UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For the quarter ended June 30, 2001 Commission file number 000-27931
DESERT HEALTH PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Arizona 86-0699108
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
8221 E. Evans Road
Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
(480) 951-1941
Registrant's telephone number, including area code
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 of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __x__ No ___
As of June 30, 2001, there were 8,280,321 shares of common stock outstanding.
INDEX
DESERT HEALTH PRODUCTS, INC.
FOR THE QUARTER ENDED
JUNE 30, 2001
PART 1 - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Balance Sheet 3
Statement of Operations 4
Statement of Cash Flow 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults by the Company upon its
Senior Securities 11
Item 4. Submission of Matter to a Vote of
Security Holders 11
Item 5. Other Information
Item 6. Exhibits and Reports of Form 8-K 11
SIGNATURES 12
2
DESERT HEALTH PRODUCTS, INC.
BALANCE SHEET
June 30, 2001
ASSETS
Current Assets
Cash $ (2,339)
Interest receivable 45,000
Note receivable 298,268
Inventory 145,421
Prepaid expenses 25,734
-----------
Total Current Assets 512,084
Property and Equipment
Furniture and equipment, net 123,993
-----------
123,993
Other Assets
Intangibles 1,732,093
Deposits 10,000
-----------
1,742,093
-----------
$ 2,378,170
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 218,548
Deferred Revenue 90,201
Interest payable 35,200
Loans payable 1,111,718
-----------
Total Current Liabilities 1,455,667
Stockholders' Equity
Preferred Stock, $.001 par value, 10,000,000 shares
authorized and 1,354,000 shares issued and outstanding 1,354
Common stock, $.001 par value, 25,000,.000 shares
authorized and 8,280,321 issued and outstanding 8,280
Subscriptions receivable 101,000
Additional paid in capital in excess of par value 3,802,014
Accumulated deficit (2,990,145)
-----------
922,503
-----------
$ 2,378,170
===========
3
DESERT HEALTH PRODUCTS, INC
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Quarter Ended June 30, 2001
Revenue $ 27,833
Cost of sales 23,098
-----------
Gross Profit 4,735
Operating Expenses 587,554
-----------
Loss from operations (582,819)
Other income (expense)
Interest expense (6,281)
Foregiveness of debt 100,000
Sale of exclusive marketing rights 100,000
Miscellaneous income 16,000
-----------
209,719
-----------
Net Loss (373,100)
Beginning accumulated deficit (2,558,504)
Prior period adjustment (58,541)
-----------
Ending accumulated deficit $(2,990,145)
===========
Earnings per common share $ (0.05)
===========
See accompanying notes to the financial statements
4
DESERT HEALTH PRODUCTS, INC.
STATEMENT OF CASH FLOWS
Quarter Ended June 30, 2001
Cash Flows from Operating Activities
Cash received from customers $ 27,833
Interest income --
Miscellaneous income 16,000
Cash paid to suppliers and employees (413,791)
Interest expense (6,281)
---------
Net Cash Provided (Used) by Operating Activities (376,239)
Cash Flows from Investing Activities
Purchase of furniture and equipment (21,080)
Purchase of intangibles 13,909
Increase in notes receivable 140,648
---------
Net Cash Provided (Used) by Investing Activities 133,477
Cash Flows from Financing Activities
Issuance of stock 167
Increase in additional paid in capital 71,812
Increase in loans 146,522
---------
Net Cash Provided (Used) by Financing Activities 218,501
Net Increase (Decrease) in Cash and Cash Equivalents (24,261)
Beginning Cash and Cash Equivalents 21,922
---------
Ending Cash and Cash Equivalents $ (2,339)
=========
5
DESERT HEALTH PRODUCTS, INC.
STATEMENTS OF CASH FLOWS - continued
Quarter Ended June 30, 2001
Reconciliation of Changes in Net Operations to Net Cash Used
by Operating Activities:
Income from operations $(373,100)
Adjustments to reconcile change in loss from operations to
net cash provided (used) by operating activities:
Depreciation 5,051
Amortization 159,281
Trade-out for services (208,543)
(Increase) decrease in operating assets
Inventory (11,348)
Deposits 50,000
Prepaid expenses (25,000)
Increase (decrease) in operating liabilities
Accounts payable 55,514
Deferred revenue (28,095)
Net Cash Provided (Used) by Operating Activities $(376,239)
=========
Non Cash Transactions
Foregiveness of debt $100,000
Purchase of intangibles 250,000
6
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
The following discussion and analysis should be read in conjunction with
our Financial Statements and the notes thereto appearing elsewhere in this
document.
RISK FACTORS AND CAUTIONARY STATEMENTS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results and events could differ materially from
those projected, anticipated, or implicit, in the forward-looking statements as
a result of the risk factors set forth below and elsewhere in this report.
