UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(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, 2010
-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 registrant 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
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act 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
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files)
Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer”, and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
accelerated filer
¨
|
Accelerated
filer
¨
|
|
Non-accelerated
filer
¨
(Do not check if a smaller reporting company)
|
Smaller
reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-25 of the Exchange Act) Yes
¨
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 16,485,257 shares of common stock, par
value $0.0025, outstanding as of October 29, 2010.
PACIFICHEALTH
LABORATORIES, INC.
TABLE
OF CONTENTS
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
|
|
3
|
|
|
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
|
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ITEM
1. FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Balance
Sheets as of September 30, 2010 (Unaudited) and December 31,
2009
|
|
4
|
|
|
|
|
|
Statements
of Operations (Unaudited) for the three and nine months ended September
30, 2010 and 2009
|
|
5
|
|
|
|
|
|
Statements
of Cash Flows (Unaudited) for the nine months ended September 30, 2010 and
2009
|
|
6
|
|
|
|
|
|
Notes
to Unaudited Financial Statements
|
|
7
|
|
|
|
|
|
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
14
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|
|
|
|
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
17
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|
|
|
|
|
|
ITEM
4T.
|
CONTROLS
AND PROCEDURES
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17
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PART
II.
OTHER
INFORMATION
|
|
|
|
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|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
|
17
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|
|
|
|
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
17
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|
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|
|
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|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
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17
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|
|
|
|
|
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ITEM
4.
|
REMOVED
AND RESERVED
|
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17
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|
|
|
|
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|
ITEM
5.
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OTHER
INFORMATION
|
|
17
|
|
|
|
|
|
|
ITEM
6.
|
EXHIBITS
|
|
18
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|
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SIGNATURES
|
|
|
18
|
Cautionary
Note Regarding Forward-Looking Statements
As
used herein, unless we otherwise specify, the terms the “Company,” "we," "us,"
and "our" means PacificHealth Laboratories, Inc.
This
Report contains forward-looking statements concerning our financial condition,
results of operations and business, including, without limitation, statements
pertaining to:
|
|
·
|
The development, testing, and
commercialization of new products and the expansion of markets for our
current products;
|
|
|
·
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The receipt of royalty
payments from our agreements with business
partners;
|
|
|
·
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Implementing aspects of our
business plan;
|
|
|
·
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Financing goals and
plans;
|
|
|
·
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Our existing cash and whether
and how long these funds will be sufficient to fund our operations;
and
|
|
|
·
|
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 Condition and Results of
Operations". Generally, you can identify these statements because they include
phrases such as "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-Q. 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.
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
PACIFICHEALTH
LABORATORIES, INC.
BALANCE
SHEETS
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
427,561
|
|
|
$
|
281,159
|
|
|
Other
short-term investments
|
|
|
150,000
|
|
|
|
175,000
|
|
|
Accounts
receivable, net
|
|
|
753,934
|
|
|
|
763,288
|
|
|
Inventories
|
|
|
776,281
|
|
|
|
806,212
|
|
|
Prepaid
expenses
|
|
|
102,021
|
|
|
|
92,702
|
|
|
Tax
loss receivable
|
|
|
-
|
|
|
|
303,931
|
|
|
Total
current assets
|
|
|
2,209,797
|
|
|
|
2,422,292
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
63,192
|
|
|
|
110,904
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,895
|
|
|
|
10,895
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,283,884
|
|
|
$
|
2,544,091
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
75,000
|
|
|
$
|
-
|
|
|
Notes
payable
|
|
|
41,815
|
|
|
|
12,182
|
|
|
Accounts
payable and accrued expenses (Includes related party of $11,000 and $0,
respectively)
|
|
|
1,031,426
|
|
|
|
1,042,051
|
|
|
Deferred
revenue
|
|
|
52,034
|
|
|
|
306,239
|
|
|
Total
current liabilities
|
|
|
1,200,275
|
|
|
|
1,360,472
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
Common
stock, $.0025 par value; authorized 50,000,000 shares; issued and
outstanding: 16,485,257 and 15,624,017 shares,
respectively
|
|
|
41,213
|
|
|
|
39,060
|
|
|
Additional
paid-in capital
|
|
|
20,149,312
|
|
|
|
20,031,599
|
|
|
Accumulated
deficit
|
|
|
(19,106,916
|
)
|
|
|
(18,887,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,083,609
|
|
|
|
1,183,619
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,283,884
|
|
|
$
|
2,544,091
|
|
The
accompanying notes should be read in conjunction with the financial
statements.
PACIFICHEALTH
LABORATORIES, INC.
