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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, 2000
-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 3, 2000 there were 4,646,367 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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PACIFICHEALTH LABORATORIES, INC.
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Independent Accountants' Report............................ 3
Balance Sheets as of September 30, 2000
and December 31, 1999................................. 4
Statements of Operations for the three and nine
months ended September 30, 2000 and 1999.............. 5
Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999..................... 6
Notes to Financial Statements.............................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................... 8
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds.............. 11
ITEM 6. Exhibits and Reports................................... 12
SIGNATURES............................................................... 13
2
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INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Shareholders
PacificHealth Laboratories, Inc.
We have reviewed the accompanying balance sheet, statement of operations, and
statement of cash flows of PacificHealth Laboratories, Inc. as of September 30,
2000, and for the three-month and nine-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the consolidated financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP.
Blue Bell, Pennsylvania
October 30, 2000
3
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PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
ASSETS
September 30, December 31,
2000 1999
(Unaudited) (Audited)
------------- ------------
Current assets:
Cash and cash equivalents $ 546,284 $ 1,742,360
Accounts receivable, net 664,851 538,837
Inventories 1,454,853 385,427
Prepaid expenses 46,963 89,305
------------ ------------
Total current assets 2,712,951 2,755,929
Property and equipment, net 80,683 84,339
Other asset:
Deposits 53,991 3,991
------------ ------------
$ 2,847,625 $ 2,844,259
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses 502,829 211,061
Reserve for product replacement 80,573 161,062
------------ ------------
Total current liabilities 583,402 372,123
------------ ------------
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, 1999 and 4,646,367 shares
at September 30, 2000 11,616 11,386
Additional paid-in capital 11,005,910 10,803,085
Accumulated deficit (8,753,303) (8,342,335)
------------ ------------
2,264,223 2,472,136
------------ ------------
$ 2,847,625 $ 2,844,259
============ ============
See notes to financial statements
4
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PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 1,503,541 $ 626,446 $ 3,337,138 $ 1,476,605
Cost of goods sold 676,427 246,131 1,462,085 562,556
----------- ----------- ----------- -----------
Gross Profit 827,114 380,315 1,875,053 914,049
Selling, general and administrative expenses 725,167 610,404 2,148,783 2,270,725
Research & Development 69,456 59,207 186,005 118,542
Amortization expense -- 795 928 2,385
Depreciation expense 10,533 8,681 28,960 27,315
Provision for replacement of product -- -- (35,000) (162,285)
----------- ----------- ----------- -----------
805,156 679,087 2,329,676 2,256,682
----------- ----------- ----------- -----------
Net operating income (loss) 21,958 (298,772) (454,623) (1,342,633)
Other income (expense)
Interest income 6,033 21,464 43,655 85,521
Bad debt recovery -- -- -- 1,350
----------- ----------- ----------- -----------
6,033 21,464 43,655 86,871
----------- ----------- ----------- -----------
Income (loss) before income taxes 27,991 (277,308) (410,968) (1,255,762)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ 27,991 $ (277,308) $ (410,968) $(1,255,762)
=========== =========== =========== ===========
Basic income (loss) per share $ 0.01 $ (0.06) $ (0.09) $ (0.28)
=========== =========== =========== ===========
Diluted income (loss) per share $ 0.01 $ (0.06) $ (0.09) $ (0.28)
=========== =========== =========== ===========
Weighted average common shares:
Basic 4,641,041 4,554,367 4,597,790 4,554,367
=========== =========== =========== ===========
Diluted 4,716,604 4,672,729 4,788,753 4,607,776
=========== =========== =========== ===========
</TABLE>
See notes to financial statements
5
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PACIFICHEALTH LABORATORIES, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss (410,968) (1,255,762)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 28,960 27,315
Amortization 928 2,385
Intrinsic value of non-employee stock options granted 43,055 --
Changes in assets and liabilities:
(Increase) / Decrease in accounts receivable (126,014) (242,649)
(Increase) / Decrease in inventories (1,069,426) 112,956
(Increase) / Decrease in prepaid expenses 42,342 105,816
Increase in other assets (50,928) --
Increase in accounts payable and accrued expenses 291,768 1,739
Decrease in reserve for product replacement (80,489) (166,487)
Decrease in customer deposits -- (3,333)
----------- -----------
Net cash used in operating activities (1,330,772) (1,418,020)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (25,304) (12,609)
----------- -----------
Net cash used in investing activities (25,304) (12,609)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt -- (60,944)
Common stock options exercised 160,000 --
----------- -----------
Net cash provided (used) by in financing activities 160,000 (60,944)
----------- -----------
Net decrease in cash (1,196,076) (1,491,573)
Cash, beginning balance 1,742,360 3,415,120
----------- -----------
Cash, ending balance $ 546,284 $ 1,923,547
=========== ===========
</TABLE>
See notes to financial statements
6
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PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(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, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. 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, 1999.