With the exception of historical matters, the matters discussed herein are
forward-looking statements that involve risks and uncertainties. Forward looking
statements include, but are not limited to, "Recent Developments and Trends,"
statements concerning anticipated trends in revenues and net income, the date of
introduction or completion of our products, projections concerning operations
and available cash flow. Our actual results could differ materially from the
results discussed in such forward-looking statements. The following discussion
of our financial condition and results of operations should be read in
conjunction with our financial statements and the related notes thereto
appearing elsewhere herein.
Overview
Desert Health Products, Inc. an Arizona corporation (the "Company") was
formed in 1991. Desert Health is engaged in the manufacturing, packaging and
sale and distribution of branded and store brand (private label) vitamins and
nutritional supplements. The company is focusing its development efforts on
certain plants and plant extracts that are widely used throughout the United
States and Europe to assist in the treatment of a variety of diseases and
physical conditions.
Results of Operations
Three months ended June 30, 2001.
Revenues.
Revenues for the three months ended June 30, 2001 were $27,833, a decrease
of $57,647 or 65% from $85480 for the three months ended March 31, 2001. This
decrease was principally attributable to our largest customer decreasing
purchases in the second quarter of 2001. The company will continue its efforts
in 2001 in establishing distribution outlets in Europe and Asia.
7
Operating Expenses.
Operating expenses for the three months ended June 30, 2001 were $587,554
which was an increase of $32,255 or 6% over the $555,299 for the three months
ended March 31, 2001. This increase was primarily the result of increased
amortization of certain intangible assts.
Net loss for the Company was $373,100 for the three months ended June 30,
2001 as compared to a net loss of $267,878 for the three months ended March 31,
2001.
Liquidity and Capital Resources.
As indicated in the Company's financial statements attached, the Company's
gross revenue was not sufficient to meet its operating expenses for the three
months ended June 30, 2001. In addition, as of June 30, 2001, the Company's
current liabilities exceeded its current assets by $943,583. Those factors
create an uncertainty regarding the Company's ability to continue as a going
concern. Management believes agreements entered into subsequent to year end
December 31, 2000 such as the Par Trust agreement, will provide the Company with
additional cash and liquidity to sustain operations.
The receipt of funds to the Company from Private Placement Offerings and
loans obtained through private sources are anticipated to offset the near term
cash requirements of the Company. Since inception, the Company has financed its
cash flow requirements through debt financing issuance of common stock for cash
and services, and minimal cash balances. As the Company continues its marketing
activities in Europe and China, it may continue to experience net negative cash
flows from operations, pending receipt of sales revenues, and will be required
to obtain additional financing to fund operations through common stock offerings
and bank borrowings to the extent necessary to provide its working capital.
Over the next twelve months, the Company intends to increase its revenues
by releasing new products under development to its target markets. However, the
Company will continue to increase the number of its employees, and expand its
facilities where necessary to meet product development and completion deadlines.
The Company believes that existing capital and anticipated funds from operations
will not be sufficient to sustain operations and planned expansion in the next
twelve months. Consequently, the Company will be required to seek additional
capital in the future to fund growth and expansion through additional equity or
debt financing or credit facilities. Considering the state of market conditions,
no assurance can be made that such financing would be available, and if
available may take either the form of debt or equity. The down turn in the
capital market will substantially impact the Company's ability to sell
securities in planned amounts and in turn its ability to meet its capital
requirement. In either case, the financing could have a negative impact on the
financial condition of the Company and its Shareholders.
8
Recent Developments and Trends:
o International Launch of Dr. Harris' Original Diabetic Feet(TM) product at
Expo Europe 2001 in Amsterdam June 2001
o USA/Canada Launch of Dr. Harris' Original Diabetic Feet(TM) product at
American Diabetic Association national annual convention in Philadelphia PA
in June 2001. Samples of product shipped to 141 prospective
distributors/customers/retailers/clinics/doctors/nurses. The Company is
exhibiting this product at the American Association of Diabetes Educators
(AADE) 28th Annual Meeting and Exhibition, August 15-19, 2001, at the
Kentucky International Convention Center in Louisville, Kentucky.
o A Business plan designed for marketing of Dr. Harris' Original Diabetic
Feet(TM) for the USA/Canada market has been developed.
The Company met with the Director of the American Diabetic Association in
ten Western states. They have agreed to endorse our product, Dr. Harris'
Original Diabetic Feet(TM) and the Company is allowed to attach "Sponsored
by the ADA" to the product. It is being arranged for the Company to attend
dozens of Diabetic Events as a Sponsor.
The Company has entered into preliminary discussions with a new Wellness
Center Project in San Antonio to provide special products exclusively for
their Wellness Programs and for resale.
o The Company obtained final registration of Desert Health's products in
Egypt resulting in a test order with a Letter of Credit in the amount of
USD $32,000.
o A Hepatitis C and Prostate product have been tested and are ready for
marketing under the guidance of advisory board members Dr. Henry Han,
Master Herbalist and Glenn Miller, M.D.
o The Company exhibited at the Expo Europe 2001 trade show in Amsterdam in
June 2001. Companies in Finland, Holland, Australia, Albania, France, Hong
Kong, etc. expressed interest in existing products as well as the new Dr.
