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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2012

 

-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 150  
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 x 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: 20,871,772 shares of common stock, par value $0.0025, outstanding as of August 9, 2012.

 

 
 

 

 

PACIFICHEALTH LABORATORIES, INC.

 

TABLE OF CONTENTS

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 3
   
PART I. FINANCIAL INFORMATION   
   
ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED)  
   
Balance Sheets as of June 30, 2012 and December 31, 2011 4
   
Statements of Operations for the three and six months ended June 30, 2012 and 2011 5
                                                                           
Statements of Cash Flows for the six months ended June 30, 2012 and 2011 6
                                                                       
Notes to Financial Statements 7
                                                                           
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL            
                      CONDITION AND RESULTS OF OPERATIONS 12
     
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
     
ITEM 4.   CONTROLS AND PROCEDURES 15
                                                                      
PART II.  OTHER INFORMATION  
                            
ITEM 1.   LEGAL PROCEEDINGS 15
   
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 15
   
ITEM 3.   DEFAULTS UPON SENIOR SECURITIES 15
   
ITEM 4.   MINE SAFETY DISCLOSURES 15
   
ITEM 5.   OTHER INFORMATION 15
   
ITEM 6.   EXHIBITS 15
   
SIGNATURES 16

 

2
 

  

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;
·The receipt of royalty payments from our agreements with business partners;
·Implementing aspects of our business plan;
·Financing goals and plans;
·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 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
(UNAUDITED)
       
ASSETS

 

   June 30,   December 31, 
   2012   2011 
Current assets:          
 Cash and cash equivalents  $446,369   $745,904 
 Other short-term investments   75,000    75,000 
 Accounts receivable, net   834,331    369,376 
 Inventories, net   982,547    571,403 
 Prepaid expenses   116,858    91,479 
Total current assets   2,455,105    1,853,162 
           
Property and equipment, net   141,072    26,729 
           
Deposits   10,895    10,895 
           
Total assets  $2,607,072   $1,890,786 
           
LIABILITIES AND STOCKHOLDERS' EQUITY 
           
Current liabilities:          
Line of credit  $37,500   $37,500 
Notes payable   43,912    19,679 
Accounts payable and accrued expenses (Includes related          
party of $16,275 and $32,000, respectively)   1,315,267    546,712 
Deferred revenue   53,312    56,170 
Total current liabilities   1,449,991    660,061 
           
Commitments          
           
Stockholders' equity:          
Common stock, $.0025 par value; authorized          
50,000,000 shares; issued and outstanding:          
20,871,772 shares   52,179    52,179 
Additional paid-in capital   21,349,201    21,313,319 
Accumulated deficit   (20,244,299)   (20,134,773)
           
    1,157,081    1,230,725 
           
           Total liabilities and stockholders' equity  $2,607,072   $1,890,786 

 

 The accompanying notes should be read in conjunction with the financial statements.

4
 

 

PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(UNAUDITED)

 

                 
   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   2012   2011   2012   2011 
Revenues:                    
Net product sales  $2,229,234   $2,245,226   $3,980,173   $3,976,837 
                     
Cost of goods sold   1,363,129    1,250,510    2,369,898    2,211,502 
                     
Gross profit   866,105    994,716    1,610,275    1,765,335 
                     
Operating expenses:                    
Sales and marketing   307,012    378,612    503,425    569,043 
General and administrative (Includes related party consulting                    
of $49,475, $48,000, $98,620 and $91,000, respectively)   606,254    511,490    1,172,497    1,048,474 
Research and development   18,439    9,978    35,487    24,795 
    931,705    900,080    1,711,409    1,642,312 
                     
(Loss) income before other (expense) income and                    
provision for income taxes   (65,600)   94,636    (101,134)   123,023 
                     
Other (expense) income:                    
Other income   -    -    -    2,100 
Interest income   121    127    234    279 
Interest expense   (4,198)   (2,994)   (8,626)   (6,403)
    (4,077)   (2,867)   (8,392)   (4,024)
                     