2. Stock Based Compensation
The Company granted 312,500 Incentive Stock Options (ISOs) to employees
during the first nine months of 2000 of which 275,000 vested upon grant with
an exercise price of $2.50 per share and 37,500 vest during the first six
months of 2001 with exercise prices ranging from $2.375 per share to $3.25
per share. The exercise price for all 312,500 options was equal to the fair
market value of the common stock on the date of grant. Since the Company
accounts for its options under APB No. 25, no compensation expense was
recognized.
The Company also granted 100,500 stock options to consultants during the
first nine months of 2000, of which 6,000 vested upon grant with an exercise
price of $2.1875 per share, 64,500 vest during the first nine months of 2001
with exercise prices ranging from $2.1875 per share to $3.50 per share, and
30,000 vest during the first quarter 2002 with an exercise price of $2.1875
per share. The Company extended 127,750 warrants during the third quarter
2000 issued to a consultant to the Company for a period of one year expiring
in July 2001 at exercises prices ranging from $3.75 to $6.25 per share. The
options and warrant extensions were determined to have a value of $22,109 for
the three months ended September 30, 2000 and a value of $43,056 for the nine
months ended September 30, 2000. These amounts were charged to operations in
the quarter ended September 30, 2000 and the nine months ended September 30,
2000 respectively, and were added to paid-in capital inaccordance with SFAS
123.
See notes to financial statements
7
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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
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. 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. We
subsequently discontinued active marketing of PROSOL PLUS and ENDUROX PROHEART
in order to concentrate our marketing resources on products that we believed had
greater sales potential.
In February 1999, we introduced ENDUROX(R)R(4)(R) 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. In April 2000, we introduced SATIETROL(R), a new diet product
that will compete in the approximately $10 billion market for weight loss and
weight control products.
(b) Results of Operations - Three Months and Nine Months Ended
September 30, 2000 versus September 30, 1999
We recorded net income of $27,991 or $.01 per share for the three
months ended September 30, 2000, compared to a loss of $277,308 or $.06 per
share for the three months ended September 30, 1999. We incurred a loss of
$410,968 or $.09 per share for the nine months ended September 30, 2000,
compared to a loss of $1,255,762 or $.28 per share for the nine months ended
September 30, 1999. The net income in 2000 vs. the net loss in 1999 for the
third quarter and the reduction in our net loss in the nine month period ended
September 30, 2000 compared to the similar period in 1999, are due primarily to
increased sales. We also reduced our reserve for product replacement by $35,000
in the nine months ended September 30, 2000 and $162,285 in the nine months
ended September 30, 1999, taking these amounts back into income as described
below.
Revenues in the three months ended September 30, 2000, were $1,503,541
compared to $626,446 for the same period in 1999. Revenues in the nine months
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ended September 30, 2000, were $3,337,138 compared to $1,476,605 for the same
period in 1999. Revenue increases in the first nine months of 2000 were due
primarily to our introduction of SATIETROL, our new diet product, and a 49%
increase in sales of ENDUROX R(4) Performance/Recovery Drink compared to the
same period in 1999. The following table provides additional information
concerning our revenues in the first nine months of 2000 and 1999:
<TABLE>
<CAPTION>
Revenues
-------------------------------------------------------
ENDUROX R(4)
ENDUROX & Performance
ENDUROX Recovery
EXCEL Drink SATIETROL Other(1)
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
2000
----
First Quarter $143,365 $ 199,928 $ - $ 5,462
Second Quarter 221,564 610,576 650,536 2,666
Third Quarter 163,283 517,342 822,705 (289)
-------- -------- --------- -------
Total $528,212 $1,327,846 $1,473,241 $ 7,839
======== ======== ========== =======
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
======== ======== ========== =======
</TABLE>
(1) - Principally ENDUROX PROHEART and PROSOL PLUS
Sales revenues reported for the first nine months of 1999 are net of a
credit of $84,474 for the return of certain products.
Gross profit margin decreased from 60.7% for the three months ended
September 30, 1999 to 55.0% for the three months ended September 30, 2000, and
from 61.9% for the nine months ended September 30, 1999 to 56.2% for the nine
months ended September 30, 2000, primarily as a result of a decrease in the
gross profit margin on ENDUROX R(4), the introduction of SATIETROL into our
product mix, and, for the three months ended September 30, 2000, payment
discounts offered to customers. When ENDUROX R(4) was first introduced last
year, it was only available in one size and one flavor. Since then, we have
expanded that line to include several size canisters and several flavors, which
has increased our cost of goods sold for ENDUROX R(4) products. SATIETROL has a
lower gross margin than the original ENDUROX and ENDUROX R(4) product lines as
this product competes in the highly competitive weight loss products segment
resulting in competitive pricing pressures. Payment discounts were offered in
the third quarter 2000 in order to accelerate collection of large receivables.
We may continue to offer discounts to customers from time to time to accelerate
cash flow.