STATEMENTS
OF OPERATIONS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
product sales
|
|
$
|
1,999,489
|
|
|
$
|
2,376,291
|
|
|
$
|
6,204,060
|
|
|
$
|
6,796,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
1,123,711
|
|
|
|
1,170,550
|
|
|
|
3,369,381
|
|
|
|
3,564,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
875,778
|
|
|
|
1,205,741
|
|
|
|
2,834,679
|
|
|
|
3,232,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
324,056
|
|
|
|
569,705
|
|
|
|
908,403
|
|
|
|
1,340,717
|
|
General
and administrative (Includes related party consulting of $22,000 for the
periods ended
September
30, 2010)
|
|
|
637,654
|
|
|
|
808,973
|
|
|
|
2,146,247
|
|
|
|
2,460,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
961,710
|
|
|
|
1,378,678
|
|
|
|
3,054,650
|
|
|
|
3,801,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before other (expense) income and provision for income
taxes
|
|
|
(85,932
|
)
|
|
|
(172,937
|
)
|
|
|
(219,971
|
)
|
|
|
(568,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
-
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
4,000
|
|
|
Interest
income
|
|
|
286
|
|
|
|
343
|
|
|
|
791
|
|
|
|
3,445
|
|
|
Interest
expense
|
|
|
(1,725
|
)
|
|
|
(1,501
|
)
|
|
|
(4,696
|
)
|
|
|
(3,758
|
)
|
|
|
|
|
(1,439
|
)
|
|
|
(1,158
|
)
|
|
|
95
|
|
|
|
3,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before provision for income taxes
|
|
|
(87,371
|
)
|
|
|
(174,095
|
)
|
|
|
(219,876
|
)
|
|
|
(564,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(87,371
|
)
|
|
$
|
(174,095
|
)
|
|
$
|
(219,876
|
)
|
|
$
|
(566,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares - basic and diluted
|
|
|
16,366,561
|
|
|
|
15,296,300
|
|
|
|
16,032,559
|
|
|
|
14,815,232
|
|
The
accompanying notes should be read in conjunction with the financial
statements.
PACIFICHEALTH
LABORATORIES, INC.
STATEMENTS
OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(UNAUDITED)
|
|
|
2010
|
|
|
2009
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(219,876
|
)
|
|
$
|
(566,638
|
)
|
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
84,361
|
|
|
|
141,659
|
|
|
Bad
debts
|
|
|
9,144
|
|
|
|
9,000
|
|
|
Equity
instrument-based expense
|
|
|
111,276
|
|
|
|
232,615
|
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
210
|
|
|
|
(1,081,013
|
)
|
|
Inventories
|
|
|
29,931
|
|
|
|
(192,549
|
)
|
|
Prepaid
expenses
|
|
|
(9,319
|
)
|
|
|
(5,281
|
)
|
|
Tax
loss receivable
|
|
|
303,931
|
|
|
|
-
|
|
|
Deposits
|
|
|
-
|
|
|
|
12,000
|
|
|
Accounts
payable and accrued expenses (Includes related party of $11,000 and $0
respectively)
|
|
|
(2,035
|
)
|
|
|
975,275
|
|
|
Deferred
revenue
|
|
|
(254,205
|
)
|
|
|
(24,732
|
)
|
|
Net
cash provided by (used in) operating activities
|
|
|
53,418
|
|
|
|
(499,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from sales of other short-term investments
|
|
|
25,000
|
|
|
|
125,000
|
|
|
Purchase
of property and equipment
|
|
|
(36,649
|
)
|
|
|
(182,386
|
)
|
|
Net
cash used in investing activities
|
|
|
(11,649
|
)
|
|
|
(57,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
borrowings on line of credit
|
|
|
75,000
|
|
|
|
-
|
|
|
Issuance
of notes payable
|
|
|
70,293
|
|
|
|
59,751
|
|
|
Repayments
of notes payable
|
|
|
(40,660
|
)
|
|
|
(83,970
|
)
|
|
Common
stock issued
|
|
|
-
|
|
|
|
150,000
|
|
|
Net
cash provided by financing activities
|
|
|
104,633
|
|
|
|
125,781
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
146,402
|
|
|
|
(431,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning balance
|
|
|
281,159
|
|
|
|
888,993
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending balance
|
|
$
|
427,561
|
|
|
$
|
457,724
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
4,696
|
|
|
$
|
3,758
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
17,157
|
|
|
$
|
2,080
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
operating activity:
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock as payment for consulting services
|
|
$
|
8,590
|
|
|
$
|
-
|
|
The
accompanying notes should be read in conjunction with the financial
statements.
PACIFICHEALTH
LABORATORIES, INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
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 rules and regulations of the SEC.
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 nine months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010. 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-K for the year ended December 31,
2009.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenue and expenses during
the reporting period. Actual results may differ from these estimates. The
significant estimates and assumptions made by the Company are in the area of
revenue recognition, as it relates to customer returns, inventory obsolescence,
allowance for doubtful accounts, valuation allowances for deferred tax assets,
and valuation of share-based payments issued under Accounting Standards
Codification (“ASC”) 718, “Compensation - Stock
Compensation”.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has incurred significant operating
losses and has an accumulated deficit of $19,106,916 as of September 30, 2010.
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. In response to this, the
Company has made changes to its operating structure by planning to reduce its
fixed overhead by streamlining its management team, reallocating its sales
budget by investing in three dedicated Regional Sales Managers to give greater
and more effective coverage of key retailers, implementing new manufacturing and
inventory procedures to maximize cash flow, increasing marketing investment
against core business without increasing total sales and marketing expenses by
eliminating non-productive line items and reallocating them into the 2011
marketing strategy, and reinstituting an aggressive research program that will
lead to the introduction of two breakthrough products in 2011. The results of
the above are not expected to be recognized until sometime in 2011.
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) collectability is reasonably assured. Sales are recorded net of
incentives paid to customers.
The
Company has a sales agreement with GNC, a significant customer of the Company,
whereby unsold product is subject to return provisions. In determining
revenue recognition for products shipped to this customer, the Company follows
the guidance in ASC 605,”Revenue Recognition” (“ASC 605”). Certain of the
products shipped are under a “pay on scan” model and revenue is deferred by the
Company until such time as the customer sells through such products to the end
consumer. The amount of deferred revenue relating to pay on scan products
reflected in the accompanying balance sheets as of September 30, 2010 and
December 31, 2009 amounted to $52,034 and $306,239, respectively.
