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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2003
-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)
100 Matawan Road, Suite 420
Matawan, NJ 07747
---------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 739-2900
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 14, 2003, there were 6,115,703 shares of common stock, par value
$.0025 per share, of the registrant outstanding.
Transitional small business disclosure format: Yes [ ] No [X]
PACIFICHEALTH LABORATORIES, INC.
TABLE OF CONTENTS
---------------------------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002........................................3
Statements of Operations (Unaudited) for the three and six months ended
June 30, 2003 and June 30, 2002....................................................................4
Statements of Cash Flows (Unaudited) for the six months ended
June 30, 2003 and June 30, 2002....................................................................5
Notes to Financial Statements.............................................................................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................................8
ITEM 3. CONTROLS AND PROCEDURES..............................................................................10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................................................11
ITEM 2. Changes in Securities and Use of Proceeds........................................................11
ITEM 3. Defaults Upon Senior Securities..................................................................11
ITEM 4. Submission of Matters to a Vote of Security Holders..............................................11
ITEM 5. Other Information................................................................................12
ITEM 6. Exhibits and Reports.............................................................................12
SIGNATURES..........................................................................................................12
2
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
ASSETS
June 30, December 31,
2003 2002
(Unaudited) (Audited)
----------- ------------
Current assets:
Cash and cash equivalents $ 210,616 $ 628,436
Accounts receivable, net 768,968 335,219
Inventories 1,209,272 1,537,784
Prepaid expenses 271,196 142,865
---------- ----------
Total current assets 2,460,052 2,644,304
Property and equipment, net 59,156 66,835
Other assets:
Deposits 17,378 3,991
---------- ----------
Total assets $2,536,586 $2,715,130
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 259,287 $ 64,212
Accounts payable and accrued expenses 693,496 280,384
Other 31,734 100,000
---------- ----------
Total current liabilities 984,517 444,596
---------- ----------
Stockholders' equity:
Common stock, $.0025 par value; authorized
50,000,000 shares; issued and outstanding:
6,115,703 shares at June 30, 2003 and
6,114,703 shares at December 31, 2002 15,289 15,287
Additional paid-in capital 13,848,583 13,839,973
Accumulated deficit (12,311,803) (11,584,726)
---------- ----------
1,552,069 2,270,534
---------- ----------
Total liabilities and stockholders' equity $2,536,586 $2,715,130
========== ==========
3
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30,2003 AND 2002
(UNAUDITED)
Three Months Six Months
Ended June 30, Ended June 30,
------------------------ ----------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues
Net product sales $1,520,552 $1,818,096 $2,918,331 $2,975,026
Cost of goods sold 737,272 807,185 1,456,993 1,370,924
---------- ---------- ---------- ----------
Gross Profit 783,280 1,010,911 1,461,338 1,604,102
Selling, general and administrative expenses 1,029,219 1,024,723 2,026,922 1,842,317
Research & development 43,248 24,523 130,539 47,360
Depreciation expense 13,356 9,359 27,473 18,574
---------- ---------- ---------- ----------
1,085,823 1,058,605 2,184,934 1,908,251
---------- ---------- ---------- ----------
Net operating income (loss) (302,543) (47,694) (723,596) (304,149)
Other income (expense):
Interest income 522 4,086 1,466 9,941
Interest expense (8,952) (918) (9,946) (1,642)
Other 5,000 - 5,000 -
---------- ---------- ---------- ----------
(3,430 3,168 (3,480) 8,299
---------- ---------- ---------- ----------
Income (loss) before income taxes (305,973) (44,526) (727,076) (295,850)
Provision for income taxes - - - -
---------- ---------- ---------- ----------
Net income (loss) $ (305,973) $ (44,526) $ (727,076) $ (295,850)
========== ========== ========== ==========
Basic income (loss) per share $ (0.05) $ (0.01) $ (0.12) $ (0.05)
========== ========== ========== ==========
Diluted income (loss) per share $ (0.05) $ (0.01) $ (0.12) $ (0.05)
========== ========== ========== ==========
Weighted average common shares:
Basic 6,115,703 6,061,302 6,115,438 6,050,313
========== ========== ========== ==========
Diluted 6,448,220 7,313,680 6,684,590 7,221,871
========== ========== ========== ==========
4
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---- ----
Cash flows from operating activities:
Net income (loss) $ (727,076) $ (295,850)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 27,473 18,574
Intrinsic value of stock options granted 7,552 15,950
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable (433,749) (605,489)
Decrease (Increase) in inventories 328,512 (223,737)
Decrease (Increase) in prepaid expenses (128,331) (105,701)
Decrease (Increase) in deposits (13,387) --
Increase (Decrease) in accounts payable/accrued expenses 413,112 345,524
Increase (Decrease) in other current liabilities (68,266) --
--------- ----------
Net cash used in operating activities (594,160) (850,729)
--------- ----------
Cash flows from investing activity:
Purchase of fixed assets (19,794) (14,946)
--------- ----------
Net cash used in investing activities (19,794) (14,946)
--------- ----------
Cash flows from financing activities:
Issuance of notes payable 254,491 52,700
Repayments of notes payable (59,417) (41,113)
Common stock options/warrants exercised 1,060 126,750
--------- ----------
Net cash provided by financing activities 196,134 138,337
--------- ----------
Net increase (decrease) in cash (417,820) (727,338)
Cash, beginning balance 628,436 1,848,847
--------- ----------
Cash, ending balance $ 210,616 $1,121,509
========= ==========
5
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America 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 and six months ended
June 30, 2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003. 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, 2002.
