UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
Of the Securities Exchange Act of 1934
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For the quarterly period ended March 31, 2002 Commission file number 000-27931
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DESERT HEALTH PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Arizona 86-0699108
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8221 East Evans Road
Scottsdale Arizona 85260
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(Address of Principal executive offices) (Zip Code)
480.951.1941
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(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 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 March 31, 2002, there were 9,201,321 Shares of common stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DESERT HEALTH PRODUCTS, INC.
STATEMENT OF CASH FLOWS
Quarter Ended March 31, 2002
Cash Flows from Operating Activities
Cash received from customers $ 31,755
Miscellaneous income 252,500
Cash paid to suppliers and employees (234,682)
Interest expense (16,780)
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Net Cash Provided (Used) in Operating Activities 32,793
Cash Flows from Investing Activities
Purchase of intangibles (4,120)
(Increase) Decrease in notes receivable (224,293)
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Net Cash Provided by Investing Activities (228,413)
Cash Flows from Financing Activities
Issuance of common and preferred stock 210
Increase (Decrease) in stock subscription receivable 12,000
Increase in additional paid in capital 7,789
Increase in loans 126,100
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Net Cash Provided (Used) by Financing Activities 146,099
Net Increase (Decrease) in Cash and Cash Equivalents (49,521)
Beginning Cash and Cash Equivalents 52,090
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Ending Cash and Cash Equivalents $ 2,569
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Reconciliation of Changes in Net Operations to Net Cash Used
by Operating Activities:
Loss from operations $(207,212)
Adjustments to reconcile change in loss from operations to
net cash provided (used) by operating activities:
Depreciation 5,000
Amortization 170,088
Loan inducement fees 54,500
(Increase) decrease in operating assets
Accounts receivable (20,428)
Inventory 4,528
Increase (decrease) in operating liabilities
Accounts payable 26,317
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Net Cash Provided (Used) by Operating Activities $ 32,793
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DESERT HEALTH PRODUCTS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
Quarter Ended March 31, 2002
Common Stock Preferred Stock
------------------- ---------------------- Additional Stock
Par Value Par Value paid-in subscription Accumulated
Shares $.001 sh Shares $.001 sh Capital receivable Deficit Total
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Balances, December 31, 2001 9,010,321 $9,010 1,338,500 $ 1,338 $4,176,094 $ 449,000 $(4,029,524) $ 605,918
Preferred shares issued in first
quarter of 2002
Converted to common stock -- -- (20,000) (20) -- -- -- (20)
Cash -- -- 40,000 40 19,960 -- -- 20,000
Common shares issued in first
quarter of 2002
Converted preferred stock 20,000 20 -- -- -- -- -- 20
Loan inducement fees 135,000 135 -- -- 54,500 (18,000) -- 36,635
Subscription receivable 36,000 36 -- -- 17,829 30,000 -- 47,865
Net loss for quarter ended
March 31, 2002 -- -- -- -- -- -- (207,212) (207,212)
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Balances, March 31, 2002 9,201,321 $9,201 1,358,500 $ 1,358 $4,268,383 $ 461,000 ($4,236,736) $ 503,206
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DESERT HEALTH PRODUCTS, INC
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
Quarter Ended March 31, 2002
Revenue, net $ 52,183
Cost of Sales 24,244
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Gross Profit 27,939
Operating Expenses 415,114
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Loss from operations (387,175)
Other Income (Expense)
Interest expense (16,780)
Loan inducement fees (54,500)
Miscellaneous expense (1,257)
Miscellaneous income 252,500
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179,963
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Net Loss (207,212)
Beginning accumulated deficit (4,029,524)
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Ending accumulated deficit $(4,236,736)
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Earnings Per Common Share $ (0.460)
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DESERT HEALTH PRODUCTS, INC.
BALANCE SHEETS
March 31, 2002
ASSETS
Current Assets
Cash $ 2,569
Accounts receivable 20,428
Notes receivable 602,118
Interest receivable 77,840
Inventory 126,560
Advances 1,671
Prepaid expenses 54,905
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Total Current Assets 886,091
Property and Equipment, net 112,476
Other Assets
Intangibles, net 1,528,016
Deposits 10,000
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1,538,016
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$ 2,536,583
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 297,682
Deferred revenue 40,000
Interest payable 157,375
Current portion of obligations payable 1,147,637
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Total Current Liabilities 1,642,694
Long Term Liabilities
Obligations payable, net of current portion 390,683
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Total Liabilities 2,033,377
Stockholders' Equity
Preferred Stock, $.001 par value, 10,000,000 shares
authorized and 1,358,500 shares issued and outstanding $ 1,358
Common stock, $.001 par value, 25,000,.000 shares
authorized and 9,261,321 issued and outstanding 9,201
Subscriptions receivable 461,000
Additional paid in capital in excess of par value 4,268,383
Accumulated deficit (4,236,736)
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503,206
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$ 2,536,583
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Item 2. 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 below and elsewhere in this report.
