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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 March 31, 2002
-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.
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(Exact name of issuer as specified in its charter)
DELAWARE 22-3367588
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1480 Route 9 North, Suite 204
Woodbridge, NJ 07095
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 636-6141
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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 May 12, 2002, there were 6,064,203 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
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets as of March 31, 2002 (Unaudited) and December 31, 2001............. 3
Statements of Operations (Unaudited) for the three months ended
March 31, 2002 and March 31, 2001........................................ 4
Statements of Cash Flows (Unaudited) for the three months ended
March 31, 2002 and March 31, 2001........................................ 5
Notes to Financial Statements..................................................... 6
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................................... 10
ITEM 6. Exhibits and Reports........................................................ 10
SIGNATURES.............................................................................. .. 11
2
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
ASSETS
March 31, December 31,
2002 2001
(Unaudited) (Audited)
------------ ------------
Current assets:
Cash and cash equivalents $ 1,220,663 $ 1,848,847
Accounts receivable, net 719,222 192,628
Inventories 2,623,048 2,634,272
Prepaid expenses 239,634 165,079
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Total current assets 4,802,567 4,840,826
Property and equipment, net 58,927 62,709
Deposits 108,322 108,322
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Total assets $ 4,969,816 $ 5,011,857
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 28,084 $ 45,048
Accounts payable and accrued expenses 509,014 291,506
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Total current liabilities 537,098 336,554
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Stockholders' equity:
Common stock, $.0025 par value; authorized 50,000,000
shares; issued and outstanding 6,039,203 shares at
March 31, 2002 and December 31, 2001 15,098 15,098
Additional paid-in capital 13,683,219 13,674,479
Accumulated deficit (9,265,599) (9,014,274)
------------ ------------
4,432,718 4,675,303
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Total liabilities and stockholders' equity $ 4,969,816 $ 5,011,857
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3
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
(UNAUDITED)
2002 2001
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Revenues:
Product sales $ 1,156,930 $ 610,079
Licensing revenues -- --
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Total Revenues 1,156,930 610,079
Cost of goods sold: 563,739 314,547
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Gross Profit 593,191 295,532
Selling, general and administrative expenses (NOTE 6) 817,595 756,980
Research & development 22,838 21,763
Depreciation expense 9,214 11,561
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849,647 790,304
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Net operating loss (256,456) (494,772)
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Other income (expense)
Interest income 5,856 1,465
Interest expense (725) (1,102)
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5,131 363
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Loss before income taxes (251,325) (494,409)
Provision (benefit) for income taxes -- --
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Net loss (NOTE 6) $ (251,325) $ (494,409)
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Basic and diluted loss per share (NOTE 6) $ (0.04) $ (0.11)
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Weighted average common shares - Basic 6,039,203 4,646,367
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4
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
(UNAUDITED)
2002 2001
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Cash flows from operating activities:
Net loss (251,325) (494,409)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 9,214 11,561
Intrinsic value of stock options granted (NOTE 6) 8,740 245,847
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable (526,594) 56,023
Decrease (Increase) in prepaid expenses (74,555) 25,080
Decrease (Increase) in inventories 11,224 203,126
Increase (Decrease) in accounts payable/accrued expenses 217,508 (156,644)
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Net cash used in operating activities (605,788) (109,416)
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Cash flows from investing activity:
Purchase of fixed assets (5,432) (2,500)
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Net cash used in investing activity (5,432) (2,500)
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Cash flows from financing activity:
Repayment of notes payable (16,964) (15,505)
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Net cash used in financing activity (16,964) (15,505)
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Net decrease in cash (628,184) (127,421)
Cash, beginning balance 1,848,847 170,491
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Cash, ending balance $ 1,220,663 $ 43,070
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5
PACIFICHEALTH LABORATORIES, INC.
NOTE TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(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 months ended March 31,
2002 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2002. 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, 2001.
2. INVENTORIES
As of March 31, 2002 and December 31, 2001, inventories consist of the
following:
2002 2001
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Raw Materials $ 350,799 $ 283,140
Work-in-process 68,487 --
Finished goods 2,207,067 2,354,437
Reserve for obsolescence (3,305) (3,305)
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$ 2,623,048 $ 2,634,272
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3. STOCK BASED COMPENSATION
The Company granted 3,000 Incentive Stock Options (ISOs) to employees
during the first three months of 2002 with an exercise price of $3.77.
1,500 of these options vest during the first quarter 2003 and 1,500 of
these options vest during the first quarter 2004. The exercise price for
all 3,000 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. See NOTE 6.
The Company did not grant any stock options to consultants during the
first three months of 2002.
4. INCOME TAXES
The Company has approximately $8,700,000 in Federal net operating loss
carryovers that were generated through March 31, 2002 and are available to
offset future taxable income in calendar years 2002 through 2030.