Harris' Original Diabetic Feet(TM) product. Albania has already completed
registration for Snore Relief(TM).
o The Company has established the foundation of a sales staff for the
launching of the Company's new products.
Roger Bowman has been appointed Executive Sales Director reporting directly
to the CEO, Johnny Shannon. Mr. Bowman has extensive sales and marketing
experience operating his own design and sales agency business from New
York, Milan, Italy and Los Angeles. His duty is to build a sales
organization, set sales
9
goals, follow salesmen productivity, set sales policy, and develop customer
service, etc. Independent sales representatives in place are:
1. Nicholas M. Simak
2. Stephen L. Kuehn
3. Scott Christensen
4. Baard Lindvaag
5. Ashraf Sharoni
6. Joanne Cavanagh
Joanne Cavanagh has been named Sales Manager for Dr. Harris' Original Diabetic
Feet(TM) and reports directly to Bowman.
o Discussions are underway with individuals to represent Desert Health's
products in the Japanese market.
o Desert Health Products, Inc., Beijing China Office is licensed to operate
with approval of the Chinese Government, including tax and registrations.
The first project of that Office involves the Company's brokering a newly
developed freeze-dried Aloe Vera product that does not form bacteria in
long-distance shipping. This product is the base in a 7-flavored Aloe Vera
beverage drink that is desired in China and could not be properly
manufactured until the advent of this freeze-dried Aloe.
The Company will earn a royalty for brokering this arrangement between the
Aloe Vera producer and the Chinese drink manufacturer. The Company's
royalty is $.06 per can. The opening test-order in August 2001 for the
project involves 350,000 cans. The projected sales are 1,000,000 cans per
quarter.
o Third quarter sales should increase due to shipping of orders generated in
the second quarter and sales of Dr. Harris' Original Diabetic Feet(TM) in
Europe and to the US market. Additional sales are anticipated as
Distributors contacted at the ExpoEurope 2001 trade show in Amsterdam
complete their registration of the Company's products and begin ordering.
o The projected launch of Dr. Han's all-natural product for prostate health
in the third quarter should generate increased sales in the third and
fourth quarters of 2001.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities
None
Item 3. Defaults by the Company upon its Senior Securities.
None
Item 4. Submission of Matter to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports of Form 8-K.
See exhibit table on Page E-1
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DESERT HEALTH PRODUCTS, INC.
(Registrant)
By: _________________________
Johnny Shannon
President
By: _________________________
Johnny Shannon
Chief Financial Officer
Date: August 14, 2001
12
EXHIBIT TABLE
Exhibit Number Description
- -------------- -----------
(1) N/A
(2)(1) Acquisition Agreement and Plan of Merger with Intercontinental Capital Fund, Inc.
(Incorporated Reference)
(3)(i)(2) Articles of Incorporation
(a) Articles of Incorporation for Desert Health Products, Inc.
(b) Amended Articles of Incorporation for Desert Health Products, Inc.
(3)(ii)(2) Bylaws
(a) Bylaws of Desert Health Products, Inc.
(4)(2) Instruments defining the rights of security holders:
(4)(i) (a) Articles of Incorporation for Desert Health Products, Inc.
(b) Amended Articles of Incorporation for Desert Health Products, Inc.
(c) Bylaws of Desert Health Products, Inc.
(5) N/A
(8) N/A
(9) N/A
(10) Material Contracts
(a)(3) Separation and Distribution Agreement between Desert Health Products, Inc. and Royal
Phoenix. (Incorporated by reference)
(b)(2) Product Marketing and Distribution Agreement between Desert Health Products, Inc. and
GH Associates, Inc.
(c)(2) Agreement regarding Dr. Harris's Original Diabetic Feet Formula
(d)(2) Exclusive Distribution Agreement between Desert Health Products, Inc. and Silmarc
Pharma s.r.l. in Italy
(e)(2) Product Marketing and Distribution Agreement between Desert Health Products, Inc. and
Snore Formula Inc.
(f)(2) Modification of Contract between Desert Health Products, Inc. and Snore Formula Inc.
(11) N/A
(13) N/A
(15) N/A
(16) N/A
(17) N/A
(18) N/A
13
(19) N/A
(20) N/A
(21) N/A
(22) N/A
(23)(2) Consent of Desert Health's Auditor
(24) N/A
(25) N/A
(26) N/A
(99)(2) Cautionary Statement Regarding Forward-Looking Statements
- ----------
(1) Filed in an 8-K on March 15, 2000
(2) Filed in an 10-SKB on April 3, 2001
(3) Filed in an 8-K on October 31, 2000
14