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 quarterly period ended March 31, 2003
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 (IRS Employer
incorporation or organization) Identification No.)
8221 EAST EVANS ROAD 85260
-----
SCOTTSDALE ARIZONA (Zip Code)
- ------------------
(Address of Principal executive offices)
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 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, 2003, there were 12,233,821 shares of common stock outstanding.
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRODUCTS, INC.
CONSOLIDATED BALANCE SHEET
March 31, 2003
ASSETS
CURRENT ASSETS
Cash $ 13,160
Accounts receivable, net of allowance of $14,915 14,794
Inventory 171,979
Advances 9,400
Prepaid expenses 25,000
-----------
Total Current Assets 234,333
PROPERTY AND EQUIPMENT, NET 102,960
OTHER ASSETS
Intangibles, net 1,518,967
Deposits 15,846
-----------
1,534,813
-----------
$ 1,872,106
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Checks issued in excess of cash balance $ 28,262
Accounts payable and accrued expenses 273,275
Deferred revenue 56,000
Interest payable 359,186
Dividends payable 69,148
Current portion of obligations payable 1,236,718
-----------
Total Current Liabilities 2,022,589
Long Term Liabilities
Obligations payable, net of current portion 328,183
-----------
Total Liabilities 2,350,772
Stockholders' Deficit
Preferred Stock, convertible, $.001 par value, 10,000,000 shares
authorized and 1,708,500 shares issued and outstanding 1,708
Common stock, $.001 par value, 25,000,000 shares
authorized, 12,658,821 issued and 12,233,821 outstanding 12,234
Subscriptions receivable 1,766,000
Treasury stock, 425,000 shares at cost (285,438)
Additional paid in capital in excess of par value 4,825,328
Accumulated deficit (6,798,498)
-----------
(478,666)
-----------
$ 1,872,106
===========
DESERT HEALTH PRODUCTS, INC
CONSOLIDATED STATEMENT OF OPERATIONS
Quarter Ended March 31, 2003
REVENUE, NET $ 33,580
COST OF SALES 21,295
---------
Gross Profit 12,285
OPERATING EXPENSES 422,676
---------
Loss from operations (410,391)
OTHER INCOME (EXPENSE)
Interest expense (67,616)
Miscellaneous expense (4,879)
Interest income 60
---------
(72,435)
---------
NET LOSS $(482,826)
=========
WEIGHTED AVERAGE EARNINGS PER COMMON SHARE $ (0.0392)
=========
DESERT HEALTH PRODUCTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
Quarter Ended March 31, 2003
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------------------- ----------------------------------
PAR VALUE PAR VALUE
SHARES $.001 SH SHARES $.001 SH
--------------- ------------- ----------------- -------------
BALANCES, DECEMBER 31, 2002 1,708,500 $ 1,708 12,113,821 $ 12,114
COMMON SHARES ISSUED IN FIRST
QUARTER OF 2003
Conversion of notes receivable -- -- (425,000) (425)
Cash -- -- -- --
Services -- -- 545,000 545
DIVIDENDS -- -- -- --
NET LOSS FOR QUARTER ENDED
MARCH 31, 2003 -- -- -- --
----------- ----------- ----------- -----------
BALANCES, MARCH 31, 2003 1,708,500 $ 1,708 12,233,821 $ 12,234
=========== =========== =========== ===========
TREASURY STOCK
------------------------- ADDITIONAL STOCK
PAID-IN SUBSCRIPTION ACCUMULATED
SHARES COST CAPITAL RECEIVABLE DEFICIT TOTAL
---------- ----------- ----------- ----------- ------------ -----------
BALANCES, DECEMBER 31, 2002 -- $ -- $ 4,801,076 $ 1,466,000 $(6,278,730) $ 2,168
---------- ----------- ----------- ----------- ----------- -----------
COMMON SHARES ISSUED IN FIRST
QUARTER OF 2003
Conversion of notes receivable 425,000 (285,438) -- -- -- (285,863)
Cash -- -- -- 300,000 -- 300,000
Services -- -- 24,252 -- -- 24,797
DIVIDENDS -- -- -- -- (36,942) (36,942)
NET LOSS FOR QUARTER ENDED
MARCH 31, 2003 -- -- -- -- -- (482,826)
----------- ----------- ----------- ----------- ----------- -----------
BALANCES, MARCH 31, 2003 425,000 $ (285,438) $ 4,825,328 $ 1,766,000 $(6,798,498) $ (478,666)
=========== =========== =========== =========== =========== ===========
DESERT HEALTH PRODUCTS, INC
CONSOLIDATED STATEMENT OF CASH FLOWS
Quarter Ended March 31, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 36,448
Cash paid to suppliers and employees (374,214)
Miscellaneous expense (4,879)
Interest income 60
Interest expense (18,062)
---------
Net Cash (Used) in Operating Activities (360,647)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (3,070)
Advances (6,900)
---------
Net Cash (Used) by Investing Activities (9,970)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in stock subscription receivable 300,000
---------
Net Cash Provided by Financing Activities 300,000
---------
Net (Decrease) in Cash and Cash Equivalents (70,617)
BEGINNING CASH AND CASH EQUIVALENTS 55,515
---------
ENDING CASH AND CASH EQUIVALENTS $ (15,102)
=========
RECONCILIATION OF CHANGES IN NET OPERATIONS TO NET CASH USED
BY OPERATING ACTIVITIES:
Loss from operations $(482,826)
Adjustments to reconcile change in loss from operations to
net cash (used) by operating activities:
Depreciation 5,688
Stock issued for services 24,797
(Increase) decrease in operating assets
Accounts receivable 2,868
Inventory 7,061
Increase (decrease) in operating liabilities
Interest payable 49,554
Accounts payable 32,211
---------
Net Cash (Used) by Operating Activities $(360,647)
=========
Note 1 - Basis of Presentation
The financial statements are unaudited and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the Company's financial
position and operating results for the interim period.