With the exception of historical matters, the matters of discussion herein
are forward-looking statements that involve risks and uncertainties. Forward
looking statements include, but are not limited to, 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 could differ
materially from the results discussed in such forward-looking statement. The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and their related notes
thereto appearing elsewhere herein.
Cautionary Statement Regarding Forward-looking Statements
The company's Form 10KSB, The Company's Annual Report to Shareholders,
this or any other Form 10QSB of The Company or any other written or oral
statements made by or on behalf of The Company may include forward-looking
statements which reflect The Company's current views with respect to future
events and financial performance. The words "believe', "expect", "anticipate",
"intends", "estimate", "forecast", "project" and similar expressions identify
forward-looking statements.
The Company wishes to caution investors that any forward-looking
statements made by or on behalf of The Company are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors include, but are not limited
to the Risk Factors listed below (many of which have been discussed in prior SEC
filings by The Company). Though The Company has attempted to list
comprehensively these important factors, The Company wishes to caution investors
that other factors could in the future prove to be important in affecting The
Company's results of operations. New factors emerge from time to time and it is
not possible for management to predict all of such factors, nor can it assess
the impact of each such factor on the business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements as they speak only of The Company's views as of the
date the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Risk Factors
Our operating results are difficult to predict in advance and may
fluctuate significantly, and a failure to meet the expectations of analysts or
our stockholders would likely result in a substantial decline in our stock price
Factors that are likely to cause our results to fluctuate include the
following:
o The gain or loss of significant customers or significant
changes in purchasing volume;
o The amount and timing of our operating expenses and capital
expenditures;
o Changes in the volume of our product sales and pricing
concessions on volume sales;
o The timing, rescheduling or cancellation of customer orders;
o The varying length of our sales cycles;
o Our ability to specify, develop, complete, introduce and
market new products and bring them to volume production
in a timely manner;
o The rate of adoption and acceptance of new industry
standards in our target markets;
o The effectiveness of our product cost reduction efforts
and those of our suppliers;
o Changes in the mix of products we sell; and
o Changes in the average selling prices of our products.
There is a limited public market for our common stock. Although our common
stock is listed on the OTC Bulletin Board, there is a limited volume of
sales, thus providing a limited liquidity into the market for our shares.
As a result of the foregoing, stockholders may be unable to liquidate
their shares for any reason.
Our success depends heavily upon the continued contributions of
Johnny Shannon, our President, whose knowledge, leadership and technical
expertise would be difficult to replace. The Company has an Employment
Agreement with Mr. Shannon that expires January 31, 2004.
To grow our business successfully and maintain a high level of
quality, we will need to recruit, retain and motivate additional highly
skilled sales, marketing, and finance personnel. If we are not able to
hire, train and retain a sufficient number of qualified employees, our
growth will be impaired. In particular, we will need to expand our sales
and marketing organizations in order to increase market awareness of our
products and to increase revenue.
In addition, as a company focused on development of complex
products, we will need to hire additional staff of various experience
levels in order to meet our product roadmap.
We are subject to various risks associated with technological change
and if we do not adapt our products to the changes our business will be
adversely affected.
Our performance will partially depend on our ability to enhance our
existing services, and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective basis. We
cannot predict f we will use new methodologies effectively or adapt our
products to consumer, vendor, advertising or emerging industry standards.
If we were unable, for technical, legal, financial or other reasons, to
adapt in a timely manner in response to changing market conditions or
customer requirements, our business, results of operations and financial
condition could be materially adversely affected.
If we need additional financing, we may not be able to raise further
financing or it may only be available on terms unfavorable to us or our
stockholders.
We believe that our available cash resources will be sufficient to
meet our anticipated working capital and capital expenditure requirements
for at least twelve months. We might need to raise additional funds,
however, to respond to business contingencies, which could include the
need to:
o Fund more rapid expansion;
o Fund additional marketing expenditures;
o Develop new products or enhance existing products;
o Enhance our operating infrastructure;
o Hire additional personnel;
o Respond to competitive pressures; or
o Acquire complementary businesses or technologies.
