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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 June 30, 1999
-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
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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 10, 1999 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, 1999
and December 31, 1998................................. 3
Statements of Operations for the three and six
months ended June 30, 1999 and 1998................... 4
Statements of Cash Flows for the six months
ended June 30, 1999 and 1998.......................... 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 SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 2,212,281 $ 3,415,120
Accounts receivable, net ........................... 530,521 270,673
Inventories ........................................ 319,330 375,074
Prepaid expenses ................................... 169,692 208,538
----------- -----------
Total current assets .................. 3,231,824 4,269,405
Property and equipment, net ........................... 93,326 104,533
Other assets:
Deposits ........................................... 3,991 3,991
Organization cost, net of accumulated amortization.. 2,518 4,107
----------- -----------
6,509 8,098
----------- -----------
$ 3,331,659 $ 4,382,036
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt .................. $ 42,129 $ 82,264
Accounts payable and accrued expenses .............. 389,966 252,262
Reserve for product replacement .................... 178,303 344,464
Customer deposits .................................. 2,196 5,529
----------- -----------
Total current liabilities .................. 612,594 684,519
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, 1998 and June 30, 1999 ............ 11,386 11,386
Additional paid-in capital ......................... 10,803,085 10,803,085
Accumulated deficit ................................ (8,095,406) (7,116,954)
----------- -----------
2,719,065 3,697,517
----------- -----------
$ 3,331,659 $ 4,382,036
=========== ===========
</TABLE>
3
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ................................... $ 527,365 $ 318,762 $ 850,159 $ 658,156
Cost of goods sold:
Inventories, beginning .................. 431,847 687,500 375,074 553,098
Purchases ............................... 86,580 67,485 260,680 304,164
----------- ----------- ----------- -----------
518,427 754,985 635,754 857,262
Less: inventories, ending ............... 319,330 674,515 319,330 674,515
----------- ----------- ----------- -----------
199,097 80,470 316,424 182,747
----------- ----------- ----------- -----------
Gross Profit ............................... 328,268 238,292 533,735 475,409
Selling, general and administrative expenses 879,302 833,738 1,658,097 1,509,850
Research & Development ..................... 38,634 23,300 59,334 50,505
Amortization expense ....................... 795 795 1,590 1,590
Depreciation expense ....................... 8,869 15,239 18,634 29,719
Provision for replacement of product ....... (162,285) -- (162,285) --
----------- ----------- ----------- -----------
765,315 873,072 1,575,370 1,591,664
----------- ----------- ----------- -----------
Net operating loss ......................... (437,047) (634,780) (1,041,635) (1,116,255)
Other income (expense)
Interest income ......................... 25,971 60,457 61,833 132,758
Bad debt recovery ....................... -- -- 1,350 --
----------- ----------- ----------- -----------
25,971 60,457 63,183 132,758
----------- ----------- ----------- -----------
Loss before income taxes ................... (411,076) (574,323) (978,452) (983,497)
Provision for income taxes ................. -- 200 -- 200
----------- ----------- ----------- -----------
Net loss ................................... $ (411,076) $ (574,523) $ (978,452) $ (983,697)
=========== =========== =========== ===========
Basic loss per share ....................... $ (0.09) $ (0.13) $ (0.21) $ (0.22)
=========== =========== =========== ===========
Diluted loss per share ..................... $ (0.09) $ (0.13) $ (0.21) $ (0.22)
=========== =========== =========== ===========
Weighted average common shares:
Basic ................................. 4,554,367 4,554,367 4,554,367 4,554,367
=========== =========== =========== ===========
Diluted ............................... 4,554,367 4,737,456 4,563,105 4,870,768
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... $ (978,452) $ (983,697)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation ...................................... 18,634 29,719
Amortization ...................................... 1,590 1,590
Changes in assets and liabilities:
(Increase)/Decrease in accounts receivable........... (259,848) 117.677
Decrease in prepaid expenses ........................ 38,844 19,423
Decrease/(Increase) in Inventories................... 55,744 (121,417)
Increase in other current assets..................... -- (53,854)
Increase in accounts payable and accrued expenses.... 137,704 1,810
Decrease in reserve for product replacement.......... (166,161) (146,588)
Decrease in customer deposits........................ (3,333) --
----------- -----------
Net cash used in operating activities.................... (1,155,278) (1,135,337)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets............................... (7,426) (35,839)
----------- -----------
Net cash used in investing activities.................... (7,426) (35,839)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt........................... (40,135) (36,424)
----------- -----------
Met cash used in financing activities.................... (40,135) (36,424)
----------- -----------
Net decrease in cash..................................... (1,202,839) (1,207,600)
Cash, beginning balance.................................. 3,415,120 5,865,881
----------- -----------
Cash, ending balance..................................... $ 2,212,281 $ 4,658,281
=========== ===========
</TABLE>
5
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(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,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. 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, 1998.