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 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 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 to
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;
3
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.
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
if 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 to our
stockholders.
We believe that our available cash resources will not 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
4
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
registration 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 customer becomes a partner in
developing that market in the long-term. However, the Company is taking steps to
offer its products to mid-size chain store operations as an initial step towards
penetrating the domestic market.
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 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 Products, Inc., 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 Capital Fund, Inc.
RESULTS OF OPERATIONS
Three months ended March 31, 2003.
Revenues. Revenues for the three months ended March 31, 2003, were $33,580,
a decrease of $18,603, or 36% from $52,183, for the three months ended March 31,
2002. This decrease was principally attributable to the continued problems
resulting from the events on September 11, 2001, and the negative market
environment making it increasingly difficult to re-establish sales. The Company
is continuing its efforts to launch new distribution outlets in Europe, Asia and
in the Domestic market.
Operating Expenses. Operating expenses for the three months ended March 31,
2003, were $422,676, which was an increase of $7562, or 1.8% as compared to
$415,114, for the three months ended March 31, 2002. This increase was primarily
the result of additional expenses incurred in the acquisition and development of
Royal Products, Inc.
Net loss for the Company was $482,287 for the three months ended March 31,
2003, as compared to a net loss of $207,212 for the three months ended March 31,
2002.
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, 2003. In addition, as of March 31, 2003, the Company's
current liabilities exceeded its current assets by $1,788,256, as compared to
$756,603 for the comparable three-month period ended March 31, 2002. Those
factors create an uncertainty regarding the Company's ability to continue as a
going concern.
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
5
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 and preferred 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. 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.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this quarterly report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. The Company's Chief Executive
Officer and Chief Financial Officer concluded, based on this evaluation, that
the Company's disclosure controls and procedures are effective. There were no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On January 27, 2003, the U.S. District Court dismissed a suit by the
Company for unfair competition and trademark violations by a competitor. The
Company has taken an appeal of the order of dismissal.
On March 3, 2003, the Company produced records in compliance with a
suit brought by a former consultant and shareholder who asserted rights to view
certain corporate records under Arizona law. The Arizona Superior Court
thereafter dismissed the suit. On March 4, 2003, the plaintiff moved for
reinstatement of the case for the purpose of seeking an award of attorney's
fees.
On March 5, 2003, the Company instituted suit in the Arizona Superior
Court, Maricopa County, against a Phoenix-based marketer of health care
products, seeking unspecified damages for fraud and misrepresentation arising
from a product licensing and marketing agreement.
On November 12, 2002, the Company was named in a suit by holders of
various promissory notes. As to one of the plaintiffs, the Company asserts a
counterclaim for breach of fiduciary duty, conversion, and wrongful interference
with business relations. The Company intends to vigorously pursue its
counterclaim, and intends to honor its loan commitments to the claimants not
implicated in the counterclaim.
ITEM 2. Changes in Securities
None
6
ITEM 3. Defaults by the Company upon its Senior Securities.
None
ITEM 4. Submission of Matters 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, 2003, the Company filed a
Form 8-K on January 10, 2003, relating to Item 5.
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
----------------------
Johnny Shannon
President
By: /s/ Johnny Shannon May 15, 2003
----------------------
Johnny Shannon/Chief Financial Officer
7
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES OXLEY ACT OF 2002
I, Johnny Shannon, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Desert Health
Products, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the registrant's board of directors, acting
as an audit committee:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls: and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
By: Johnny Shannon
----------------
Johnny Shannon
Chief Executive Officer, Chief Financial Officer and President
8
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Desert Health Products, Inc., (the
"Company") on Form 10-Q for the period ended September 30, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
1. The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operation of the Company.
By: /s/ Johnny Shannon
--------------
Johnny Shannon Date: May 15, 2003
Chief Executive Officer
Chief Financial Officer
President
9