The components of the Company's deferred tax assets as of March 31, 2002
and December 31, 2001 are as follows:
2002 2001
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Net operating loss carry forwards $ 3,140,000 $ 3,035,000
Valuation allowance (3,140,000) (3,035,000)
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Deferred tax asset $ - $ -
6
5. LICENSING AGREEMENT
On June 1, 2001, the Company entered into an exclusive license agreement
with GlaxoSmithKline ("GSK"), one of the world's largest pharmaceutical
companies, for SATIETROL, the Company's appetite control product. The
agreement provides GSK with worldwide rights to the trademarks,
technology, patents, and know how for SATIETROL for the duration of the
patents which expires in 2017. Under the agreement, PHLI received an
initial payment of $1,000,000, has received a subsequent milestone payment
of $250,000, will receive additional milestone payments provided GSK meets
certain development goals, and will receive ongoing product royalties upon
launch of the product by GSK. The agreement does not set a specific time
by which GSK must launch the product, but does set a specific time for
launch after GSK has met some of the intermediate milestones. GSK is
permitted to terminate the license agreement at any time for any reason,
provided that it pays all milestone payments earned prior to termination.
In this event, all rights to the product will revert to the Company. The
license agreement grants GSK a right of first refusal to obtain an
exclusive license on any new product developments in appetite suppression,
weight loss, weight management, or meal replacement for weight loss. The
right of first refusal only applies if the Company intends to use a third
party to further develop or commercialize the new product, and not if the
Company will commercialize the product itself. The right of first refusal
will lapse if the Company undergoes a change in control. The Company can
continue to sell the SATIETROL line of products until GSK launches their
SATIETROL product. At that time, the Company can continue to market the
powdered meal replacement product, currently sold under the name SATIETROL
COMPLETE(R), without using the SATIETROL name, in the current health food
store channels of distribution. GSK will be responsible for future
manufacturing, marketing, and sales upon launch by GSK of any products it
launches. GSK also purchased approximately 9% of PHLI's common stock for
$1.5 million under a contemporaneous stock purchase agreement. As of March
31, 2002, the Company has received an aggregate $2,750,000 from GSK from
the combined licensing and stock purchase agreements.
6. RESTATEMENT OF PRIOR PERIOD FINANCIAL STATEMENTS
The Company granted options to our Chief Executive Officer under his 1998
Employment Agreement to purchase up to 475,000 shares of our common stock
at $6.00 per share. In connection with our CEO's 2001 Employment Agreement
(the "Agreement"), the Company re-priced the exercise price of those
options to $0.313 per share, which was the then market price of our common
stock on the date of the Agreement. At the time of the execution of the
Agreement such options were fully vested and had a fair value of $217,075.
The options were fully exercised early in the second quarter of 2001.
The Company did not record a charge to operations until the fourth quarter
of 2001. The Company determined that the transaction should have been
recorded in the first quarter of 2001 and, as such, is restating the
financial statements for the quarter ended March 31, 2001 with the filing
of this Form 10-QSB. The effect of this restatement was to increase
selling, general, and administrative expenses and net loss by $217,075.
Net loss per share increased from ($0.06) to ($0.11).
7
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 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, 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 have shown that ACCELERADE is
significantly better than conventional sports drinks in improving endurance
during exercise.
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 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.
8
On June 1, 2001, the Company entered into an exclusive license
agreement with GSK, one of the world's largest pharmaceutical companies, for
SATIETROL, the Company's appetite control product. The agreement provides GSK
with worldwide rights to the trademarks, technology, patents, and know how for
SATIETROL for the duration of the patents which expires in 2017. Under the
agreement, PHLI received an initial payment of $1,000,000, has received a
subsequent milestone payment of $250,000, will receive additional milestone
payments provided GSK meets certain development goals, and will receive ongoing
product royalties upon launch of the product by GSK. The agreement does not set
a specific time by which GSK must launch the product, but does set a specific
time for launch after GSK has met some of the intermediate milestones. GSK is
permitted to terminate the license agreement at any time for any reason,
provided that it pays all milestone payments earned prior to termination. In
this event, all rights to the product will revert to the Company. The license
agreement grants GSK a right of first refusal to obtain an exclusive license on
any new product developments in appetite suppression, weight loss, weight
management, or meal replacement for weight loss. The right of first refusal only
applies if the Company intends to use a third party to further develop or
commercialize the new product, and not if the Company will commercialize the
product itself. The right of first refusal will lapse if the Company undergoes a
change in control. The Company can continue to sell the SATIETROL line of
products until GSK launches their SATIETROL product. At that time, the Company
can continue to market the powdered meal replacement product, currently sold
under the name SATIETROL COMPLETE(R), without using the SATIETROL name, in the
current health food store channels of distribution. GSK will be responsible for
future manufacturing, marketing, and sales upon launch by GSK of any products it
launches. GSK also purchased approximately 9% of PHLI's common stock for $1.5
million under a contemporaneous stock purchase agreement. As of March 31, 2002,
the Company has received an aggregate $2,750,000 from GSK from the combined
licensing and stock purchase agreements.
