===============================================================================
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, 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
---------
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 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 September 30, 1999
and December 31, 1998................................... 3
Statements of Operations for the three and nine
months ended September 30, 1999 and 1998................ 4
Statements of Cash Flows for the nine months
ended September 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.................... 11
ITEM 6. Exhibits and Reports......................................... 12
SIGNATURES.................................................................. 12
2
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,923,547 $ 3,415,120
Accounts receivable, net 513,322 270,673
Inventories 262,118 375,074
Prepaid expenses 102,722 208,538
------------ ------------
Total current assets 2,801,709 4,269,405
Property and equipment, net 89,564 104,533
Other asset:
Deposits 3,991 3,991
Organization cost, net of
accumulated amortization 1,988 4,107
------------ ------------
5,979 8,098
------------ ------------
$ 2,897,252 $ 4,382,036
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 21,320 $ 82,264
Accounts payable and accrued expenses 254,001 252,262
Reserve for product replacement 177,977 344,464
Customer deposits 2,196 5,529
------------ ------------
Total current liabilities 455,494 684,519
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 September 30, 1999 11,386 11,386
Additional paid-in capital 10,803,085 10,803,085
Accumulated deficit (8,372,713) (7,116,954)
------------ ------------
2,441,757 3,697,517
------------ ------------
$ 2,897,252 $ 4,382,036
============ ============
</TABLE>
-3-
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ----- ----
<S> <C> <C> <C> <C>
Revenues $ 626,446 $ 176,051 $ 1,476,605 $ 834,207
Cost of goods sold:
Inventories, beginning 319,330 674,515 375,074 553,098
Purchases 188,919 75,694 449,600 379,858
----------- ----------- ----------- -----------
508,249 750,209 824,674 932,956
Less: inventories, ending 262,118 711,239 262,118 711,239
----------- ----------- ----------- -----------
246,131 38,970 562,556 221,717
----------- ----------- ----------- -----------
Gross Profit 380,315 137,081 914,050 612,490
Selling, general and administrative
expenses 610,404 769,911 2,270,725 2,279,961
Research & Development 59,207 21,847 118,542 72,352
Depreciation & Amortization 9,476 12,544 29,700 43,853
Provision for replacement of product -- -- (162,285) --
----------- ----------- ----------- -----------
679,087 804,302 2,256,681 2,396,166
----------- ----------- ----------- -----------
Net operating loss (298,773) (667,221) (1,342,632) (1,783,676)
Other income (expense)
Interest income 21,464 61,013 85,521 193,771
Bad debt recovery -- -- 1,350 --
----------- ----------- ----------- -----------
21,464 61,013 86,871 193,771
----------- ----------- ----------- -----------
Loss before income taxes (277,309) (606,208) (1,255,761) (1,589,905)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (277,309) $ (606,208) $(1,255,761) $(1,589,905)
=========== =========== =========== ===========
Basic loss per share $ (0.06) $ (0.13) $ (0.28) $ (0.35)
=========== =========== =========== ===========
Diluted loss per share $ (0.06) $ (0.13) $ (0.28) $ (0.35)
=========== =========== =========== ===========
Weighted average common shares:
Basic 4,554,367 4,554,367 4,554,367 4,554,367
=========== =========== =========== ===========
Diluted 4,672,729 4,647,470 4,607,776 4,754,543
=========== =========== =========== ===========
</TABLE>
-4-
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,255,761) $(1,589,905)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation & Amortization 29,700 43,853
Changes in assets and liabilities:
Decrease in accounts receivable (242,649) 70,634
(Increase) decrease in prepaid expenses 105,816 (39,544)
(Increase) decrease in inventories 112,956 (158,141)
Decrease in other current assets -- 2,104
Increase in deposits -- (9,266)
Increase (decr.) in accounts payable and accrued expenses 1,739 197,954
(Decrease) increase in reserve for product replacement (166,487) (177,851)
(Decrease) in customer deposits (3,333) --
----------- -----------
Net cash used in operating activities (1,418,019) (1,660,162)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (12,609) (39,518)
----------- -----------
Net cash used in investing activities (12,609) (39,518)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (60,944) (55,310)
----------- -----------
Net cash (used in) provided by financing activities (60,944) (55,310)
----------- -----------
Net decrease in cash (1,491,573) (1,754,990)
Cash, beginning balance 3,415,120 5,865,881
----------- -----------
Cash, ending balance $ 1,923,547 $ 4,110,891
=========== ===========
</TABLE>
See notes to financial statements
-5-
<PAGE>
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 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
nine months ended September 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)R4(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 a new
product, Satietrol(TM), that will compete in the approximately $10 billion
market for weight loss and weight control products, in late 1999.
(b) Results of Operations - Three Months and Nine Months Ended September
30, 1999 versus September 30, 1998
We incurred a loss of $277,309 or $.06 per share for the three months ended
September 30, 1999, compared to a loss of $606,208 or $.13 per share for the
period ended September 30, 1998. We incurred a loss of $1,255,761 or $.28 per
share for the nine months ended September 30, 1999, compared to a loss of
$1,589,905 or $.35 per share for the nine months ended September 30, 1998. The
reduction in our net loss in the three month and nine month periods ended
September 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 September 30, 1999, were $626,446
compared to $176,051 for the same period in 1998. Revenues in the nine months
ended September 30, 1999, were $1,476,605 compared to $834,207 for the same
period in 1998. Revenue increases during 1999 were due to sales of our
ENDUROX(R)R4(TM) Performance/Recovery Drink, which was introduced in February
1999. The following table provides additional information concerning our
revenues in the first nine months 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
Third Quarter 178,538 443,880 4,028
-------- -------- -------
Total $561,110 $885,963 $29,532
======== ======== =======
1998
----
First Quarter $260,415 $ -- $78,979
Second Quarter 318,762 -- --
Third Quarter 176,051 -- --
-------- -------- -------
Total $755,228 $ -- $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. 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 nine months of 1999 are net of a
credit of $84,474 for the return of certain products. There was no comparable
adjustment in the 1998 period.