2. Year 2000 Discussion:
As has been widely reported, many computer systems process dates based on
two digits for the year of a transaction and are unable to process dates in the
year 2000 and beyond. Therefore, these computer programs do not properly
recognize a year that begins with "20" instead of the familiar "19". If not
corrected, many computer applications could fail or create erroneous results.
The Company primarily uses licensed software products in its operations with a
significant portion of processes and transactions centralized in one particular
software package. The manufacturer of this software has already provided the
Company with a Year 2000 Update for no charge, so that the Company's main
processing system is Year 2000 compliant. In addition, the server for the
Company's workstation environment and the word processing and spreadsheet
package that the Company utilizes have been upgraded with "service releases" or
"patches" that have made these systems Year 2000 compliant. These upgrades were
provided to the Company at no cost. The Company has initiated a formal
communications program with a substantial majority of its significant suppliers
and customers to determine their Year 2000 status. While the Company expects a
successful resolution of all issues, there can be no guarantee that the systems
of other companies which interact with the Company's systems will be converted
in a timely manner. Unsuccessful conversions by these third party companies
should not have a material adverse effect on the Company's business as
contingent plans have been formed to transact business through facsimile and
telephone lines.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS OF
OPERATIONS
This discussion contains forward-looking statements, which we have made
pursuant to the safe-harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements reflect our 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. We do not undertake to update any
forward-looking statement that may be made from time to time by us or on our
behalf.
(a) Introduction
PacificHealth Laboratories, Inc. 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. Our first
product, ENDUROX(R) was introduced in March 1996, and commercial sales began in
May 1996. In March 1997, we extended the ENDUROX line of products with ENDUROX
ProHeart(R) and ENDUROX EXCEL(R). Prosol Plus(TM), a product marketed to sustain
emotional balance and promote a positive frame of mind, was introduced in
December 1997. In February 1999, we introduced ENDUROX(R)R(4)(TM)
Performance/Recovery Drink, the latest in our ENDUROX line of products, which
demonstrated a number of exercise related benefits in clinical studies,
including enhanced performance and extended endurance, decreased post-exercise
muscle stress, and reduced free radical build-up. We expect to introduce
Satietrol(TM), a new product that will compete in the approximately $10 billion
market for weight loss and weight control products, later in 1999.
(b) Results of Operations - Three Months and Six Months Ended June 30, 1999
versus June 30, 1998
We incurred a loss of $411,076 or $.09 per share for the three months ended
June 30, 1999, compared to a loss of $574,523 or $.13 per share for the period
ended June 30, 1998. We incurred a loss of $978,452 or $.21 per share for the
six months ended June 30, 1999, compared to a loss of $983,697 or $.22 per share
for the six months ended June 30, 1998. The reduction in our net loss in the
three month and six month periods ended June 30, 1999, is due primarily to
increased sales and to a reduction in our reserve for the return or exchange of
certain products, as described in greater detail below.
Revenues in the three months ended June 30, 1999, were $527,365 compared to
$318,762 for the same period in 1998. Revenues in the six months ended June 30,
1999, were $850,159 compared to $658,156 for the same period in 1998. Revenue
increases in the first half of 1999 were due primarily to our introduction of
the ENDUROX(R)R(4)(TM) Performance/Recovery Drink in February 1999. The
following table provides additional information concerning our revenues in the
first half of 1999 and 1998:
7
<PAGE>
Revenues
--------------------------------------
Original Endurox R(4) Other
Endurox Performance (principally
Product Recovery Prosol
Line Drink Plus(1))
------- ------------ ------------
1999
----
First Quarter ....................... $139,984 $173,127 $ 9,683
Second Quarter ...................... 242,588 268,956 15,821
-------- -------- -------
Total ........................... $382,572 $442,083 $25,504
======== ======== =======
1998
----
First Quarter ....................... $260,415 $ -- $78,979
Second Quarter ...................... 318,762 -- --
-------- -------- -------
Total ........................... $579,177 $ -- $78,979
======== ======== =======
- ----------
(1) We are not actively marketing Prosol Plus(TM) because we believe our
advertising dollars will be better used promoting new products that compete
in categories that have greater sales potential. A minor amount of repeat
sales of Prosol Plus(TM) are made through our largest customer. Our initial
clinical tests have indicated that Prosol Plus(TM) has a positive effect on
patients' compliance with a weight loss regimen, and we may package Prosol
Plus(TM) with Satietrol(TM) after that product is introduced.