(Loss) income before provision for income taxes   (69,677)   91,769    (109,526)   118,999 
                     
Provision for income taxes   -    -    -    - 
                     
Net (loss) income  $(69,677)  $91,769   $(109,526)  $118,999 
                     
Basic (loss) income per share  $0.00   $0.00   $(0.01)  $0.01 
                     
Diluted (loss) income per share  $0.00   $0.00   $(0.01)  $0.01 
                     
Weighted average common shares - basic   20,871,772    19,723,499    20,871,772    18,202,826 
                     
Weighted average common shares - diluted   20,871,772    19,929,921    20,871,772    18,390,201 
                     

 

The accompanying notes should be read in conjunction with the financial statements.

 

 

5
 

 

PACIFICHEALTH LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011
(UNAUDITED)

 

         
   2012   2011 
Cash flows from operating activities:          
  Net (loss) income  $(109,526)  $118,999 
  Adjustments to reconcile net (loss) income to net          
    cash used in operating activities:          
        Depreciation   33,107    23,651 
        Bad debts   6,000    6,000 
        Equity instrument-based expense   35,882    32,802 
    Changes in assets and liabilities:          
        Accounts receivable   (470,955)   (571,175)
        Inventories   (411,144)   (463,821)
        Prepaid expenses   (25,379)   (108,742)
        Accounts payable and accrued expenses (Includes related          
             party of ($15,725) and $91,000, respectively)   768,555    932,136 
        Deferred revenue   (2,858)   14,450 
Net cash used in operating activities   (176,318)   (15,700)
           
Cash flows from investing activities:          
    Proceeds from sales of other short-term investments   -    75,000 
    Purchase of property and equipment   (147,450)   (2,541)
Net cash (used in) provided by investing activities   (147,450)   72,459 
           
Cash flows from financing activities:          
    Net repayments on line of credit   -    (37,500)
    Issuances of notes payable   47,344    65,427 
    Repayments of notes payable   (23,111)   (27,336)
    Common stock issued   -    1,095,000 
Net cash provided by financing activities   24,233    1,095,591 
           
Net (decrease) increase in cash and cash equivalents   (299,535)   1,152,350 
           
Cash and cash equivalents, beginning balance   745,904    134,165 
           
Cash and cash equivalents, ending balance  $446,369   $1,286,515 
           
           
Supplemental disclosures of cash flow information:          
    Cash paid for interest  $8,626   $6,403 
           
    Cash paid for income taxes  $2,140   $16,113 
           
The accompanying notes should be read in conjunction with the financial statements. 

 

6
 

 

PACIFICHEALTH LABORATORIES, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 AND 2011

(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 (“U.S. GAAP”) 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 six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. 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, 2011.

 

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”.

 

2. Revenue Recognition

 

Revenue is recognized upon the sale of products as they are sold to customers when title to the goods has passed, the price to the customer is fixed and determinable, and collection from the customer is reasonably assured. All sales revenue is recorded on a net basis, net of incentives paid and discounts offered to customers, and excludes sales tax collected from being reported as sales revenue and sales tax remitted from being reported as a cost.

 

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”. 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 June 30, 2012 and December 31, 2011 amounted to $53,312 and $56,170, respectively.

 

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 three and six months ended June 30, 2012, the Company did not redeem any 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.

 

4. Inventories

 

Inventories consist of the following:

 

   June 30,   December 31, 
   2012   2011 
Raw materials  $-   $5,511 
Packaging supplies   4,824    1,897 
Finished goods   936,676    521,511 
Finished goods on consignment   41,047    42,484 
   $982,547   $571,403 
           

 

Included above are reserves against finished goods of $36,171 and $37,121, respectively, at June 30, 2012 and December 31, 2011. 

