===============================================================================
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 June 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 August 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]
--- ---
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of June 30, 1998
and December 31, 1997................................. 3
Statements of Operations for the three and six
months ended June 30, 1998 and 1997................... 4
Statements of Cash Flows for the six months
ended June 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>
June 30, December 31,
1998 1997
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,658,281 $ 5,865,881
Accounts receivable, net 290,433 408,110
Inventories 674,515 553,098
Prepaid expenses 225,158 244,581
Other 56,760 2,906
----------- -----------
Total current assets 5,905,147 7,074,576
Property and equipment, net 107,870 101,750
Other asset:
Organization cost, net of accumulated amortization 5,698 7,288
----------- -----------
$ 6,018,715 $ 7,183,614
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 78,369 $ 74,658
Accounts payable and accrued expenses 257,440 255,630
Reserve for product replacement 463,902 610,491
----------- -----------
Total current liabilities 799,711 940,779
Long-term debt 42,129 82,264
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 1,000,000 shares;
issued and outstanding-0-shares 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 June 30, 1998 11,386 11,386
Additional paid-in capital 10,803,085 10,803,085
Accumulated deficit (5,637,596) (4,653,900)
----------- -----------
5,176,875 6,160,571
----------- -----------
$ 6,018,715 $ 7,183,614
=========== ===========
</TABLE>
3
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- ---------------------------
1998 1997 1998 1997
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues $ 318,762 $ 661,084 $ 658,156 $ 2,188,986
Cost of goods sold:
Inventories, beginning 687,500 1,107,233 553,098 905,950
Purchases 67,485 (84,666) 304,164 453,773
---------- ----------- ----------- ------------
754,985 1,022,567 857,262 1,359,723
Less: inventories, ending 674,515 326,513 674,515 326,513
---------- ----------- ----------- ------------
80,470 696,054 182,747 1,033,210
---------- ----------- ----------- ------------
Gross Profit 238,292 (34,970) 475,409 1,155,776
Selling, general and administrative expenses 833,738 1,860,477 1,509,850 4,011,681
Research & Development 23,300 19,411 50,505 30,887
Amortization expense 795 795 1,590 1,590
Depreciation expense 15,239 23,951 29,719 43,787
Provision for replacement of product -- 560,278 -- 560,278
---------- ----------- ----------- ------------
873,072 2,464,912 1,591,664 4,648,223
---------- ----------- ----------- ------------
Net operating loss (634,780) (2,499,882) (1,116,255) (3,492,447)
Other income (expense)
Interest income 64,018 15,759 140,271 32,162
Investment fees (3,561) -- (7,513) --
---------- ----------- ----------- ------------
60,457 15,759 132,758 32,162
---------- ----------- ----------- ------------
Loss before income taxes (574,323) (2,484,123) (983,497) (3,460,285)
Provision for income taxes 200 38,212 200 38,212
---------- ----------- ----------- ------------
Net loss $ (574,523) $(2,522,335) $ (983,697) $ (3,498,497)
========== =========== =========== ============
Basic loss per share $ (0.13) $ (0.80) $ (0.22) $ (1.16)
========== =========== =========== ============
Diluted loss per share $ (0.13) $ (0.80) $ (0.22) $ (1.16)
========== =========== =========== ============
Weighted average common shares:
Basic 4,554,367 3,180,287 4,554,367 3,078,524
========== =========== =========== ============
Diluted 4,737,456 3,820,690 4,870,768 3,710,617
========== =========== =========== ============
</TABLE>
4
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (983,697) $(3,498,497)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 29,719 43,787
Amortization 1,590 1,590
Deferred taxes 38,012
Loss on retirement of fixed assets 58,061
Changes in assets and liabilities:
Decrease in accounts receivable 117,677 1,254,276
Decrease in prepaid expenses 19,423 55,352
(Increase)/Decrease in Inventories (121,417) 287,334
Increase in other current assets (53,854) (11,228)
Increase in accounts payable and accrued expenses 1,810 439,793
(Decrease)/Increase in reserve for product replacement (146,588) 819,095
----------- -----------
Net cash used in operating activities (1,135,337) (512,425
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (35,839) (52,082)
----------- -----------
Net cash used in investing activities (35,839) (52,082)
----------- -----------
Cash flows from financing activities:
Issuance of common stock -- 994,055
Repayments of long-term debt (36,424) --
Dividends paid -- (304)
----------- -----------
Net cash (used in) provided by financing activities (36,424) 993,751
----------- -----------
Net (decrease) increase in cash (1,207,600) 429,244
Cash, beginning balance 5,865,881 743,313
----------- -----------
Cash, Ending balance $ 4,658,281 $ 1,172,557
=========== ===========
Non-cash financing activity:
Preferred stock dividend $ -- $ 67,360
=========== ===========
</TABLE>
5
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 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
six months ended June 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 June 30, 1998 and December 31, 1997, the balance in the reserve for
product replacement was $463,902 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 did not report June 30, 1997 financial
information previously, and is reporting Earnings per Share for the three
months and the six months ended June 30, 1998 and 1997 in accordance with
SFAS No. 128.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 June 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, several of
which are scheduled to be introduced in the current fiscal year. These products,
which are expected to be launched in the fourth quarter, 1998, are primarily in
the areas of weight management, treatment of arthritis and wound healing. In
addition, the Company expects to introduce its ENDUROX(r) SPORTS DRINK, the
latest in its ENDUROX line of products, in the fourth quarter of 1998.