Prior to
April 1, 2009, for certain products not under a pay on scan model, the Company
recognized revenue identical to the pay on scan model. Effective April, 1,
2009, the Company commenced recognizing revenue on these products upon shipment
as the Company determined that it has met the criteria established in ASC 605,
specifically as it relates to the ability to estimate future returns. This
change in estimate for these product shipments was based primarily on the
Company’s determination that it could, based on historical secular analysis,
estimate its returns of such product shipments with such historical data
covering a five-year period.
3.
Other Short-Term Investments
Excess
cash is invested in auction rate securities with long-term maturities, the
interest rates of which are reset periodically (typically between 7 and 35 days)
through a competitive bidding process often referred to as a "Dutch
auction".
Accordingly,
the Company has classified such investments as other short-term investments.
During the nine months ended September 30, 2010, the Company redeemed $25,000 of
these investments.
The
Company measures fair value utilizing a hierarchy that prioritizes into three
levels the components of valuation techniques that are used to measure fair
value. The fair value hierarchy gives the highest priority to quoted
market prices (unadjusted) in active markets for identical assets or liabilities
(Level 1); lower priority to inputs other than quoted prices that are observable
for assets or liabilities, either directly or indirectly (Level 2); and the
lowest priority to unobservable inputs (Level 3).
The
Company has measured these investments as Level 2 inputs.
Inventories
consisted of the following:
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
|
December 31,
|
|
|
|
|
(Unaudited)
|
|
|
2009
|
|
|
Raw
materials
|
|
$
|
2,022
|
|
|
$
|
-
|
|
|
Work-in-process
|
|
|
-
|
|
|
|
-
|
|
|
Packaging
supplies
|
|
|
79,475
|
|
|
|
80,611
|
|
|
Finished
goods
|
|
|
669,239
|
|
|
|
645,095
|
|
|
Finished
goods on consignment
|
|
|
25,545
|
|
|
|
80,506
|
|
|
|
|
$
|
776,281
|
|
|
$
|
806,212
|
|
Included
above are reserves against finished goods of $51,893 and $387,971, respectively,
at September 30, 2010 and December 31, 2009.
5.
Property and Equipment
Property
and equipment consist of the following:
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
|
December 31,
|
|
|
|
|
(Unaudited)
|
|
|
2009
|
|
|
Furniture
and equipment
|
|
$
|
839,187
|
|
|
$
|
815,724
|
|
|
Molds
and dies
|
|
|
231,732
|
|
|
|
218,546
|
|
|
|
|
|
1,070,919
|
|
|
|
1,034,270
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
1,007,727
|
|
|
|
923,366
|
|
|
|
|
$
|
63,192
|
|
|
$
|
110,904
|
|
6.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consist of the following:
|
|
|
September 30,
|
|
|
|
|
|
|
|
2010
|
|
|
December 31,
|
|
|
|
|
(Unaudited)
|
|
|
2009
|
|
|
Trade
payables
|
|
$
|
857,245
|
|
|
$
|
826,236
|
|
|
Accrued
expenses
|
|
|
130,155
|
|
|
|
180,086
|
|
|
Commissions
payable
|
|
|
25,078
|
|
|
|
23,265
|
|
|
Deferred
rent
|
|
|
18,948
|
|
|
|
12,464
|
|
|
|
|
$
|
1,031,426
|
|
|
$
|
1,042,051
|
|
7.
Stock-Based Compensation
The
Company accounts for equity instrument issuances (including common stock,
options, and warrants) in accordance with ASC 718. Such equity issuances
encompass transactions in which an entity exchanges its equity instruments for
goods or services including such transactions in which an entity obtains
employee services in share-based payment transactions and issuances of stock
options to employees. The Company recorded charges of $30,971 and $111,276,
respectively, in the three and nine month periods ended September 30, 2010,
representing the effect on loss from continuing operations, loss before income
taxes and net loss. The Company recorded charges of $93,819 and $232,615,
respectively, in the three and nine month periods ended September 30, 2009,
representing the effect on loss from continuing operations, loss before income
taxes and net loss.
The
Company recorded charges of $7,355 and $22,281, respectively, in the three and
nine month periods ended September 30, 2010 for previously issued equity
instruments to employees. The Company recorded charges of $38,541 and
$117,973, respectively, in the three and nine month periods ended September 30,
2009 for previously issued equity instruments to employees.
The
Company granted 500,000 stock options to employees during the three months ended
September 30, 2010 with an exercise price of $0.145 per share. Of these options,
166,664 of these options vest in the third quarter of 2011; 166,667 of these
options vest in the third quarter of 2012; and 166,669 of these options vest in
the third quarter of 2013. The Company granted 750,000 stock options to
employees during the nine months ended September 30, 2010 with exercise prices
ranging from $0.122 per share to $0.145 per share. Of these options, 83,333 vest
in the first quarter of 2011; 166,664 of these options vest in the third quarter
of 2011; 83,333 of these options vest in the first quarter of 2012; 166,667 of
these options vest in the third quarter of 2012; 83,334 of these options vest in
the first quarter of 2013; and 166,669 of these options vest in the third
quarter of 2013. These options were determined to have a total fair value of
approximately $80,750. Compensation expense recognized during the three and nine
months ended September 30, 2010 for these options amounted to $3,507 and $6,667
respectively. The Company did not grant any options to employees in the
three months ended September 30, 2009. The Company granted 200,000 stock options
to a former Chief Executive Officer/President during the nine months ended
September 30, 2009 with an exercise price of $0.28 per share. Of these options,
50,000 vest in the second quarter of 2010, 50,000 of these options vest in the
second quarter of 2011, 50,000 of these options vest in the second quarter of
2012, and 50,000 of these options vest in the second quarter of 2013. These
options were determined to have a total fair value of approximately $43,000.