 

7
 

  

5. Property and Equipment

 

Property and equipment consist of the following:

 

   June 30,   December 31, 
   2012   2011 
Furniture and equipment  $652,716   $537,655 
Molds and dies   148,755    116,366 
    801,471    654,021 
           
Less accumulated depreciation   660,399    627,292 
   $141,072   $26,729 

 

 

6. Common Stock Issuances and Stock-Based Compensation

 

The Company accounts for equity instrument issuances for compensation (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 and consulting services in share-based payment transactions and issuances of stock options to employees and consultants. The Company recorded charges of $17,933 and $16,401, respectively, in the three month periods ended June 30, 2012 and 2011, representing the effect on (loss) income from operations, (loss) income before provision for income taxes and net (loss) income. The Company recorded charges of $35,882 and $32,802, respectively, in the six month periods ended June 30, 2012 and 2011, representing the effect on (loss) income from operations, (loss) income before provision for income taxes and net (loss) income.

 

Employee Compensation

 

The Company recorded charges of $15,596 and $14,292 during the three months ended June 30, 2012 and 2011, respectively, for previously issued equity instruments to employees. The Company recorded charges of $31,192 and $28,584 during the six months ended June 30, 2012 and 2011, respectively, for previously issued equity instruments to employees.

 

The Company did not grant any options to employees during the three and six months ended June 30, 2012 and 2011, respectively.

 

Non-Employee Compensation

 

The Company granted no stock options to consultants during the three and six months ended June 30, 2012 and 2011. The Company recorded charges of $728 and $0 in the three month periods ended June 30, 2012 and 2011, respectively, for previously issued stock options to consultants. The Company recorded charges of $1,456 and $0 in the six month periods ended June 30, 2012 and 2011, respectively, for previously issued stock options to consultants.

 

The Company recorded charges of $1,609 and $2,109 in the three month periods ended June 30, 2012 and 2011, respectively, for previously issued warrants to non-employee athlete endorsers. The Company recorded charges of $3,234 and $4,218 in the six month periods ended June 30, 2012 and 2011, respectively, for previously issued warrants to non-employee athlete endorsers.

 

The Company did not grant any warrants to non-employee athlete endorsers during the three and six month periods ended June 30, 2012 and 2011.

  

8
 

 

In summary, compensation charges to operations for the periods presented are as follows: 

 

   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   2012   2011   2012   2011 
Employee compensation  $15,596   $14,292   $31,192   $28,584 
Non-employee compensation   2,337    2,109    4,690    4,218 
   $17,933   $16,401   $35,882   $32,802 

 

A summary of employee options activity under the plans as of June 30, 2012 and changes during the six-month period then ended are presented below:

 

           Weighted-     
       Weighted-   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
Options  Shares   Price   Term (Years)   Value 
Balance, January 1, 2012   1,728,500   $0.25           
  Granted during the period   -    -           
  Exercised during the period   -    -           
  Expired during the period   (26,000)   2.12           
  Cancelled during the period   (75,000)   0.16           
Outstanding, June 30, 2012   1,627,500   $0.23    2.66   $62,270 
Exercisable, June 30, 2012   776,665   $0.29    2.00   $26,757 

 

The market value of the Company’s common stock as of June 30, 2012 was $0.21 per share.

 

As of June 30, 2012, the total fair value of non-vested awards amounted to $64,432. The weighted average remaining period over which such options are expected to be recognized is 1.56 years.

 

A summary of non-employee options activity under the plans as of June 30, 2012 and changes during the six-month period then ended are presented below:

 

           Weighted-     
       Weighted-   Average     
       Average   Remaining   Aggregate 
       Exercise   Contractual   Intrinsic 
Options  Shares   Price   Term (Years)   Value 
Balance, January 1, 2012   25,000   $0.27           
  Granted during the period   -    -           
  Exercised during the period   -    -           
  Expired during the period   -    -           
Outstanding, June 30, 2012   25,000   $0.27    1.38   $- 
Exercisable, June 30, 2012   12,500   $0.27    1.38   $- 

 

As of June 30, 2012, the total fair value of non-vested awards amounted to $1,456. The weighted average remaining period over which such options are expected to be recognized is 0.50 years.

