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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, 2005
-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 May 16, 2005, there were 10,237,045 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
Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004.............4
Statements of Operations (Unaudited) for the three months ended
March 31, 2005 and March 31, 2004................................................5
Statements of Cash Flows (Unaudited) for the three months ended
March 31, 2005 and March 31, 2004................................................6
Notes to Financial Statements.....................................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................10
ITEM 3. CONTROLS AND PROCEDURES...................................................13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.........................................................13
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds...............14
ITEM 3. Defaults Upon Senior Securities...........................................14
ITEM 4. Submission of Matters to a Vote of Security Holders.......................14
ITEM 5. Other Information.........................................................14
ITEM 6. Exhibits..................................................................14
SIGNATURES............................................................................14
2
This Report contains forward-looking statements concerning our financial
condition, results of operations and business, including, without limitation,
statements pertaining to:
o The development and testing of new products and the expansion of
the market for our current products;
o Implementing aspects of our business plans;
o Financing goals and plans;
o Our existing cash and whether and how long these funds will be
sufficient to fund our operations; and
o Our raising of additional capital through future equity
financings.
These and other forward-looking statements are primarily in the section
entitled "Management's Discussion and Analysis of Financial Conditions and
Results of Operations". Generally, you can identify these statements because
they use phrases like "anticipates," "believes," "expects," "future," "intends,"
"plans," and similar terms. These statements are only predictions. Although we
do not make forward-looking statements unless we believe we have a reasonable
basis for doing so, we cannot guarantee their accuracy, and actual results may
differ materially from those we anticipated due to a number of uncertainties,
many of which are unforeseen. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Report on
Form 10-QSB. Our actual results could differ materially from those anticipated
in these forward-looking statements for many reasons, including those stated in
this Report. We undertake no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
We cannot be sure when or if we will be permitted by regulatory agencies to
undertake clinical trials or to commence any particular phase of clinical
trials. Because of this, statements regarding the expected timing of clinical
trials cannot be regarded as actual predictions of when we will obtain
regulatory approval for any "phase" of clinical trials.
We believe it is important to communicate our expectations to our
investors. There may be events in the future, however, that we are unable to
predict accurately or over which we have no control. Cautionary language in this
Report provides examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations we describe in our
forward-looking statements.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACIFICHEALTH LABORATORIES, INC.
BALANCE SHEETS
March 31, December 31,
2005 2004
------------- -------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 346,186 $ 25,832
Accounts receivable, net 1,066,791 430,580
Inventories 1,516,992 1,760,064
Prepaid expenses 188,807 215,091
------------- -------------
Total current assets 3,118,776 2,431,567
Property and equipment, net 101,465 111,273
Deposits 34,394 34,396
------------- -------------
Total assets $ 3,254,635 $ 2,577,236
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 461,267 $ 373,781
Accounts payable and accrued expenses 1,105,434 1,580,094
Advance payments from customers 1,213,865 376,000
------------- -------------
Total current liabilities 2,780,566 2,329,875
------------- -------------
Stockholders' equity:
Preferred stock 948,053 -
Common stock, $.0025 par value; authorized
50,000,000 shares; issued and outstanding:
10,237,045 shares at March 31, 2005 and
10,237,045 shares at December 31, 2004 25,593 25,592
Additional paid in capital 15,778,864 15,778,865
Accumulated deficit (16,278,441) (15,557,096)
------------- -------------
474,069 247,361
------------- -------------
Total liabilities and stockholders' equity $ 3,254,635 $ 2,577,236
============= =============
4
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
(UNAUDITED)
2005 2004
------------- -------------
Revenues:
Net product sales $ 997,661 $ 2,303,597
Cost of goods sold: 604,398 1,129,815
------------- -------------
Gross profit 393,263 1,173,782
Selling, general and administrative expenses 1,005,354 1,093,694