Compensation expense recognized during the three and nine months ended September
30, 2009 for these options amounted to $2,688. These options were subsequently
canceled as part of a former CEO’s Separation Agreement on January 27,
2010.
The
Company recognized $18,000 and $72,000, respectively, for the three and nine
month periods ended September 30, 2010 as a component of employee compensation
for common shares issued as payment of directors’ fees. The Company recognized
$24,000 and $78,000, respectively, for the three and nine month periods ended
September 30, 2009 as a component of employee compensation for common shares
issued as payment of directors’ fees. The Company recognized $0 and $3,363,
respectively, for the three and nine month periods ended September 30, 2010 as a
component of employee compensation for common shares issuable as payment to a
director of the Company for advisory services. The Company did not recognize any
expense as a component of employee compensation for common shares issuable as
payment to a director of the Company for advisory services for the three and
nine month periods ended September 30, 2009.
Non-Employee
Compensation
The
Company granted no stock options to consultants during the three and nine month
periods ended September 30, 2010 and 2009.
The
Company recorded charges of $2,051 and $6,791, respectively, in the three and
nine month periods ended September 30, 2010 for previously issued warrants to
non-employee athlete endorsers. The Company did not record any charges in
the three and nine month periods ended September 30, 2009 for previously issued
warrants to non-employee athlete endorsers.
The
Company did not grant any warrants to non-employee athlete endorsers during the
three months ended September 30, 2010. The Company granted 10,000 warrants
to non-employee athlete endorsers during the nine months ended September 30,
2010 with an exercise price of $0.12 per share. Of these warrants, 5,000
warrants vest in the fourth quarter of 2010 and 5,000 of these warrants vest in
the fourth quarter of 2011. These warrants were determined to have a total fair
value of $460. Compensation expense recognized during the three and nine months
ended September 30, 2010 for these warrants amounted to $58 and $174,
respectively. These amounts were charged to operations and added to additional
paid-in capital in accordance with ASC 718. The Company did not grant any
warrants to non-employee athlete endorsers during the three months ended
September 30, 2009. The Company granted 402,500 warrants to non-employee
athlete endorsers during the nine months ended September 30, 2009 with an
exercise price of $0.14 per share. Of these warrants, 109,167 warrants vest in
the fourth quarter of 2009; 4,167 warrants vest in the first quarter of 2010;
109,167 of these warrants vest in the fourth quarter of 2010; 4,167 warrants
vest in the first quarter of 2011; 109,166 of these warrants vest in the fourth
quarter of 2011; 4,166 warrants vest in the first quarter of 2012; and 62,500 of
these warrants vest in the fourth quarter of 2012. These warrants were
determined to have a total fair value of $38,713. Compensation expense
recognized during the three and nine months ended September 30, 2009 for these
warrants amounted to $2,689 and $8,053 respectively. These amounts were charged
to operations and added to additional paid-in capital in accordance with ASC
718.
In
summary, compensation charges to operations for the periods presented are as
follows:
|
|
|
Three Months
|
|
|
Nine Months
|
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
compensation
|
|
$
|
28,862
|
|
|
$
|
65,229
|
|
|
$
|
104,311
|
|
|
$
|
198,661
|
|
|
Consultant
compensation
|
|
|
2,109
|
|
|
|
28,590
|
|
|
|
6,965
|
|
|
|
33,954
|
|
|
|
|
$
|
30,971
|
|
|
$
|
93,819
|
|
|
$
|
111,276
|
|
|
$
|
232,615
|
|
A summary
of employee options activity under the plans as of September 30, 2010 and
changes during the nine-month period then ended is presented below:
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2010
|
|
|
2,438,500
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
Granted
during the period
|
|
|
750,000
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Exercised
during the period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
during the period
|
|
|
(1,000,000
|
)
|
|
|
0.56
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2010
|
|
|
2,188,500
|
|
|
$
|
0.51
|
|
|
|
2.64
|
|
|
$
|
9,500
|
|
|
Exercisable,
September 30, 2010
|
|
|
1,213,500
|
|
|
$
|
0.79
|
|
|
|
1.32
|
|
|
$
|
-0-
|
|
The
market value of the Company’s common stock as of September 30, 2010 was $0.15
per share.
A summary
of the non-vested stock options for employees during the nine months ended
September 30, 2010 is as follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Non-vested Options
|
|
|
|
|
|
|
|
Non-vested,
January 1, 2010
|
|
|
1,129,583
|
|
|
$
|
0.46
|
|
|
Granted
during the period
|
|
|
750,000
|
|
|
|
0.14
|
|
|
Vested
during the period
|
|
|
(362,917
|
)
|
|
|
0.50
|
|
|
Forfeited
during the period
|
|
|
(541,666
|
)
|
|
|
0.52
|
|
|
Non-vested,
September 30, 2010
|
|
|
975,000
|
|
|
$
|
0.16
|
|
As of
September 30, 2010, the total fair value of non-vested awards amounted to
$114,283. The weighted average remaining period over which such options are
expected to be recognized is 2.87 years.