 

9
 

 

 

A summary of warrant activity as of June 30, 2012 and changes during the six-month period then ended is presented below:

       Weighted-  

 

 

 
       Average   Aggregate 
       Exercise   Intrinsic 
Warrants  Shares   Price   Value 
Balance, January 1, 2012   2,890,500   $0.31      
  Granted during the period   -    -      
  Expired during the period   (12,500)   0.14      
Outstanding, June 30, 2012   2,878,000   $0.31   $17,500 
Exercisable, June 30, 2012   2,815,500   $0.31   $13,125 

 

As of June 30, 2012, the total fair value of non-vested awards amounted to $3,218. The weighted average remaining period over which such options are expected to be recognized is 0.50 years.

 

7. Income Taxes

 

The Company has approximately $17,813,000 in Federal and $4,463,000 in state net operating loss carryovers available as of June 30, 2012 that can be used to offset future taxable income in calendar years 2012 through 2032. The net operating loss carryovers begin to expire in the year 2016 through the year 2032. As of June 30, 2012, 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 $7,368 and $8,768, respectively, at June 30, 2012 and December 31, 2011 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 2009, 2010 and 2011 Federal and state income tax returns are open for examination.

 

8. Concentrations

 

Significant customer sales and vendor inventory purchase concentrations are summarized as follows:

 

   Net Sales   Net Sales         
   Three Months Ended   Six Months Ended   A/R Balance   A/R Balance 
   06/30/12   06/30/11   06/30/12   06/30/11   06/30/12   12/31/11 
Customer A   11%   17%   13%   17%   17%   33%
Customer B   20%   13%   13%   12%   23%   0%
Customer C   *    *    *    10%   *    * 

 

   Net Inventory Purchases   Net Inventory Purchases         
   Three Months Ended   Six Months Ended   A/P Balance   A/P Balance 
   06/30/12   06/30/11   06/30/12   06/30/11   06/30/12   12/31/11 
Vendor A   77%   72%   78%   72%   65%   57%
Vendor B   22%   23%   19%   24%   9%   2%

 

* - Not applicable

  

9. Line of Credit

 

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 June 30, 2012) with a floor of 5.00%. This line is collateralized by the short-term investments. The maximum amount that the Company may borrow is limited to 50% of the value of these short-term investments. The Company renewed this one-year revolving line of credit that now matures on May 21, 2013 in the amount of $37,500. As of both June 30, 2012 and December 31, 2011, the outstanding balance was $37,500. The weighted average interest rate on this line of credit was 5% for the three and six months ended June 30, 2012 and 2011.

 

 

10
 

 

 

10. Consulting Agreements

 

On February 4, 2011, 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 indefinite term with an option by either party to terminate the agreement with thirty (30) days notice. The Company will pay Signal a fee of $16,000 per month, commencing March 1, 2011, plus approved expenses during the term of the agreement. Expense for the three months ended June 30, 2012 and 2011 was $49,475 and $48,000, respectively. Expense for the six months ended June 30, 2012 and 2011 was $98,620 and $91,000, respectively. Included in accounts payable and accrued expenses at June 30, 2012 and December 31, 2011 is $16,275 and $32,000, respectively, relating to this agreement.

 

On July 1, 2012, the Company revised their April 1, 2012 agreement with an outside party to provide social media advisory, consulting, and development services by decreasing the monthly payments to $10,000. The agreement can be terminated with thirty (30) days notice for any reason starting June 1, 2013 or before that time if the outside party does not meet its obligations as outlined in the agreement. The Company expensed $50,923 during the three months ended June 30, 2012 under the revised agreement. The Company expensed $92,063 during the six months ended June 30, 2012 under both agreements.

 

On May 1, 2012, the Company entered into a consulting agreement with an outside party to provide consulting services in connection with the Company’s launch of its new BODY GLOVE SURGE™ energy gel as well as provide west coast sales services for the Company’s other brands. Under terms of the agreement, the Company will pay the consultant a fee of $5,500 per month plus approved expenses and a bonus based on sales. The agreement runs through December 31, 2012. Expense for the three and six months ended June 30, 2012 was $9,625.