We expect that sales in the fourth quarter of 1999 will be approximately
level with or increase slightly over the sales in the third quarter of 1999, due
to the increasing acceptance of ENDUROX(R)R4(TM) Performance/Recovery Drink by
consumers and retailers. During September 1999, we introduced two line
extensions of the Drink; an all natural tangy orange flavor and an economy size
fruit punch flavor. We believe these line extensions will contribute to
increased sales of this product in the fourth quarter.
Our gross profit margin decreased from 77.9% for the three months ended
September 30, 1998 to 60.7% for the three months ended September 30, 1999, and
from 73.4% for the nine months ended September 30, 1998 to 61.9% for the nine
months ended September 30, 1999, primarily as a result of our product sales mix.
The ENDUROX(R)R4(TM) Performance/Recovery Drink has a higher cost of goods sold
than the original ENDUROX line of products.
Our selling, general and administrative expenses decreased from $769,911
for the three months ended September 30, 1998 to $610,404 (approximately 21%)
for the three months ended September 30, 1999. The approximate $160,000 decrease
in S,G & A for this comparable period is presented by major identifiable areas
in the following table:
-8-
<PAGE>
S, G & A expense category $ Decrease from 1998 to 1999
------------------------- ----------------------------
Advertising $ 54,000
Promotion 47,000
Investor relations 21,000
Salaries and benefits 24,000
--------
$146,000
Additional detail concerning these third quarter expense reductions
follows:
o Advertising expenses declined $54,000 as a result of bringing the
advertising design and development function "in-house" as opposed to
hiring an advertising agency. We also decreased expenditures on
advertising spokespersons.
o We reduced promotion expense by spending less on conventions and
events, and by lowering cooperative expenditures. Cooperative fees are
required in order to gain distribution in the mass merchant stores,
but, in 1999, we switched our distribution focus from the mass market
primarily to health and bike shops and catalogues.
o We reduced investor relation expenses by taking this function
in-house.
o The decrease in salaries and benefits was due to the departure of a
high level marketing employee. We have no intention of filling this
position in the short term.
Our selling, general and administrative expenses decreased from $2,279,961
for the nine months ended September 30, 1998 to $2,270,725 for the nine months
ended September 30, 1999, despite the advertising and promotion costs incurred
in connection with the launch of the ENDUROX(R)R4(TM) Performance/Recovery Drink
in February 1999 (approximately $250,000). The overall decrease in S, G & A
expense was achieved primarily through reductions in mass merchant expenses,
including a reduction of $130,000 in cooperative funding and a $58,000 decrease
in master broker fees. The reduction of mass merchant expense was directly
related to our shifting our focus of distribution from the mass market to health
and bike stores and catalogues.
We anticipate a slight reduction in S, G & A expense levels for the
remainder of the year and throughout the first quarter of 2000. While our
current level of selling, general and administrative expenses is still high
relative to present sales levels, we believe that the effectiveness of our
advertising and promotional campaign for the ENDUROX(R)R4(TM)
Performance/Recovery Drink, the line extensions of the Drink introduced in the
third quarter, and its widening acceptance will lead to increasing sales of this
product without corresponding increases in S, G & A.
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 September 30,
1999, we estimated that our remaining capsule exchange for caplets and /or
credit refunds would not exceed $178,303, which was the same
-9-
<PAGE>
estimate at the end of second quarter 1999. At June 30, 1999, we reduced our
reserve by $162,285 and offset our net loss for that six month period by taking
the amount back into income in the second quarter and accordingly, this amount
is also included in our nine month 1999 results.
(c) Liquidity and Capital Resources
At September 30, 1999, our current assets exceeded our current liabilities
by approximately $2.35 million, with a ratio of current assets to liabilities of
approximately 6.2 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 $200,000 over the remainder of 1999.
-10-
<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,
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 68,927
(3) Purchase of real estate -0-
(4) Acquisition of other businesses -0-
(5) Repayment of debt 135,602
(6) Working capital 3,709,003
(7) Temporary investments* 1,853,957
(8) Any other purpose expected to -0-
involve $100,000 or more
(9) Research & development 211,057
----------
Total applied through 9/30/99 $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.
-11-
<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, 1999
-----------------------------
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,923,547
<SECURITIES> 0
<RECEIVABLES> 513,322
<ALLOWANCES> 0
<INVENTORY> 262,118
<CURRENT-ASSETS> 2,801,709
<PP&E> 89,564
<DEPRECIATION> 27,580
<TOTAL-ASSETS> 2,897,252
<CURRENT-LIABILITIES> 455,494
<BONDS> 0
0
0
<COMMON> 11,386
<OTHER-SE> 2,441,757
<TOTAL-LIABILITY-AND-EQUITY> 2,897,252
<SALES> 1,476,605
<TOTAL-REVENUES> 1,563,476
<CGS> 562,556
<TOTAL-COSTS> 2,819,237
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,255,761)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,255,761)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,255,761)
<EPS-BASIC> (0.28)
<EPS-DILUTED> (0.28)
</TABLE>