Research & development expenses 73,023 38,372
Depreciation expense 16,162 9,509
------------- -------------
1,094,539 1,141,575
------------- -------------
Net operating income (loss) (701,276) 32,207
------------- -------------
Other income (expense)
Interest income 1,607 2,601
Interest expense (19,562) (27,031)
------------- -------------
(17,955) (24,430)
------------- -------------
Income (loss) before income taxes (719,231) 7,777
Provision (benefit) for income taxes 2,115 -
------------- -------------
Net income (loss) $ (721,346) $ 7,777
============= =============
Basic and diluted income (loss) per share $ (0.07) $ 0.00
============= =============
Weighted average common shares - Basic 10,237,045 10,218,688
============= =============
Weighted average common shares - Diluted 11,078,001 10,993,993
============= =============
5
PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31, 2004
(UNAUDITED)
2005 2004
------------- -------------
Cash flows from operating activities:
Net income (loss) (721,346) 7,777
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 16,162 9,509
Intrinsic value of stock options granted - 14,369
Changes in assets and liabilities:
Decrease (Increase) in accounts receivable (636,211) (1,070,711)
Decrease (Increase) in inventories 243,072 (286,879)
Decrease (Increase) in prepaid expenses 26,284 (30,312)
Decrease (Increase) in deposits 2 (8,425)
Increase (Decrease) in accounts payable/accrued
expenses (474,660) 667,925
Increase (Decrease) in advance payments from customers 837,865 -
------------- -------------
Net cash used in operating activities (708,832) (696,747)
------------- -------------
Cash flows from investing activity:
Purchase of fixed assets (6,353) (48,505)
------------- -------------
Net cash used in investing activity (6,353) (48,505)
------------- -------------
Cash flows from financing activities:
Issuance of notes payable 1,208,054 1,210,103
Repayments of notes payable (1,120,568) (1,054,768)
Preferred stock issued 1,000,000 -
Costs associated with preferred stock issuance (51,947)
Common stock issued - 42,750
Fees in connection with private placement - (68,635)
Common stock options/warrants exercised - -
------------- -------------
Net cash used in financing activities 1,035,539 129,450
------------- -------------
Net decrease in cash 320,354 (615,802)
Cash, beginning balance 25,832 1,798,703
------------- -------------
Cash, ending balance $ 346,186 $ 1,182,901
============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 19,562 $ 27,031
============= =============
6
PACIFICHEALTH LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(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, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. 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, 2004.
The accompanying financial statements have been prepared assuming that
PacificHealth Laboratories, Inc. (the "Company") will continue as a
going concern. The Company has incurred significant recurring operating
losses and significant negative cash flows from operations. The Company
has an accumulated deficit of $16,278,441 as of March 31, 2005. The
Company also has limited ability to borrow additional funds under its
line of credit and is dependent on the completion of a financing in
order to continue operations. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
The Company has raised approximately $1 million in cash from the sale of
its Series A Convertible Preferred Stock in January 2005. The Company
continues to seek additional financing from certain strategic partners
and other equity investors. The Company may explore other strategic
alternatives. In addition, the Company is considering reducing operating
expenses and has also been able to negotiate extended credit terms with
certain vendors, including the Company's contract manufacturer. While
the Company is aggressively pursuing the opportunities and actions
described above, there can be no assurance that the Company will be
successful in its efforts.
2. REVENUE RECOGNITION
Sales are recognized when all of the following criteria are met: (1)
persuasive evidence that an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the seller's price to the
buyer is fixed and determinable; and, (4) collectibility is reasonably
assured. Sales are recorded net of incentives paid to customers.
In December 2003, the Company entered into a purchasing agreement with a
significant customer for its strength training products whereby all
unsold product is subject to a right of return provision if certain
minimum levels of retail sales in a 12-month period of time from the
date of initial sale are not achieved. In March 2005, the Company was
informed by its major customer that they will discontinue carrying the
Company's strength training products. The Company and the customer have
agreed to a discount program in the second quarter of 2005 to sell
through as much of the retail inventory as possible. It is likely that
the Company will absorb a large portion of the discount. Given the
ongoing significant business relationship between the Company and the
customer, the Company may accept returns of product from the customer
after a period of special promotion and discounting if other
alternatives are not agreed to.