 

11. Vendor Agreement

 

On February 9, 2011, the Company entered into an agreement with its largest vendor whereby extended payment terms were granted to the Company up to 90 days from invoice date and up to a maximum credit limit of $750,000. In the second quarter of 2011, the credit limit was increased to $850,000. Unpaid invoices under this agreement will bear simple interest at an annual rate of 5%, calculated on a per diem basis, during the period commencing 31 days following the invoice date until paid, payable monthly. Additionally, the vendor has a security interest in the Company’s accounts receivable. At June 30, 2012, there was no available credit under this agreement. Interest expense under this agreement was $3,552 and $7,327, respectively, for the three and six months ended June 30, 2012. Interest expense under this agreement was $2,059 and $4,369, respectively, for the three and six months ended June 30, 2011.

 

12. Licensing Agreement

 

On April 17, 2012, the Company entered into a licensing agreement with Body Glove International that gives the Company the right to use the Body Glove trademark and other intellectual property rights in connection with the design, manufacture, marketing, distribution and sale of a form of the Company’s 2ND SURGE™ Ultra Energy Gel.

 

13. Subsequent Event

 

Effective August 1, 2012, the Company entered into an athletic partner agreement with well-known surfer Garrett McNamara whereby he will endorse and help market the Company’s new product BODY GLOVE SURGE energy gel. The Agreement runs through the two test marketing phases which should last until mid 2013. Under terms of the agreement, the Company will pay him a fee of $500 per month plus granted him 5,000 warrants on the effective date and will grant him another 5,000 warrants when phase two starts in early 2013.

 

 

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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.

 

(a)Introduction

 

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.

 

We are a sales and marketing driven company that derives value from our own brands that are based on the latest nutrition technology. We will continue to expand on the benefits of our core endurance nutrition products while exploring the latest science in order to introduce cutting edge new brands and products that allow our core endurance athletes to work out and compete more effectively. We will also direct new research and development in the endurance nutrition category to drive product development and consumer communications across both existing and new brands.

 

Endurance

 

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

 

· ACCELERADETM Sports Drink – Introduced in May 2001

 

· ACCEL GEL® Advanced Sports Gel – Introduced in February 2004

 

· 2ND SURGE® Ultra Energy Gel – Introduced in March 2011

 

· ACCEL RECOVERTM Muscle Recovery Bar – Introduced in March 2011

 

· ENDUROX® EXCEL® Natural Workout Supplement – Introduced in March 1997

 

· ACCELERADE HYDROTM Sports Drink with less calories and sugar – Introduced in June 2008

 

In the first quarter of 2011, we launched two new products: 2ND SURGE and ACCEL RECOVER. 2ND SURGE is an energy gel that is the first all-natural product specifically formulated to delay the onset of both muscle and brain fatigue. The product’s proprietary formula contains rapidly acting carbohydrates, specific proteins, caffeine and selected antioxidants that are proven to increase the delivery of critical nutrients to brain and muscle cells, maintain metabolic energy needs, inhibit the release of fatigue signals in the brain, and reduce muscle damage, an important trigger for the release of fatigue signals. ACCEL RECOVER is the first bar nutritionally engineered for maximum muscle recovery with a breakthrough formula that incorporates a unique blend of three carbohydrates to rapidly and completely replenish depleted muscle glycogen stores, a proprietary combination of three proteins enriched with glutamine, arginine and leucine, the amino acids that drive the repair and rebuilding of muscle protein and the rapid transport of nutrients to muscles, medium-chain triglycerides that rapidly convert into energy rather than fat and antioxidants to protect muscles from free-radical damage and to regenerate the body’s natural antioxidant pathways.

 

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During the second quarter of 2012, we completed the transition of all of our formulations to all-natural. In addition, we have updated all of our packaging to align all the brands: ACCELERADE, ENDUROX R4, and ACCEL GEL, with a common brand look, usage chart recommendations, and our social icons. Both 2ND SURGE and ACCEL RECOVER BAR, which we launched last year, were already in the updated packaging and all-natural formulas.