2. Inventories
As of June 30, 2003 and December 31, 2002, inventories consist of the
following:
06/30/03 12/31/02
-------- --------
Raw Materials $ 9,431 $ 3,228
Packaging supplies 41,016 39,341
Work in Process 48,605 -
Finished goods 1,110,220 1,495,215
---------- ----------
$1,209,272 $1,537,784
========== ==========
3. Stock Based Compensation
The Company granted 21,000 Incentive Stock Options (ISOs) to employees
during the first six months of 2003 with exercise prices ranging from
$0.80 per share to $1.92 per share. 11,000 of these options vest during
the first quarter of 2004 and 10,000 of these options vest during the
first quarter of 2005. The exercise price for all 21,000 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 4,500 stock options to consultants during the
first six months of 2003. All 4,500 options vested upon grant with
exercise prices ranging from $0.89 per share to $2.15 per share. These
options were determined to have a value of $4,873 for the six months ended
June 30, 2003 and this amount was charged to operations and added to
paid-in capital in accordance with SFAS 123. In addition, 45,000 options
issued to consultants expired during the first six months of 2003.
The following table illustrates the effect on net (loss) income and
earnings per share if the fair value based method had been applied to all
awards:
Six Months Ended June 30,
2003 2002
---- ----
Reported net (loss) income $ (727,076) $ (295,850)
Stock-based employee compensation expense included in
reported net loss, net of related tax effects -0- -0-
Stock-based employee compensation determined under the
fair value based method, net of related tax effects (130,271) (82,757)
---------- -----------
Pro forma net (loss) income $ (857,347) $ (378,607)
========== ===========
Basic and diluted (loss) per share:
As reported ($0.12) ($0.05)
Pro forma ($0.14) ($0.06)
6
4. Income Taxes
The Company has approximately $11,588,000 in Federal net operating loss
carryovers that were generated through June 30, 2003 and are available to
offset future taxable income in calendar years 2003 through 2023.
The components of the Company's deferred tax assets as of June 30, 2003
and December 31, 2002 are as follows:
2003 2002
---- ----
Net operating loss carry forwards $ 4,270,000 $ 4,066,000
Deferred charges 45,000 45,000
Valuation allowance (4,315,000) (4,111,000)
----------- -----------
Deferred tax asset $ - $ -
5. Notes Payable
Included in notes payable, the Company, during the second quarter of 2003,
secured a $750,000 asset-based credit facility from USA Funding of Dallas,
TX. The amount of available credit is based on the value of the Company's
eligible receivables from time to time. This credit facility bears
interest at a rate of prime plus 2% as well as a 0.75% discount rate on
all advances.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This quarterly report on Form 10-QSB contains statements relating to
future results of the Company (including certain projections and business
trends) that are "forward-looking statements" as defined in the Private
Securities Litigation Reform Act of 1995. These statements can be identified by
introductory words such as "expects", "plans", "intends", "believes", "will",
"estimates", "forecasts", "projects" or words of similar meaning, and by the
fact that they do not relate strictly to historical or current facts. Actual
outcomes and results may differ materially from what is expressed or implied in
our forward-looking statements. Among the factors that affect future results are
changes in political and economic conditions; demand for and market acceptance
of new and existing products, as well as other risks and uncertainties detailed
from time to time in the filings of the Company with the Securities and Exchange
Commission.
(a) Introduction
The Company was incorporated in April 1995 as a nutrition technology
company that researches, develops, and commercializes functionally unique
proprietary products for sports performance, weight loss and Type 2 diabetes.