Sales revenues reported for the first half of 1999 are net of a credit of
$84,474 for the return of certain products. There was no comparable adjustment
in the 1998 periods.
We believe that our advertising and promotional support for
ENDUROX(R)R(4)(TM) Performance/Recovery Drink in the first half of 1999
stimulated sales of the original ENDUROX line of products, and that this will
continue in the third quarter. Accordingly, we expect that sales for the
original ENDUROX line of products and the ENDUROX(R)R(4)(TM)
Performance/Recovery Drink to continue to increase over the next six months at
our present level of advertising and promotional expenditures. In addition, we
expect to introduce two line extensions of the ENDUROX(R)R(4)(TM)
Performance/Recovery Drink towards the end of the third quarter: a regular size
all-natural tangy orange flavor and an extra large size of its original fruit
punch flavor. Both of these new items should serve to broaden our distribution
base.
Our gross profit margin decreased from 74.8% for the three months ended
June 30, 1998 to 62.2% for the three months ended June 30, 1999, and from 72.2%
for the six months ended June 30, 1998 to 62.8% for the six months ended June
30, 1999, primarily as a result of our product sales mix. The ENDUROX(R)R(4)(TM)
Performance/Recovery Drink has a higher cost of goods sold than the original
ENDUROX line of products. Our selling, general and administrative expenses
increased from $833,738 for the three months ended June 30, 1998 to $879,302
(approximately 5%) for the three months ended June 30, 1999, and from $1,509,850
for the six months ended June 30, 1998 to $1,658,097 (approximately 9%) for the
six months ended June 30, 1999. These increases resulted primarily
8
<PAGE>
from expenses associated with the launch of the ENDUROX(R)R(4)(TM)
Performance/Recovery Drink. We anticipate a reduction in our marketing and
advertising expenses during the second half of 1999, since the costs associated
with the launch of ENDUROX R(4) were all incurred during the first six months of
the year.
In 1997, we reformulated our original 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. At June 30, 1997 we
estimated a reserve for charges resulting from exchanging our retailers'
inventory of capsules for caplets or issuing a credit refund for returned
capsules. At the end of each quarter, we compare the reserve's balance to a
current estimate of capsule exchange/credit refund exposure. At June 30, 1999,
we estimated that our remaining capsule exchange for caplets and /or credit
refunds will not exceed $178,303. As a result, we reduced our reserve by
$162,285 and offset our net loss for the three and six months ended June 30,
1999 by taking that amount back into income in the second quarter.
Selling, general and administrative costs are expected to stabilize during
the remainder of 1999 as the ENDUROX(R)R(4)(TM) Performance/Recovery Drink's
advertising and promotional campaigns are carried forth. While our current level
of selling, general and administrative expenses is high relative to present
sales levels, we believe that our investment in infrastructure, primarily for
sales and marketing personnel and a new advertising and promotional campaign, is
necessary to build multiple product lines and to adequately support the sales
that new products are expected to generate.
(c) Liquidity and Capital Resources
At June 30, 1999, our current assets exceeded our current liabilities by
approximately $2.62 million, with a ratio of current assets to liabilities of
approximately 5.3 to 1. Our strong current position is the result of completion
of our initial public offering in the fourth quarter of 1997, which resulted in
net proceeds to us of approximately $5.98 million.
We expect to be able to satisfy our cash requirements during the next 12
months from cash on hand. We have 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
associated with the introduction of our weight control product, Satietrol(TM),
in the fourth quarter of 1999. These expenditures presently are projected in the
range of $500,000 over the remainder of 1999.
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,
1999, 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 63,744
(3) Purchase of real estate -0-
(4) Acquisition of other businesses -0-
(5) Repayment of debt 114,793
(6) Working capital 3,502,967
(7) Temporary investments* 2,145,192
(8) Any other purpose expected to involve $100,000 or more -0-
(9) Research & development 151,850
-----------
Total applied through 6/30/99 $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 13, 1999
------------------------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,212,281
<SECURITIES> 0
<RECEIVABLES> 530,521
<ALLOWANCES> 0
<INVENTORY> 319,330
<CURRENT-ASSETS> 3,231,824
<PP&E> 93,326
<DEPRECIATION> 18,634
<TOTAL-ASSETS> 3,331,659
<CURRENT-LIABILITIES> 612,594
<BONDS> 0
0
0
<COMMON> 11,386
<OTHER-SE> 2,707,679
<TOTAL-LIABILITY-AND-EQUITY> 3,331,659
<SALES> 850,159
<TOTAL-REVENUES> 913,342
<CGS> 316,424
<TOTAL-COSTS> 1,891,794
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (978,452)
<INCOME-TAX> 0
<INCOME-CONTINUING> (978,452)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (978,452)
<EPS-BASIC> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