In April 2004, the Company entered into a purchasing agreement with the
same significant customer for all other products sold to this customer
whereby all unsold product is subject to return provisions identical or
similar to the one disclosed above. Through December 31, 2004, in
addition to the four criteria described above, the Company recognized
revenue related to these products after analyzing retail sell-through
data provided by the customer and the Company's expectation of future
customer sell-through trends. A new agreement was signed in April 2005
that increased minimum levels of retail sell-through requirements.
Starting January 1, 2005, the Company will recognize revenue when its
products are sold through to the consumer by its major customer.
7
3. INVENTORIES
As of March 31, 2005 and December 31, 2004, inventories consisted of the
following:
03/31/05 12/31/04
------------ ------------
Raw Materials $ 51,161 $ 104,745
Work in process - 70,020
Packaging supplies 64,769 70,015
Finished goods 852,320 1,324,284
Finished goods on consignment 548,742 191,000
------------ ------------
$ 1,516,992 $ 1,760,064
============ ============
4. STOCK BASED COMPENSATION
The Company did not grant any options to employees or consultants during
the first three months of 2005. During the first three months of 2005,
13,500 options previously issued to employees and 60,875 options
previously issued to consultants expired.
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:
Quarter Ended March 31,
----------------------------
2005 2004
------------ ------------
Reported net (loss) income $ (721,346) $ 7,777
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 (59,067) (42,802)
------------ ------------
Pro forma net (loss) income $ (780,413) $ (35,025)
============ ============
Basic and diluted (loss) per share:
As reported $ (0.07) $ 0.00
Pro forma $ (0.08) $ (0.00)
5. INCOME TAXES
The Company has approximately $14,467,000 in Federal net operating loss
carryovers that were generated through March 31, 2005 and are available
to offset future taxable income in calendar years 2005 through 2025.
The components of the Company's deferred tax assets as of March 31, 2005
and December 31, 2004 are as follows:
03/31/05 12/31/04
------------ ------------
Net operating loss carry forwards $ 5,910,000 $ 5,498,000
Inventory reserve 272,000 272,000
Valuation allowance (6,182,000) (5,770,000)
------------ ------------
Deferred tax asset $ - $ -
6. NOTES PAYABLE
Included in notes payable at March 31, 2005 is $420,533 payable to USA
Funding. During the second quarter of 2003, the Company secured a
$750,000 revolving asset-based credit facility from USA Funding of
Dallas, TX. This facility was for one year commencing on June 1, 2003.
This credit facility has been increased to $1,000,000 and has been
renewed for 2 years commencing June 1, 2004. The amount of available
credit is based on the value of the Company's eligible receivables from
time to time. Eligible receivables include those receivables that have
payment terms equal to or less than net 45 days or have been outstanding
for less than 90 days. The receivables are financed with recourse. This
credit facility bears interest at a rate of prime plus 1.75% as well as
a 0.75% discount rate on all advances. At March 31, 2005,
8
the Company had approximately $200,000 of availability under this credit
facility and, as of May 13, 2005 the Company had approximately $150,000
of availability under this credit facility.
7. CONCENTRATION
Our two largest customers accounted for approximately 14% and 21%,
respectively, of net sales for the three months ended March 31, 2005 and
44% and 20%, respectively, of net sales for the three months ended March
31, 2004. At March 31, 2005, the company has deferred $716,000 in
revenues related to one of these customers. At March 31, 2005, amounts
due from these two customers represented approximately 32% and 30%,
respectively, of accounts receivable. At December 31, 2004, amounts due
from these two customers represented approximately 23% and 13%,
respectively, of accounts receivable.