Sports Performance
------------------
Our first sports performance product, ENDUROX(R), was introduced in
March 1996 with commercial sales beginning in May 1996. In March 1997, we
extended the ENDUROX line of products with ENDUROX EXCEL(R). In February 1999,
we introduced ENDUROX(R) R4(R) Performance/Recovery Drink to be taken following
exercise. In clinical studies performed or funded by the Company, ENDUROX R4 has
demonstrated a number of exercise-related benefits including enhanced
performance, extended endurance, and decreased post-exercise muscle damage. In
June 2001, we introduced ACCELERADE(R) Sports Drink, to be taken during exercise
using the same patented technology as ENDUROX R4. Research studies funded by the
Company have shown that ACCELERADE is significantly better than conventional
sports drinks in improving endurance during exercise. In the first two quarters
of 2003, we commenced test marketing of our ready-to-drink form of ACCELERADE in
the San Diego and Colorado Springs areas. The test market is expected to
continue through the 3rd quarter of 2003 in Colorado Springs.
Weight Loss
-----------
In weight loss, the Company has focused its research and development
efforts on development of novel nutritional compositions that stimulate the
body's major satiety peptide, or cholecystokinin (CCK). In April 2000, we
introduced our first weight loss product, SATIETROL(R), a natural appetite
control product based on this research. Clinical studies performed or funded by
the Company have shown that Satietrol, a pre meal beverage, can reduce hunger up
to 43% 3 1/2 hours after eating. In January 2001, we extended our weight loss
product line with the introduction of SATIETROL COMPLETE(R), a 220-calorie meal
replacement product that incorporates the patented SATIETROL technology. In June
2001, the Company signed an exclusive worldwide Licensing Agreement with
GlaxoSmithKline ("GSK") for its SATIETROL technology. Under the Agreement, the
Company received an initial payment of $1,000,000 and received a subsequent
milestone payment of $250,000. GSK subsequently canceled the Licensing Agreement
in September 2002 with all rights reverting to the Company. In the third quarter
of 2002, the Company funded clinical studies that confirmed an improvement in
the efficacy of SATIETROL. The Company is conducting further studies on
SATIETROL in 2003.
8
Type 2 Diabetes
---------------
Type 2 diabetes has become the fastest growing chronic condition in the
United States. Obesity and poor glucose regulation appear to be primary
characteristics of this condition. Research has suggested that cholecystokinin
(CCK) may play a role in insulin release and glucose regulation. The Company's
research in this area is to develop a nutritional product that can help Type 2
diabetics lose weight by controlling appetite while improving glucose
regulation. The Company expects to initiate clinical trials on a product for use
by Type 2 diabetics in the future.
(b) Results of Operations - Six Months Ended June 30, 2003 vs. June 30, 2002
We recorded a net loss of ($305,973), or ($0.05) per share, for the
second quarter ended June 30, 2003 compared to a net loss of ($44,526), or
($0.01) per share, for the second quarter ended June 30, 2002. We recorded a net
loss of ($727,076), or ($0.12) per share, for the six-month period ended June
30, 2003, compared to a net loss of ($295,850), or ($0.05) per share, for the
six-month period ended June 30, 2002. The increase in the net loss for the
three-month period ended June 30, 2003 vs. the same period in 2002 is due
primarily to a decrease in revenues. The increase in the net loss for the
six-month period ended June 30, 2003 vs. the same periods in 2002 is due
primarily to increases in marketing expenses and research and development
expenses as detailed below.
Revenues in the quarter ended June 30, 2003 were $1,520,552 compared to
$1,818,096 for the same period in 2002. Revenues in the six-month period ended
June 30, 2003 were $2,918,331 compared to revenues of $2,975,026 for the same
period in 2002. We believe revenues decreased in the second quarter of 2003 due
to the seasonally poor weather experienced across the United States during this
period. The users of our sports drinks tend to be serious outdoor athletes such
as bicyclists, runners, and triathletes. Inclement weather forces such athletes
to workout less, thereby lessening the demand for our sports drinks. For the
six-month period ending June 30, 2003, sales of our ACCELERADE Sports Drink
increased 22% over the same period in 2002.
Gross profit was $783,280 for the three months ended June 30, 2003
compared to $1,010,911 for the three months ended June 30, 2002. Gross profit
was $1,461,338 for the six months ended June 30, 2003 compared to $1,604,102 for
the six months ended June 30, 2002. Gross profit margin on product sales was
51.5% for the three months ended June 30, 2003, compared to 55.6% for the three
months ended June 30, 2002. Our gross profit margin on product sales was 50.1%
for the six-month period ended June 30, 2003 versus 53.9% for the six-month
period ended June 30, 2002. The reasons for the decrease in gross profit margins
are increases in warehouse costs as we bring on additional warehouses, increases
in freight costs, and slotting fees paid in the first quarter of 2003 in the
form of product for getting our ACCELERADE product sold in 990 Rite-Aid drug
stores that feature a special nutrition section.
Our selling, general, and administrative ("S, G, & A") expenses were
$1,029,219 for the three-month period ended June 30, 2003 compared to $1,024,723
for the three-month period ended June 30, 2002. Our S, G, & A expenses increased
to $2,026,922 for the six-month period ended June 30, 2003 from $1,842,317 for
the six-month period ended June 30, 2002. The primary reason for the increase in
S, G, & A expenses in the six-month period ended June 30, 2003, compared to the
same period in 2002 was an increase in salaries and employee benefits as we
expanded our marketing and sales team.
