty-five percent would be
returned for refunds. The cost of the replacement inventory, $433,500, was
charged to the provision, and the estimated refunds, $318,750, were recorded as
a reduction of revenue.
Both ENDUROX EXCEL and ENDUROX ProHeart were introduced in a caplet form.
At September 30, 1998 and December 31, 1997, the balance in the reserve for
product replacement was $432,640 and $610,491, respectively.
3. Earnings per share:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share". The new
standard was required to be adopted by all public companies for the reporting
periods ending after December 15, 1997, (the Company's fourth quarter), and
requires restatement of Earnings per Share for all prior periods reported. The
Company is reporting Earnings per Share for the three months and the nine months
ended September 30, 1998 and 1997 in accordance with SFAS No. 128.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS OF
OPERATIONS
This discussion contains forward-looking statements made by the Company pursuant
to the safe-harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements reflect the Company's current views with
respect to such future events. Actual results may vary materially and adversely
from those anticipated, believed, estimated or otherwise indicated. Factors that
could cause actual results to differ adversely include, without limitation,
unexpected laboratory results in clinical research studies, inability to secure
targeted product endorsers, and timing differences between the scheduled and
actual launch date of new products. Further information and additional important
factors are set forth in reports and other filings with the Securities and
Exchange Commission, including the Company's Prospectus dated December 19, 1997,
under the caption "Risk Factors". The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
(a) Introduction
The Company was incorporated in April 1995 to develop and market dietary
supplements that improve and promote health and well being and can be offered
for sale without prior approval by The Food and Drug Administration in
compliance with current regulatory guidelines. The Company's first product,
ENDUROX(R), was introduced in March 1996, and commercial sales began in May
1996. Prior to that time, the Company was engaged in organizational and
financing activities, product research and development, and preliminary
marketing and distribution activities. As of September 30, 1998, the Company had
introduced and was engaged in marketing the following four products: ENDUROX(R),
ENDUROX ProHeart(R), ENDUROX EXCEL(R) ("the ENDUROX line of products") and
PROSOL PLUS(TM).
The Company has identified and developed a number of new products, one of which
is scheduled to be introduced in the current fiscal year. The Company expects to
introduce its ENDUROX(R)R4(TM) Performance/Recovery Drink, the latest in its
ENDUROX line of products, in the fourth quarter of 1998. In addition, the
Company expects to launch several other products during 1999. These products are
primarily in the areas of weight management, treatment of arthritis and
wound-healing.
(b) Results of Operations - Three Months and Nine Months Ended
September 30, 1998 versus September 30, 1997
The Company incurred a loss of $606,208 or $.13 per share for the three months
ended September 30, 1998, compared to a loss of $462,911 or $.16 per share for
the period ended September 30, 1997. The Company incurred a loss of $1,589,905
or $.35 per share for the nine months ended September 30, 1998, compared to a
loss of $3,961,408 or $1.32 per share for the nine months ended September 30,
1997. Revenues in the three months ended September 30, 1998, were $176,051
compared to $645,250 for the same period in 1997. Revenues in the nine months
ended September 30, 1998, were $834,207 compared to $2,834,236 for the same
period in 1997.
Management attributes the decrease in revenues in the first nine months of 1998
compared to the corresponding 1997 periods to a number of factors, beginning in
the fourth quarter of 1997 when the Company lacked sufficient funds to commit to
7
<PAGE>
advance advertising and promotion dates in 1998. As a result of the Company's
significantly reduced advertising and promotional support virtually no new
distribution channels were opened in 1998, and existing retailers' in-store
sales of the ENDUROX line of products sharply declined. As per store sales
declined, a substantial number of stores discontinued carrying the ENDUROX line,
which further contributed to the Company's declining sales trend.
Also contributing to the decrease in 1998 sales compared to the similar 1997
periods is the fact that a majority of the Company's sales in the first half of
1997 were attributed to "pipe-line fill" for the original ENDUROX product. Once
the distribution pipeline for a product is filled, sales result only from
reorders from retailers as they replenish inventory sold to their customers,
from the expansion of the distribution network, or from adding retailers in
existing distribution channels. 1998 sales are primarily reorders with very
little "pipe-line fill".
Although the trend for sales in the three months and nine months ended September
30, 1998 is declining, management believes that sales for the existing ENDUROX
products should stabilize or improve slightly in future periods. Management
anticipates that the advertising and promotional expenditures associated with
the launch of the new ENDUROX(R)R4(TM) Performance/Recovery Drink will have
a spillover effect on existing ENDUROX product sales. As indicated above, the
Company expects to launch the ENDUROX(R)R4(TM) Performance/Recovery Drink in
the fourth quarter 1998. The Company cannot predict, however, what the sales of
ENDUROX(R)R4(TM) Performance/Recovery Drink will be, or the extent of any
spillover effect that advertising and other promotional expenditures for the
ENDUROX(R)R4(TM) Performance/Recovery Drink will have on the sales of the
existing ENDUROX product line.
The Company's gross profit margin increased slightly from 73% for the three
months ended September 30, 1997 to 78% for the three months ended September 30,
1998. Gross profit margin in the three months ended September 30, 1998 was
higher than the comparable 1997 period due to the product sales mix. The
Company's gross profit margin increased from 57% for the nine months ended
September 30, 1997 to 73% for the nine months ended September 30, 1998. Gross
profit margin in the nine months ended September 30, 1997, was negatively
affected by the Company's decision to reformulate its original ENDUROX product
into a caplet rather than a capsule. As a result, the Company abandoned its
inventory of capsules (which was charged against cost of goods sold) and,
whenever necessary, either exchanged its retailers' inventory of capsules with
caplets or issued a credit for returned capsules. The exchange of caplets for
capsules was recorded as a charge to the provision for product replacement.