 

In the third quarter of 2012, we will introduce in a test market in Southern California our first product in conjunction with the License Agreement we signed with Body Glove International, a water sports and outdoor activities company. This product will be a form of our 2ND SURGE Ultra Energy Gel under the brand name BODY GLOVE SURGE. This product is ideal for individuals who participate in active sports including surfing, skateboarding, and bicycle motocross (BMX). Active sports represent the fastest growing segment in sports participation. Our new association with Body Glove should help us gain penetration among this group of consumers. We expect to expand this test market to Florida and the Carolinas in early 2013.

 

(b) Results of Operations – Three and Six Months Ended June 30, 2012 and 2011

 

Revenues for the three-month period ended June 30, 2012 were $2,229,234 as compared to $2,245,226 for the same period in 2011. Revenues for the six-month period ended June 30, 2012 were $3,980,173 as compared to $3,976,837 for the same period in 2011. Included in revenues for the three and six months ended June 30, 2011 is approximately $0 and $25,000, respectively, of weight regulation sales that have been discontinued. Therefore, total endurance sales for the six months ended June 30, 2012 were up approximately 1% from the same period in 2011. The biggest impact to revenue has been the continued reduction in purchases in the nutritional channel. This channel was down $50,000 in the second quarter and $185,000 year to date. Although our ecommerce sales are up 9% year to date, this falls below our expectations.

 

For the three months ended June 30, 2012, gross profit margin on product sales was 38.9% compared to 44.3% for the same period in 2011. For the six months ended June 30, 2012, gross profit margin on product sales was 40.5% compared to 44.4% for the same period in 2011. In the second quarter of 2012, we offered approximately $41,000 in sales discounts (1.8% of revenues) to certain customers to move old-labeled products from their shelves in order to accelerate availability of our new all-natural products. These discounts are expected to continue through the early part of the third quarter of 2012. Product costs also increased approximately $72,000 (3.2% of sales) and $117,000 (2.9% of sales), respectively, for the three and six months ended June 30, 2012 as a result of across the board ingredient price increases, most notably higher protein costs. In addition, increased transportation costs have impacted us. We expect to continue to be challenged by these rising costs throughout 2012.

 

Sales and marketing (“S & M”) expenses decreased $71,600 to $307,012 for the three-month period ended June 30, 2012 from $378,612 for the same period in 2011. S & M expenses decreased $65,618 to $503,425 for the six-month period ended June 30, 2012 from $569,043 for the same period in 2011. Although no assurances can be given, S & M expenses should remain lower than 2011 levels, as in 2012 the S & M mix will be driven more by our internet and social marketing campaigns. We will also be launching our new BODY GLOVE SURGE product (see above) in the third quarter of 2012.

 

General and administrative (“G & A”) expenses increased $94,764 to $606,254 for the three-month period ended June 30, 2012 from $511,490 for the same period in 2011. G & A expenses increased $124,023 to $1,172,497 for the six-month period ended June 30, 2012 from $1,048,474 for the same period in 2011. The increase in G & A in the three and six month periods ended June 30, 2012 as compared to the same periods in 2011 is due primarily to an increase in expenses related to gearing up our Internet and ecommerce presence. Also included in G & A in the six-month periods ended June 30, 2012 and 2011 is approximately $0 and $15,000, respectively, paid to the 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 on January 27, 2011.

 

Research and development (“R & D”) expenses were $18,439 for the three month period ended June 30, 2012 compared to $9,978 for the same period in 2011. R & D expenses were $35,487 for the six month period ended June 30, 2012 compared to $24,795 for the same period in 2011. We will continue to incur R & D expenses for the remainder of 2012 and into 2013 as we invest in science and new products based on this science.