If we raise additional funds through the issuance of equity or convertible
debt securities, the percentage ownership of our stockholders would be
reduced, and these newly issued securities might have rights, preferences
or privileges senior to those of existing stockholders. Additional
financing might not be available on terms favorable to us, or at all. If
adequate funds were not available or were not available on acceptable
terms, our ability to fund our operations, take advantage of unanticipated
opportunities, develop or enhance our products or otherwise respond to
competitive pressures would be significantly limited.
OVERVIEW
Desert Health Products, Inc., an Arizona corporation ("The Company") was
formed in 1991. The Company is engaged in the packaging, sale and distribution
of branded and store brand (private label) vitamins, nutritional supplements,
skin care and animal care products. Desert Health has focused its marketing and
registrations efforts primarily in the foreign marketplace. This is a very time
consuming and expensive project, but the nutriceutical and nutritional
supplement market is growing at a faster pace internationally than the domestic
market. One of the many rewards of having customers in the international market
is that once the registrations are in place, the customers becomes a partner in
developing that market for the long-term.
Desert Health markets over 100 products, which are packaged under various
labels and bottle counts. They are sold in Vitamin and Mineral combinations,
Chinese Herbal Products, Specialty Supplements, Weight Management Products,
Herbal/Botanical Products, FemAid Product Support Systems, Ayurvedic Products,
Skin Care Products, Pet Care Products and Water Purification Products. The
Company offers varying potency levels in tablets and chewable and gelatin
encapsulated capsules ("soft gels"). The Company has traditionally outsourced
its raw materials manufacturing.
On January 26, 2000, pursuant to an Acquisition Agreement and Plan of
Merger entered into by and between Desert Health and Intercontinental Capital
Fund, Inc., (Intercontinental) a Nevada corporation, (a company subject to the
reporting requirements of the Securities and Exchange Act of 1934) all of the
outstanding shares of common stock of Intercontinental were exchanged for
400,000 shares of Rule 144 restricted common stock of Desert Health, in a
transaction in which Desert Health was the successor and took on the reporting
requirements of Intercontinental.
RESULTS OF OPERATIONS
Three months ended March 31, 2002.
Revenues. Revenues for the three months ended March 31, 2002, were
$52,183, a decrease of $33,297 or 39% from $85,480 for the three months ended
March 31, 2001. This decrease was principally attributable to the continued
after effects of the impact of the events on September 11, 2001 on the
international market. However, The Company believes the impact of those events
is diminishing and will continue to diminish over time. The Company will
continue its efforts in 2001 in establishing distribution outlets in Europe and
Asia, and North America.
Operating Expenses. Operating expenses for the three months ended March
31, 2002 were $415,114, which was a decrease of $140,185, or 25% as compared to
$555,299 for the three months ended March 31, 2001. This decrease was primarily
the result of reductions in amounts paid to officers and other cost saving
measures being implemented by The Company.
Net loss for The Company was $207,212 for the three months ended March 31,
2002 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 March 31, 2002. In addition, as of March 31, 2002, The Company's
current liabilities exceeded its current assets by $756,603 as compared to
$286,083 for the comparable three-month period ended March 31, 2001. Those
factors create an uncertainty regarding The Company's ability to continue as a
going concern. Management believes
agreements being negotiated subsequent to year-end December 31, 2001, and new
product orders as product registrations in foreign countries are completed, will
provide The Company with additional cash and liquidity to sustain operations.
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, China and North America, 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 extend 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. 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 it may take either the form of debt, equity, or a combination thereof.
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 requirements. In either case, the financing could have a negative
impact on the financial condition of The Company and its Shareholders.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On May 9, 2002, The Company brought suit against GHC Associates, Inc., an
Arizona-based distributor of a skin care system marketed for use by diabetes
sufferers. The complaint, filed with the United States District Court in
Phoenix, Arizona, alleges that the defendant's marketing and packaging of its
product violates The Company's rights under the federal Lanham Trademark Act.
The complaint seeks an accounting, the impoundment of infringing materials, and
unspecified monetary damages.
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
(a) Exhibits
None
(b) Reports on Form 8-K
During the quarter ended March 31, 2002, The Company did not file
any reports on Form 8-K.
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: /s/ Johnny Shannon
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Johnny Shannon
President
By: /s/ Johnny Shannon
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Johnny Shannon
Chief Financial Officer
Date May 15, 2002