Refunds were recorded as a reduction of revenue. There were no comparable
charges in the three months and nine months ended September 30, 1998.
At June 30, 1997, the Company's management estimated that approximately 170,000
packages of capsule product were in retailers' inventory and recorded a reserve
totaling $752,250. The estimate assumed that seventy-five percent of the
packages would be returned for replacement and twenty-five percent would be
returned for refunds. The cost of the replacement inventory, $433,500, was
charged to the provision, and the estimated refunds, $318,750, were recorded as
a reduction of revenue. At September 30, 1998 and December 31, 1997, the balance
in the reserve for product replacement was $432,640 and $610,491, respectively.
8
<PAGE>
In addition to the Company's improvement in gross profit margins described
above, the Company's net loss in the first nine months of 1998 was reduced
compared to the corresponding 1997 period due to a reduction in selling, general
and administrative expenses. These expenses decreased from $912,255 for
the three months ended September 30, 1997 to $769,911 (approximately 16%)
for the three months ended September 30, 1998, and decreased from $4,923,936 for
the nine months ended September 30, 1997 to $2,279,761 (approximately 54%)
for the nine months ended September 30, 1998, primarily as a result of
significant reductions in both television and print advertising expenditures in
1998. This decrease was partially offset by the addition of new sales and
marketing personnel mid-way through the second quarter of 1998. Selling, general
and administrative costs are expected to increase slightly in the fourth quarter
1998 with the addition of two new employees; one in marketing, and the other, in
customer service. While the Company's current level of selling, general and
administrative expenses is high relative to present sales levels, management
believes that its investment in infrastructure, primarily sales and marketing
personnel, is necessary to build multiple product lines and to adequately
support the sales that new products are expected to generate. The Company's need
for funds for these purposes was expected at the time of the Company's initial
public offering in December 1997, and its costs in these areas are substantially
on target.
(c) Liquidity and Capital Resources
At September 30, 1998, the Company's current assets exceeded its current
liabilities by approximately $4.48 million, with a ratio of current assets to
liabilities of approximately 5.5 to 1. The Company's strong current position is
the result of completion of its initial public offering in the fourth quarter of
1997, which resulted in net proceeds to the Company of approximately $5.98
million.
Management expects the Company to be able to satisfy its cash requirements
during the next 12 months from cash on hand. The Company has no commitments for
significant capital expenditures over the next 12 months. The largest
expenditures now contemplated (apart from current levels of sales, general and
administrative costs) are advertising or promotional expenditures anticipated in
connection with the ENDUROX line of products and PROSOL PLUS. These expenditures
presently are projected in the range of $200,000 over the remainder of 1998. At
this time, the Company is unable to project expenditures relating to the future
product launches of the new products.
9
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a), (b) Changes in Securities: None.
(c) Sales of Unregistered Securities: None.
(d) The Registration Statement to which the following disclosures pertain
is Registration Statement on Form SB-2 (Registration No. 333-36379) effective
December 18, 1997 (the "Registration Statement").
From the effective date of the Registration Statement through September 30,
1998, net proceeds from the sale of securities pursuant to the Registration
Statement in the amount of $5,978,546 have been applied as follows:
<TABLE>
<CAPTION>
<S> <C>
(1) Construction of plant, building and facilities $ -0-
(2) Purchase and installation of
machinery and equipment 39,518
(3) Purchase of real estate -0-
(4) Acquisition of other businesses -0-
(5) Repayment of debt 55,310
(6) Working capital 1,801,347
(7) Temporary investments* 4,010,019
(8) Any other purpose expected to
involve $100,000 or more -0-
(9) Research & development 72,352
----------
Total applied through 9/30/98 $5,978,546
==========
</TABLE>
* Short term commercial paper.
None of the expenditures described above were made directly or indirectly to
directors, officers or general partners of the Company, any associate of any
such persons, any person owning 10% or more of any class of equity securities of
the Company, or any affiliate of the Company.
10
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
No. Description
------- -----------
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PACIFICHEALTH LABORATORIES, INC.
By: /S/ JONATHAN D. RAHN
------------------------
JONATHAN D. RAHN
Executive Vice President
(Principal Financial
Officer and Principal Accounting
Officer)
Date: November 11, 1998
-----------------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,110,891
<SECURITIES> 0
<RECEIVABLES> 343,692
<ALLOWANCES> 6,216
<INVENTORY> 711,239
<CURRENT-ASSETS> 5,444,533
<PP&E> 99,801
<DEPRECIATION> 41,468
<TOTAL-ASSETS> 5,558,503
<CURRENT-LIABILITIES> 966,516
<BONDS> 0
0
0
<COMMON> 11,386
<OTHER-SE> 4,570,667
<TOTAL-LIABILITY-AND-EQUITY> 5,558,503
<SALES> 834,207
<TOTAL-REVENUES> 1,035,902
<CGS> 221,717
<TOTAL-COSTS> 2,617,683
<OTHER-EXPENSES> 7,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,589,705)
<INCOME-TAX> 200
<INCOME-CONTINUING> (1,589,905)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,589,905)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