One supplier accounted for approximately 10% of total purchases for the
three months ended March 31, 2005 and 43% of total purchases for the
three months ended March 31, 2004. At March 31, 2005 and December 31,
2004, amounts due to this vendor represented approximately 69% and 69%,
respectively, of accounts payable/accrued expenses.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In this Report on Form 10-QSB, the terms the "Company," "we", "us," and
"our" refer to PacificHealth Laboratories, Inc.
(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
The Company's first sports performance product, ENDUROX (R), was
introduced in March 1996 with commercial sales beginning in May 1996. In March
1997, the Company extended the ENDUROX line of products with ENDUROX EXCEL (R).
In February 1999, the Company introduced ENDUROX (R) R(4) (R)
Performance/Recovery Drink to be taken following exercise. In clinical studies
performed or funded by the Company, ENDUROX R(4) has demonstrated a number of
exercise-related benefits including enhanced performance, extended endurance,
and decreased post-exercise muscle damage. In June 2001, the Company introduced
ACCELERADE (R) Sports Drink, to be taken during exercise using the same,
patented technology as ENDUROX R(4). Research studies funded by the Company have
shown that ACCELERADE is significantly better than conventional sports drinks in
improving endurance during exercise. In 2003, the Company introduced a
ready-to-drink form of ACCELERADE. In December 2003, the Company acquired all of
the outstanding shares of Strong Research Corp. ("STRONG"), a research-based
educational sports nutrition company, in exchange for 150,000 shares of the
Company's common stock. STRONG had no material revenues but is actively involved
in the scientific education of athletes on proper nutrition utilizing leading
Ph.D.-level scientists in sports nutrition. In March 2004, the Company
introduced The NUTRIENT TIMING SYSTEM ("NTS"), the first suite of products
specifically engineered for during, immediate post-workout, and subsequent use
by strength-training athletes. The NTS product line was launched in GNC in March
2004 and sold exclusively in GNC locations through January 2005. In March 2005,
the Company was informed by representatives of GNC that GNC would discontinue
the NTS line of products.
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, the
Company 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% three and one-half hours after eating. In January 2001, the
Company 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 terminated the Licensing Agreement in September 2002 with all
rights reverting back to the Company. In the third quarter of 2003, the Company
funded clinical studies performed at a private research firm that showed a
statistically significant reduction in caloric intake in overweight individuals
using a new improved form of SATIETROL in both beverage and tablet form. The
Company will conduct additional studies on SATIETROL in 2005.
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 the primary
characteristics of Type 2 diabetes. Research has suggested that cholecystokinin
(CCK) may play a role in insulin release and glucose regulation. The Company's
research in this area has focused upon the development of nutritional products
that can help Type 2 diabetics lose weight by controlling appetite while
improving glucose regulation. The Company will initiate clinical trials in the
Type 2 diabetes area in 2005.
(b) RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005 VS. MARCH 31, 2004
We recorded a net loss of ($721,346) or ($0.07) per share, for the three
months ended March 31, 2005 compared to net income of $7,777 or $0.00 per share,
for the three months ended March 31, 2004. The net loss for the three-month
period
10
ended March 31, 2005 as compared to the net income in the same period in 2004 is
due primarily to decreased revenues as detailed below.
Revenues in the three-month period ended March 31, 2005 decreased to
$997,661 from $2,303,597 for the same period in 2004. Revenues decreased as the
first quarter of 2004 included significant opening orders for the Company's
COUNTDOWN post-workout drink for the strength-training athlete. This product has
been discontinued by the Company's customer. As a result of signing a new
purchasing agreement that increased certain sell-through minimums, the Company
has started to recognize revenue based upon when its products are sold through
to the consumer by its major customer. As a result, the Company has deferred
approximately $716,000 in shipments to its major customer in the quarter ended
March 31, 2005.