A summary
of warrant activity as of September 30, 2010 and changes during the nine-month
period then ended is presented below:
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2010
|
|
|
402,500
|
|
|
$
|
0.14
|
|
|
|
|
|
Granted during the period
|
|
|
10,000
|
|
|
|
0.12
|
|
|
|
|
|
Canceled during the period
|
|
|
(90,000
|
)
|
|
|
0.14
|
|
|
|
|
|
Outstanding,
September 30, 2010
|
|
|
322,500
|
|
|
$
|
0.14
|
|
|
$
|
3,425
|
|
|
Exercisable,
September 30, 2010
|
|
|
83,332
|
|
|
$
|
0.14
|
|
|
$
|
833
|
|
A summary
of the non-vested warrants during the nine months ended September 30, 2010 is as
follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
Non-vested Warrants
|
|
|
|
|
|
|
|
Non-vested,
January 1, 2010
|
|
|
289,343
|
|
|
$
|
0.14
|
|
|
Granted
during the period
|
|
|
10,000
|
|
|
|
0.12
|
|
|
Vested
during the period
|
|
|
(175
|
)
|
|
|
0.14
|
|
|
Canceled
during the period
|
|
|
(60,000
|
)
|
|
|
0.14
|
|
|
Non-vested,
September 30, 2010
|
|
|
239,168
|
|
|
$
|
0.14
|
|
As of
September 30, 2010, the total fair value of non-vested awards amounted to
$17,000. The weighted average remaining period over which such options are
expected to be recognized is 2.10 years.
8.
Common Stock Issuances
On
January 20, 2010, the Company issued 61,359 shares of its common stock as
payment of certain sales commissions that were accrued at December 31, 2009 for
an amount totaling $8,590.
On March
10, 2010, the Company issued 32,966 shares of its common stock valued at $3,363
to a director of the Company for advisory services.
On March
31, 2010, the Company issued 317,646 shares of its common stock valued at
$27,000 as payment of directors’ fees for the first quarter of
2010.
On June
30, 2010, the Company issued 329,269 shares of its common stock valued at
$27,000 as payment of directors’ fees for the second quarter of
2010.
On
September 30, 2010, the Company issued 120,000 shares of its common stock valued
at $18,000 as payment of directors’ fees for the third quarter of
2010.
The
Company
has
approximately $16,611,000 in Federal and $3,243,000 in state net operating loss
carryovers available as of September 30, 2010 that can be used to offset future
taxable income in calendar years 2010 through 2030. The net operating loss
carryovers begin to expire in the year 2016 through the year 2030. As of
September 30, 2010, the Company has fully reserved for these net operating loss
carryovers.
ASC 740,
“Income Taxes”, clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements. It prescribes a threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC
740 also provides guidance on derecognition, measurement, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition.
The
Company has recorded a liability related to uncertain tax positions in the
amount of approximately $23,000 and $40,000, respectively, at September 30, 2010
and December 31, 2009 relating to certain states in which the Company is
required to file state tax returns as they have effectively established nexus in
these states. These amounts have been recorded as a component of accounts
payable and accrued expenses on the balance sheet.
The
Company’s 2007, 2008 and 2009 Federal and state income tax returns are open for
examination.
The
Company’s two largest customers accounted for approximately 24% and 10%,
respectively, of net sales for the three months ended September 30, 2010 and the
Company’s two largest customers accounted for approximately 23% and 18%,
respectively, of net sales for the three months ended September 30, 2009.
The Company’s three largest customers accounted for approximately 19%,15% and
10%, respectively, of net sales for the nine months ended September 30, 2010 and
the Company’s two largest customers accounted for approximately 20% and 16%,
respectively, of net sales for the nine months ended September 30, 2009. At
September 30, 2010, amounts due from these three customers represented
approximately 27%, 5%, and 2%, respectively, of net accounts receivable. At
December 31, 2009, amounts due from these three customers represented
approximately 52%, 6%, and 1%, respectively, of net accounts receivable. No
other customers exceeded 10% of respective captions noted above.
Two of
the Company’s suppliers accounted for approximately 76% and 18%, respectively,
of total inventory purchases for the three months ended September 30, 2010 and
two of the Company’s suppliers accounted for approximately 56% and 25%,
respectively, of total inventory purchases for the three months ended September
30, 2009. Two of the Company’s suppliers accounted for approximately 76% and
17%, respectively, of total inventory purchases for the nine months ended
September 30, 2010 and two of the Company’s suppliers accounted for
approximately 64% and 15%, respectively, of total inventory purchases for the
nine months ended September 30, 2009. At September 30, 2010, amounts due
to these two vendors represented approximately 59% and 4%, respectively, of
accounts payable and accrued expenses. At December 31, 2009, amounts due
to these two vendors represented approximately 42% and 0%, respectively, of
accounts payable and accrued expenses. No other vendors exceeded 10% of
respective captions noted above.
In April
2008, the Company obtained a one-year revolving line of credit with a financial
institution with an interest rate equal to the Wall Street Journal Prime Rate
(3.25% as of September 30, 2010) with a floor of 5.00%. This line is
collateralized by the short-term investments that are deemed auction rate
securities. The maximum amount that the Company may borrow is limited to 50% of
the value of these auction rate securities. The Company renewed this
one-year revolving line of credit that now matures in May 2011 in the amount of
$87,500. On February 22, 2010, the Company drew down $87,500, the maximum amount
allowed under this line of credit at that time. The Company paid back $12,500 of
this line in May 2010.