(b) Results of Operations - Three Months and Six Months Ended June 30,
1998 versus June 30, 1997
The Company incurred a loss of $574,523 or $.13 per share for the three months
ended June 30, 1998, compared to a loss of $2,522,335 or $.80 per share for the
period ended June 30, 1997. The Company incurred a loss of $983,697 or $.22 per
share for the six months ended June 30, 1998, compared to a loss of $3,498,497
or $1.16 per share for the six months ended June 30, 1997. Revenues in the three
months ended June 30, 1998, were $318,762 compared to $661,084 for the same
period in 1997. Revenues in the six months ended June 30, 1998, were $658,156
compared to $2,188,986 for the same period in 1997.
Management attributes the decrease in revenues in the first half of 1998
compared to the corresponding 1997 periods to a substantial decrease in
advertising and promotional expenditures, as well as a decline in the number of
stores carrying the ENDUROX line. In addition, a majority of all sales of the
7
<PAGE>
Company in the six months ended June 30, 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 and, as a result, the Company
believes sales in the three months and six months ended June 30, 1998 are
indicative of sales levels of existing products that can be expected in future
periods with current levels of advertising and promotional expenditures.
The Company's gross profit margin increased from a negative -5.3% for the three
months ended June 30, 1997 to 74.8% for the three months ended June 30, 1998,
and from 53% for the six months ended June 30, 1997 to 72% for the six months
ended June 30, 1998. Gross profit margin in the 1997 periods were 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 six months ended June 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 June 30, 1998 and December 31, 1997, the balance in
the reserve for product replacement was $463,902 and $610,491, respectively.
In addition to the Company's improvement in gross profit margin, the reduction
in the Company's net loss in the first half of 1998 compared to the
corresponding 1997 periods is attributable to a reduction in selling, general
and administrative expenses. These expenses decreased from $1,860,477 for the
three months ended June 30, 1997 to $833,738 (approximately 55%) for the three
months ended June 30, 1998, and decreased from $4,011,681 for the six months
ended June 30, 1997 to $1,509,850 (approximately 62%) for the six months ended
June 30, 1998.
The substantial decrease in selling, general and administrative expenses between
the periods were primarily the result of significant reductions in both
television and print advertising in 1998, along with a general reduction in
advertising and promotional expenditures. Due to the Company's lack of
advertising funds in the fourth quarter of 1997, the Company was unable to
commit to advance advertising and promotional dates for the first six months of
1998. However, in the second quarter of 1998, the Company hired two additional
employees who will primarily focus on increasing the sales of the ENDUROX line
of products, implementing the Company's new advertising and promotional
campaigns, and launching new products. As a result, management expects that
sales of the ENDUROX line of products will increase in the second half of 1998,
specifically in the fourth quarter, over the sales of these products in the
first half of 1998, with a corresponding increase in selling, general and
administrative expenses. The Company is unable to predict sales for the ENDUROX
SPORTS DRINK and other new products scheduled for introduction in the fourth
quarter of 1998.
8
<PAGE>
(c) Liquidity and Capital Resources
At June 30, 1998, the Company's current assets exceeded its current liabilities
by approximately $5.11 million, with a ratio of current assets to liabilities of
approximately 7.0 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 $400,000 to $600,000 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 June 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:
(1) Construction of plant, building and facilities $ -0-
(2) Purchase and installation of machinery and equipment 35,839
(3) Purchase of real estate -0-
(4) Acquisition of other businesses -0-
(5) Repayment of debt 36,424
(6) Working capital 1,256,254
(7) Temporary investments* 4,599,524
(8) Any other purpose expected to -0-
involve $100,000 or more
(9) Research & development 50,505
----------
Total applied through 6/30/98 $5,978,546
==========
* 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: AUGUST 14, 1998
----------------------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,658,281
<SECURITIES> 0
<RECEIVABLES> 297,877
<ALLOWANCES> 7,444
<INVENTORY> 674,515
<CURRENT-ASSETS> 5,905,147
<PP&E> 107,870
<DEPRECIATION> 29,719
<TOTAL-ASSETS> 6,018,715
<CURRENT-LIABILITIES> 799,711
<BONDS> 0
0
0
<COMMON> 11,386
<OTHER-SE> 5,165,489
<TOTAL-LIABILITY-AND-EQUITY> 6,018,715
<SALES> 658,156
<TOTAL-REVENUES> 798,427
<CGS> 182,747
<TOTAL-COSTS> 1,774,411
<OTHER-EXPENSES> 7,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (983,497)
<INCOME-TAX> 200
<INCOME-CONTINUING> (983,697)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (983,697)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