For the three months ended March 31, 2005, gross profit margin was 39.4%
compared to 51.0% for the three months ended March 31, 2004. The decrease in
gross profit margin for the three months ended March 31, 2005 compared to the
same period in 2004 is primarily due to lower gross profit margins on new
products, promotional expenses paid to promote the Company's products that are
deducted from revenues, and freight on deferred revenue shipments. From time to
time, the Company may incur additional promotional expenses in connection with
the sale of its products. These promotional expenses should result in higher
unit volumes of sales of these products. During the quarter ended March 31,
2005, the Company incurred $36,000 (3.6% of sales) in freight costs related to
shipments that will be recognized as revenue in a subsequent period when the
Company's products are sold through to the end-user customer.
Selling, general, and administrative ("S, G, & A") expenses decreased to
$1,005,354 for the three-month period ended March 31, 2005 from $1,093,694 for
the three-month period ended March 31, 2004. S, G, & A expenses decreased due
primarily to decreases in advertising and marketing expenses associated with the
NTS suite of products.
Research and development expenses were $73,023 for the three months
ended March 31, 2005 compared to $38,372 for the three months ended March 31,
2004. The increase was due to our aggressive research and development plan put
in place as we continue to seek out additional patents and claims for our
products. We anticipate research and development expenses will increase as we
conduct additional clinical trials on all of our products.
Interest expense was $19,562 for the three months ended March 31, 2005
compared to $27,031 for the three months ended March 31, 2004. Interest expense
is incurred in connection with our accounts receivable funding from USA Funding
described in the "Liquidity and Capital Resources" section below.
(c) LIQUIDITY AND CAPITAL RESOURCES
The Company's cash balance as of the date of this filing was
approximately $265,000. As of May 13, 2005, the Company also had approximately
$150,000 of availability under its credit facility. Based on this, without any
additional financing, the Company can continue to operate for 60-90 days from
the date of this filing. As a result of its current liquidity position, the
Company's auditors in the December 31, 2004 financial statements have expressed
doubt that the Company can continue as a going concern. The Company's financial
statements do not include any adjustments related to this uncertainty.
Management has responded to the aforementioned risks by continuing to
seek additional financing. In January 2005, the Company obtained an investment
of $1,000,000 from Hormel Health Labs, LLC ("Hormel"), the terms of which are
discussed below. The Company may explore other strategic alternatives. In
addition, the Company is considering reducing operating expenses. The Company
has also been able to finance its operations through an increase in accounts
payable by negotiating extended terms from its vendors. While the Company is
aggressively pursuing the opportunities and actions described above, there can
be no assurance that the Company will be successful in its efforts.
At March 31, 2005, the Company's current assets exceeded its current
liabilities by approximately $338,000 with a ratio of current assets to current
liabilities of approximately 1.1 to 1. At March 31, 2005, cash on hand was
$346,186, an increase of $320,354 from December 31, 2004, primarily as the
result of the investment by Hormel (see below) as well as an increase of
$636,211 in accounts receivable, a decrease in inventory of $243,072, a decrease
in accounts payable/accrued expenses of $474,660, and an increase in advance
payments from customers of $837,865 from December 31, 2004. Accounts receivable
increased and inventory decreased at March 31, 2005 from December 31, 2004 due
to higher revenues in the first quarter of 2005 as compared to fourth quarter of
2004. Advance payments from customers increased as the Company has deferred
revenues related to shipments to a major customer.
11
Notes payable increased $87,486 to $461,267 at December 31, 2004
primarily as a result of the increased use of our accounts receivable funding
from USA Funding due to higher first quarter sales in 2005 compared to fourth
quarter 2004. During the second quarter of 2003, the Company secured a $750,000
asset-based credit facility from USA Funding of Dallas, TX. This facility was
for one year commencing on June 1, 2003. This credit facility has been increased
to $1,000,000 and has been renewed for 2 years commencing June 1, 2004. 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 1.75% as well as a 0.75% discount rate on all advances. At March 31,
2005, we had approximately $200,000 of availability under this credit facility
and as of May 13, 2005 we had approximately $150,000 of availability under this
credit facility.