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 2002.
(B) RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 VS. MARCH 31, 2001
We recorded a net loss of ($251,325) or ($0.04) per share for the three
months ended March 31, 2002 compared to a net loss of ($494,409) or ($0.11) per
share for the three months ended March 31, 2001. The financial statements for
the quarter ended March 31, 2001 have been restated to give effect to the
re-pricing of certain stock options granted to our Chief Executive Officer under
a 1998 Employment Agreement. The fair value of those re-priced options amounted
to $217,075. Such amount had been originally been recorded as a charge to
operations in the fourth quarter of 2001. The Company has determined that the
transaction should have been recorded in the first quarter of 2001. As such, the
Company has recorded a charge to operations for $217,075, which increased
selling, general, and administrative expenses and net loss by $217,075. Net loss
per share increased from ($0.06) to ($0.11). The reduction in the net loss for
the three-month period ended March 31, 2002 vs. the same period in 2001 is due
primarily to this restatement of the first quarter 2001 income statement as
mentioned above.
Revenues in the three-month period ended March 31, 2002 were $1,156,930
compared to $610,079 for the same period in 2001. Sales of our Sports
Performance products, which includes ENDUROX R4 and ACCELERADE, increased 128%
for the three months ended March 31, 2002 compared to the same period in 2001.
ACCELERADE was launched in second quarter 2001 and did not contribute to
revenues in the three-month period ending March 31, 2001.
Gross profit margin on product sales increased to 51.3% for the three
months ended March 31, 2002 compared to 48.4% for the three months ended March
31, 2001. The primary reasons for the increase in gross profit margin on product
sales for the three months ended March 31, 2002 compared to the same period in
2001 were that in first quarter 2001 we offered payment discounts to customers
to accelerate cash flow and we wrote off $15,565 (2.5% of sales) of SATIETROL
packaging components no longer considered appropriate. We discontinued offering
payment discounts in the second quarter of 2001.
9
Selling, general, and administrative ("S, G, & A") expenses increased
to $817,595 for the three-month period ended March 31, 2002 from $756,980 for
the three-month period ended March 31, 2001. Our increased S, G, & A is due
primarily to an increase in advertising expenses as we expand our advertising
and marketing campaign for 2002 as well as additional salaries as we expand our
marketing and sales team.
Research and development expenses were $22,838 for the three months
ended March 31, 2002 versus $21,763 for the three months ended March 31, 2001.
We anticipate research and development expenses will increase as additional
clinical trials 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 March 31, 2002, the Company's current assets exceeded its current
liabilities by approximately $4.3 million with a ratio of current assets to
current liabilities of approximately 8.9 to 1. Cash decreased $628,184 from
December 31, 2001 primarily because of our net loss for the first quarter of
2002 as well as an increase in accounts receivable from December 31, 2001 which
was offset by an increase in accounts payable/accrued expenses of $217,508.
Inventory levels remained relatively the same at March 31, 2002 as compared to
December 31, 2001.
At March 31, 2002, total inventory included approximately $1,150,000 of
SATIETROL. On that date, the SATIETROL inventory had an average remaining shelf
life of approximately 2 years. The Company is identifying additional sales
outlets for this inventory, and is confident that it will be able to sell this
inventory for at least its cost by the end of 2002.
Based on our current plans and level of operations, we do not see a
need for additional cash in the next twelve months.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
None.
10
(B) REPORTS ON FORM 8-K:
On April 8, 2002, the Company filed a Current Report on Form 8-K dated
April 1, 2002, reporting, under Item 4, a change in our independent auditors
from Larson, Allen, Weishair & Co., LLP to Richard A. Eisner & Co. to serve as
the independent public accountants to audit the financial statements for the
fiscal year ended December 31, 2002.
On April 11, 2002, the Company filed a Current Report on Form 8-K dated
April 1, 2002, reporting, under Item 5, the increase in size of the Board of
Directors to six and the appointment of Michael Cahr to the Board of Directors.
In addition, on this report was the announcement of the Annual Meeting to take
place on Tuesday, June 18, 2002 at 10:00 AM local time at the Woodbridge Hilton,
Iselin, NJ 08830.
On May 3, 2002, the Company filed a Current Report on Form 8-K dated
April 30, 2002, reporting, under Item 5, the increase in size of the Board of
Directors to seven and the appointment of Joseph Harris to the Board of
Directors.
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
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STEPHEN P. KUCHEN
Vice President (Principal Financial
Officer and Principal
Accounting Officer)
Date: MAY 14, 2002
11