In
September 2009, the Company entered into a lease extension for its current
office space that was set to expire in June 2012. The terms of the lease
extension call for the term to begin September 2009 and conclude in June 2015.
Monthly payments commence at $9,583 and increase to $11,250 by the last year
with the first month of rent free. The Company records monthly rent expense on a
straight line basis over the term of the lease. The difference between rent
expense recorded and the amount paid is credited or charged to “Deferred rent”
which is included as a component of accounts payable and accrued expenses in the
accompanying balance sheet. As of September 30, 2010, this amounted to
$18,948.
13.
CEO Separation Agreements
The
Company entered into a Separation and Release Agreement with the former CEO on
January 27, 2010. Under the terms of the agreement, the former CEO had
agreed to provide consulting services for a period of 90 days following the date
of the agreement for which he was entitled to $5,673 per week. During the
one-year period commencing on January 11, 2010, the former CEO is entitled to
the sum of $295,000, less the sum of consulting fees paid during such period and
less any income, wages and/or salary received by him during such period in
respect of full-time or substantially full-time employment. The Company
also agreed to pay the former CEO $50,000 for relocation costs under certain
circumstances, the cost of life insurance premiums during the period in which he
provides consulting services, and the cost of health insurance coverage for a
period of six months. In the three and nine months ended September 30, 2010, the
Company recognized $88,750 and $261,868, respectively, of expense under this
Agreement.
The
Company entered into a Separation Agreement with a former CEO effective August
1, 2008. The terms of the agreement consisted of twelve equal monthly payments
that aggregate $295,000 and include a non-compete clause. In the three and
nine months ended September 30, 2009, the Company recognized $24,583 and
$172,081, respectively, of expense under this Agreement.
On July
27, 2010, the Company entered into a consulting agreement with Signal Nutrition
LLC (“Signal”), a company controlled by a director of the Company. Under
terms of the Agreement, Signal will work with outside researchers, assist in
developing new products, and formulate sales and marketing plans for the
Company. The Agreement has an initial term of six months, with options by either
party to renew for an additional six months, subject, however, to the right of
either party to terminate on 15 days notice. The Company will pay Signal a fee
of $11,000 per month, commencing September 1, 2010, during the term of the
Agreement. Expense for the three and nine months ended September 30, 2010 is
$22,000. Included in accounts payable and accrued expenses as of September 30,
2010 is $11,000 relating to this agreement.
|
Item
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
In this
Report on Form 10-Q, the terms the “Company,” “we”, “us,” and “our” refer to
PacificHealth Laboratories, Inc.
PacificHealth
Laboratories is a leading nutrition company that was incorporated in the State
of Delaware in April 1995. We focus on the development, marketing and
selling of patented premium nutrition tools that enable our consumers to enhance
their health and improve their performance. Our principal area of focus is
exercise performance and recovery, including optimal weight management. Our
products can be marketed without prior Food and Drug Administration (“FDA”)
approval under current regulatory guidelines.
Following
the departure of a former CEO in January 2010, we are evolving into a more
consumer-oriented, brand-driven company that derives value from our own brands
based on our science-based nutrition technology. Today, we employ multiple
strategies for the commercialization of our technologies. We will continue to
place emphasis on the creation of brands while also expanding on the benefits of
our core endurance nutrition products. We will direct new research and
development in this category to drive both new product development and consumer
communications across all our brands, both existing and potential new
brands.
Sports
Performance
Our
research into factors influencing exercise performance, muscle endurance, and
recovery has led to the development and commercialization of a new generation of
sports and recovery drinks. The key to our technology is the specific
ratio in which protein is combined with carbohydrates. We have received
two patents on this technology and over 18 studies have been published
demonstrating that products based on this technology can extend endurance,
reduce muscle damage, improve rehydration, and accelerate muscle recovery.
Our research in exercise performance has led to the introduction and
commercialization of a number of products for the aerobic athlete
including:
· ENDUROX
R4
®
Recovery Drink – Introduced in February 1999
·
ACCELERADE
TM
Sports
Drink – Introduced in May 2001
·
ACCELERADE HYDRO
TM
Sports
Drink with 30% less calories and 55% less sugar – Introduced in June
2008
· ACCEL
GEL
®
– Introduced in February 2004
·
ENDUROX
®
EXCEL
®
Natural Workout Supplement – Introduced in March 1997
Weight
Regulation
Satiety
peptides have been shown to suppress appetite and reduce food intake. Our
research has specifically focused on developing nutritional formulations that
can stimulate cholecystokin (CCK), one of the body’s primary satiety peptides.
CCK is normally released after a meal, particularly one high in fat and
protein. CCK is often called the “feel full” protein because when it is
released it gives a feeling of fullness and signals the brain to terminate the
meal. The objective of our research is to develop a nutritional
composition that stimulates and extends the duration of action of CCK in a
calorically efficient way, i.e. to cause a release of CCK with 45-50 calories of
specific nutrients rather than 1,000 calories. We have seven patents on our
appetite suppressant technology.
In the
first quarter of 2009, we launched FORZE GPS™ in our sports specialty channel.
FORZE GPS was the first appetite management nutrition tool designed specifically
for athletes. We were not successful in 2009 in achieving adequate sales for
this product line. We therefore decided not to continue to aggressively market
this product in 2010 as we did in 2009 but we will continue to sell this product
line on a limited basis in 2010.