On January 28, 2005, the Company entered into a Series A Preferred Stock
Purchase Agreement and related agreements with Hormel pursuant to which the
Company issued and sold 90,909 shares of Series A Preferred Stock for an
aggregate purchase price of $1,000,000 or $11.00 per share. The terms of
conversion and the preferences relating to the Series A Preferred Stock are
described in the following paragraph. The shares Series A Preferred Stock issued
to Hormel are convertible into an aggregate 909,090 shares of common stock,
subject to adjustment. In connection with the Series A Stock Purchase Agreement,
the Company and Hormel entered into an Investors' Rights Agreement on the same
date. Under the Investors Rights Agreement, the Company agreed, upon request by
the holders of the Series A Preferred Stock, and subject to customary terms and
conditions, to file a registration statement with the Securities and Exchange
Commission (the "SEC") registering for resale the shares of common stock
issuable upon conversion of the Series A Preferred Stock. Under the Investors'
Rights Agreement, the Company also agreed to include the common stock issuable
upon conversion of the Series A Preferred Stock in any other registration
statement the Company may file with the SEC. The Investors' Rights Agreement
prohibits the Company from granting registration rights superior to those under
the Investors Rights Agreement. Under the Investors' Rights Agreement, the
holders of the Series A Preferred Stock also are granted a right to participate
on a pro rata basis in future sales of equity securities (or securities
exercisable for or convertible into equity securities). As long as at least 50%
of the original shares of the Series A Preferred Stock remain outstanding, the
holders have the right to designate an individual to be nominated to the Company
Board of Directors, provided that such designee would be considered an
independent director under the Exchange Act. Hormel has not yet indicated
whether it will exercise this right or the identities of proposed designees.
Also in connection with this transaction, the Company, Hormel and Dr. Robert
Portman, the Chairman of the Company's Board of Directors and Chief Scientific
Officer, entered into a Right of First Refusal and Co-Sale Agreement on January
28, 2005. Under this agreement, the Company and Hormel have the right of first
refusal to purchase shares of the Company's common stock, which are held by Dr.
Portman and which he wishes to sell, at the price and terms offered by a third
party. In addition, if the right of first refusal is not exercised in connection
with any sale by Dr. Portman, Hormel will have the right to require a portion of
its shares to be included with Dr. Portman's sale to a third party. Certain
sales by Dr. Portman will be exempt from these restrictions, including public
sales by Dr. Portman pursuant to Rule 144.
As of May 13, 2005, the Company had outstanding 90,909 shares of its
Series A Preferred Stock outstanding. In the event of a liquidation of the
Company, sale of substantially all of its assets, and certain mergers and
consolidations involving the Company, the holders of the Series A Preferred
Stock are entitled to be paid an amount equal to the greater of: (i) the
original purchase price for the Series A Preferred Stock ($11 per share) plus
accrued dividends, if any, or (ii) the amount they would have received as
holders of the number of shares of commons stock into which the Series A
Preferred Stock is then convertible (the "Series A Liquidation Amount"). In the
event of the sale of substantially all of the Company's assets and certain
mergers and consolidations involving the Company, if the Company does not effect
a dissolution of the Company under the General Corporation Law of the State of
Delaware within 60 days after such event, then the holders of a majority of the
shares of the Series A Preferred Stock then outstanding will have the right to
require the redemption of such shares at a price per share equal to the Series A
Liquidation Amount. There are no sinking fund provisions applicable to the
Series A Preferred Stock. Cumulative annual dividends will accrue at the rate of
$.022 on each share of Series A Preferred Stock outstanding. The Company is not
required to pay accrued dividends except in connection with liquidation, merger
or sale of the Company and certain other events. However, no dividends may be
paid on common stock unless all accrued dividends on the Series A Preferred
Stock have been paid. The holders of the Series A Preferred Stock are also
entitled to participate in any dividends paid to the holders of common stock on
an as-converted basis. The holders of outstanding shares of Series A Preferred
Stock shall be entitled to cast the number of votes equal to the number of whole
shares of Common Stock into which the shares of Series A Preferred Stock held by
such holder are convertible as of the record date for determining stockholders
entitled to vote on such matter. Subject to certain adjustments, each share of
the Series A Preferred Stock is convertible at the option of the holder into ten
shares of common stock. The number of shares of common stock issuable upon
conversion of the Series A Preferred Stock will increase, pursuant to a weighted
average formula in the event that the Company issues common stock at a price
below $1.10 per share, with certain exceptions.