 

We recorded a net loss of ($69,677), or $0.00 per share (basic and diluted), for the quarter ended June 30, 2012 compared to net income of $91,769, or $0.00 per share (basic and diluted), for the same period in 2011. We recorded a net loss of ($109,526), or ($0.01) per share (basic and diluted), for the six months ended June 30, 2012 compared to net income of $118,999, or $0.01 per share (basic and diluted), for the same period in 2011. The net loss in the three and six months ended June 30, 2012 as compared to net income for the same periods in 2011 is due primarily to lower gross margins and higher operating expenses as detailed above. The decreases in gross margin percents for the quarter and six months ended June 30, 2012 of 5.4% and 3.9%, respectively, impacted net income by approximately $120,000 in the second quarter and $155,000 year to date. Included in the three and six months ended June 30, 2012 is approximately $102,000 and $158,000, respectively, in operating expenses as part of our investment in internet and social marketing campaigns that we did not have in the same periods in 2011.

 

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(c) Liquidity and Capital Resources

 

At June 30, 2012, our current assets exceeded our current liabilities by approximately $1,005,000 with a ratio of current assets to current liabilities of approximately 1.7 to 1. At June 30, 2012, cash on hand was $446,369, a decrease of $299,535 from December 31, 2011, primarily as the result of an increase in accounts receivable (net of reserves) of $464,955, an increase in inventory of $411,144 (net of reserves), an increase in prepaid expenses of $25,379, repayments of notes payable of $23,111, and a decrease in deferred revenue of $2,858 offset by issuances of notes payable of $47,344 and an increase in accounts payable and accrued expenses of $768,555 from December 31, 2011. Also, capital expenditures of $147,450 were made in the first six months of 2012. Accounts receivable increased as 2nd quarter 2012 sales were significantly higher than 4th quarter 2011 sales. Inventories increased due to higher anticipated sales in the 3rd quarter of 2012 as compared to the 1st quarter of 2012. Accounts payable and accrued expenses increased primarily due to the increase in inventory.

 

On February 9, 2011, we entered into an agreement with our largest vendor whereby extended payment terms were granted of up to 90 days from invoice date and up to a maximum credit limit of $750,000. In the second quarter of 2011, the credit limit was increased to $850,000. At June 30, 2012, there was no available credit under this agreement.

 

Net cash used in operating activities for the six months ended June 30, 2012 was $176,318 compared to net cash used in operating activities for the same period in 2011 of $15,700. Net cash used in operating activities was greater in 2012 than in 2011 primarily due to the net loss for the six months ended June 30, 2012 as compared to net income for the same period in 2011. The increase in accounts receivable in 2012 was less than the increase in accounts receivable in 2011 primarily due to average days’ sales outstanding being approximately 27 days as of June 30, 2012 compared to approximately 32 days at June 30, 2011. Inventories increased in 2012 comparably to the increase in inventories in 2011. Accounts payable and accrued expenses also increased in 2012 comparably as in 2011 due to extended payment terms negotiated with our main inventory suppliers. Historically, we have funded inventory purchases through trade credit and we expect that to continue.

 

As of June 30, 2012, we had $75,000 invested in auction rate securities that are presented as short-term investments on the balance sheet. We have not redeemed any of these investments in 2012. We have obtained a revolving line of credit with a financial institution with a maturity of May 2013 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. As of June 30, 2012 and December 31, 2011, the balance of this line of credit was $37,500, respectively.

 

Capital expenditures of $147,450 were made in the first six months of 2012 consisting primarily of new websites to enhance our Internet presence and computer software to upgrade back office systems. We have no material commitments for future 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 are material to investors.

 

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.

  

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ITEM 4. 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 June 30, 2012, 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 June 30, 2012, 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. MINE SAFETY DISCLOSURES

 

Not applicable.

 

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*

 

101*

 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

The following financial information from PacificHealth Laboratories, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheets (unaudited) at June 30, 2012, and December 31, 2011, (ii) Statements of Operations (unaudited) for the three and six months ended June 30, 2012 and 2011, (iii) Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011

 

* Filed herewith

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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: August 9, 2012
     

 

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