(b)
Results of
Operations – Three and Nine Months Ended September 30, 2010 and
2009
Revenues
for the three-month period ended September 30, 2010 decreased by $376,802, or
approximately 16%, to $1,999,489 from $2,376,291 for the same period in 2009.
Revenues for the nine-month period ended September 30, 2010 decreased by
$592,904, or approximately 9%, to $6,204,060 from $6,796,964 for the same period
in 2009. The decrease in revenues in the three- and nine- month periods ended
September 30, 2010 as compared to the same periods in 2009 is the result of a
reduction in promotional sales-through to one of our major customers and a
change in 2009 in the way we reported certain product sales to another
major customer. A major customer’s gross sales were down $404,000 and $220,000,
respectively, for the three and nine month periods ended September 30, 2010 as
compared to the same periods in 2009. One of the key changes we will be
implementing in 2011 is an increase in consumer messaging and new product
support to drive consumer awareness versus a heavy reliance on trade promotion
to drive revenue. Also, in 2009, we changed the way we reported certain product
sales to another major customer. Effective April 1, 2009, we commenced
recognizing revenue for certain products not under a pay on scan (consignment)
model upon shipment as we determined that we have met the criteria established
in ASC 605, specifically as it relates to the ability to estimate future
returns. This change in estimate for these product shipments was based primarily
on our determination that we could, based upon historical secular analysis,
estimate our returns of such product shipments with such historical data
covering a five-year period. This resulted in additional revenues in the three
and nine month periods ended September 30, 2009 of approximately
$279,000.
For the
three months ended September 30, 2010, gross profit margin on product sales was
43.8% compared to 50.7% for the three months ended September 30, 2009. For the
nine months ended September 30, 2010, gross profit margin on product sales was
45.7% compared to 47.6% for the nine months ended September 30, 2009. The lower
gross profit margins in the three and nine month periods ended September 30,
2010 compared to the same periods in 2009 are due primarily to promotional
allowances given to major accounts in order to facilitate sales of our
products.
Sales and
marketing (“S & M”) expenses decreased $245,649, or approximately 43%, to
$324,056 for the three-month period ended September 30, 2010 from $569,705 for
the three-month period ended September 30, 2009. S & M expenses decreased as
a percentage of product sales to approximately 16% in the three-month period
ended September 30, 2010 compared to approximately 24% in the three-month period
ended September 30, 2009. S & M expenses decreased $432,314, or
approximately 32%, to $908,403 for the nine-month period ended September 30,
2010 from $1,340,717 for the nine-month period ended September 30, 2009. S &
M expenses decreased as a percentage of product sales to approximately 15% in
the nine-month period ended September 30, 2010 compared to approximately 20% in
the nine-month period ended September 30, 2009. The decrease in S & M
expenses is due to the 2009 public relations and marketing campaign (including
sample expense) associated with the launch of FORZE GPS as well as initial costs
incurred for rolling out a national sales representation organization. We have
assessed our return on investment in the third party outside sales group as well
and decided to replace them with three PHLI-employed dedicated Regional Sales
Managers. These new regional managers will be spending 100% of their time
supporting our new consumer efforts across triathlon, bicycle, and running
stores in the U.S.
General
and administrative (“G & A”) expenses decreased $171,319, or approximately
21%, to $637,654 for the three-month period ended September 30, 2010 from
$808,973 for the three-month period ended September 30, 2009. G & A expenses
decreased $314,227, or approximately 13%, to $2,146,247 for the nine-month
period ended September 30, 2010 from $2,460,474 for the nine-month period ended
September 30, 2009. The decrease for the three and nine month periods is due
primarily to lower CEO severance payments (see below), investor relations,
travel and entertainment, and options expenses. Included in G & A in the
three and nine month periods ended September 30, 2010 is approximately $89,000
and $262,000, respectively, paid to a former CEO for transition expenses and in
the form of a non-compete clause pursuant to his Separation Agreement. These
payments will continue under the terms of the Separation Agreement until January
27, 2011. Included in G & A in the three and nine month periods ended
September 30, 2009 is approximately $25,000 and $172,000, respectively, paid to
a former CEO in the form of a non-compete clause pursuant to his Separation
Agreement. These payments ended under the terms of the Separation Agreement
effective as of July 31, 2009.
We
recorded a net loss of ($87,371), or ($0.01) per share (basic and diluted), for
the quarter ended September 30, 2010 compared to a net loss of ($174,095), or
($0.01) per share (basic and diluted), for the quarter ended September 30, 2009.
We recorded a net loss of ($219,876), or ($0.01) per share (basic and diluted),
for the nine months ended September 30, 2010 compared to a net loss of
($566,638), or ($0.04) per share (basic and diluted), for the nine months ended
September 30, 2009. The lower net loss in the three and nine month periods ended
September 30, 2010 as compared to the same periods in 2009 is due primarily to
decreases in S & M and G & A expenses as detailed
above.
(c)
Liquidity and Capital Resources
At
September 30, 2010, our current assets exceeded our current liabilities by
approximately $1,010,000 with a ratio of current assets to current liabilities
of approximately 1.8 to 1. At September 30, 2010, cash on hand was $427,561, an
increase of $146,402 from December 31, 2009, primarily as the result of a
decrease in accounts receivable (net of reserves) of $210, a decrease in
inventory of $29,931 (net of reserves), an increase in prepaid expenses of
$9,319, a decrease in tax loss receivable of $303,931, net borrowings under a
line of credit of $75,000, issuances of notes payable of $70,293, repayments of
notes payable of $40,660, a decrease in accounts payable and accrued expenses of
$2,035, and a decrease in deferred revenue of $254,205 from December 31, 2009.