12
On April 28, 2005, the Company filed a Certificate of Designations (the
"Certificate") creating the Series B Preferred Stock with the Secretary of the
State of the State of Delaware. The Certificate was effective as of the date
filed. Under the Certificate, 45,455 shares of authorized but unissued preferred
stock were designated as Series B Preferred Stock. The Company filed the
Certificate in contemplation of proposed financing transactions, but does not
have a binding agreement as to an any financing. The Company has not issued any
shares of Series B Preferred Stock to date. Cumulative annual dividends will
accrue at the rate of $.022 on each share of Series B Preferred Stock
outstanding. The Company will not be required to pay accrued dividends except in
connection with liquidation, dissolution, merger, consolidation or sale all or
substantially all of the assets of the Company and certain other events.
However, no cash dividends may be paid on common stock unless all accrued but
unpaid dividends, if any, on Series B Preferred Stock have been paid. The
holders of Series B Preferred Stock will also be entitled to participate in any
dividends paid to the holders of common stock on an as-converted basis. In the
event of a liquidation of the Company, sale of all or substantially all of its
assets, and certain mergers and consolidations involving the Company, the
holders of the Series B Preferred Stock will be entitled to be paid an amount
equal to the greater of: (i) the original purchase price for the Series B
Preferred Stock plus accrued but unpaid dividends, if any, or (ii) the amount
they would have received as holders of the number of shares of common stock into
which their shares of Series B Preferred shares Stock then convertible. Subject
to certain adjustments, each share of Series B Preferred Stock will be
convertible at the option of the holder into ten shares of common stock. The
number of shares of common stock issuable upon conversion of the Series B
Preferred Stock will increase, pursuant to a weighted average formula set forth
in the Certificate, in the event the Company issues common stock at a price
below $1.10 per share, with certain exceptions. The holders of the Series B
Preferred Stock will be entitled to vote on an as-converted basis with the
holders of the common stock and the Series A Preferred Stock together as a
single class on all matters submitted for a vote of the holders of common stock.
The Certificate also provides that in certain instances, the consent of the
holders of at least 66% of the outstanding shares of Series B Preferred Stock
will be required for the Company to take certain actions including: (i)
liquidate, dissolve, merge or consolidate the Company or sell all or
substantially all of its assets, unless the transaction would result in a
certain rate of return for the holders of Series B Preferred Stock; (ii) amend
the Company's Certificate of Incorporation or Bylaws in a manner adverse to the
Series B Preferred Stock; (iii) create an additional class or series of stock
senior to or on par with the Series B Preferred Stock; (iv) purchase, redeem or
pay cash dividends on common stock; or (v) incur certain types of debt in excess
of $750,000.
The Company has no material commitments for capital expenditures.
(d) OFF-BALANCE SHEET ARRANGEMENTS
There are no off-balance sheet arrangements between the Company and any
other entity that have, or are reasonably likely to have, a current or future
effect on the Company's financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources.
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-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of March 31, 2005, the end of the
period covered by this report, 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 and are operating in an effective manner.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
13
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company issued 90,909 shares of its newly created Series A
Convertible Preferred Stock to Hormel Health Labs, LLC. A description of this
transaction is contained in the Company's Current report on Form 8-K, dated
January 24, 2005 and filed January 28, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit No. Description of Exhibit
----------- -----------------------------------------------------
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.
14
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
Chief Financial Officer and Chief Operating
Officer (Principal Financial Officer and
Principal Accounting Officer)
Date: MAY 16, 2005
15