9
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Selling, general and administrative expenses increased from $610,404
for the third quarter 1999 to $725,167 (approximately 19%) for the third quarter
2000. Selling, general and administrative expenses decreased from $2,270,725 for
the nine months ended September 30, 1999 to $2,148,783 (approximately 5%) for
the nine months ended September 30, 2000. The increase in selling, general and
administrative expenses for the third quarter 2000 is due primarily to increases
in advertising expenses, convention expenses, and consulting fees offset by the
elimination of certain spokespersons' fees. Advertising expenses were increased
primarily to support the continued national rollout of the SATIETROL product,
which began in August 2000. The decrease in selling, general and administrative
expenses for the nine months ended September 30, 2000 compared to the nine
months ended September 30, 1999 is due primarily to the elimination of certain
spokespersons' fees. Selling, general and administrative expenses are expected
to increase during the fourth quarter of 2000 as we continue the SATIETROL
advertising and promotional campaign to develop the sales potential of the
product.
Research and development expenses increased from $59,207 for the three
months ended September 30, 1999 to $69,456 for the three months ended September
30, 2000, and increased from $118,542 for the nine months ended September 30,
1999 to $186,005 for the nine months ended September 30, 2000. This is due to
the research and development program associated with the SATIETROL product line.
Our research and development on SATIETROL led us to file a patent in February
2000. The U.S. Patent and Trademark office issued a Notice of Allowability of
Claims for SATIETROL in October 2000. All 72 claims were allowed. Another patent
incorporating the SATIETROL technology was filed in July 2000 and we plan to
file two additional patents based on this technology in the fourth quarter of
2000. We anticipate that these research and development costs will continue at
this level as we broaden both the SATIETROL and ENDUROX R(4) product lines.
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 would not exceed $178,303. As a result, we reduced our reserve by
$162,285 at June 30, 1999 and our net loss for the nine months ended September
30, 1999 was offset by taking that amount back into income in the second quarter
of 1999. At June 30, 2000, we estimated that our remaining capsule exchange for
caplets and/or credit refunds would not exceed $80,573. As a result, we reduced
our reserve by $35,000 at June 30, 2000 and our net loss for the nine months
ended September 30, 2000 was offset by taking that amount back into income in
the second quarter of 2000.
(c) Liquidity and Capital Resources
At September 30, 2000, our current assets exceeded our current
liabilities by approximately $2.1 million, with a ratio of current assets to
current liabilities of approximately 4.7 to 1. The Company received cash in the
amount of $28,750 during the quarter ended September 30, 2000 for the exercise
of 17,000 shares of stock under the Company's 1995 Incentive Stock Option Plan.
Accounts receivable were higher at September 30, 2000 compared to December 31,
1999 as sales were higher in the third quarter 2000 than in the fourth quarter
10
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of 1999. Accounts receivable as a percentage of sales decreased, however, due to
quicker collections achieved through offering discounts to certain customers.
Initially, a large portion of our sales of SATIETROL was through our web site
(www.hungeroff.com). Sales through our web site have decreased since August
2000, as we have increased SATIETROL sales to other Internet retailer sites and
to our traditional retailers nationally. This change in our sales mix of
SATIETROL customers served to decrease accounts receivable turnover, since sales
made through our SATIETROL web site are paid directly to us by the consumer via
credit card, whereas the majority of our sales are now to retailers who pay
according to standard industry credit terms. We were able to offset this
decrease in accounts receivable turnover during the three and nine month periods
by accelerating collections of certain large receivables by offering payment
discounts. Inventory levels were substantially higher at September 30, 2000
compared to December 31, 1999 in order to support both actual and anticipated
increased sales levels. The initial response to SATIETROL upon its introduction
in April 2000 was very positive and inventory was purchased to meet sales based
on sales growth we anticipated from the original response. We have also built
SATIETROL inventory in anticipation of the coming diet season that begins after
the holidays, with expected shipments to our retailer base beginning in December
2000.
We are currently seeking additional equity financing in order to fund
our expected growth. We have no commitments for significant capital expenditures
over the next 12 months. The largest expenditures now contemplated (apart from
expenses necessary to support current levels of sales, general and
administrative costs) are advertising and promotional expenditures associated
with the continued development of SATIETROL sales and to fund the launch of a
SATIETROL meal replacement product scheduled for January 2001. These
expenditures presently are projected in the range of $500,000 over the remainder
of 2000 and $1,000,000 for the first quarter of 2001. We are also seeking
additional equity to enable us to finance the additional inventory needed to
support this expanding sales base and to fund the launch of additional flavors
and line extensions for ENDUROX R(4) in the first quarter of 2001. We anticipate
seeking approximately $2,000,000 for all of these purposes. Without adequate
financing, sales and corporate growth may be limited.
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,
2000, 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-
11
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(2) Purchase and installation of
machinery and equipment 99,291
(3) Purchase of real estate -0-
(4) Acquisition of other businesses -0-
(5) Repayment of debt 156,922
(6) Working capital 4,733,941
(7) Temporary investments* 529,998
(8) Any other purpose expected to -0-
involve $100,000 or more
(9) Research & development 458,394
----------
Total applied through 9/30/00 $5,978,546
==========
* Short term commercial paper and/or money market funds.
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.
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.
12
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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/ STEPHEN P. KUCHEN
-----------------------
STEPHEN P. KUCHEN
Vice President
(Principal Financial
Officer and Principal Accounting
Officer)
Date: NOVEMBER 3, 2000
13