Inventories decreased due to better inventory management. Tax loss receivable
decreased as we received the net proceeds related to the sale of a portion of
our unused net operating loss carryovers for the State of New Jersey (see
below). Accounts payable and accrued expenses decreased primarily due to
aggressive inventory control. The line of credit increased as we drew down
the maximum amount allowed under our auction rate securities line of credit (see
below) and subsequently repaid a portion of this line. Deferred revenue
decreased primarily as a result of a major customer discontinuing selling a
number of products previously recorded as deferred revenue. Inventory associated
with this deferred revenue previously recorded as consignment inventory has been
returned to us in salable condition and recorded as finished goods.
On
February 8, 2010, we received $303,931 of net proceeds related to the sale of a
portion of our unused net operating loss carryovers for the State of New Jersey
to a third party through the 2009 NJEDA Technology Business Tax Certificate
Transfer Program. We used these proceeds for working capital
purposes.
Net cash
provided by operating activities for the nine months ended September 30, 2010
was $53,418 compared to net cash used in operating activities for the same
period in 2009 of $499,664. The net cash provided by operations for the nine
months ended September 30, 2010 as compared to the net cash used in operations
in the same period in 2009 is due to a slight decrease in accounts receivable in
2010 as compared to an increase in accounts receivable in 2009, the receipt of
the net proceeds from the tax loss sale in 2010 (see above) and a slight
decrease in accounts payable and accrued expenses in 2010 compared to an
increase in accounts payable and accrued expenses in 2009. Accounts
receivable decreased slightly in 2010 compared to an increase in 2009 due to
less days sales outstanding in 2010 as we offered payment discounts to our major
customers in 2010. Accounts payable and accrued expenses decreased slightly in
2010 compared to an increase in 2009 as we better managed inventory levels in
2010 as well as used the proceeds from the tax loss sale to increase payments to
our vendors. Historically, we have funded inventory purchases through trade
credit and we expect that to continue.
As of
September 30, 2010, we had $150,000 invested in auction rate securities that are
presented as short-term investments on the balance sheet. During the first nine
months of 2010, we were able to redeem $25,000 of these investments. We have
obtained a revolving line of credit with a financial institution with a maturity
of May 2011 that will accept these securities as collateral. The maximum amount
that we may borrow is limited to 50% of the value of these auction rate
securities. On February 22, 2010, we drew down the $87,500 maximum amount
allowed under this line of credit and on May 20, 2010 we paid down $12,500 on
this line from the proceeds of the redeemed securities.
In
September 2009, we entered into a lease extension for our current office space
that was set to expire in June 2012. The terms of the lease extension call for
the term to begin September 2009 and conclude in June 2015. Monthly payments
commence at $9,583 and increase to $11,250 by the last year with the first month
of rent free. We record monthly rent expense on a straight line basis over the
term of the lease. The difference between rent expense recorded and the amount
paid is credited or charged to “deferred rent” which is included as a component
of accounts payable and accrued expenses in the accompanying balance sheet. As
of September 30, 2010, this amounted to $18,948.
We have
no material commitments for capital expenditures.
(d)
Off-Balance Sheet Arrangements
There are
no off-balance sheet arrangements between us and any other entity that have, or
are reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures, or capital resources that is
material to investors.
(e)
Going Concern
We have incurred significant operating
losses and have an accumulated deficit of $19,106,916 as of September 30, 2010.
These factors raise substantial doubt about our ability to continue as a going
concern. In response to this, we have made changes to our operating structure by
planning to reduce our fixed overhead by streamlining our management team,
reallocating our sales budget by investing in three dedicated Regional Sales
Managers to give greater and more effective coverage of key retailers,
implementing new manufacturing and inventory procedures to maximize cash flow,
increasing marketing investment against core business without increasing total
sales and marketing expenses by eliminating non-productive line items and
reallocating them into the 2011 marketing strategy, and reinstituting an
aggressive research program that will lead to the introduction of two
breakthrough products in 2011. The results of the above are not expected to be
recognized until sometime in 2011.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Per Item
305(e) of Regulation S-K, a smaller reporting company is not required to provide
the information required by this item.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and
procedures.
Based on their evaluation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the
Exchange Act) as of September 30, 2010, the end of the period covered by this
Report, our Chief Executive Officer and Chief Financial Officer have concluded
that our disclosure controls and procedures are designed to ensure that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC’s rules and forms; that such information
is accumulated and disclosed to management, including the Chief Executive
Officer and the Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure; and that such disclosure controls and
procedures are effective.
Changes in internal control over
financial reporting.
During the quarter ended September 30, 2010, there
were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
II. OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. REMOVED AND RESERVED
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
|
Exhibit
Number
|
|
Description of Exhibit
|
|
31.1*
|
|
Rule
13a-14(a) Certification of Chief Executive Officer
|
|
|
|
|
|
31.2*
|
|
Rule
13a-14(a) Certification of Chief Financial Officer
|
|
|
|
|
|
32**
|
|
Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of
2002
|
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant 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 (Principal Financial Officer and Principal Accounting
Officer)
|
|
|
|
Date:
October 29, 2010
|
PacificHealth Laboratories (CE) (USOTC:PHLI)
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