9
Research and development ("R & D") expenses were $43,248 for the three
months ended June 30, 2003 versus $24,523 for the three months ended June 30,
2002. R & D expenses were $130,539 for the six months ended June 30, 2003 versus
$47,360 for the six months ended June 30, 2002. R & D expenses increased during
the second quarter of 2003 compared to the same period in 2002 due to a study we
conducted to further enhance our SATIETROL weight loss technology. In addition,
R & D expenses increased in the six-month period ended June 30, 2003 compared to
the same period in 2002 due to R & D expenses associated with the test market of
the ready-to-drink form of our ACCELERADE product in the first quarter of 2003.
We anticipate R & D expenses will increase as additional clinical trials and
studies are conducted on all of our products as we continue to seek out
additional patents and claims for our products.
(c) Liquidity and Capital Resources
At June 30, 2003, the Company's current assets exceeded its current
liabilities by approximately $1.475 million with a ratio of current assets to
current liabilities of approximately 2.5 to 1. At June 30, 2003, cash on hand
was $210,616, a decrease of $417,820 from December 31, 2002, primarily because
of our net loss for the first six months of 2003 as well as an increase of
$433,749 in accounts receivable from December 31, 2002 that was offset by an
increase in notes payable of $195,075 and an increase in accounts
payable/accrued expenses of $413,112. Inventory levels decreased by $328,512 at
June 30, 2003 as compared to December 31, 2002, as we more efficiently turned
our inventory in 2003.
During the second quarter of 2003, the Company secured a $750,000
asset-based credit facility from USA Funding of Dallas, TX. The amount of
available credit is based on the value of the Company's eligible receivables
from time to time. This credit facility bears interest at a rate of prime plus
2% as well as a 0.75% discount rate on all advances. At June 30, 2003, we had
approximately $400,000 of availability under this credit facility and as of
August 14, 2003, we had approximately $325,000 of availability under this credit
facility.
The Company anticipates significantly reducing its advertising and
marketing expenditures in the second half of 2003 since the Company's primary
advertising season is generally in the second quarter of its fiscal year. The
Company also has the ability to borrow against its credit facility as described
above and is currently in negotiations to raise additional equity capital.
Should the Company not be successful in raising additional equity capital, we
may have to significantly alter our operations.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of June 30, 2003, the Company's chief
executive officer and chief financial officer have concluded that the Company's
disclosure controls and procedures are designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
10
Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.
II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
(a), (b) Changes in Securities:
None.
(c) Recent Sales of Unregistered Securities:
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On June 11, 2003, the Company held its Annual Meeting of Stockholders,
pursuant to information contained in the Company's Notice of Annual
Meeting of Stockholders and Proxy Statement that were mailed to
stockholders on May 19, 2003.
(b) One of the matters listed in the Company's Proxy for the meeting was
the annual Election of Directors. There were six nominees for election
who were elected by the shareholders to serve for a one-year term. The
results of the balloting were as follows (Shares voting: 5,294,658 of
6,115,703):
Nominee For Against Abstain
------- --- ------- -------
Robert Portman 5,270,488 -0- 24,170
Stephen P. Kuchen 5,271,888 -0- 22,770
David Portman 5,270,888 -0- 23,770
T. Colin Campbell 5,271,788 -0- 22,870
Michael Cahr 5,273,388 -0- 21,270
Joseph Harris 5,273,288 -0- 21,370
(c) Another matter voted upon by the stockholders was the ratification of
the appointment of Eisner, LLP as independent auditors for the Company
for the fiscal year ending December 31, 2003. This matter was approved.
The results of the balloting for this matter was as follows:
Matter For Against Abstain
------ --- ------- -------
Appointment of auditors 5,265,680 19,678 9,300
11
(d) The final matter voted upon by the stockholders was the ratification of
a proposal to authorize the Board of Directors to issue up to 2,000,000
shares of common stock for less than market value in excess of amounts
permitted by NASDAQ rule 435(I)(1)(D) without stockholder approval.
This matter was approved. The results of the balloting for this matter
was as follows:
Matter For Against Abstain
------ --- ------- -------
Authorization to sell excess common stock 2,724,839 104,326 9,000
Broker Non-Votes: 2,456,493
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Section 302 Certification of Robert Portman, Chief Executive
Officer.
31.2 Section 302 Certification of Stephen P. Kuchen, Chief Financial
Officer
32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(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/ STEPHEN P. KUCHEN
------------------------------
STEPHEN P. KUCHEN
Vice President (Principal Financial Officer
and Principal Accounting Officer)
12